[Federal Register: November 8, 2002 (Volume 67, Number 217)]
[Notices]
[Page 68217-68218]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08no02-142]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-46759; File No. SR-BSE-2002-14]
Self-Regulatory Organizations; Order Granting Accelerated
Approval to Proposed Rule Change by the Boston Stock Exchange, Inc.
Relating to an Interpretation of its Execution Guarantee Rule
November 1, 2002.
I. Introduction
On September 5, 2002, the Boston Stock Exchange, Inc. (``BSE'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to render voluntary a CHX
specialist's obligation to fill limit orders in the specialist's book
following a primary market trade-through, if such trade-through occurs
in an exchange-traded funds (``ETFs'') tracking the Nasdaq-100 Index
(``QQQs''), the Dow Jones Industrial Average (``DIAMONDs''), and the
Standard & Poor's 500 Index (``SPDRs'').
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The proposed rule change was published for comment in the Federal
Register on October 8, 2002.\3\ No comments were received on the
proposal. This order approves the proposal.
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\3\ See Securities Exchange Act Release No. 46580 (October 1,
2002), 67 FR 62839. The proposed rule change is currently in effect
as a pilot. See Securities Exchange Act Release Nos. 46482
(September 10, 2002), 67 FR 58662 (September 17, 2002) (notice of
immediate effectiveness of pilot for the period September 4, 2002 to
October 4, 2002); 46651 (October 11, 2002), 67 FR 64669 (October 21,
2002) (notice of immediate effective of extension of pilot to
November 3, 2002.)
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II. Description of the Proposal
A. Background
The BSE is a participant in the Intermarket Trading System
(``ITS''). The ITS is an order routing network designed to facilitate
intermarket trading in exchange-listed equity securities among
participating self-regulatory organizations (``SROs'') based on current
quotation information emanating from their markets. The terms of the
linkage are governed by the ITS Plan, a national market system plan
approved by the Commission pursuant to Section 11A of the Act and Rule
11Aa3-2 thereunder.\4\
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\4\ See Securities Exchange Act Release No. 19456 (January 27,
1983), 48 FR 4938 (February 3, 1983). The SROs participating in ITS
include the American Stock Exchange LLC (``Amex''), the Boston Stock
Exchange, Inc. (``BSE''), the Chicago Board Options Exchange, Inc.
(``CBOE''), the Chicago Stock Exchange, Inc. (``CSE''), the
Cincinnati Stock Exchange, Inc. (``Cincinnati''), the National
Association of Securities Dealers, Inc. (``NASD''), the New York
Stock Exchange, Inc. (``NYSE''), the Pacific Stock Exchange, Inc.
(``PCX''), and the Phlx (collectively ``Participant Exchanges'').
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Section 8(d)(i) of the ITS Plan provides that absent reasonable
justification or excuse, a member of a Participant Exchange should not
effect trade-throughs.\5\ If, however, a trade-through does occur and a
complaint is received through ITS from the party whose bid or offer was
traded through, the party who initiated the trade-through may be
required to satisfy the bid or offer traded through or take other
remedial action.\6\ Each Participant Exchange, including the Phlx,\7\
has adopted and obtained Commission approval of a ``trade-through
rule,'' which is substantively the same as that provided in the ITS
Plan.
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\5\ A trade-through results when a member purchases (or sells) a
security at a price that is higher (lower) than the price offered in
one or more of the other ITS participant's markets. See ITS Plan,
Section 8(d)(i).
\6\ See ITS Plan, Exhibit B.
\7\ See Phlx Rule 2001A.
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In a recent Order, the Commission recognized that the ITS trade-
through provisions were designed to encourage market participants to
display their trading interest, and to help achieve best execution for
customer orders in exchange-listed securities.\8\ The Commission also
acknowledged, however, that these rules were designed at a time when
``the order routing and
[[Page 68218]]
execution facilities of markets were much slower, intermarket
competition was less keen, and the minimum quote increment for
exchange-listed securities was \1/8\ of a dollar ($ 0.125).'' \9\ The
Commission noted that with the introduction of decimal pricing and
technology changes that greatly reduced execution times, the trade-
through provisions of the ITS Plan have limited the ability of a
Participant to provide an automated execution when a better price is
displayed by another Participant that does not offer automated
executions.\10\ In support of this conclusion, the Commission explained
that certain electronic systems are able to deliver executions in a
fraction of a second, while ITS participants have, at a minimum, thirty
seconds to respond to a commitment to trade. Because of this, ``an ITS
Participant seeking to execute a transaction at a price inferior to the
price quoted by another ITS Participant must generally either (i)
attempt to access the other Participant's quote, which could delay the
customer's transaction by thirty seconds or more, or (ii) become
potentially liable to the other Participant for the amount by which its
quote was traded through.'' \11\
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\8\ See Securities Exchange Act Release No. 46428 (August 28,
2002), 67 FR 56607 (September 4, 2002) at 56607 (``ITS Exemption
Order'').
\9\ Id.
\10\ Id.
\11\ Id. at 56607-8.
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In its Order, the Commission stated that the ITS trade-through
provisions were particularly restrictive in the case of the QQQs,
DIAMONDs and SPDRs, as these ETFs are highly liquid securities, and
their value is derived form the values of the underlying shares. The
Commission noted that immediate execution of these securities might be
more important than the opportunity to obtain a better price to certain
investors.\12\ To address this issue, the Commission granted a de
minimis exemption from the trade-through provisions of the ITS Plan
with respect to transactions in the QQQs, DIAMONDs and SPDRs that are
effected at a price no more than three cents away from the best bid and
offer quoted in the Consolidated Quote System (``CQS''). This
exemption, which went into effect on September 4, 2002 and will remain
in effect until June 4, 2003, allows Participants to execute
transactions, through automatic execution or otherwise, without
attempting to access the quotes of other Participants when the expected
price improvement would not be significant.\13\
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\12\ Id.
\13\ Id. at 56608.
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B. Applicability to the BSE
Chapter II, Dealings on the Exchange, Section 33, Execution
Guarantee, of the BSE Rules paragraph (c)(2) states that ``(a)ll agency
limit orders will be filled if one of the following conditions occur *
* * (2) there has been price penetration of the limit in the primary
market * * *'' There are similar provisions in various sections of
Chapter XV, Dealer Specialists.\14\ These provisions, in particular
those set forth in Chapter II, guarantee that a limit order in a BSE
specialist's book will be filled if the primary market trades through
the limit price. When the BSE specialist provides this trade-through
protection to its customer limit orders, he is permitted to seek relief
through ITS.
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\14\ See, e.g., the Commentary to Section 1, Specialists, which
sets forth a specialist's obligations in relation to buying and
selling on a principal basis while holding unexecuted orders in his
book; Section 2, Responsibilities, which sets forth, in part, a
specialist's primary duties as agent; Section 4, Precedence to
Orders in the Book, which sets forth the precedence parameters a
specialist must adhere to; and Section 18, Procedures for Competing
Specialists, which sets forth, in various paragraphs, obligations
which may conflict with the de minimis exemption in the Order.
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Under the Commission's ITS Exemption Order, however, certain
primary market trades-through in the QQQs, DIAMONDS and SPDRs will
constitute exempt trades-through, and therefore the specialist will no
longer be able to seek recourse to seek satisfaction through ITS from
the primary market even though the BSE Rules will require the BSE
specialists to provide trade-through protection. Therefore, the BSE has
proposed to add Paragraph .07 to the Interpretations and Policies
section of Chapter II, Dealings on the Exchange, Section 33, Execution
Guarantee, of the BSE that will permit the Exchange to not enforce the
provisions of Paragraph (c)(2) of Section 33 following a de minimis
trade through of certain ETFs outlined in the ITS Exemption Order.
III. Discussion
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\15\ In particular, the Commission finds that the proposed
rule is consistent with the requirements of section 6(b)(5) of the Act
\16\ because it is designed to facilitate transactions in securities;
to remove impediments to and perfect the mechanism of a free and open
market and a national market system; and, in general, to protect
investors and the public interest; and is not designed to permit unfair
discrimination between customers, issuers, brokers or dealers.
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\15\ In approving this rule proposal, the Commission notes that
it has also considered the proposed rule's impact on efficiency,
competition, and capital formation. 15 U.S.C. 78c(f).
\16\ 15 U.S.C. 78f(b)(5).
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The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of the publication of
notice thereof in the Federal Register. By adopting the proposed
exemption, the Exchange removes the specialist's obligation to provide
trade-through protection in situations where it will not be permitted
to seek satisfaction through ITS from the primary market. This
obligation was one the BSE assumed voluntarily in order to make its
market more attractive to sources of order flow, not an obligation the
Act imposes on a market. The Commission believes that the business
decision to potentially forego order flow by no longer providing print
protection is a judgment the Act allows the BSE to make.\17\ Further
the Commission notes that it approved similar proposed rule changes for
the Chicago Stock Exchange, Inc. (``CHX'') and the Philadelphia Stock
Exchange, Inc. (``PHLX''), and believes that it is appropriate to grant
the same relief to the BSE in a timely manner.\18\
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\17\ The Commission notes that the BSE's proposed rule change
will remain in effect only until the expiration of the Commission's
ITS Exemption Order on June 4, 2003.
\18\ See Securities Exchange Act Release Nos. 46760 (November 1,
2002) (order approving SR-CHX-2002-31); and 46761 (November 1,
2002)(order approving SR-Phlx-2002-49.
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IV. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\19\ that the proposed rule change (SR-BSE-2002-14) is approved on
an accelerated basis.
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\19\ 15 U.S.C. 78f(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 02-28430 Filed 11-7-02; 8:45 am]
BILLING CODE 8010-01-P