[Federal Register: January 22, 2003 (Volume 68, Number 14)]
[Notices]
[Page 3062-3070]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22ja03-86]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-47186; File No. SR-BSE-2002-15]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Boston Stock Exchange, Inc., Establishing Trading Rules
for the Boston Options Exchange Facility
January 14, 2003.
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 31, 2002, 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
December 18, 2002, the BSE filed Amendment No. 1 that entirely replaced
the original rule filing.\3\ On January 9, 2003, the BSE filed
Amendment No. 2
[[Page 3063]]
that entirely replaced the original rule filing and Amendment No. 1.\4\
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.
\3\ See Letter from George W. Mann, Jr., Executive Vice
President and General Counsel, BSE, to Annette Nazareth, Director,
Division of Market Regulation (``Division''), Commission, dated
December 18, 2002.
\4\ See Letter from George W. Mann, Jr., Executive Vice
President and General Counsel, BSE, to Annette Nazareth, Director,
Division, Commission, dated January 8, 2003.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The BSE proposes to create a new electronic options trading
facility of the Exchange, called the Boston Options Exchange (``BOX'').
The text of the proposed rule change is available for inspection at the
Office of the Secretary, the BSE, the Commission's Public Reference
Room, and on the Commission's Internet Web site (http://www.sec.gov/rules/sro/shtml
).
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 BSE proposes to establish rules for BOX,\5\ a new exchange
facility, as that term is defined in Section 3(a)(2) of the Act.\6\ BOX
would be operated by Boston Options Exchange Group, LLC (``BOX
LLC'').\7\ BOX would administer a fully automated trading system for
standardized equity options intended for the use of Options
Participants.\8\ It would conduct an auction market similar to the ones
conducted by the options exchange markets currently in operation,
although the BOX auction would occur electronically and not on a floor.
BOX would provide automatic order execution capabilities in the options
securities listed or traded on the BSE.
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\5\ The term ``BOX'' means the Boston Options Exchange or Boston
Stock Exchange Options Exchange, an options trading facility of the
Exchange under Section 3(a)(2) of the Act. See proposed BOX Rules,
Chapter I, General Provisions, Sec. 1(a)(6) (definition of ``BOX'').
\6\ 15 U.S.C. 78c(a)(2).
\7\ The founding members of BOX LLC are the BSE, the Bourse de
Montreal, Inc., and Interactive Brokers Group, LLC.
\8\ The term ``Options Participant'' or ``Participant'' means a
firm or organization that is registered with the Exchange pursuant
to Chapter II of the proposed BOX Rules for purposes of
participating in options trading on BOX as an ``Order Flow
Provider'' and/or ``Market Maker.'' See proposed BOX Rules, Chapter
I, General Provisions, Sec. 1(a)(39) (definition of ``Options
Participant'').
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The BSE intends to establish BOX as an options market where orders
from all types of market participants may interact directly with each
other on a price/time priority basis. Through a specific process called
the Price Improvement Period (``PIP''),\9\ BOX would attract orders and
subject them to price improvement and real price competition without
which they would otherwise simply be executed at the NBBO. BOX would
offer a price/time priority based limit order book where any Public
Customer \10\ or broker-dealer market participant could submit orders
(post prices) or take liquidity. It would also provide a limited
facility for Order Flow Providers \11\ to interact with their own order
flow but only at prices better than the best bid or offer on the
market; and a true opportunity for Market Makers \12\ to step in and
compete for those orders quickly and anonymously.
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\9\ See proposed BOX Rules, Chapter V, Doing Business on BOX,
Sec. 18, Price Improvement Period.
\10\ The term ``Customer'' means either a Public Customer or a
broker-dealer. The term ``Public Customer'' means a person that is
not a broker or dealer in securities. All Customer orders must be
submitted through an approved BOX Options Participant. See proposed
BOX Rules, Chapter I, General Provisions, Sec. 1(a)(19) (definition
of ``Customer'') and Sec. 1(a)(49) (definition of ``Public
Customer'').
\11\ The terms ``Order Flow Provider'' or ``OFP'' mean those
Options Participants representing as agent Customer Orders on BOX.
See proposed BOX Rules, Chapter I, General Provisions, Sec. 1(a)(45)
(definition of ``Order Flow Provider'').
\12\ The term ``Market Maker'' means an Options Participant
registered with the Exchange for the purpose of making markets in
options contracts traded on the Exchange and that is vested with the
rights and responsibilities specified in Chapter VI of these
proposed BOX Rules. All Market Makers are designated as specialists
on the Exchange for all purposes under the Act. See proposed BOX
Rules, Chapter I, General Provisions, Sec. 1(a)(31) (definition of
``Market Maker'').
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a. Summary of BOX Trading Rules. (i) Low Barriers to Trading
Access. BOX would have multiple and competing market makers rather than
a specialist driven system. There would be no designated specialists,
primary market makers, or lead market makers with authority to control
trading in a particular options class. Market making in an options
class on BOX would be open to all qualified Options Participants who
are approved by the Exchange as Market Makers.\13\ All appointed
competing Market Makers would be responsible for ensuring basic
liquidity. BOX has invested heavily to acquire the necessary processing
capacity to rapidly and efficiently process the messaging traffic that
multiple market making would generate as BOX believes this would
significantly intensify competition. This competition would encourage
tighter spreads and better pricing to the ultimate advantage of the
investor. Further, in the spirit of maintaining a flat and open
marketplace, BOX would limit Market Makers' privileges within their
appointed classes to the ability to maintain orders on all series and
to the opportunity to participate in PIP auctions. BOX Options
Participants, whether Market Makers or Order Flow Providers, or both,
would not be required to obtain membership in the BSE, nor to lease
trading rights from any member (``seat holder'') of the BSE. Market
Maker Participants would be required to register as an Options
Participant, obtain approval from the BSE and pay a modest annual
access fee for trading rights and a low execution fee per contract.\14\
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\13\ See proposed BOX Rules, Chapter VI, Market Makers, Sec. 4,
Appointment of Market Makers.
\14\ The BSE intends to file under separate cover a proposed
rule change regarding BOX related fees, pursuant to Section 19(b) of
the Act, 15 U.S.C. 78s(b).
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In addition, as BOX would be fully automated and without a central
trading floor, Participants would have to access BOX from ``remote''
locations. The reduction in fixed costs and the barriers to entry would
give rise to a wider variety of market participants than heretofore
seen, resulting in fiercer competition to the ultimate advantage of the
Customers who use BOX.
(ii) Anonymous Central Order Book with Price/Time Priority. All
orders on BOX would be entered on the BOX Central Order Book (``BOX
Book'').\15\ Only prices and quantities would be displayed to all
trading Participants, maintaining full anonymity with regard to the
ownership of each order. With only minor exceptions, all orders would
be matched on a strict price and time priority algorithm. This will
result in better pricing since the price and time priority algorithm
gives a strong incentive to trading Participants to post their very
best prices rapidly. There would be no opportunity to ``step up
[[Page 3064]]
and match'' in order to participate in a trade on BOX.
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\15\ The term ``Central Order Book'' or ``BOX Book'' means the
electronic book of orders maintained by the BOX Trading Host. See
proposed BOX Rules, Chapter I, General Provisions, Sec. 1(a)(12)
(definition of ``Central Order Book'').
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(iii) All Orders Firm for All Traders. All orders on the BOX Book
would be firm at all times for all trading Participants. An order on
the BOX Book is available in its entirety to all parties on a ``first
come, first serve'' basis whether from a Market Maker, Public Customer
or broker/dealer account.
(iv) Price Improvement Period. To address the issues of
internalization of Customer Orders by Order Flow Providers and Market
Makers, BOX has developed PIP. The BOX PIP would be a very rapid
auction starting at a price better than the current NBBO where BOX
Participants could compete to improve the Customer side of the trade.
b. BOX Regulated as a Facility of the Exchange. The BSE has entered
into various agreements with BOX LLC under which BOX LLC would operate
BOX as a facility of the BSE. Pursuant to these agreements, the BSE
would maintain responsibility for all regulatory functions related to
the facility, and BOX LLC would be responsible for the business of the
facility to the extent those activities are not inconsistent with the
regulatory and oversight functions of the BSE. The BSE intends to file
with the Commission under separate cover a proposed rule change
regarding the delegation of authority from the BSE to Boston Options
Exchange Regulation, LLC (``BOXR''), a wholly-owned subsidiary of the
BSE, for regulatory functions related to the facility such as
surveillance and compliance (``Delegation Plan''). In addition, the BSE
intends to file under the Delegation Plan a proposed rule change
regarding the relationship between the BSE, BOXR, and the BOX entities.
In addition, the BSE intends to file the necessary rule changes to
allow the BSE to join the Options Intermarket Linkage Plan, the Options
Price Reporting Authority (``OPRA'') and the Options Self-Regulatory
Council (``OSRC''), which have been authorized under the applicable
National Market System (``NMS'') plans.\16\
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\16\ The OSRC is currently operating under a draft agreement, as
opposed to a formal plan declared effective by the Commission
pursuant to Section 11A of the Act, 15 U.S.C. 78k-1.
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c. The BSE Would Conduct All Necessary Surveillance of BOX. As part
of its obligations under the Act and pursuant to its own rules, the BSE
would conduct all necessary surveillance of the operation of and
trading on BOX.\17\ The BSE intends to implement a state-of-the-art
electronic system for producing detailed audit trails of all orders
submitted to BOX. The BSE emphasizes that it has not only the
technological capability to establish and maintain an audit trail, but
also, the staff expertise and capital resources to satisfactorily
oversee a new electronic options market.
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\17\ The BSE will delegate to BOXR the authority to provide the
necessary surveillance of the operation of and trading on BOX
pursuant to the proposed Delegation Plan to be filed by the BSE
under separate cover.
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The BSE, as a well-established exchange, has the requisite staff
experience to support and to supplement the technological surveillance
necessary for the all-electronic BOX. As one of the nation's oldest
securities exchanges, the BSE has repeatedly demonstrated its success
in attracting qualified management and regulatory staff, who have
proven their knowledge of the federal securities laws and the self-
regulatory role of a registered exchange. Furthermore, consistent with
the requirements of the Act, the BSE will demonstrate to the
Commission, as necessary, that it has adequate financial resources to
fund a surveillance program for a fully electronic options trading
facility. In accordance with its regulatory responsibilities, the BSE
will also demonstrate to the Commission that the technological
capabilities of BOXR and BOX would be more than adequate for the
surveillance of trading on BOX.\18\
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\18\ The BSE will comply with the Commission's Automation Review
Policy with regard to BOX. See Securities Exchange Act Release No.
27445 (Nov. 16, 1989), 54 FR 48703 (Nov. 24, 1989) (``ARP I
Release'') and Securities Exchange Act Release No. 29185 (May 9,
1991), 56 FR 22490 (May 15, 1991) (``ARP II Release''). The BSE will
ensure that BOX has ``the capacity to accommodate current and
reasonably anticipated future trading volume levels adequately and
to respond to localized emergency conditions.''
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d. The Boston Options Exchange. BOX, the proposed electronic
options trading facility of the BSE, would offer liquidity, price
quality and low cost of execution for market participants. BOX would
function as a limit order book under the principle of price/time
priority for all market participants' orders and would provide
execution enhancements. Market Makers would participate electronically
in BOX to enhance liquidity in the book and would be able to interact
with order flow subject to automatic price improvement requirements. In
addition, orders would be permitted facilitation on BOX subject to
price improvement where the price and time priority of the limit order
book is protected.
BOX is described in more detail in the following subsections.
Specifically, subsection (i) describes the BOX membership structure and
the registration requirements as well as the trading obligations of
Market Makers and Order Flow Providers. Subsection (ii) describes
trading on the BOX Trading Host in detail, including a description of
how orders are executed during BOX's trading session.
(i) BOX Membership Structure: Options Participants. With the
introduction of BOX, the BSE intends to change its membership rules to
reflect the new all-electronic options trading environment. BOX would
have only one category of members, as that term is defined in the
Section 3(a)(3)(A) of the Act: \19\ Options Participants. Any
registered broker-dealer who wishes to be a member once BOX begins
operation would have to become a BSE-approved Options Participant.\20\
By becoming an Options Participant, the registered broker-dealer would
be permitted to effect options transactions on BOX. An Options
Participant: (1) Must agree to be bound by the Constitution, By-Laws
and Rules of the BSE and the BOX Rules, and by federal securities laws,
and by all applicable rules and regulations of the Commission; (2)
would not acquire ownership or distribution rights in the BSE or BOX;
and (3) would have representation as will be proposed in the Delegation
Plan to be filed with the Commission by the BSE under separate cover.
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\19\ See 15 U.S.C. 78c(a)(3)(A).
\20\ See proposed BOX Rules, Chapter II, Participation, Sec. 1,
Options Participation.
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BOXR would authorize any Options Participant who met certain
enumerated requirements to obtain access to BOX. The requirements for
access are as follows: First, all Options Participants must make
application to, and be approved by, the BSE as Options Participants.
Second, all approved Participants must enter into an Options
Participation Agreement with the Exchange. Options Participants would
be approved to participate on BOX as Market Makers, Order Flow
Providers, or both.
(A) Market Makers
Registered BOX Market Makers would be designated as dealer-
specialists on the BSE for all purposes under the Act.\21\
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\21\ See proposed BOX Rules, Chapter VI, Market Makers, Sec. 1,
Market Maker Registration.
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(1) Registration. To become a market maker on BOX, an Options
Participant would have to register as a BOX Market Maker by filing a
written application with the BSE.\22\ In determining whether to approve
a Market Maker application, the BSE would consider, among other
[[Page 3065]]
things, the Options Participant's capital, operations, personnel,
technical resources, and disciplinary history. Upon receipt by the
Options Participant of notice of the BSE's approval, the Options
Participant's Market Maker registration would become effective.\23\ If
the application is disapproved, the applicant Options Participant would
have the opportunity to appeal the specific grounds of the denial under
the provisions of Chapter II, Participation, Section 3, Denial of and
Conditions to Participation. A Market Maker's registration could be
suspended or terminated by the BOXR upon a determination that the
Market Maker has failed to properly comply with the Market Maker's
obligations under proposed Chapter VI Section 5 of the BOX Rules, as
discussed below.
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\22\ See proposed BOX Rules, Chapter VI, Market Makers, Sec.
1(a), Market Maker Registration.
\23\ See proposed BOX Rules, Chapter II, Participation, Sec. 2,
Qualification Requirements for Options Participants and proposed BOX
Rules, Chapter VI, Market Makers, Sec. 1, Market Maker Registration.
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(2) Appointments. In addition to registering as a Market Maker
generally, a Market Maker must obtain an appointment in each options
class in which it wishes to make a market on BOX by filing an
application with BOXR. In determining whether to approve or disapprove
the Market Maker's appointment in a class, BOXR could consider, among
other things: (1) The financial and technical resources available to
the Market Maker; (2) the Market Maker's experience, expertise and past
performances in making markets or options trading; and (3) the
maintenance and enhancement of competition among Market Makers in each
class of options to which it is appointed.\24\
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\24\ See proposed BOX Rules, Chapter VI, Market Makers, Sec.
4(b), Appointment of Market Makers.
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Each Market Maker may be appointed to any options class listed on
BOX for trading. Such an appointment would consist of at least one
class and may include all classes traded on the Exchange. BOXR would
not list an options class for trading unless at least two Market Makers
are appointed to the options class.\25\ In addition, before BOXR opens
trading for any additional series of an options class, it would require
at least two Market Makers to be appointed for trading that particular
class. Upon appointment, BOXR would require Market Makers to maintain
active markets in that class for a period of at least six months.\26\
However, BOXR would not require a Market Maker in a class to continue
trading in that class if BOXR makes an affirmative determination that
continued trading in that class by a single Market Maker is to the
detriment of that Market Maker, of no adverse consequence to an
existing Customer of BOX or an Options Participant, and serves no
greater purpose in the fair and orderly functioning of the
marketplace.\27\ Once a class is opened for trading and subsequently
only one Market Maker remains appointed to that class, BOXR may
continue trading in that class if BOXR makes an affirmative
determination that halting of trading in such class would be
detrimental to the remaining Market Maker, and that continued trading
in such class by one Market Maker would be in the interest of
maintaining a fair and orderly marketplace and would not create adverse
consequence to an existing Customer of BOX or an Options
Participant.\28\
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\25\ See proposed BOX Rules, Chapter IV, Securities Traded on
the Boston Options Exchange Facility, Sec. 5(a), Minimum
Participation Requirement for Opening Trading of Option Classes.
\26\ See proposed BOX Rules, Chapter VI, Market Makers, Sec.
5(a)(viii), Obligations of Market Makers.
\27\ See proposed BOX Rules, Chapter IV, Securities Traded on
the Boston Options Exchange Facility, Sec. 5(b), Minimum
Participation Requirement for Opening Trading of Option Classes.
\28\ See proposed BOX Rules, Chapter IV, Securities Traded on
the Boston Options Exchange Facility, Sec. 5(c), Minimum
Participation Requirement for Opening Trading of Option Classes.
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Under the proposal, BOXR may suspend or terminate any appointment
of a Market Maker and may make additional appointments or change the
options classes included in a Market Maker's appointment whenever, in
BOXR's judgment, the interests of a fair and orderly market are best
served by such action.\29\
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\29\ See proposed BOX Rules, Chapter VI, Market Makers, Sec.
4(c), Appointment of Market Makers.
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(3) Obligations. Market Makers on BOX would electronically engage
in a course of dealing for their own account to enhance liquidity
available on BOX and to assist in the maintenance of fair and orderly
markets. In addition, Market Makers may interact with directed order
flow, subject to price improvement requirements and certain obligations
and duties. Specifically, Market Makers would have to satisfy the
following responsibilities and duties during trading: (1) Maintain
continuous firm, two-sided quotes, which are limit orders submitted to
BOX by a Market Maker, in those options classes in which the Market
Maker is appointed to trade; (2) maintain adequate minimum capital in
accordance with Chapter VI Section 9; (3) remain in good standing with
BOXR; (4) inform BOXR of any material change in financial or
operational condition or in personnel; and (5) clear and settle
transactions through the facilities of a registered clearing
member.\30\ If BOXR found any substantial or continued failure by a
Market Maker to meet the above obligations and duties, BOXR would
subject the Market Maker to disciplinary action, suspension or
revocation of the Market Maker's appointment in one or more options
classes.\31\ Subject to certain limitations, a Market Maker may enter
all order types permitted to be entered by Customer participants under
the Rules to buy or sell options in classes of options listed on BOX to
which the Market Maker is not appointed.\32\
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\30\ See, generally, proposed BOX Rules, Chapter VI, Market
Makers.
\31\ See proposed BOX Rules, Chapter VI, Market Makers, Sec.
5(e), Obligations of Market Makers.
\32\ See proposed BOX Rules, Chapter VI, Market Makers, Sec.
6(e), Market Maker Quotations.
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(B) Order Flow Providers
Order Flow Providers (``OFPs'') would be those Options Participants
representing orders of Public Customers and other Broker Dealers on the
BOX market. OFPs may also register as Market Makers. OFPs may trade as
principal, both as contra party to Customer Orders submitted to BOX by
such OFP and as contra party to unrelated orders submitted to BOX by
other Options Participants. OFPs may only act as contra party to their
own Customer Orders pursuant to the rules of the Price Improvement
Period (see discussion below).\33\
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\33\ See proposed BOX Rules, Chapter V, Doing Business on BOX,
Sec. 18, The Price Improvement Period.
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(ii) The BOX Trading Host. BOX would operate an automated trading
system for standardized equity options. This section describes the most
significant rules and procedures governing trading on BOX.
(A) Generally
Each Market Maker on BOX would enter its own independent quotations
into the BOX Trading Host (``Trading Host''). Market Makers would enter
a quantity with their quotations, which must meet the minimum size
requirements established by the Exchange.\34\ OFPs would enter agency
and principal orders into the Trading Host. Market Makers and OFPs may
enter into BOX the following standard types of orders: market orders,
limit orders, Day Orders, Good-Til-Canceled (GTC) Orders, Fill-or-Kill
Orders, Fill-
[[Page 3066]]
and-Kill Orders, Market-on-Open Orders, and Minimum Volume Orders.\35\
Market Makers and OFPs would receive from BOX information on all of the
orders and quotations pending in the Trading Host, including a display
of up to the five best bids and offers currently quoted on BOX in each
options series, as well as the aggregate size at each of the five best
prices.\36\
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\34\ See proposed BOX Rules, Chapter VI, Market Makers, Sec.
6(a), Market Maker Quotations.
\35\ See proposed BOX Rules, Chapter V, Doing Business on BOX,
Sec. 14, Order Entry.
\36\ See proposed BOX Rules, Chapter V, Doing Business on BOX,
Sec. 16(a)(ii), Execution and Price/Time Priority.
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(B) Order Ranking and Display
The BOX Book contains all the Options Participants' orders. Limit
orders of Options Participants submitted to BOX would be ranked and
maintained in the BOX Book according to price/time priority, such that
within each price level, all orders would be organized by the time of
entry. \37\ No distinction is made to this priority with regard to
account designation (Public Customer, Broker/Dealer or Market Maker).
The orders are ranked based on the specified limit price and the time
of original order entry in the Trading Host. If an order is executed in
its entirety, its price/time priority is also exhausted and so, the
next order in price/time priority would move to the top of the BOX
Book. An Options Participant must submit a new order if it wishes to
refresh its order. This new order would be ranked at the specified
limit price according to the time that the new order was entered.
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\37\ See proposed BOX Rules, Chapter V, Doing Business on BOX,
Sec. 16(a)(i), Execution and Price/Time Priority.
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(C) Order Execution and Priority Rules
Trades would occur when orders or quotations match in the Trading
Host. If more than one order has been entered into the Trading Host at
the same price, priority would be based on the time of order entry.\38\
If an Options Participant enters a limit order into the Trading Host
that matches an order already in the Trading Host, a trade would occur
at the price of the order already in the Trading Host up to the
available size. After executing against that order, the limit order
would trade against other orders in the Trading Host until the limit
order is filled in its entirety or the limit order depletes the
available size at that price. If any amount of the limit order remains
unexecuted, the balance of the order would become either the best bid
or offer.\39\
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\38\ See proposed BOX Rules, Chapter V, Doing Business on BOX,
Sec. 16(a)(iv)(2), Execution and Price/Time Priority.
\39\ See proposed BOX Rules, Chapter V, Doing Business on BOX,
Sec. 16(a)(iv)(3), Execution and Price/Time Priority.
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(D) Price Improvement Period
The BOX PIP system would enhance the traditional firm facilitation
mechanism and provide guaranteed price improvement opportunities for
Customers. Chapter V Section 18 of the BOX Rules provides an OFP with
the ability to use the PIP to enter a Customer Order and execute that
order as principal.\40\ An OFP is not otherwise permitted to execute an
agency order as principal unless the order is first permitted to
interact with other interest on BOX through the PIP system.\41\
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\40\ BOX Order Flow Providers and Market Makers may attempt to
interact with their own orders by initiating a PIP. However, for
purposes of simplicity in this discussion, initiators of PIPs
generally are referred to as ``Order Flow Providers.''
\41\ See proposed BOX Rules, Chapter V, Doing Business on BOX,
Sec. 17(b), Customer Orders and Order Flow Providers.
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In order to preclude unfair internalization, BOX Rules prevent an
OFP from entering simultaneous Customer and proprietary orders before
there is an opportunity for the Customer Order to interact with other
trading interest on BOX.\42\ BSE has proposed supplementary material in
the BOX Rules to provide that it is a violation of Chapter V, Section
17 for an OFP to circumvent the Rules by providing an opportunity for a
Customer to execute against agency orders handled by the OFP
immediately upon their entry into the Trading Host. In addition, it
would be a violation for an OFP to cause the execution of an order it
represents as agent on BOX by orders it solicited from Options
Participants and non-Option Participant broker-dealers to transact with
such orders, whether such solicited orders are entered into the Trading
Host directly by the OFP or by the solicited party (either directly or
through another Participant), if the OFP fails to expose those orders
on BOX as required by Chapter V, Section 17. The BSE believes that
these interpretations would prevent an OFP from thwarting the
restrictions on trading as principal.
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\42\ See proposed BOX Rules, Chapter V, Doing Business on BOX,
Section 17, Supplementary Material .01 and .02, Customer Orders and
Order Flow Providers.
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(1) Key Features of the Price Improvement Period
(a) An OFP may submit any Customer Order for price improvement into
the PIP at a price of at least one cent better than the prevailing
NBBO.
(b) Market Makers and the introducing OFP may compete for the
Customer execution in one-cent increments; however, all BOX
Participants are informed of each PIP and may submit competing orders
at standard price increments.
(c) A Market Maker would need to match or improve the price
proposed by the Primary Improvement Order \43\ for the opportunity to
participate in the execution.
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\43\ See proposed BOX Rules, Chapter V, Doing Business on BOX,
Sec. 18(e), The Price Improvement Period. See also, the discussion
of OFP Submission of Order to PIP and PIP Participants and
Improvement Orders in Sections (d)(ii)(D)(2) and (4) below.
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(d) The PIP would run for three seconds and cannot be cancelled by
the OFP.
(e) Execution is in price and time priority at the end of the PIP
with two exceptions: (1) The OFP is guaranteed no more than a minimum
quantity,\44\ provided he has matched the PIP execution price and (2) a
Market Maker Prime \45\ may in some cases have partial time priority
over other Market Makers at the end of the PIP.
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\44\ See the discussion of PIP Trade Allocation in Section
(d)(ii)(D)(7).
\45\ The Market Maker Prime is a BOX Market Maker who has
partial time priority over all other Market Makers in the matching
mechanism of the PIP. The Market Maker Prime is the first Market
Maker who has a quote that is equal to the NBBO on the contra side
of the market as the Customer Order at the instant the PIP is
initiated. See the discussion of Market Maker Prime in Section
(d)(ii)(E) below.
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(f) As the execution of the Customer Order is guaranteed at the
start of the PIP, the Customer Order has priority over all other orders
on his side of the market during the PIP.
(2) OFP Submission of Order to PIP
OFPs executing agency orders may designate market and marketable
limit Customer Orders for price improvement and submission to the PIP.
Customer Orders designated for the PIP would be submitted to BOX with a
matching contra order, the ``Primary Improvement Order,''\46\ equal to
the full size of the Customer Order. The Primary Improvement Order
would be on the opposite side of the market than that of the original
Customer Order and represent a bid (offer) that is at least $.01
greater than the bid (less than the
[[Page 3067]]
offer) of the National Best Bid Offer (NBBO) at the time of the
commencement of the PIP.\47\
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\46\ An Improvement Order is any order entered into the PIP by
the OFP at a price better than the specified NBBO or any order enter
by a Market Maker at or better than the OFP's Primary Improvement
Order. The subsequent price modifications to an OFP's Primary
Improvement Order are treated as new Improvement Orders for the sake
of establishing priority in the PIP process. See proposed BOX Rules,
Chapter V, Doing Business on BOX, Sec. 18(e)(i)-(ii), The Price
Improvement Period. See also, the discussion of PIP Participants and
Improvement Orders in Section (d)(ii)(D)(4) below.
\47\ See proposed BOX Rules, Chapter V, Doing Business on BOX,
Sec. 18(e), The Price Improvement Period.
---------------------------------------------------------------------------
(3) Pilot Program--No Minimum Size Requirement for Price Improvement
BSE believes the customer protection benefits of the PIP process
should be open to orders of all sizes since:
(a) The price to the Customer for PIP orders must better the
prevailing NBBO;
(b) The price to the Customer is firm;
(c) The OFP and not the Customer bears the risk of market movements
during the PIP; and
(d) The Customer is given an opportunity for further price
improvement during the three second exposure period.
From the Customer's perspective, the only result of having the
Customer's small order being ineligible for the PIP would be that the
Customer's order would likely be filled at a price at least a penny
worse than if it had been filled through the PIP.\48\ Indeed, because
of the relatively lower risk to the OFP and the Market Makers by virtue
of the small size, there is a greater likelihood of price improvement
to be provided by BOX Market Makers stepping in and participating in
the PIP. On the other hand, creating a minimum size requirement would
mandate that all small orders are automatically executed at the
prevailing quotes with no opportunity for any price improvement.
Consequently, BOX would have no minimum size requirement for orders
entered into the PIP, for at least a Pilot Period to extend eighteen
months from the day trading commences on BOX. During this Pilot Period,
BOX would supply the Commission with data to support at least the
following tenets:
---------------------------------------------------------------------------
\48\ See proposed BOX Rules, Chapter V, Doing Business on BOX,
Sec. 18, Supplementary Material, The Price Improvement Period.
---------------------------------------------------------------------------
(a) That there is meaningful competition for all size PIP orders;
(b) That there is significant price improvement for all orders
executed through the PIP, and;
(c) That there is an active and liquid market functioning on BOX
outside of the PIP mechanism.
Any data that is submitted to the Commission by the BSE during this
Pilot Period and related directly to it, would be submitted on a
confidential basis.\49\
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\49\ See proposed BOX Rules, Chapter V, Doing Business on BOX,
Sec. 18, Supplementary Material, The Price Improvement Period.
---------------------------------------------------------------------------
(4) PIP Participants and Improvement Orders
Improvement Orders are specialized orders submitted in increments
of $.01 that are valid only in the PIP process. Improvement Orders may
not be submitted in increments smaller than $.01.\50\ An Improvement
Order is any order entered into the PIP by the OFP at a price better
than the specified NBBO or any order entered by a Market Maker at or
better than the OFP's Primary Improvement Order. PIP Participants would
enter Improvement Orders seeking to gain priority to give the contra
Customer Order an improved execution price over the NBBO. Only BOX
Market Makers may submit competing Improvement Orders and only for
those classes within their appointment. OFPs may submit Improvement
Orders only in the PIP auction for which they have submitted the
Primary Improvement Order.\51\ The subsequent price modifications by
the OFP to an OFP's Primary Improvement Order are treated as new
Improvement Orders for the sake of establishing priority in the PIP
process.\52\ Market Makers and OFPs meeting the foregoing criteria
would be deemed PIP Participants for that specific PIP only, and may
continually submit competing Improvement Orders during that PIP.\53\
Options Participants not deemed PIP Participants may nonetheless submit
orders to the Trading Host during the PIP in order to compete; however,
the normal price increments would apply to these orders.\54\
---------------------------------------------------------------------------
\50\ See proposed BOX Rules, Chapter V, Doing Business on BOX,
Sec. 18(h), The Price Improvement Period.
\51\ See proposed BOX Rules, Chapter V, Doing Business on BOX,
Sec. 18(e)(i), The Price Improvement Period.
\52\ See proposed BOX Rules, Chapter V, Doing Business on BOX,
Sec. 18(e)(ii), The Price Improvement Period.
\53\ See proposed BOX Rules, Chapter V, Doing Business on BOX,
Sec. 18(e)(i), The Price Improvement Period.
\54\ See proposed BOX Rules, Chapter V, Doing Business on BOX,
Sec. 18(e),(f),(g), The Price Improvement Period.
---------------------------------------------------------------------------
BOX Improvement Orders are firm and cannot be cancelled during the
PIP. Thus, from the outset of the PIP, a Customer is guaranteed a
locked-in trade at a price at least a penny better than the NBBO, and
the OFP (and not the Customer) bears full market risk during the PIP.
An OFP is not permitted to cancel its Primary Improvement Order or the
Customer Order nor modify the size of its Primary Improvement Order at
any time during the PIP, and may only modify the price of its Primary
Improvement Order by improving it. A Market Maker, except for a Market
Maker that has submitted a Primary Improvement Order, may: (1) Submit a
competing Improvement Order for any size up to the size of the Customer
Order, (2) submit competing Improvement Order(s) for any price equal to
or better than the Primary Improvement Order, (3) improve the price of
his Improvement Order at any point during the PIP, and (4) decrease the
size of his Improvement Order, but only if he improves the price of
that order.\55\
(5) Competition During the PIP
At the conclusion of the PIP, the Customer Order would be matched
in accordance with price/time priority against the best prevailing
orders on BOX, whether Improvement Orders or subsequent ``unrelated
orders'' \56\ to the PIP that were received by BOX during the PIP
process from non-PIP Participants.\57\ Any portion of an Improvement
Order left unfilled would be cancelled. The only exceptions to time
priority in the PIP matching process concern limited priority accorded
the OFP and Market Maker Prime at the PIP conclusion; these are
described below in detail.\58\
---------------------------------------------------------------------------
\55\ See proposed BOX Rules, Chapter V, Doing Business on BOX,
Sec. 18(e)(ii), The Price Improvement Period.
\56\ An ``unrelated order'' would be defined as a non-
Improvement Order entered into the BOX market during a PIP. See
proposed BOX Rules, Chapter V, Doing Business on BOX, Sec. 18(a),
The Price Improvement Period.
\57\ See proposed BOX Rules, Chapter V, Doing Business on BOX,
Sec. 18(e)(iii), The Price Improvement Period.
\58\ See proposed BOX Rules, Chapter V, Doing Business on BOX,
Sec. 18(f), The Price Improvement Period and Sec. 19, Market Maker
Prime.
---------------------------------------------------------------------------
In cases where an unrelated order on the same side as the Customer
Order is submitted to BOX during a PIP, which is immediately executable
(all or partially) against either an Improvement Order or an order on
the BOX Book, the PIP would be concluded and the Customer Order would
be matched with the Improvement Order(s) to the fullest extent
possible. Improvement Orders would not be matched with unrelated
orders; however, the Customer Order may be executed against unrelated
orders where the latter have a better price than the Improvement
Order.\59\
---------------------------------------------------------------------------
\59\ See proposed BOX Rules, Chapter V, Doing Business on BOX,
Sec. 18(g), The Price Improvement Period.
---------------------------------------------------------------------------
The BOX Rules provide strong incentives for both OFPs and Market
Makers to compete aggressively for Customer Orders entered into the PIP
process. First, in contrast to some other systems, under the proposed
BOX Rules no one would get a ``last look'' to step
[[Page 3068]]
up and match the prices bid or offered during the PIP. Therefore, the
OFP attempting to trade against its own order through the PIP process,
as well as the Market Makers who are competing to participate on that
order, all have a strong incentive to put their best prices forward
first before the PIP ends. In the PIP, the Market Maker would need to
match or improve the price proposed by the OFP's Primary Improvement
Order (or its modification) if the Market Maker is to participate in
the execution. The PIP process is not a face-to-face or screen-based
negotiation, but a true auction--where market participants are
anonymous, where all the prices are firm from the beginning, where the
auction cannot be cancelled by the facilitation firm, and where no one
gets a last look to change one's price before the auction ends. Since
the PIP is an anonymous trading environment where there is no
specialist or market maker who controls the process and there is no
physical, technological or procedural impediment to posting a better
price and breaking into a trade, BOX Market Makers would have the
opportunity and incentive not to let trades happen at uncompetitive
prices.
(6) PIP Duration Is Three Seconds
The PIP auction process would be 3 seconds in duration because the
BSE believes it is enough time for a vigorous, multi-round, electronic
price improvement auction among the BOX Market Makers and the OFP who
initiates the PIP, and yet is not so long that it is economically
infeasible for OFPs to be firm for the Customer Order for at least a
penny better than the prevailing NBBO at the inception of the PIP. This
gives the Customer price protection against market movements but also
exposes the OFP to full market risk during the entire course of the
PIP. This exposure cannot be hedged because the OFP has no way of
knowing with certainty how much--if any--of the trade the OFP would
receive because the OFP's price may be matched or bettered by any
Market Maker during the PIP.\60\
---------------------------------------------------------------------------
\60\ See proposed BOX Rules, Chapter V, Doing Business on BOX,
Sec. 18, The Price Improvement Period.
---------------------------------------------------------------------------
Balanced against the fact that the OFP is held firm and bears full
market risk during the PIP, the PIP must nonetheless be long enough to
assure that the OFP's price to the Customer is a fair one--meaning
among other things that a competitive, multi-round auction is possible
between and among the OFP and the Market Makers in the relevant class.
As a practical matter, the PIP process for all Options Participants
would necessarily be governed by computerized systems, not by human
traders. Market Makers and OFPs can easily either develop their own
software to manage trading on BOX, or utilize one of the many front-end
solutions that have been written to connect with electronic-based
exchanges.
In addition to the fact that BOX OFP and Market Maker prices must
be firm during the PIP, the three second duration of the PIP reflects
the processing speed of the trading system upon which BOX would be
operated and the speed of network transmissions.\61\ The BOX system
would implement full multi-round and multi-participant auctions during
a PIP of three seconds. Therefore, the Exchange believes that a three
second PIP is the best way to minimize the market risk borne by OFPs so
that they can provide firm, aggressive pricing to Improvement Orders,
and yet assure that those prices are tested by a reasonable electronic
auction process.
---------------------------------------------------------------------------
\61\ The communication of PIP orders from the BOX hub to BOX
market participants is not reliant on OPRA and does not impact OPRA
system capacity.
---------------------------------------------------------------------------
(7) PIP Trade Allocation
As mentioned earlier, at the conclusion of the PIP, the Customer
Order is executed against all orders on the opposite side of the BOX
Book (both Improvement Orders, Market Maker quotes, unrelated orders
and the Primary Improvement Order submitted by the OFP) following price
priority. When two or more orders on the opposite side of the BOX Book
are at an identical price limit, time priority is used with two
exceptions.
As discussed below, if the OFP Primary Improvement Order as
modified (if at all) is equal to the best limit price, the Primary
Improvement Order has priority over all orders for 40 percent of the
Customer Order. If there is a Market Maker Prime for this PIP, and the
Market Maker Prime's Improvement Order is also at the best limit, the
Market Maker Prime has priority over all other Market Maker Improvement
Orders and unrelated orders up to one third of the unexecuted portion
of the Customer Order remaining at that price level.\62\
---------------------------------------------------------------------------
\62\ See proposed BOX Rules, Chapter V, Doing Business on BOX,
Sec. 19, Market Maker Prime.
---------------------------------------------------------------------------
(8) OFP Priority Over Other Orders at Identical Price
Upon conclusion of the PIP, the OFP who submitted the Primary
Improvement Order retains certain priority privileges. If the OFP's
Primary Improvement Order as modified (if at all) during the PIP is
matched by or matches a competing Improvement Order or unrelated order
at any price level, the OFP retains priority for only forty percent
(40%) of any unexecuted portion of the Customer Order available at that
price level, notwithstanding the time priority of the Primary
Improvement Order, competing Improvement Order or unrelated order. The
OFP will receive additional allocation only after all other orders have
been filled at that price level.\63\
---------------------------------------------------------------------------
\63\ See proposed BOX Rules, Chapter V, Doing Business on BOX,
Sec. 18(f), The Price Improvement Period.
---------------------------------------------------------------------------
(E). Market Maker Prime
The Market Maker Prime is a BOX Market Maker who has partial time
priority over all other Market Makers in the matching mechanism of the
PIP. The Market Maker Prime is a Market Maker who has a quote \64\ that
is equal to or better than the NBBO on the same side of the market as
the Primary Improvement Order at the instant the PIP is initiated. If
more than one Market Maker meets the criteria, the Market Maker whose
quote has time priority would be the Market Maker Prime for that
PIP.\65\
---------------------------------------------------------------------------
\64\ In this context a Market Maker's ``quote'' is derived from
his order on the BOX Book and does not include any Improvement
Orders in the PIP process.
\65\ See proposed BOX Rules, Chapter V, Doing Business on BOX,
Sec. 19, Market Maker Prime.
---------------------------------------------------------------------------
At the conclusion of the PIP, the Marker Maker Prime (if he has
entered an Improvement Order during the PIP at a limit price which is
executable against the Customer Order at the end of the PIP) would have
a trade allocation priority of up to one third of the unexecuted
portion of the Customer Order remaining at that price level after any
priorities accorded the OFP have been met. The Market Maker Prime would
have priority over all other Market Maker Improvement Orders and
unrelated orders up to one third of the unexecuted portion of the
Customer Order remaining at that price level.
If the Market Maker Prime modifies his quote on BOX during the PIP
to meet the best limit price instead of entering an Improvement Order
into the PIP process, the Market Maker Prime rules do not apply to the
modified quote. The trade matching follows the normal PIP priority
rules where the Market Maker Prime's modified quote would be treated as
an unrelated order. If the Market Maker Prime cancels his quote during
the PIP, the Market Maker keeps his status of Market Maker Prime for
any Improvement Order previously entered
[[Page 3069]]
in that PIP.\66\ The Market Maker Prime rules apply only if the Market
Maker Prime enters an Improvement Order during the PIP, these rules do
not apply to the quote of the Market Maker Prime on BOX outside of the
PIP process. At the conclusion of the individual PIP, the Market Maker
loses his status as Market Maker Prime. A Market Maker Prime would be
determined each time a new PIP is triggered. There is not necessarily a
Market Maker Prime for each PIP.\67\
---------------------------------------------------------------------------
\66\ See proposed BOX Rules, Chapter V, Doing Business on BOX,
Sec. 19, Market Maker Prime.
\67\ See proposed BOX Rules, Chapter V, Doing Business on BOX,
Sec. 19, Market Maker Prime.
---------------------------------------------------------------------------
(F) PIP Examples
Box--PIP Trade Allocation Examples
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Below are examples of trade allocation for orders executed through the BOX PIP. The examples cover only orders
executed via the PIP--all other orders executed on BOX are allocated in strict price/time priority.
Principles regarding the PIP:
--PIP duration is 3 seconds and must begin with an OFP Primary Improvement Order at a price at least one penny
better than NBBO.
--If the OFP Primary Improvement Order is at the same price level at the end of the PIP as one or more Market
Makers, then the OFP's allocation is 40%.
--Allocation among Market Makers who are all at the same price level at the end of the PIP is based on time
priority of their Improvement Orders during the PIP, except that a Market Maker Prime would be entitled to a
minimum of one third of the total available Market Maker allocation compared to other Market Makers at the same
price level.
----------------------------------------------------------------------------------------------------------------
FOR EACH EXAMPLE.................. Trade Allocation ( of contracts) If OFP Market Maker Prime & 2 MMs Are on Parity and
BOX is 2.00 bid 2.15 offer at and Market Maker Prime Other MMs Are on Parity There Is No Market
start of PIP.. & 2 Other MMs Are on at End of PIP and There Maker Prime on Parity.
Parity at End of PIP is No OFP on Parity
(Market Maker A is (Market Maker A is
Market Maker Prime). Market Maker Prime).
-----------------------------------
(NOTE: For simplicity, these
examples all involve Customer
sell orders, but the PIP process
works the same for buys)
1. OFP receives an order to sell OFP 40 MMA 33 MMB 50.
100 contracts and starts PIP with MMA 20.................. MMB 50.................. MMC 50.
Primary Improvement Order bid of MMB 40.................. MMC 17.................. MMA 0.
2.01 or better. In time priority MMC 0...................
in the PIP, MMB bids 2.04 for 50
contracts, MMC bids 2.04 for 50
contracts, and MMA bids 2.04 for
50 contracts.
-----------------------------------
2. OFP receives an order to sell OFP 40 MMA 33 MMB 20.
100 contracts and starts PIP with MMA 20.................. MMB 20.................. MMC 30.
bid of 2.01 or better. In time MMB 20.................. MMC 30.................. MMA 50.
priority in the PIP, MMB bids MMC 20.................. MMA 17..................
2.04 for 20 contracts, MMC bids (MMA total = 50; 33
2.04 for 30 contracts, and MMA ``Prime'' allocation +
bids 2.04 for 50 contracts. 17 time priority).
-----------------------------------
3. OFP receives an order to sell OFP 40 MMA 33 MMB 50.
100 contracts and starts PIP with MMA 20.................. MMB 50.................. MMC 30.
bid of 2.01 or better. In time MMB 40.................. MMC 17.................. MMA 20.
priority in the PIP MMB bids 2.04 MMC 0...................
for 50 contracts, MMC bids 2.04
for 30 contracts, MMA bids 2.04
for 50 contracts.
-----------------------------------
4. OFP receives an order to sell OFP 40 MMA 33 MMA 50.
100 contracts and starts PIP with MMA 20.................. MMA 17.................. MMB 30.
bid of 2.01 or better. In time MMA 30.................. MMB 30.................. MMC 20.
priority in the PIP MMA bids 2.04 MMB 10.................. MMC 20..................
for 50 contracts, MMB bids 2.04 (MMA total = 50; 20 (MMA total = 50; 33
for 30 contracts, MMC bids 2.04 ``Prime'' allocation + ``Prime'' allocation +
for 50 contracts. 30 time priority). 17 time priority).
-----------------------------------
5. OFP receives an order to sell OFP 4 MMA 3 MMB 10.
10 contracts and starts PIP with MMA 2................... MMB 7................... MMC 0.
bid of 2.01 or better. In time MMB 4................... MMC 0................... MMA 0.
priority in the PIP MMB bids 2.04 MMC 0...................
for 10 contracts, MMC bids 2.04
for 10 contracts, MMA bids 2.04
for 10 contracts.
-----------------------------------
6. OFP receives an order to sell OFP 4 MMA 3 MMA 10.
10 contracts and starts PIP with MMA 2................... MMA 7................... MMB 0.
bid of 2.01 or better. In time MMA 4................... (MMA total = 10; 3 MMC 0.
priority in the PIP MMA bids 2.04 (MMA total = 6; 2 ``Prime'' allocation +
for 10 contracts, MMB bids 2.04 ``Prime'' allocation + 7 time priority).
for 10 contracts, MMC bids 2.04 4 time priority).
for 10 contracts.
-----------------------------------
[[Page 3070]]
7. OFP receives an order to sell OFP 40 MMA 33 MMB 10.
100 contracts and starts PIP with MMA 20.................. MMB 10.................. MMC 30.
bid of 2.01 or better. In time MMB 10.................. MMC 30.................. MMA 50.
priority in the PIP MMB bids 2.04 MMC 30.................. MMA 17.................. (10 to bidder(s) at next
for 10 contracts, MMC bids 2.04 (10 to bidder(s) at next highest PIP bid)
for 50 contracts, MMA bids 2.04 highest PIP bid).
for 50 contracts. (MMA total = 50; 33
``Prime'' allocation +
17 time priority).
-----------------------------------
8. OFP receives an order to sell MMB 10 at 2.05 MMB 10 at 2.05 MMB 10 at 2.05.
100 contracts and starts PIP with OFP 36 at 2.04.......... MMA 30 at 2.04 (1/3 of MMC 30.
bid of 2.01 or better. In time MMA 18 at 2.04.......... 90). MMA 50.
priority in the PIP. MMB bids MMC 30 at 2.04.......... MMC 30 at 2.04.......... (10 to bidder(s) at next
2.05 for 10 contracts, MMC bids MMA 6 at 2.04........... MMA 20 at 2.04.......... highest PIP bid).
2.04 for 30 contracts, and MMA (MMA total = 24; 18 (10 to bidder(s) at next
bids 2.04 for 50 contracts. ``Prime'' allocation + highest PIP bid).
6 time priority). (MMA total = 50; 30
``Prime'' allocation +
20 time priority).
----------------------------------------------------------------------------------------------------------------
e. Conclusion. In all, BOX has a market structure that would be
``flat and open,'' built on the price/time priority representation of
all market participants' orders. These key ingredients, coupled with
the low cost of entry, would offer liquidity, price quality and low
cost for all market participants. Additionally, the Exchange is
confident that there would be active Market Maker participation in BOX
for several reasons:
(a) In order to ensure vigorous price competition in all cases, BOX
would not begin trading any class of options unless there is a minimum
of two Market Makers appointed to the class. As a result, Customer
Orders would be subject to auctions potentially including at least
three participants--the two Market Makers and the OFP submitting the
Primary Improvement Order--assuring the possibility of a real,
competitive auction process.\68\
---------------------------------------------------------------------------
\68\ Telephone conversation between Wayne Pestone, Bingham
McCutchen LLP (outside counsel for the Exchange), and Deborah L.
Flynn, Assistant Director, Division, Commission, on January 9, 2003.
---------------------------------------------------------------------------
(b) A Market Maker would be given dual incentives to quote the best
price first on BOX: (1) To gain price/time priority for the entire size
of his quote, and (2) to gain the Market Maker Prime trade allocation
privileges in a PIP.
(c) The ability of Market Makers trading in the PIP to
competitively price orders in finer increments than those generally
employed in BOX would provide incentives for them to participate as
Market Makers in the auction process.
(d) A Market Maker would have a high incentive for aggressively
pricing an option for which a PIP is underway since there is an
indisputable and immediate Customer interest in the option that is
certain to result in a trade execution.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the requirements under Section 6(b) of the Act,\69\ in general,
and furthers the objective of Section 6(b)(5) of the Act,\70\ in
particular, in that it is 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, processing
information with respect to, and facilitating transaction in
securities, to remove impediments to and perfect the mechanism for a
free and open market and a national market system, and, in general, to
protect investors and the public interest.
---------------------------------------------------------------------------
\69\ 15 U.S.C. 78f(b).
\70\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
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 did not solicit or receive written comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding, or (ii) as to
which the Exchange consents, the Commission will:
(A) By order approve such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609.
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 filings will also be
available for inspection and copying at the principal office of the
Exchange. All submissions should refer to File No. SR-BSE-2002-15 and
should be submitted by February 12, 2003.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\71\
---------------------------------------------------------------------------
\71\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-1345 Filed 1-21-03; 8:45 am]
BILLING CODE 8010-01-P