Self-regulatory organizations; proposed rule changes: Boston Stock Exchange, Inc.,

[Federal Register: October 15, 2003 (Volume 68, Number 199)]

[Notices]

[Page 59435-59437]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr15oc03-118]

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48596; File No. SR-BSE-2003-08]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto by the Boston Stock Exchange, Inc. Relating to the Exchange's Instant Liquidity Access Service for Certain Limit Orders

October 7, 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 July 14, 2003, 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 September 8, 2003, the Exchange submitted an amendment to the filing.\3\

[[Page 59436]]

The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

\1\ 15 U.S.C. 78s(b)(1).

\2\ 17 CFR 240.19b-4.

\3\ See letter from John Boese, Vice President, Legal and Compliance, BSE, to Nancy Sanow, Assistant Director, Division of Market Regulation, Commission, dated September 5, 2003 (``Amendment No. 1''). In Amendment No. 1, the BSE: (1) Clarified that the proposal is substantially similar to the New York Stock Exchange, Inc. (``NYSE'') rule related to the NYSE's Direct+ execution functionality; (2) corrected typographical errors in the purpose section; (3) clarified how trades will be reported to the Consolidated Tape Association; (4) noted that the proposed rule will be replacing an obsolete BSE rule related to year 2000 testing; and (5) and inserted a cross reference to other BSE rules that clarify instances in which BSE published quotes might not be ``firm.''

1. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

   The Exchange proposes to add provisions to its rules governing a new service that will provide for the instant execution of certain limit orders of a specified size. The text of the proposed rule change is below. Proposed new language is in italics; proposed deletions are in brackets. * * * * * Chapter I Definitions Sec. 3.

   Instant Liquidity Access (``ILA'') Order

   An ILA order is a round-lot limit order of no less than 100, nor more than 1000, shares priced at the Exchange's published offer (in the case of a buy) or at the Exchange's published bid (in the case of an order to sell), which a member or member-organization has entered for immediate execution in accordance with, and to the extent provided by, Chapter XXXIII, Section 8 (Instant Liquidity Access) of these Rules. * * * * * Chapter XXXIII Beacon

   Sec. 8. [Year 2000 testing] Instant Liquidity Access (a) Each member and member organization shall participate in testing of computer systems designed to prepare for Year 2000, in a manner and frequency prescribed by the Exchange, and shall provide to the Exchange reports related to such testing as requested by the Exchange.

   (b) The Exchange may exempt a member or member organization from this requirement if that member cannot be accommodated in the testing schedule by the organization conducting the test, if the member does not employ computers in its business, or for other good reasons.

   (c) Every member of the Exchange that clears securities transactions on behalf of other broker-dealers must take reasonable measures to ensure that each broker-dealer for which it clears securities transactions conducts testing with such member.

   Adopted.

   December 31, 1998.]

   This section applies to the facilitation of orders through Instant Liquidity Access, a mechanism offered by the Exchange. All other provisions of the Constitution and Rules of the Exchange are applicable unless superseded by this section.

   (a) Only straight limit orders without tick restrictions are eligible for entry as instant execution or Instant Liquidity Access (``ILA'') orders. ILA orders to buy shall be priced at the price of the published BSE offer. ILA orders to sell shall be priced at the price of the BSE bid. An ILA order shall receive an immediate, instant execution against orders reflected in the Exchange's published quotation and shall be immediately reported as BSE transactions, unless:

   (i) the BSE's published quotation is not firm (in accordance with Rule 11Ac1-1 of the Act, as set forth in these Rules in Chapter III, ``Dealings on the Exchange'', Section 7, ``Dissemination of Quotations'');

   (ii) the primary market's published quotation is spread away from the BSE quotation in an amount, as determined by the Market Performance Committee of the Exchange, which would warrant curtailing the availability of instant executions in a particular security (currently $0.25). Such an amount can be altered by the Market Performance Committee, as market conditions warrant, from time to time;

   (iii) with respect to a single-sided ILA order, a better price exists in another ITS participating market center;

   (iv) with respect to a single-sided ILA order, the BSE's published bid or offer is 100 shares;

   (v) trading in the subject security has been halted;

   (vi) the primary market has executed a block size trade at a price inferior to the BSE bid or offer.

   ILA orders that cannot be immediately executed shall be cancelled.

   (b) Availability of ILA feature. ILA orders in a particular stock shall be eligible to receive an instant execution if entered after the Exchange has disseminated a published bid or offer in that stock until 4:00 p.m. or any other closing time of the exchange's floor market.

   (c) Orders may not be broken into smaller amounts. An ILA order for any account in which the same person is directly or indirectly interested may only be entered at intervals of no less that 30 seconds between the entry of each such order in the book.

   (d) Interaction with ITS orders. If an inbound ITS commitment has been processed and apportioned according to the rules set forth in Chapter XXXI, Intermarket Trading Sysem, herein, based on orders in the BSE book, an ILA execution cannot take place against the same order.

   (e) Partial executions. An ILA order which is for a size greater than that displayed on the BSE book will receive an instant execution up to the displayed size of the BSE quotation. Any excess will automatically be cancelled. * * * * *

2. 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.

   1. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change

      1. Purpose

         The purpose of the proposed rule change is to add new sections to its rules concerning new trading system functionality to provide for the instant execution of limit orders of 1000 shares or less against trading interest in the Exchange's published quotation. This new functionality, Instant Liquidity Access (``ILA''), will accommodate Exchange customers seeking immediate execution or cancel, similar to services offered by other exchanges and Electronic Communications Networks (``ECNs''), such as the New York Stock Exchange's Direct+ service.\4\

         \4\ As noted above, the BSE's proposal is substantially similar to the existing NYSE Direct+ automatic execution functionality. It does, however, differ in the following four respects. First, inbound ILA orders to sell must be priced ``at'' (while the NYSE rule requires orders to be priced ``at or above'') the BSE published bid price and inbound orders to buy must be priced ``at'' (while the NYSE rule requires orders to be priced ``at or below'') the BSE published ask price. Second, the NYSE rule includes an exclusion, relating to an automatic execution trade being more than 5 cents away from the previous trade in that security executed on the NYSE. Third, the NYSE rule requires the display of any unexecuted portion of a Direct+ order or any Direct+ orders that cannot be immediately filled as limit orders regular way. The BSE proposal requires that such orders be canceled if not immediately filled. Finally, the BSE proposal includes an exclusion for such instances when the national best bid or offer spread is $0.25 or more. Teleconference between John Boese, Vice President, Legal and Compliance, BSE, and Christopher B. Stone, Special Counsel, Division of Market Regulation, Commission (September 30, 2003).

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         It would not be mandatory that all limit orders of 1000 shares or less be entered as ILA orders; rather, the member organization entering the order can choose to enter an ILA order when such member organization believes that the speed and certainty of an execution at the Exchange's published bid or offer price is in its customer's best interest. In such a case, the member organization would enter an ILA order priced at the Exchange's published offer price (in the case of an ILA order to buy), or an ILA order priced at the Exchange's published bid price (in the case of an ILA order to sell). The ILA order would then receive an instant execution without being exposed to the auction market, provided the bid or offer is still available. If the ILA feature is not available for any reason, the ILA order will be cancelled. Moreover, any member organization that believes in any particular case that the customer's interests would be best served by affording the customer's order the opportunity for price improvement may enter a limit or market order into BEACON for representation in the auction market, rather than an ILA order.

         ILA orders will be reported to the Consolidated Tape Association with a unique identifier, a ``.e'', to denote that they were instantly executed. The Exchange's published bid or offer would be automatically decremented to the extent of the size of the ILA order to reflect the ILA execution. The contra side of the ILA order would be the trading interest reflected in the Exchange's bid or offer, with such interest participating in the execution according to the Exchange's auction market principles of priority and parity. Additionally, if an inbound ITS commitment has been processed and apportioned according to the rules set forth in Chapter XXXI, Intermarket Trading System, based on orders on the BSE book, an ILA execution cannot take place against that same order. Finally, any ILA order, which is for a size greater than that displayed in the BSE book will receive an instant execution up to the displayed size of the BSE quotation. Any excess will automatically be cancelled.

         The Exchange's proposal would implement a new set of rules, set forth in Section 8 of Chapter XXXIII, BEACON \5\, and an addition to Chapter 1, Definitions, Section 3, Orders.

         \5\ The existing language in this Section will be deleted, as it applied to Y2K systems testing requirements, and replaced with provisions detailing the instant proposal.

      2. Statutory Basis

         The Exchange believes that the proposed rule change is consistent with the provisions of Section 6(b) of the Act \6\ and Section 6(b)(5) of the Act,\7\ in particular, which requires, among other things, that the rules of an exchange be designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest; and is not designed to permit unfair discrimination between brokers or dealers.

         \6\ 15 U.S.C. 78f(b).

         \7\ 15 U.S.C. 78f(b)(5).

         The Exchange also believes that the proposed rule change is designed to support the principles of section 11A(a)(1) of the Act \8\ in that it seeks to assure economically efficient execution of securities transactions, makes it practicable for brokers to execute investor's orders in the best market and provide an opportunity for investors' orders to be executed without the participation of a dealer.

         \8\ 17 U.S.C. 78k-l(a)(1).

   2. 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.

   3. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others

      The Exchange has neither solicited nor received written comments on the proposed rule change.

3. 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.

4. 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 filing will also be available for inspection and copying at the principal office of the Exchange. All submissions should refer to File No. SR-BSE-2003-08 and should be submitted by November 5, 2003.

   For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\9\

   \9\ 17 CFR 200.30-3(a)(12).

   Margaret H. McFarland, Deputy Secretary.

   [FR Doc. 03-25975 Filed 10-14-03; 8:45 am]

   BILLING CODE 8010-01-P