Self-Regulatory Organizations; Boston Stock Exchange, Inc.; Order Approving Proposed Rule Change Establishing a De Minimis Exception to the 80/20 Test Relating to Linkage Trades on the Boston Options Exchange, 53034 [E5-4833]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 70, Number 171 (Tuesday, September 6, 2005)]
[Notices]
[Page 53034]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-4833]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52346; File No. SR-BSE-2005-16]


Self-Regulatory Organizations; Boston Stock Exchange, Inc.; Order 
Approving Proposed Rule Change Establishing a De Minimis Exception to 
the 80/20 Test Relating to Linkage Trades on the Boston Options 
Exchange

August 26, 2005.

I. Introduction

    On May 19, 2005, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``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 seeking to amend its rules governing its operation 
of intermarket linkage on the Boston Options Exchange (``BOX''). 
Specifically, the Exchange is proposing to amend Chapter XII, Section 
5(b) of the BOX Rules to establish a de minimis exception to the 
limitation on Principal Order \3\ access imposed by the Plan for the 
Purpose of Creating and Operating an Intermarket Option Linkage 
(``Linkage Plan'') \4\ and related rules.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ A ``Principal Order'' is an order for the principal account 
of an eligible market maker that does not relate to a customer order 
the market maker is holding. See Section 2(16)(b) of the Linkage 
Plan.
    \4\ On July 28, 2000, the Commission approved a national market 
system plan for the purpose of creating and operating an intermarket 
options market linkage (``Linkage'') proposed by the American Stock 
Exchange, LLC, Chicago Board Options Exchange, Inc., and the 
International Stock Exchange, Inc. See Securities Exchange Act 
Release No. 43086 (July 28, 2000), 65 FR 48023 (August 4, 2000). 
Subsequently, the Philadelphia Stock Exchange, Inc., the Pacific 
Exchange, Inc. and the BSE joined the Linkage Plan. See Securities 
Exchange Act Release Nos. 43573 (November 16, 2000), 65 FR 70851 
(November 28, 2000); 43574 (November 16, 2000), 65 FR 70850 
(November 28, 2000); and 49198 (February 5, 2004), 69 FR 7029 
(February 12, 2004).
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    The proposed rule change was noticed for comment in the Federal 
Register on July 27, 2005.\5\ The Commission received no comments on 
the proposed rule change. This order approves the proposed rule change.
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    \5\ See Securities Exchange Act Release No. 52071 (July 20, 
2005), 70 FR 43472 (July 27, 2005).
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II. Description

    The purpose of this proposed rule change is to implement proposed 
Joint Amendment No. 17 to the Linkage Plan. Section 8(b)(iii) of the 
Linkage Plan provides that Eligible Market Makers should send Principal 
Orders through the Linkage on a limited basis and not as a primary 
aspect of their business. Joint Amendment No. 17, together with this 
proposed rule change, would change Section 8(b)(iii) of the Linkage 
Plan and Chapter XII, Section 5(b) of the BOX Rules to establish an 
exemption from the provision in the rule that states that a Market 
Maker that effected 20 percent or more of its volume in a particular 
option by sending Principal Orders through the Linkage in a calendar 
quarter is prohibited from sending Principal Orders via the Linkage in 
such option during the following calendar quarter (the ``80/20 Test'').
    The Exchange believes that applying the 80/20 Test has resulted in 
anomalies for Market Makers with limited volume in an eligible option 
class. Specifically, if a Market Maker has very little overall trading 
volume in an option, the execution of one or two Principal Orders 
during a calendar quarter could result in the Market Maker failing to 
meet the 80/20 Test. This would bar the Market Maker from using the 
Linkage to send Principal Orders for the following calendar quarter. 
The BOX contends that it was not its intention to bar Market Makers 
with limited volume from sending Principal Orders through the Linkage 
in these circumstances, since such trading does not constitute a 
primary aspect of their business. Thus, the Exchange's proposed rule 
would create a de minimis exemption from the 80/20 Test for Market 
Makers that have a total contract volume of less than 1,000 contracts 
in an options class for a calendar quarter.

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.\6\ 
In particular, the Commission finds that the proposed rule change is 
consistent with the requirements of Section 6(b)(5) of the Act \7\ 
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 
to protect investors and the public interest. The Commission believes 
that the proposed rule change will increase the availability of Linkage 
to members of the Participants by limiting the applicability of the 80/
20 Test in situations where market makers have minimal trading volume 
in a particular options class.
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    \6\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \7\ 15 U.S.C. 78f(b)(5).
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    The Commission recognizes that the Exchange does not believe that 
it is necessary to bar market makers with limited volume from sending 
Principal Orders through the Linkage, as such trading does not raise 
concerns that a member is sending such orders as ``a primary aspect of 
their business.'' The Commission believes that the de minimis exemption 
from the 80/20 Test proposed by the Exchange for market makers that 
have a total contract volume of less than 1,000 contracts in an options 
class for a calendar quarter should ensure that market makers with 
relatively low volume in a particular options class can send a 
reasonable number of Principal Orders without being barred from using 
the Linkage by application of the 80/20 Test in the following calendar 
quarter.

IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the proposed rule change (SR-BSE-2005-16) is approved.
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    \8\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-4833 Filed 9-2-05; 8:45 am]
BILLING CODE 8010-01-P