[Federal Register Volume 69, Number 29 (Thursday, February 12, 2004)]
[Notices]
[Pages 7051-7055]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-3023]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49192; File No. SR-BSE-2004-05]


Self Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval to a Proposed Rule Change and Amendment 
No. 1 Thereto by the Boston Stock Exchange, Inc. To Establish a Six-
Month Pilot for Market Opening Procedures of the Boston Options 
Exchange

February 4, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 4, 2004, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change, as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. On 
February 4, 2004, the Exchange submitted Amendment No. 1 to the 
proposal.\3\ The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons. For the 
reasons discussed below, the Commission is granting accelerated 
approval of the proposed rule change, as amended for a six-month pilot 
period.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from John A. Boese, Vice President Legal and 
Compliance, BSE, to Nancy Sanow, Assistant Director, Division of 
Market Regulation (``Division''), Commission, dated February 4, 2004 
(``Amendment No. 1''). In Amendment No. 1, the Exchange made a 
technical correction to the rule text.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to add a provision to its Boston Options 
Exchange trading rules to provide for a six-month pilot regarding 
market opening procedures, that will expire on August 6, 2004. Proposed 
new language is italicized. Proposed deletions are in [brackets].
* * * * *

RULES OF THE BOSTON STOCK EXCHANGE

RULES OF THE BOSTON OPTIONS EXCHANGE FACILITY

Trading of Options Contracts on BOX

Chapter V Doing Business on BOX

* * * * *

Sec. 9 Opening the Market

    The following rules are in effect until August 6, 2004.
    (a) Pre-Opening Phase. [Orders may be submitted, modified and 
cancelled throughout the pre-opening phase preceding the start of the 
market. Customers may only submit Market-On-Opening or limit orders 
pursuant to Section 14(c) of this Chapter V. In addition, any open and 
unexecuted orders from the previous trading session, which are still 
valid, will remain on the BOX Book during the pre-opening phase. Market 
Makers shall submit orders during the pre-opening phase pursuant to 
their obligations under Chapter VI of these Rules. No trade matches are 
to occur during the pre-opening phase. BOX will calculate a theoretical 
opening price (``TOP'') and broadcast it to all BOX market participants 
throughout this period. The TOP is the price at which opening trades 
would occur if the opening were to commence at that given moment.
    (b) Opening Match. BOX will determine a single price at which a 
particular option series will be opened. BOX will calculate the optimum 
number of options contracts that could be matched at a price, taking 
into consideration all the orders on the BOX Book.
    i. The opening match price is the price which will result in the 
matching of the highest number of options contracts.
    ii. Should two or more prices satisfy the maximum quantity 
criteria, the price which will leave the fewest resting orders in the 
BOX Book will be selected as the opening match price.
    iii. Should there still be two or more prices which meet both 
criteria in paragraphs (i) and (ii), the price which is closest to the 
previous day's closing price will be selected as the opening match 
price.
    (c) The determination of the opening match price in each series of 
options shall be held promptly following the opening of the underlying 
security in the primary market where it is traded. An underlying 
security shall be deemed to be opened on the primary market where it is 
traded if such market has (i) reported a transaction in the underlying 
security, or (ii) disseminated opening quotations for the underlying 
security and not given an indication of a delayed opening, whichever 
first occurs.
    (d) The opening match in any options class shall be delayed until 
the underlying security has opened for trading in the primary market, 
unless BOXR determines that the interests of a fair and orderly market 
are best served by opening trading in the options class. In the event 
that the underlying security has not opened within a reasonable time 
after 9:30 a.m. est, an Options Official shall report the delay to the 
Market Regulation Center and an inquiry shall be made to determine the 
cause of the delay.
    (e) BOXR may delay the opening match in any class of options in the 
interests of a fair and orderly market.]
    For some period of time before the opening in the underlying 
security (as determined by BOXR but not less than one hour and 
distributed to all BOX Participants via regulatory circular from BOXR), 
the BOX Trading Host will accept orders and quotes. During this period, 
known as the Pre-Opening Phase, orders and quotes are placed on the BOX 
Book but do not generate trade executions. Complex Orders and 
contingency orders (except ``Market-on-Opening'', Minimum Volume, and 
Fill and Kill orders) do not participate in the opening and are not 
accepted by the BOX Trading Host during this Pre-Opening Phase. BOX-Top 
Orders and Price Improvement Period orders are not accepted during the 
Pre-Opening Phase.
    (b) Calculation of Theoretical Opening Price. From the time that 
the BOX Trading Host commences accepting orders and quotes at the start 
of the Pre-Opening Phase, the BOX Trading Host will calculate and 
provide the Theoretical Opening Price (``TOP'') for the current resting 
orders and quotes on the BOX Book during the Pre-Opening Phase. The TOP 
is that price at which the Opening Match would occur at the current 
time, if that time were the opening, according to the Opening Match 
procedures described in

[[Page 7052]]

paragraph (e) below. The quantity that would trade at this price is 
also calculated. The TOP is re-calculated and disseminated every time a 
new order or quote is received, modified or cancelled and where such 
event causes the TOP price or quantity to change.
    A TOP can only be calculated if an opening trade is possible. An 
opening trade is possible if: (i) The BOX Book is crossed (highest bid 
is higher than the lowest offer) or locked (highest bid equals lowest 
offer), or there are Market-on-Opening Orders in the BOX Book and (ii) 
at least one order or quote on the opposite side of the market.
    (c) Broadcast Information During Pre-Opening Phase. The BOX Trading 
Host will disseminate information to all BOX Participants about resting 
orders in the BOX Book that remain from the prior business day and any 
orders or quotes sent in before the Opening Match. This information 
will be disseminated in the usual BOX format of five best limits and 
associated quantity, aggregating all orders and quotes at each price 
level. This broadcast will also include the TOP and the quantity 
associated with the TOP. Any orders or quotes which are at a price 
better (i.e. bid higher or offer lower) than the TOP, as well as all 
Market-on-Opening orders will be shown only as a total quantity on the 
BOX Book at a price equal to the TOP.
    (d) Market Maker Obligations During Pre-Opening Phase. BOX Market 
Makers holding an assignment on a given options class are obliged, as 
part of their obligations to ensure a fair and orderly market, to 
provide continuous two-sided quotes according to the BOX minimum 
standards commencing with the minute preceding the scheduled opening of 
the market for the underlying security.
    (e) Opening Match.
    (i) Complex Orders and contingency orders do not participate in the 
Opening Match or in the determination of the opening price. The BOX 
Trading Host will establish the opening price at the time of the 
Opening Match. The opening price is the TOP at the moment of the 
Opening Match. The BOX Trading Host will process the series of a class 
in a random order, starting at the first round minute after the opening 
for trading of the underlying security, and at each round minute 
thereafter. If the opening of a particular class is to occur within 15 
seconds of the next round minute, the opening of that class will take 
place at the next subsequent round minute after the round minute that 
is 15 or less seconds away (i.e. within 75 seconds). In determining the 
priority of orders to be filled, the BOX Trading Host will give 
priority to Market-on-Opening orders first, then to Limit Orders whose 
price is better than the opening price, and then to resting orders on 
the BOX Book at the opening price. One or more series of a class may 
not open because of conditions cited in paragraph (f) of this Section 
9.
    (ii) The BOX Trading Host will determine a single price at which a 
particular option series will be opened. BOX will calculate the optimum 
number of options contracts that could be matched at a price, taking 
into consideration all the orders on the BOX Book.
    (1) The opening match price is the price which will result in the 
matching of the highest number of options contracts.
    (2) Should two or more prices satisfy the maximum quantity 
criteria, the price which will leave the fewest resting contracts in 
the BOX Book will be selected as the opening match price.
    (3) Should there still be two or more prices which meet both 
criteria in subparagraphs (1) and (2), the price which is closest to 
the previous day's closing price will be selected as the opening match 
price. For new classes in which there is no previous day's closing 
price, BOX will utilize the price assigned to the class by BOX at the 
time the class was created (``reference price'').
    (f) As the Opening Match price is determined by series, the BOX 
Trading Host will proceed to move the series from the Pre-Opening Phase 
to the continuous or regular trading phase and disseminate to OPRA and 
to all Options Participants the opening trade price, if any. At this 
point, the BOX trading system is open for trading and all orders and 
quotes are accepted and processed according to the BOX trading rules. 
When the BOX Trading Host cannot determine an opening price, but none 
of the reasons exist for delaying an opening as outlined in paragraph 
(g) of this Section 9, below, the series will nevertheless move from 
Pre-Opening Phase to the continuous trading phase.
    (g) The BOX Trading Host will not open a series if one of the 
following conditions is met:
    i. The opening price is not within an acceptable range as 
determined by the MRC, and will be announced to all BOX Participants 
via the Trading Host. (In making this determination the MRC will 
consider, among other factors, all prices that exceed a variance 
greater than either $.50 or 20% to the previous day's closing price.)
    ii. There is a Market-on-Opening order with no corresponding order 
or quote on the opposite side.
    (h) If one of the conditions in paragraph (g) of this Section 9 is 
met, the MRC will not open the series but will send a RFQ. MRC will 
delay the opening of the series until such time as responses to the RFQ 
from the BOX Market Makers assigned to the class, or other interested 
trading parties, have been received and booked by the BOX Trading Host 
and the consequent opening price is deemed compatible with an orderly 
market.
    (i) MRC may order a deviation from the standard manner of the 
opening procedure, including delaying the opening in any option class, 
when it believes it is necessary in the interests of a fair and orderly 
market.
    (j) The procedure described in this Section 9 may be used to reopen 
a class after a trading halt.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to add a new section to 
the Rules of the Boston Options Exchange on a six-month pilot basis 
relating to opening the market. Chapter V, Doing Business on BOX, 
Section 9, Opening the Market, establishes guidelines regarding market 
opening procedures.
    The BOX Opening the Market process is designed to maximize the 
transparency of the opening process, enable the widest possible 
participation and ensure that the principles of price and time priority 
are respected. Achieving these three goals should ensure a fair and 
orderly market opening at a price determined by the convergence of all 
buy and sell interests at that moment. The BSE believes that the BOX 
Pre-Opening Phase and Opening Match process would be transparent and 
encourage participation of all market participants by treating all 
orders equally.

[[Page 7053]]

General Description

    Prior to the start of trading each day, the BOX Trading Host would 
be in Pre-Opening Phase. This Pre-Opening Phase would commence at least 
one hour prior to the scheduled Opening Match. All BOX Options 
Participants would be informed of the precise time of the Pre-Opening 
Phase via a regulatory circular disseminated by BOXR (BOXR currently 
plans to start the Pre-Opening Phase at 7:45 a.m. est). During the Pre-
Opening Phase Options Participants would be able to enter, modify and 
cancel orders and quotes, including Limit Orders, Fill and Kill orders, 
Market-on-Opening orders and quotes. Moreover, Limit Orders from 
previous trading sessions which are still valid (e.g. GTC orders) would 
be automatically brought to the new Pre-Opening Phase and also would be 
available for modification and cancellation. During the Pre-Opening 
Phase the Trading Host would prohibit BOX-Top and Price Improvement 
Period (``PIP'') orders. A Theoretical Opening Price (``TOP''), which 
is the price which would be the opening price if the Opening Match were 
to occur at that moment, would be calculated and broadcast continuously 
to all BOX Options Participants during the Pre-Opening Phase; however, 
no orders would be matched, nor trades executed. All Pre-Opening Phase 
allowable orders and quotes may continue to be entered, modified and 
cancelled up to the moment of the Opening Match. Any orders or quotes 
remaining on the BOX Book after the Opening Match would be accessible 
for modification or cancellation during regular trading.

Theoretical Opening Price

    From the time that the BOX Trading Host commences accepting orders 
and quotes at the start of the Pre-Opening Phase, the BOX Trading Host 
would calculate and provide the TOP for the current orders and quotes 
on the BOX Book during the Pre-Opening Phase.
    The TOP is that price at which the greatest number of options 
contracts in the BOX Book would be traded. If there is more than one 
price that would satisfy this criteria, the TOP is the price that would 
then leave the fewest number of resting, options contracts on the BOX 
Book after execution of all eligible quantities at the TOP. If there is 
still more than one price satisfying both these criteria, the TOP would 
be the price closest to the previous day's closing price.
    The quantity that would theoretically trade at the TOP also would 
be calculated. The TOP would be re-calculated and disseminated every 
time a new order or quote is received, modified or cancelled and where 
such event causes the TOP price or quantity to change. A TOP can only 
be calculated if an opening trade is possible. An opening trade is 
possible if: (1) the BOX Book is crossed (highest bid is higher than 
the lowest offer) or locked (highest bid equals lowest offer), or there 
are Market-on-Opening orders in the BOX Book and (2) at least one order 
on the opposite side of the market, which may include another Market-
on-Opening order.

Broadcast During Pre-Opening Phase

    Throughout the Pre-Opening Phase, Options Participants would 
receive the BOX broadcast that includes the ``five best limits'' (total 
quantity of contracts and number of orders for each price on each side 
of the market), which is identical to that provided by BOX during the 
regular trading day. In addition, during the Pre-Opening Phase, the BOX 
broadcast would include the TOP as well as the total quantity of 
contracts and orders on each side of the market that could execute at 
that price. This quantity would include Limit Orders and quotes equal 
to or better than the TOP, as well as Market-on-Opening orders. As with 
all BOX market data broadcasts, the orders and quotes are anonymous.

Opening Match

    The Opening Match would be at the conclusion of the Pre-Opening 
Phase when the eligible orders would be executed. The Opening Match 
price would be the TOP at the moment of the Opening Match. In 
determining which orders would be executed at the opening price in the 
case of an imbalance between bids and offers, the BOX Trading Host 
would give priority to Market-on-Opening orders first, then to Limit 
Orders whose price is better than the opening price, and then to 
resting orders on the BOX Book at the opening price. Immediately 
following the Opening Match, the options series would move into a 
continuous, or regular trading phase. The BOX Trading Host would 
process the series of a class in a random order, starting at the first 
round minute after the opening for trading of the underlying security, 
and at each round minute thereafter. If the opening of a particular 
class would occur within 15 seconds of the next round minute, the 
opening of that class would take place at the next subsequent round 
minute after the round minute that is 15 or less seconds away (i.e. 
within 75 seconds). The BSE estimates that the entire process for a 
class generally would take fewer than five seconds. As the Opening 
Match price is determined for each series, the BOX system would proceed 
to move that series from the Pre-Opening Phase to the continuous or 
regular trading phase and would disseminate to the Options Price 
Reporting Authority and to all Options Participants the opening trade 
price, if any. At this point, the BOX trading system would be open for 
trading in that series and all orders and quotes would be accepted and 
processed according to the BOX trading rules.
    When there is no Opening Match possible due to the absence of 
matching orders or quotes and none of the reasons exist for delaying an 
opening as outlined in paragraph (g) of Section 9 and as described 
below, the series would nevertheless move from the Pre-Opening Phase to 
the continuous or regular trading phase. This situation would occur 
when no orders or quotes are on the BOX Book at the time of the 
scheduled Opening Match calculation. Consequently, the series would be 
open for trading under the BOX market rules and procedures for the 
continuous or regular trading phase, and BOX would be able to receive 
orders and quotes as they are submitted. BOX would send an advisory 
message to all Options Participants when any option series has been 
opened and moved into the continuous or regular trading phase, 
including those where no opening match trade was possible.

BOX Market Makers During Pre-Opening Phase

    The BOX Market Maker obligations provide that each Market Maker in 
an appointed class should begin to assume his quoting obligations no 
later than one minute prior to the scheduled opening of the underlying 
security. This time (at present 9:29 EST) will be communicated to 
Options Participants via regulatory circular from BOXR. BOX Market 
Maker obligations also provide that Market Makers are responsible for 
ensuring a fair and orderly opening of the market and that they must 
respond within three seconds with a bid and offer for at least ten 
contracts if an RFQ is issued on a class where they do not already have 
a quote.

Delayed Opening

    BOX would delay the opening of an options series if it is 
determined by the Market Regulation Center (``MRC'') and announced to 
all BOX Participants via the Trading Host that the Opening Match price 
(as indicated by the TOP) would be outside an acceptable price range. 
In making such a determination the MRC would consider, among other 
factors, prices that exceed a variance

[[Page 7054]]

greater than either $0.50 or 20% to the previous day's closing price. 
BOX would also delay the opening of an options series if there is no 
order or quote on the opposite side of the market from a Market-on-
Opening order. In each case, the MRC would issue an RFQ obliging BOX 
Market Makers to furnish additional orders and quotes such that the 
options series may open fairly.
    Pursuant to Section 19(b)(2) of the Act,\4\ the BSE requests that 
the Commission find good cause to accelerate the effectiveness of this 
rule filing. The Exchange believes accelerated approval is warranted 
because the proposed rule change will provide standardized market open 
procedures for BOX that the BSE can surveil for and enforce, that will 
be in place on the first day that trading begins on BOX. Because the 
proposed rule change is a pilot, the BSE will be able to assess the 
proposed rule change before requesting permanent approval of the BOX's 
market open rules. The BSE also requests acceleration of effectiveness 
for business considerations. The BSE acknowledges that it may be 
required to amend BOX's market open rules before the Commission will 
approve them on a permanent basis. Accordingly, the BSE requests that 
the Commission accelerate the effectiveness of the proposed rule change 
prior to the 30th day after its publication in the Federal Register.
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    \4\ 15 U.S.C. 78s(b)(2).
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the requirements under Section 6(b) of the Act,\5\ in general, and 
furthers the objective of Section 6(b)(5) of the Act,\6\ in particular, 
in that it is designed to promote just and equitable principles of 
trade, to remove impediments to and perfect the mechanism of a free and 
open market and a national market system, and protect investors and the 
general public by standardizing procedures during market openings.
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    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change, as 
amended, will impose any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange did not solicit or receive written comments on the 
proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the proposed rule change, as amended, including 
whether the proposed rule change is consistent with the Act. Persons 
making written submissions should file six copies thereof with the 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609. Comments may also be submitted 
electronically at the following e-mail address: [email protected]. 
All comment letters should refer to File No. SR-BSE-2004-05. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review comments more efficiently, 
comments should be sent in hardcopy or by e-mail but not by both 
methods. Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying at the Commission's Public Reference Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the Exchange. All submissions should be submitted 
by March 4, 2004.

IV. Commission's Findings and Order Granting Accelerated Approval of 
the Proposed Rule Change

    After careful review of the proposal, as amended, the Commission 
finds that the proposed rule change to establish BOX Market Opening 
procedures for a six-month pilot period is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange and, in particular, the 
requirements of Section 6 of the Act.\7\ Specifically, the Commission 
finds that the proposal is consistent with Section 6(b)(5) of the 
Act,\8\ which requires, in part, that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and practices; to 
promote just and equitable principles of trade; to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, and processing information with respect to, and facilitating 
transactions in securities; to remove impediments to and perfect the 
mechanism of a free and open market and a national market system; and, 
in general, to protect investors and the public interest.\9\ The 
Commission believes that the proposed rules should help to ensure that 
the opening of the BOX Market is conducted in a fair and orderly 
fashion.
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    \7\ 15 U.S.C. 78f.
    \8\ 15 U.S.C. 78f(b)(5).
    \9\ In approving the Exchange's proposal, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
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    Pursuant to Section 19(b)(2) of the Act,\10\ the Commission may not 
approve any proposed rule change, or amendment thereto, prior to the 
30th day after the date of publication of notice of the filing thereof, 
unless the Commission finds good cause for so doing and publishes its 
reasons for so finding. The Commission hereby finds good cause for 
approving the proposed rule change prior to the 30th day after 
publishing notice of the proposal in the Federal Register.
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    \10\ 15 U.S.C. 78s(b)(2).
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    The Commission notes that many of the proposed revisions to the 
provisions of the BOX Market Opening procedures are modeled on existing 
rules of the other options exchanges. The Commission believes that 
accelerating approval of these rules for the BOX Market Opening is 
appropriate because these revisions do not raise new regulatory issues. 
Other revisions, although not based on existing exchange rules, were 
not material to the overall proposal because such revisions clarify the 
proposed BOX Market Opening procedures and ensure that each series will 
open in a fair and orderly fashion in the absence of a specialist or 
primary market maker. Further, the Commission believes that granting 
accelerated approval of the proposal will allow the BSE to 
expeditiously implement the pilot program to launch the BOX Market 
without any unnecessary delay. Accordingly, pursuant to Section 
19(b)(2),\11\ the Commission finds good cause for approving the 
proposed rule change prior to the 30th day after the date of 
publication of notice thereof in the Federal Register.
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    \11\ 15 U.S.C. 78s(b)(2).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change, as amended, (SR-BSE-2004-05) is hereby 
approved on an

[[Page 7055]]

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accelerated basis, for a six-month pilot period until August 6, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-3023 Filed 2-11-04; 8:45 am]
BILLING CODE 8010-01-P