[Federal Register Volume 69, Number 249 (Wednesday, December 29, 2004)]
[Notices]
[Pages 78065-78068]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3877]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50904; File No. SR-BSE-2004-57]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Boston Stock Exchange, 
Inc. Relating to the Execution Guarantee Rules

December 21, 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 December 7, 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. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \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 its rules regarding execution 
guarantees.

[[Page 78066]]

The text of the proposed rule change appears below.\3\ Additions are in 
italics; deletions are in brackets.
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    \3\ The Commission notes that a technical change was made to the 
proposed rule text of Sec. 33(a) submitted by the BSE to correct a 
typographical error. Specifically, in the rule text proposed to be 
added to this Section, the word ``a'' was changed to ``at''. 
Telephone conversation between John Boese, Vice President and Chief 
Regulatory Officer, BSE, and Jennifer Colihan, Special Counsel, 
Division of Market Regulation, Commission, on December 20, 2004.
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* * * * *

RULES OF THE BOSTON STOCK EXCHANGE

Chapter II

Dealings on the Exchange

Sec. 33 Execution Guarantee

    (a) The Execution Guarantee shall be available to each member firm 
in all issues traded through the Intermarket Trading System (ITS) and 
registered to a specialist on the Exchange. Specialists must accept and 
guarantee execution on all agency market and marketable limit orders 
[from 100 up to and including 1,299 shares] on the basis of the NBBO 
bid on a sell order or the NBBO offer on a buy order at the time an 
order is received. Sell orders will be satisfied up to the size of the 
lesser of the NBBO bid or 1299 shares; buy orders up to the lesser of 
the NBBO offer or 1299 shares. No portion of an order larger than 1299 
shares is subject to this public agency guarantee.
    (b) Subject to the requirements of the short sale rule, all agency 
market orders must be filled on the basis of the Consolidated Quotation 
System best bid or better on a sell order, or the Consolidated 
Quotation System best offer or better on a buy order.
    (c) All agency limit orders will be filled if one of the following 
conditions occur:
    (1) the bid or offering at the limit price has been exhausted in 
the primary market as defined in the CTA Plan;
    (2) there has been a price penetration of the limit in the primary 
market; or
    (3) the issue is trading on the primary market at the limit price 
unless it can be demonstrated that such order would not have been 
executed if it had been transmitted to the primary market, or the 
broker and specialist agree to a specific volume-related or other 
criteria requiring a fill.
    * * * Interpretations and Policies:
    .01--Pre-opening orders must be accepted and filled at the primary 
market opening[, provided however that on such orders the specialist 
shall be obligated to accept orders up to 1299 shares on both the buy 
side and the sell side].
    .02--In trading halt situations occurring on the primary market, 
orders will be executed based on the reopening price.
    .03--Simultaneous orders must be executed pursuant to the 
provisions of the Rule up to an accumulated size equal to the 
prevailing NBBO displayed size on receipt of the order.
    .04--For purposes of limit order execution, size will be governed 
by that displayed on the Consolidated Quotation System (``CQS'').
    .05--If the displayed quotations of the Consolidated Quotation 
System can be demonstrated to be in error or a market center is 
experiencing system problems which result in an invalid quotation in 
CQS, an adjustment in execution price may be allowed as prescribed in 
.06.
    .06--In unusual trading situations or in the event of an equipment 
failure, a specialist or floor broker may seek relief from the 
requirements of this rule from two out of three Floor Officials (floor 
members of the Market Performance Committee or Board of Governors).

Chapter XXXIII

BEACON

Section 5 Automatic Execution Parameters

    [a) All market and marketable limit orders in ITS issues up to and 
including 1,299 shares will be eligible for automatic execution. All 
automatic execution parameters will be updated on a regular basis and 
published in BEACON. Specialists may provide larger automatic execution 
parameters than the 1299 minimum requirement. Parameters in excess of 
these minimum requirements will be pursuant to specific authorization 
by a Specialist with a member organization, and will not be published 
in BEACON.
    (b) A 599 automatic execution parameter may be requested for a 
particular stock for good cause shown by submitting a statement to the 
Market Performance Committee setting forth the specific conditions and/
or reasons that render participation at the 1299 parameter injurious.
    (c) The BEACON reference price for automatic execution is the 
consolidated best bid or offer (``BBO'') price. All market and 
marketable limit orders will be filled in their entirety (up to the 
current automatic execution parameter) at the reference price, 
regardless of the displayed size of the BBO.
    (d) Market orders that would be executed outside the primary market 
price range for the day should be ``stopped'' and will be executed at 
the BEACON reference price, or better as subsequent trades occur on the 
Consolidated Tape.]
    Automatic execution size parameters will be set in BEACON according 
to specialist specifications, by issue. All market or marketable limit 
orders of a size equal to or less than the automatic execution 
parameters will be automatically executed in their entirety, at the 
price of the NBBO.
    Orders that are larger than the size of the automatic execution 
parameters, will be automatically executed up to the size of the 
automatic execution parameter, at the price of the NBBO. The remainder 
of any order which is not automatically executed, i.e. that portion of 
the order which is greater than the size of the automatic execution 
parameter, will be guaranteed professional handling by the specialist 
according to the specialist's fiduciary duties of best execution.
* * * * *

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 BSE 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 proposed rule change would amend two sections of the Rules of 
the Board of Governors of the Boston Stock Exchange (``BSE Rules'') 
relating to the guaranteed execution of agency market and marketable 
limit orders (``Execution Guarantee'').
    In Chapter II, the Exchange sets forth rules related to the 
Execution Guarantee (``Execution Guarantee Rules''). Currently, the 
Execution Guarantee is that Exchange specialists must accept and 
guarantee execution of all agency market and marketable limit orders 
from 100 up to and including 1,299 shares, at the price of the National 
Best Bid or Offer (``NBBO''). The Exchange is proposing to amend its 
Execution Guarantee Rules so that specialists would be obligated to 
fill agency market and marketable limit orders at the price of the 
NBBO, but at a size of the lesser

[[Page 78067]]

of the displayed size of the NBBO or 1,299 shares. The Exchange 
represents that the proposed rule change would be consistent with the 
rules of other exchanges in this area, specifically the Chicago Stock 
Exchange (Article XX, Rule 37) and the National Stock Exchange (Rule 
11.9 (n)).
    Although the BSE's proposal is to limit the size of the Execution 
Guarantee, specialists would still be obligated, under the general 
principles of best execution, to seek the best execution of their 
customer orders. This would include the execution of a market order at 
the size available in the NBBO quotation. For example, if a specialist 
received a 5,000 share market order and the size reflected in the NBBO 
was 5,000 shares or greater, the specialist would be obligated to 
pursue an execution of that order in its entirety, regardless of the 
BSE's Execution Guarantee Rules.\4\
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    \4\ If the quote of the BSE specialist is the NBBO, the BSE 
specialist is obligated by Rule 11Ac1-1(c)(2) under the Act (``Quote 
Rule'') to execute any order up to the size of his quote. 17 CFR 
240.11Ac1-1(c)(2).
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    The Exchange also notes that the average trade size executed on the 
primary listed markets has drastically reduced in recent years, due to 
a variety of factors. With the reduction of executed trade size, the 
size of the NBBO has also greatly reduced, thereby often making it 
difficult for BSE specialists to find a contra market for trades which 
they, under current rules, must execute at the NBBO price, for a size 
up to 1,299 shares, regardless of the size of the posted NBBO. In an 
era in which average quotation spreads are reducing to the lowest 
possible difference, the current BSE Execution Guarantee Rules in 
Chapter II often mean that BSE specialists are forced to absorb a 
position for which a market no longer exists. Accordingly, the Exchange 
is seeking to change its Execution Guarantee Rules so that its 
specialists are not disadvantaged by the requirements of this Rule.
    The Exchange is also seeking to change its rules in Chapter XXXIII, 
BEACON, Section 5, Automatic Execution Parameters, regarding Automatic 
Execution Parameters (``Automatic Execution Rules''), so that the 
Automatic Execution Rules do not conflict with the proposed changes to 
the Execution Guarantee Rules. Currently, the Automatic Execution Rules 
discuss automatic execution parameters in relation to the 1,299 share 
requirement, and state that all market and marketable limit orders up 
to and including 1,299 shares will be eligible for automatic execution. 
The Automatic Execution Rules also discuss the updating and publishing 
of automatic execution parameters, and permit a specialist to provide 
automatic execution parameters in excess of the 1,299 share minimum 
guarantee. Further, they discuss the concept of reference price, 
defined as the NBBO price, and state that all market and marketable 
limit orders will be filled in their entirety up to the size of the 
automatic execution parameter at the reference price, regardless of the 
size of the NBBO.
    To be consistent with the changes proposed to the Execution 
Guarantee Rules, the Exchange is proposing to replace the current 
language in Chapter XXXIII, Section 5, in its entirety. The current 
language of this Section is closely related to the current Execution 
Guarantee Rules, such as the references to 1,299 share as being the 
minimum size of the automatic execution parameter. Also, the Exchange 
believes that the discussion of ``reference price,'' in particular the 
fact that it is essentially an undefined term within the BSE Rules, 
could lead to confusion with the proposed changes to the Execution 
Guarantee Rules discussed above. Therefore, the Exchange is proposing 
replacing the current language of Chapter XXXIII, Section 5 with 
language that more accurately reflects the automatic execution of 
orders on the BSE, in congruence with the proposed changes to the 
Exchange's Execution Guarantee Rules.
    The proposed new language of the Automatic Execution Rules explains 
that automatic execution parameters are set according to specialist 
specifications. All market or marketable limit orders of a size equal 
to or less than the automatic execution parameters will be 
automatically executed in their entirety at the price of the NBBO. For 
orders that are larger than the size of the automatic execution 
parameters, that portion of the order which is in excess of the 
execution parameter will be guaranteed handling by the specialist in 
accordance with the specialist's fiduciary duties of best execution, 
although not necessarily automatic execution, while that portion of the 
order which would fall within the size of the automatic execution 
parameter will be automatically executed in BEACON.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Act \5\ in general, and 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 is not designed to permit unfair discrimination between 
customers, brokers, or dealers, or to regulate by virtue of any 
authority matters not related to the administration of the Exchange.
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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 will 
impose any burden on competition.

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

    The Exchange has designated the proposed rule change as a non-
controversial rule change pursuant to Section 19(b)(3)(A) of the Act 
\7\ and Rule 19b-4(f)(6) \8\ thereunder. Consequently, because the 
proposed 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 of filing,\9\ 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 and Rule 19b-4 thereunder.
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    \7\ 15 U.S.C. 78s(b)(3)(a).
    \8\ 17 CFR 240.19b-4(f)(6).
    \9\ The Commission has waived the requirement that the Exchange 
provide written notice of its intent to file the proposed rule 
change at least five days prior to the filing date in connection 
with this filing.
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing,

[[Page 78068]]

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-2004-57 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-2004-57. 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 Room. Copies of such filing also will be available for 
inspection and copying at the principal offices 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-2004-57 and should be 
submitted on or before January 19, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E4-3877 Filed 12-28-04; 8:45 am]
BILLING CODE 8010-01-P