[Federal Register Volume 70, Number 115 (Thursday, June 16, 2005)]
[Notices]
[Pages 35143-35146]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3093]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51821; File No. SR-BSE-2004-51]


Self-Regulatory Organizations; Boston Stock Exchange, Inc.; Order 
Granting Approval of Proposed Rule Change and Amendment Nos. 1, 2, and 
3 Thereto and Notice of Filing and Order Granting Accelerated Approval 
to Amendment No. 4 Thereto Relating to the Trading of Market Orders on 
the Boston Options Exchange

June 10, 2005.

I. Introduction

    On December 15, 2004, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange''), filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ to amend the rules of the Boston Options Exchange 
(``BOX'') to allow market orders to trade on BOX. On January 5, 2005, 
April 19, 2005 and April 21, 2005, BSE filed Amendment Nos. 1, 2 and 3, 
respectively, to the proposal. The proposed rule change, as amended, 
was published for comment in the Federal Register on April 28, 2005.\3\ 
The Commission received no comments on the proposal. On June 2, 2005, 
BSE filed

[[Page 35144]]

Amendment No. 4 to the proposed rule change.\4\ This order approves the 
proposed rule change, as amended, provides notice of filing of 
Amendment No. 4, grants accelerated approval to Amendment No. 4, and 
solicits comments from interested persons on Amendment No. 4.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 51597 (April 21, 
2005), 70 FR 22156 (``Notice'').
    \4\ In Amendment No. 4, BSE made simplifying and clarifying 
revisions to a portion of the proposed rule text and represented 
that BSE will provide certain information to the Commission as 
discussed further below.
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II. Description of the Proposal

    BSE proposes to allow an additional order type, ``Market Orders,'' 
to trade on BOX, governed by detailed procedures as set forth in the 
proposed rule change. BSE also proposes to clarify how BOX-Top Orders 
are treated in certain situations.

A. Trading of Market Orders on BOX

    The proposed Market Orders would be similar to, but differ from, 
Market-on-Opening Orders and BOX-Top Orders, two other order types 
currently available on BOX.\5\ Market Orders submitted to BOX would be 
executed at the best price available in the market for the total 
quantity available from any contra side bid or offer. Unlike Market-on-
Opening and BOX-Top Orders, however, if the full quantity of a Market 
Order could not be executed at the initial execution price, the 
remaining quantity of the Market Order would then execute at the next 
best price available from any contra side bid or offer, and the process 
would continue until the Market Order was fully executed. To avoid 
trading through the national best bid or offer (``NBBO''), Market 
Orders would be filtered prior to execution at each price level 
pursuant to the procedures set forth in Chapter V, Section 16(b) of the 
BOX Rules.
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    \5\ Market-on-Opening Orders, which are valid only during the 
pre-opening and opening match phases of the market, are executed on 
the market opening at the best price available in the market until 
all volume required to fill the order on the opposite side of the 
market has been traded or the order quantity has been exhausted. 
BOX-Top Orders, which may be submitted only during the continuous 
trading phase of the market, are executed at the best price 
available in the market for the total quantity available from any 
contra side bid or offer. In general, in the case of both Market-on-
Opening Orders and BOX-Top Orders, any residual volume left after 
part of the order has been executed is automatically converted to a 
limit order at the price at which the original Market-on-Opening 
Order and BOX-Top Order was executed.
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    At the opening, Market Orders would have priority over Market-on-
Opening and Limit Orders. In the case where the lowest offer for any 
options contract is $.05, and a BOX Participant enters a Market Order 
to sell that series, any such Market Order would be treated as a Limit 
Order to sell at a price of $.05.
    Under the proposal, a Market Order could be designated as a Minimum 
Volume (``MV'') order (an order type that currently exists on BOX) and 
in such case would only be executed if the specified minimum volume is 
immediately available to trade.\6\ Market Orders also would be eligible 
to be submitted for price improvement through the PIP.\7\
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    \6\ If a volume equal to or greater than the specified minimum 
volume of an MV order trades, the residual volume would be filtered 
against trading through the NBBO according to the procedures set 
forth in Section 16(b) of Chapter V of the BOX Rules and, if 
applicable, executed with any orders on the BOX Book.
    \7\ In general, the PIP is a three-second auction starting at a 
price better than the current NBBO during which BOX Participants 
compete to participate in the execution of a customer order 
submitted to the PIP (newly termed under the proposal as a ``PIP 
Order''), by submitting specially designated orders called 
Improvement Orders in one-penny increments that are valid only in 
the PIP process. For a more complete description of the PIP process, 
see Securities Exchange Act Release No. 49068 (January 13, 2004), 69 
FR 2775 (January 20, 2004) (approving establishment of trading rules 
for BOX, including the PIP process).
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B. Market Orders and BOX-Top Orders Submitted During a PIP

    The BOX Rules currently provide that in cases when an executable 
unrelated order is submitted to BOX during a PIP on the same side as 
the customer order, such that the unrelated order would cause an 
execution to occur prior to the end of the PIP, the PIP is deemed 
concluded and the customer order is matched pursuant to the relevant 
PIP provisions. The proposed rule change would set forth specifically 
that the submission to BOX of a Market Order or BOX-Top Order on the 
same side as a PIP Order will prematurely terminate the PIP when, at 
the time of the submission of the Market Order or BOX-Top Order, the 
best Improvement Order is equal to or better than the NBBO.\8\ In 
Amendment No. 4, BSE added language to clarify that ``NBBO'' in this 
proposed provision refers to the NBBO ``on the same side of the market 
as the best Improvement Order.'' \9\ When the PIP is terminated, the 
PIP Order would be matched against the best prevailing orders on BOX 
(whether Improvement Orders or unrelated orders received by BOX during 
the PIP),\10\ pursuant to Paragraph (e)(iii) of Section 18 of Chapter V 
of the BOX Rules. Following the execution of the PIP Order, any 
remaining Improvement Orders would be cancelled and the Market Order or 
BOX-Top Order would be filtered pursuant to Paragraph (b) of Section 16 
of Chapter V of the BOX Rules.
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    \8\ Proposed change to Paragraph (i) of Section 18 of Chapter V 
of the BOX Rules.
    \9\ The above phrase replaces parenthetical language in the 
proposed rule text as set forth in the Notice, which stated: ``If a 
BOX-Top Order or Market Order is a buy order, the best Improvement 
Order is better than the NBBO when the price of the best Improvement 
Order is lower than the National Best Offer. If a BOX-Top Order or 
Market Order is a sell order, the best Improvement Order is better 
than the NBBO when the price of the best Improvement Order is higher 
than the National Best Bid.'' BSE proposed this revision to simplify 
and clarify the proposed rule text, and represents that the revised 
language has the same meaning as the language previously proposed.
    \10\ Excluding unrelated orders that were immediately executed 
during the interval of the PIP, as described below. See proposed 
Paragraph (e)(iii) of Section 18 of Chapter V of the BOX Rules.
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    The proposed rule change would also address the treatment of Market 
Orders and BOX-Top Orders entered on BOX during a PIP on the opposite 
side of a PIP Order.\11\ As rephrased in Amendment No. 4, the proposed 
rule change would set forth specifically that the submission to BOX of 
a Market Order or BOX-Top Order on the opposite side as a PIP Order 
will immediately execute against the PIP Order when, at the time of the 
submission of the Market Order or BOX-Top Order, the best Improvement 
Order ``does not cross the NBBO on the same side of the market as the 
PIP Order.'' \12\ The Market Order or BOX-Top Order would immediately 
execute against the PIP Order up to the lesser of (a) the size of the 
PIP Order, or (b) the size of the Market Order or BOX-Top Order. The 
trade would be executed at a price equal to either (i) one penny better 
than the NBBO, if the best BOX price on the opposite side of the market 
from the Market Order or BOX-Top Order is equal to the NBBO at the time 
of the execution, or (ii) the NBBO.\13\ The remainder of the Market 
Order or BOX-Top Order, if any, would be filtered pursuant to Section 
16(b) of Chapter V of the BOX Rules. The remainder of the PIP Order, if 
any, would continue in the PIP process. In Amendment No. 4, BSE

[[Page 35145]]

also proposes to clarify that following the execution of the PIP Order, 
any remaining Improvement Orders would be cancelled.\14\
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    \11\ Proposed change to Paragraph (i) of Section 18 of Chapter V 
of the BOX Rules.
    \12\ The above phrase replaces the phrase ``is equal to or 
better than the NBBO'' in the proposed rule text, as well as the 
accompanying proposed parenthetical language that stated: ``If a 
BOX-Top Order or Market Order is a buy order, the best Improvement 
Order is better than the NBBO when the price of the best Improvement 
Order is lower than the National Best Offer. If a BOX-Top Order or a 
Market Order is a sell order, the best Improvement Order is better 
than the NBBO when the price of the best Improvement Order is higher 
than the National Best Bid.'' BSE proposed these revisions to 
simplify and clarify the proposed rule text, and represents that the 
revised language has the same meaning as the language previously 
proposed.
    \13\ If the PIP Order is to buy, the trade will be priced at the 
national best bid or one penny more than the national best bid. If 
the PIP Order is to sell, the trade will be priced at the national 
best offer or one penny less than the national best offer.
    \14\ Proposed change to Paragraph (i) of Section 18 of Chapter V 
of the BOX Rules. A related change would be made to Paragraph (b) of 
Section 16 of Chapter V of the BOX Rules, which describes how 
inbound orders to BOX are filtered to avoid trading through the 
NBBO. BSE proposes to add subparagraph (iv) to clarify that at each 
step in the filtering process, under certain circumstances if an 
order (including a Market Order) is an unrelated order on the 
opposite side of a PIP Order, the order will be immediately executed 
against the PIP Order as described above, and that any remaining 
quantity will continue in the filtering process as set forth in 
Paragraph (b) of Section 16 of Chapter V of the BOX Rules.
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III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 4, including whether Amendment No. 4 
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-2004-51 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-BSE-2004-51. 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 office of 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-2004-51 and should be submitted on or before July 7, 2005.

IV. Discussion and Commission Findings

    The Commission has reviewed carefully the proposed rule change, as 
amended, and finds that it is consistent with the requirements of 
Section 6 of the Act \15\ and the rules and regulations thereunder 
applicable to a national securities exchange.\16\ In particular, the 
Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\17\ 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 
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. Section 6(b)(5) also requires that 
the rules of an exchange not be designed to permit unfair 
discrimination among customers, issuers, brokers, or dealers.
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    \15\ 15 U.S.C. 78f.
    \16\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \17\ 15 U.S.C. 78f(b)(5).
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    BSE represents that the majority of BOX's current and prospective 
order flow providers (``OFPs'') have requested the ability to trade 
Market Orders on BOX because their technology is designed for the use 
of market orders and their customers prefer market orders over BOX-Top 
Orders. BOX wishes to accommodate and attract order flow from these 
OFPs.\18\ The Commission notes that other options exchanges accept 
market orders, and believes that it is consistent with the Act for BOX 
to accommodate this type of order, as well. The Commission notes, in 
particular, that Market Orders would be filtered at every price level 
to prevent trading through the NBBO.
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    \18\ See Notice.
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    The Commission further believes that the various related provisions 
that BSE has proposed regarding the use and handling of Market Orders, 
including the availability of the MV designation for Market Orders, the 
ability to submit Market Orders as PIP Orders, and the priority of 
Market Orders at the opening over Limit Orders and Market-on-Opening 
Orders, are reasonable and consistent with the Act.
    The Commission notes that the proposed rule change sets forth in 
detail the manner in which Market Orders will interact with other 
orders in the BOX system, and in particular how such orders, as well as 
BOX-Top Orders, will be treated if entered while a PIP is in progress. 
The BOX Rules currently provide that a PIP is concluded early when an 
unrelated order is submitted to the BOX in certain cases. The proposed 
rule change specifies the circumstances under which a Market Order or 
Box-Top Order will cause an early termination, and how the PIP Order 
and Market Order or Box-Top Order will be executed in these 
circumstances. The proposed rule change further specifies the 
circumstances in which a Market Order or Box-Top Order on the opposite 
side of a PIP Order will execute against the PIP Order before the 
conclusion of the PIP, and the principles governing what price the PIP 
Order will receive in these circumstances. These proposed provisions 
thus clarify for investors and market participants how their orders 
will be executed in various situations.
    While BSE has set forth the reasons why it believes early 
termination of the PIP and immediate execution of opposite-side Market 
Orders and Box-Top Orders is necessary in the relevant 
circumstances,\19\ the Commission is cognizant of a concern that 
premature termination of the PIP could result in a PIP Order being 
disadvantaged by the premature conclusion of a PIP, in that the PIP 
Order would not have received the full three-second auction exposure 
period in which to receive price improvement. The Commission notes that 
current Paragraph (i) of Section 18 of Chapter V of the BOX Rules 
states that it is considered conduct inconsistent with just and 
equitable principles of trade for any BOX Participant to enter 
unrelated orders into BOX for the purpose of disrupting or manipulating 
the Improvement Period process. The Commission believes that this rule 
should help address the above concern.
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    \19\ See Notice.
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    In addition, in Amendment No. 4, BSE represents that during the 
Pilot Period set forth in the BOX Rules relating to aspects of the PIP 
and reports on the PIP process,\20\ BOX will provide additional 
information each month with respect to situations in which the PIP is 
terminated prematurely or a Market

[[Page 35146]]

Order or BOX-Top Order interacts with a PIP Order before the PIP's 
conclusion. This data should aid the Commission in evaluating the 
effect of these rules. The following information will be provided:
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    \20\ See Paragraph .01 of Supplemental Material to Section 18 of 
Chapter V of the BOX Rules and Securities Exchange Act Release No. 
49068 (January 13, 2004), 69 FR 2775 (January 20, 2004).
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    (1) The number of times that a Market Order or BOX-Top Order in the 
same series on the same side of the market as the PIP Order prematurely 
terminated the PIP, and (a) the number of times such orders were 
entered by the same (or affiliated) firm that initiated the PIP that 
was terminated, and (b) the number of times such orders were entered by 
a firm (or an affiliate of such firm) that participated in the 
execution of the PIP Order;
    (2) For the orders addressed in each of 1(a) and 1(b) above, the 
percentage of PIP premature terminations due to the receipt of a Market 
Order or BOX-Top Order in the same series on the same side of the 
market as the PIP Order that occurred within one second of the start of 
the PIP; the percentage that occurred between one and two seconds of 
the start of the PIP; and the percentage that occurred between two and 
three seconds of the start of the PIP; and the average amount of price 
improvement provided to the PIP Order where the PIP is prematurely 
terminated during each of these time periods;
    (3) The number of times that a Market Order or BOX-Top Order in the 
same series on the opposite side of the market as the PIP Order 
immediately executed against the PIP Order, and (a) the number of times 
such orders were entered by the same (or affiliated) firm that 
initiated the PIP, and (b) the number of times such orders were entered 
by a firm (or an affiliate of such firm) that participated in the 
execution of the PIP Order;
    (4) For the orders addressed in each of 3(a) and 3(b) above, the 
percentage of PIP early executions due to the receipt of a Market Order 
or BOX-Top Order in the same series on the opposite side of the market 
as the PIP Order that occurred within one second of the start of the 
PIP; the percentage that occurred between one and two seconds of the 
start of the PIP; and the percentage that occurred between two and 
three seconds of the start of the PIP; and the average amount of price 
improvement provided to the PIP Order where the PIP Order is 
immediately executed during each of these time periods; and
    (5) The average amount of price improvement provided to the PIP 
Order when the PIP runs the full three seconds.

V. Accelerated Approval of Amendment No. 4

    Pursuant to Section 19(b)(2) of the Act,\21\ 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 do publishes 
its reasons for so finding. The Commission hereby finds good cause for 
approving Amendment No. 4 to the proposal prior to the 30th day after 
publishing notice of Amendment No. 4 in the Federal Register. The 
Commission believes that the proposed revisions made by Amendment No. 4 
simplify and clarify the proposed rule change and do not change its 
substance. As such, the Commission believes it is appropriate to 
accelerate approval of Amendment No. 4 so that BSE can implement the 
proposed rule change without delay. In addition, in Amendment No. 4, 
BSE represents that it will provide specified information each month 
that the Commission believes will aid it in its evaluation of the PIP. 
Accordingly, pursuant to Section 19(b)(2) of the Act,\22\ the 
Commission finds good cause to approve Amendment No. 4 prior to the 
30th day after notice of Amendment No. 4 is published in the Federal 
Register.
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    \21\ 15 U.S.C. 78s(b)(2).
    \22\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, is consistent with the Act and the rules and 
regulations thereunder applicable to a national securities exchange, 
and, in particular, with Section 6(b)(5) of the Act.\23\
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    \23\ 15 U.S.C. 78f(b)(5).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\24\ that the proposed rule change (SR-BSE-2004-51) and Amendment 
Nos. 1, 2, and 3 are approved; and that Amendment No. 4 thereto is 
approved on an accelerated basis.
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    \24\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E5-3093 Filed 6-15-05; 8:45 am]
BILLING CODE 8010-01-P