[Federal Register Volume 69, Number 224 (Monday, November 22, 2004)]
[Notices]
[Pages 67968-67970]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3271]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50669; File No. SR-BSE-2004-47]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Boston Stock Exchange, 
Inc. Relating to $5 Quotation Spreads on the Boston Options Exchange

November 16, 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 October 29, 2004, the Boston Stock Exchange (``BSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
items I and II below, which items have been prepared by the Exchange. 
The Commission is publishing this notice to

[[Page 67969]]

solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 2 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend a section of its Boston Options 
Exchange rules regarding quote spread requirements. The text of the 
proposed rule change appears below. Additions are in italics. Deleted 
items are in brackets.
    * * *
Chapter VI Market Makers
Sec. 5 Obligations of Market Makers
    (a)
    (i)-(vi) No change.
    (vii) Price options fairly by, among other things, bidding and 
offering so as to create differences of no more than [$.25]$5 between 
the bid and the offer following the pre-opening phase for each options 
contract. During the pre-opening phase, spread differentials shall be 
no more than $.25 between the bid and offer for each options contract 
for which the bid is less than $2, no more than $.40 where the bid is 
at least $2 but does not exceed $5, no more than $.50 where the bid is 
more than $5 but does not exceed $10, no more than $.80 where the bid 
is more than $10 but does not exceed $20, and no more than $1.00 where 
the bid is $20 or greater, provided that BOX may establish differences 
other than the above for one or more options series. The bid/offer 
differentials stated above shall not apply to in-the-money options 
series where the underlying securities market is wider than the 
differentials set forth above. For these series, the bid/ask 
differential may be as wide as the quotation on the primary market of 
the underlying security.
    * * *

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 IV 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 permit quote spread 
parameters of up to $5, regardless of the price of the bid, for all 
options classes traded on the Boston Options Exchange (``BOX''). 
Currently, Chapter VI, Section 5(a)(vii) of the BOX Rules establishes 
maximum bid-ask differentials (also referred to as quote spread 
requirements) that vary from $0.25 to $1.00, depending upon the price 
of the option.\3\ The primary purpose of the quote spread requirements 
is to help maintain narrow spreads in options. These requirements can 
have the unintended consequence of requiring market makers to quote at 
prices that are unnecessarily narrow, thereby exposing them to great 
risk if markets move quickly.
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    \3\ The allowable bid-ask differential are: $0.25 for options 
under $2, $0.40 for options between $2 and $5, $0.50 for options 
between $5 and $10, $0.80 for options between $10 and $20, and $1.00 
for options above $20. See Chapter VI, Section 5(a)(vii) of the BOX 
Rules.
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    Given the competitive market making structure of BOX, and the 
existence of vigorous inter-market competition, the mandatory quote 
spread requirements may not be necessary to ensure narrow and 
competitive spreads in options. In this regard, the BOX market 
structure creates strong incentives for competing market makers and 
other market participants to disseminate competitive prices. On BOX, 
each market maker quotes independently, and customers and broker-
dealers can enter limit orders at prices better than those posted by 
market makers. BOX automatically collects this trading interest 
information, calculates the BOX best bid and offer, and disseminates 
that value to the Options Price Reporting Authority. Accordingly, the 
BOX market is competitive, accessible and transparent.
    In addition, market participants in BOX have strong incentives to 
quote competitively. BOX allocates incoming orders based on the price 
and time of receipt of orders and quotes on the book. A market 
participant, including a market maker, will not participate in any 
trade if other orders or quotes have time priority at the same price. 
Therefore, all BOX market participants have incentive to quote the best 
price first. Also, BOX's unique Market Maker Prime Rule \4\ gives 
market makers an added incentive to quote the best price first in order 
to gain an enhanced trade allocation in the BOX Price Improvement 
Period (``PIP'').\5\ In the BOX approval order the Commission stated 
that it ``believes that the BSE's proposal to give priority to a Market 
Maker who quotes aggressively before a PIP is initiated [Market Maker 
Prime], is consistent with the Act and may provide a further incentive 
for Market Makers to publicly display their best quotes, which would 
benefit all options market participants.'' \6\
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    \4\ See Chapter V, Section 19 of the BOX Rules.
    \5\ See Chapter V, Section 18 of the BOX Rules.
    \6\ See Securities Exchange Act Release No. 49068 (January 13, 
2004), 69 FR 2775 (January 20, 2004) (SR-BSE-2002-15).
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    Given BOX's NBBO protections \7\ as well as through the Options 
Market Linkage Plan, market participants have even stronger incentives 
to quote at the best price, lest incoming orders be filled away. Thus, 
inter- and intra-market competitive forces provide strong incentives 
for market participants to quote competitively and enter quotes and 
orders that improve the price and depth of the market.
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    \7\ See Chapter V, Section 16(b) of the BOX Rules. BOX filters 
all inbound orders to ensure that these orders will not execute at a 
price outside the current national best bid or offer.
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    For these reasons, BSE proposes to widen the allowable spread on 
BOX to $5. The proposed quote spread requirements will apply after the 
opening. During the opening, market makers will be required to quote in 
accordance with the traditional bid-ask width requirements. The $5 
quotation requirements would become operative immediately following the 
opening.
    BSE notes that its proposal is similar to pilot programs adopted by 
the International Securities Exchange, Inc. (``ISE'') and the Chicago 
Board Options Exchange, Inc. (``CBOE'') that the SEC recently approved 
on a permanent basis,\8\ and a rule change proposed by the Pacific 
Exchange, Inc. (``PCX'') that was immediately effective upon filing.\9\
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    \8\ See Securities Exchange Act Release Nos. 50015 (July 14, 
2004), 69 FR 43872 (July 22, 2004) (SR-ISE 2003-22); and 50079 (July 
26, 2004), 69 FR 45858 (July 30, 2004) (SR-CBOE-2004-44).
    \9\ See Securities Exchange Act Release No. 50538 (October 14, 
2003), 69 FR 62105 (October 22, 2004) (SR-PCX-2004-89).
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\10\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\11\ in particular, in that it 
is designed to promote just and equitable principles of trade, to 
prevent fraudulent and manipulative acts and,

[[Page 67970]]

in general, to protect investors and the public interest.
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    \10\ 10 15 U.S.C. 78f(b).
    \11\ 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 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 has neither solicited nor received comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    As noted above, this proposal is similar to pilot programs adopted 
by the ISE and the CBOE that the Commission recently approved on a 
permanent basis,\12\ and a rule change proposed by PCX that was 
immediately effective on filing.\13\ Neither the ISE proposal nor the 
CBOE proposal received any public comments. Accordingly, the BSE 
believes that this proposal does not raise any new issues or regulatory 
concerns. The Exchange has therefore designated the proposed rule 
change as a ``non-controversial'' rule change pursuant to Section 
19(b)(3)(A) of the Act \14\ and subparagraph (f)(6) of Rule 19b-4 
thereunder.\15\ Consequently, because the foregoing rule change: (1) 
Does not significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) does not become operative for 30 days from the date on which it 
was filed, or such shorter time as the Commission may designate if 
consistent with the protection of investors and the public interest, it 
has become effective pursuant to Section 19(b)(3)(A) of the Act \16\ 
and Rule 19b-4(f)(6) thereunder.\17\
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    \12\ See supra, note 8.
    \13\ See supra, note 9.
    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6).
    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative prior to 30 days after the date of filing. 
However, Rule 19b-4(f)(6)(iii) permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest. The Exchange has requested that the 
Commission waive the 30-day operative delay specified in Rule 19b-
4(f)(6) because the proposal provides quote width relief similar to 
that provided under the rules of other exchanges.\18\ Accordingly, the 
Exchange believes that its proposal does not raise new regulatory 
issues, significantly affect the protection of investors or the public 
interest, or impose any significant burden on competition. In addition, 
the Exchange believes that its request is consistent with the 
protection of investors and the public interest and that good cause 
exists, including the need to keep BOX competitive and efficient.
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    \18\ See supra, notes 8 and 9.
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    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public 
interest.\19\ Specifically, the Commission believes that allowing the 
BSE to implement $5 quotation spread parameters like those adopted by 
the ISE, the PCX, and the CBOE will help the BOX to compete with those 
exchanges. The Commission believes that the BSE's proposal raises no 
new issues or regulatory concerns that the Commission did not consider 
in approving the ISE and CBOE proposals. For these reasons, the 
Commission designates that the proposal become operative immediately.
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    \19\ For purposes only of waiving the operative delay for this 
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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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate the rule change if it 
appears to the Commission that the action is necessary or appropriate 
in the public interest, for the protection of investors, or would 
otherwise further the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic comments:

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-BSE-2004-47 on the subject line.

Paper comments:

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-BSE-2004-47. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 in the Commission's Public Reference Section, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of this filing also will be 
available for inspection and copying at the principal office of the 
BSE. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-BSE-
2004-47 and should be submitted on or before December 13, 2004.
    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E4-3271 Filed 11-19-04; 8:45 am]
BILLING CODE 8010-01-P