Self-Regulatory Organizations; Boston Stock Exchange, Inc.; Notice of Filing of Proposed Rule Change Relating to the Implementation of the Second Phase of the Boston Equities Exchange (“BeX”) Trading System, 47264-47276 [E6-13400]

Download as PDF 47264 Federal Register / Vol. 71, No. 158 / Wednesday, August 16, 2006 / Notices For the Commission by the Division of Market Regulation, pursuant to delegated authority.18 Nancy M. Morris, Secretary. [FR Doc. E6–13401 Filed 8–15–06; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–54291; File No. SR–BSE– 2006–30] Self-Regulatory Organizations; Boston Stock Exchange, Inc.; Notice of Filing of Proposed Rule Change Relating to the Implementation of the Second Phase of the Boston Equities Exchange (‘‘BeX’’) Trading System August 8, 2006. 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 August 3, 2006, the Boston Stock Exchange (‘‘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 BSE. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change In previous rule filings, BSE proposed to establish the governance framework for a new electronic trading facility, as that term is defined in Section 3(a)(2) of the Act,3 which is to be called BeX,4 and to propose rules that pertain to the first phase of BeX.5 The first phase of the BeX trading system involves a fully automated electronic book for the display and execution of orders in securities listed otherwise than on The 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 Under the Act, the ‘‘term ‘facility’ when used with respect to an exchange includes its premises, tangible or intangible property whether on the premises or not, any right to the use of such premises or property or any service thereof for the purpose of effecting or reporting a transaction on an exchange (including, among other things, any system of communication to or from the exchange, by ticker or otherwise, maintained by or with the consent of the exchange), and any right of the exchange to the use of any property or service.’’ See 15 U.S.C. 78c(a)(2). 4 See Securities Exchange Act Release No. 54035 (June 22, 2006), 71 FR 37135 (June 29, 2006) (SR– BSE–2006–20) (‘‘BeX Governance Filing’’). 5 See Securities Exchange Act Release No. 54034 (June 22, 2006), 71 FR 37140 (June 29, 2006) (SR– BSE–2006–22) (‘‘BeX Facility Filing’’). jlentini on PROD1PC65 with NOTICES 2 17 VerDate Aug<31>2005 20:24 Aug 15, 2006 Jkt 208001 Nasdaq Stock Market for which the BSE obtains unlisted trading privileges (‘‘UTP’’) after June 30, 2006. The proposed rules set forth below are being filed in connection with the implementation of the second phase of the BeX trading system. As of January 1, 2007, there will no longer be any specialist participation in any transactions on the BSE or otherwise. Additionally, in connection with satisfying the requirements of Regulation NMS, the BSE is proposing eight new order types; rules to prevent locked or crossed quotations; a new order routing system; and an order protection rule. The text of the proposed rule change is available on Exchange’s Web site (https:// www.bostonstock.com), at the Exchange’s Office of the Secretary, and at the Commission’s Public Reference Room. The text of the proposed rule change also appears below. Proposed new language is italicized; deleted language is in [brackets].6 Rules of the Boston Stock Exchange Chapter XXXVII—Boston Equities Exchange (‘‘BeX’’) Trading System The Boston Equities Exchange (‘‘BeX’’) trading system is a fullyautomated facility of the Exchange, which allows eligible orders in eligible securities to electronically match and execute against one another. Section 1. BeX Eligible Securities (a) Eligible Securities. All securities eligible for trading on the Exchange [that are listed otherwise than on The Nasdaq Stock Market for which the BSE obtains unlisted trading privileges (‘‘UTP’’) after June 30, 2006] shall be eligible for trading through BeX. Any specialist request to remove a security from BeX shall be considered by the appropriate Board Committee. Section 2. Eligible Orders Subsections (a) through (b)—no change. (c) Eligible order types: (i) Orders eligible for execution in BeX may be designated as one of the following existing BSE order types as defined in Chapter I, Section 3 except that any reference in the existing BSE Rules to the execution of Orders as soon as ‘‘represented at the specialist’s post’’ shall for purposes of this Section be understood to mean ‘‘entered in BeX’’: 6 For clarity, the rule text below treats the rule text proposed in the BeX Facility Filing as existing rule text even though that filing has not been approved by the Commission. PO 00000 Frm 00102 Fmt 4703 Sfmt 4703 (A) At the Opening or At the Opening Only Order. (B) Day Order. (C) Do Not Increase (DNI). (D) Do Not Reduce (DNR). (E) Fill or Kill. (F) Good ‘Till Cancel Order. (G) Immediate or Cancel. (H) Limit, Limited Order or Limited Price Order. (I) At the Close. (J) Market Order. (K) Stop Limit Order. (L) Stop Order. With the exception of Fill or Kill and Immediate or Cancel Orders, a customer may append to an Order an instruction that the Order be routed to the market(s) displaying the National Best Bid or Offer if the Order would trade through the National Best Bid or Offer if executed on the BeX. Absent such an instruction, the order will be cancelled. (ii) Orders eligible for execution in BeX may also be designated as one of the following additional order types: (A) ‘‘Cross’’: An order to buy and sell the same security at a specific price better than the best bid and offer displayed in BeX and equal to or better than the National Best Bid and Offer. A Cross Order may represent interest of one or more BSE Members. (B) ‘‘Cross with Size’’: A Cross Order to buy and sell at least 5,000 shares of the same security with a market value of at least $100,000.00 (i) at a price equal to or better than the best bid or offer displayed in BeX and the National Best Bid or Offer and (ii) where the size of the order is larger than the largest order [aggregate size of all interest] displayed in BeX at that price.[; and (iii) where neither side of the order is for the account of the BSE Member sending the order to BeX.] (C) ‘‘Good ‘Till Date (GTD)’’: An order to buy or sell that, if not executed, expires at the end of date specified in the order. (D) ‘‘Good ‘Till Time (GTT)’’: An order to buy or sell that, if not executed, expires at the time specified in the order. (E) ‘‘Limit or Close’’: A limit order to buy or sell that if not executed prior to the Market on Close cutoff time of 3:40 p.m., pursuant to Chapter II, Section 22, will automatically convert to an At the Close Order for inclusion in the closing process and if not so executed, at the close, will be cancelled. (F) ‘‘Mid-Point Cross ’’: A two-sided order with both a buy and sell component combined that executes at the midpoint of the National Best Bid or Offer. A Mid-point Cross Order will be rejected when a locked or crossed E:\FR\FM\16AUN1.SGM 16AUN1 jlentini on PROD1PC65 with NOTICES Federal Register / Vol. 71, No. 158 / Wednesday, August 16, 2006 / Notices market exists in that security at the time the Order is received. Midpoint Cross Orders may be entered, quoted, executed and reported in increments as small as one-half of the Minimum Price Variation. (G) ‘‘Reserve’’: A Limit Order with a portion of the size displayed and with a reserve portion of the size that is not displayed. A Reserve Order cannot be an IOC Order or Market Order. (H) ‘‘Minimum Quantity’’: A Minimum Quantity Order is an order subject to the provisions of Chapter XXXVII, Section 6, that, upon entry, must be executed at least at its minimum quantity or it will be cancelled. If executed in part, the remaining quantity remains in the book and follows the execution rule of the order type. A Stop Limit Order can be a Minimum Quantity Order and, at the election of the order, will be handled pursuant to subsection (j) of Section 3. (I) ‘‘Preferred Price Cross’’: A TwoSided Cross Order with a preferred limit price and an optional preferred tick, both set by the Member. A preferred limit price is the limit price the twosided cross order will be executed at if it is equal to or better than the National Best Bid or National Best Offer (‘‘Preferred Limit Price’’). The optional preferred tick is the amount of ticks beyond the preferred limit price at which the two-sided cross order may be executed (‘‘Optional Preferred Tick’’). The Preferred Price Cross order cannot be executed at a price that is more than the preferred limit price plus the amount of optional preferred ticks or less than the preferred limit price minus the amount of optional preferred ticks. If the Preferred Price Cross cannot be executed at the Preferred Limit Price the execution price of the Cross will be determined by the Trading System to be the closest price to the Preferred Limit Price, respecting the Optional Preferred Tick and the National Best Bid or National Best Offer. (J) Best Price Intermarket Sweep Order (‘‘BPISO’’): A Best Price Intermarket Sweep Order (BPISO) is an order marked as required by SEC Rule 600(b)(30) that is to be executed against any orders at the Exchange’s Best Bid or Best Offer (including any undisplayed orders at that price) as soon as the order is received by BSE, with any unexecuted balance of the order to be immediately cancelled. BSE, in executing the BPISO, shall not take any of the actions described in Chapter XXXVIII, Section 4 to prevent an improper trade through. (K) Automated Immediate or Cancel (‘‘AIOC’’): An automated immediate or cancel order received on BSE will execute immediately and automatically, VerDate Aug<31>2005 20:24 Aug 15, 2006 Jkt 208001 either in whole or in part, at or better than its limit price, with any unexecuted balance of the order to be immediately cancelled. The unexecuted portion of the order will not be routed to another Trading Center. (L) ‘‘Price-Penetrating ISO’’: An order marked as required by SEC Rule 600(b)(30) that is to be executed at or better than its limit price as soon as the order is received by BSE, with any unexecuted balance of the order to be immediately cancelled. Orders marked as price-penetrating ISO shall be executed against any eligible orders in BSE (including any undisplayed orders, through multiple price points). BSE, in executing these orders, shall not take any of the actions described in Chapter XXXVIII, Section 4 to prevent an improper trade-through. (M) ISO Cross Order: A two sided order that, upon receipt, will be executed without any action on the part of the Exchange to prevent an improper trade through. The Member submitting an ISO Cross is responsible for checking all protected quotes and must send one or more ISO orders to other Trading Centers displaying a price better than the cross price. (N) Cancel on Corporate Action: In the event of a dividend, distribution or stock split (‘‘Corporate Action’’), the order in the limit book will be cancelled. Subsection (d)—no change. * * * Interpretations and Policies .01 The terms ‘‘Best Bid’’ and ‘‘Best Offer’’ shall mean, respectively, the highest and lowest priced order to buy and sell an eligible security in BeX. .02 The terms ‘‘National Best Bid’’ and ‘‘National Best Offer’’ shall mean, respectively, the highest and lowest priced order or quote to buy and sell a BeX eligible security displayed in the consolidated quotation system for the security. Section 3. Operation of BeX Subsections (a)–(f)—no change. (g) Post-Primary Trading Session (PPS). The BeX PPS will operate from the time when the primary market disseminates its closing price until [4:30] 6:30 p.m. During the BeX PPS only cross orders at a specific price may be submitted. Subsection (h)—no change. (i) Ranking and Display of Orders (i)–(ii)—no change (iii) The displayed portion of Reserve Orders (not the reserve portion) shall be ranked at the specified limit price and the time of order entry. If the displayed portion of the Reserve Order is decremented such that fewer than 100 shares are displayed, the displayed PO 00000 Frm 00103 Fmt 4703 Sfmt 4703 47265 portion of the Reserve Order shall be replenished for: a) The displayed amount; or b) the entire reserve amount, if the remaining reserve amount is smaller than the displayed amount. Upon replenishment the reserve portion shall be submitted and ranked at the specified limit price and time of replenishment. (iv) Except as otherwise permitted by Section 3, paragraphs (v)–(vi) below, all orders at all price levels on BeX shall be displayed to all Members on an anonymous basis and transactions executed on BeX will be processed anonymously. The transaction reports will indicate the details of the transaction, but will not reveal contra party identities. (v) BeX will reveal the identity of a Member in the following circumstances: (A) For regulatory purposes or to comply with an order of a court or arbitrator; (B) When the National Securities Clearing Corporation (‘‘NSCC’’) ceases to act for a Member or the Member’s clearing firm, and NSCC determines not to guarantee the settlement of the Member’s trades; or (C) On risk management reports provided to the contra party of the Member or Member’s clearing firm each day by 4 p.m. (E.S.T.) which disclose trading activity on the aggregate dollar value basis. (vi) In order to satisfy Members’ record keeping obligations under SEC Rules 17a–3(a)(1) and 17a–4(a), BSE shall retain for the period specified in Rule 17a–4(a) the identity of each Member that executes an anonymous transaction described in paragraph (i)(iii) of this rule. The information shall be retained by BeX in its original form or a form approved under Rule 17a–6. Members shall retain the obligation to comply with SEC Rule 17a–3(a)(1) and 17a–4(a) whenever they possess the identity of their contra party. Interpretations and Policies: .01 No Member having the right to trade through the facilities of BeX and who has been a party to or has knowledge of an execution shall be under obligation to divulge the name of the buying or selling firm in any transaction. .02 Except as required by paragraphs (v)–(vi), no Member shall transmit through the facilities of BeX any information regarding a bid, offer, other indication of an order, or the Member’s identity, to another Member until permission to disclose and transmit such bid, offer, other indication of an order, or the Member ’s identity has been obtained from the originating E:\FR\FM\16AUN1.SGM 16AUN1 47266 Federal Register / Vol. 71, No. 158 / Wednesday, August 16, 2006 / Notices Member shall not be permitted to reapply as a Market Maker for a period of six months. Member or the originating Member affirmatively elects to disclose its identity. Subsections (j) through (k)—no change. Section 4. Cancellation of Transactions Subsection (a)—no change. Section 5. Handling of Clearly Erroneous Transactions Subsection (a)—no change. Section 6. Orders To Be Reduced and Increased on Ex-Date Subsections (a) through (d)—no change. Section 7. Application of BSE Rules Subsection (a)—no change. jlentini on PROD1PC65 with NOTICES Section 8. Approval of Market Makers (a) No Member shall act as a Market Maker in any security unless such Member has been approved as a Market Maker in such security by the Exchange pursuant to this Section and the Exchange has not suspended or canceled such approval. Approved Market Makers are designated as dealers on the Exchange for all purposes under the Securities Exchange Act of 1934 and the rules and regulations thereunder. (b) An applicant shall file an application for Market Maker status on such form as the Exchange may prescribe. Applications shall be reviewed by the Exchange, which shall consider such factors including, but not limited to capital operations, personnel, technical resources, and disciplinary history. (c) An applicant’s Market Maker status shall become effective upon receipt by the Member of notice of an approval by the Exchange. In the event that an application is disapproved by the Exchange, the applicant shall have an opportunity to be heard upon the specific grounds for the denial, in accordance with the provisions of Chapter XXX of the BSE Rules. (d) A Market Maker may be suspended or terminated by the Exchange upon a determination of any substantial or continued failure by such Market Maker to engage in dealings in accordance with Section 10, below. (e) Any Market Maker may withdraw its Market Maker status by giving written notice to the Exchange. Such withdrawal shall become effective on the tenth business day following the Exchange’s receipt of the notice. A Market Maker who fails to give a ten-day written notice of withdrawal to the Exchange may be subject to formal disciplinary action pursuant to Chapter XXX. Subsequent to withdrawal, the VerDate Aug<31>2005 20:24 Aug 15, 2006 Jkt 208001 Section 9. Assignments of Market Maker in a Security (a) A Market Maker may be assigned a newly authorized security or in a security already admitted to dealings on the BeX by filing an assignment request form with the Exchange. Assignment of the security shall become effective on the first business day following the Exchange’s approval of the assignment. In considering the approval of the assignment of the Market Maker in a security, the Exchange may consider: (1) the financial resources available to the Market Maker; (2) the Market Maker’s experience, expertise and past performance in making markets, including the Market Maker’s performance in other securities; (3) the Market Maker’s operational capability; (4) the maintenance and enhancement of competition among Market Makers in each security in which they are assigned; (5) the existence of satisfactory arrangements for clearing the Market Maker’s transactions; (6) the character of the market for the security, e.g., price, volatility, and relative liquidity. (b) A Market Maker’s assignment in a security may be terminated by the Exchange if the Market Maker fails to enter quotations in the security within five (5) business days after the Market Maker’s assignment in the security becomes effective. (c) The Exchange may limit the number of Market Makers in a security upon prior written notice to Members. (d) Market Makers shall be selected by the Exchange. Such selection shall be based on, but is not limited to, the following: experience with making markets in equities; adequacy of capital; willingness to promote the BeX as a marketplace; issuer preference; operational capacity; support personnel; and history of adherence to Exchange rules and securities laws. (e) Voluntary Termination of Security Registration. A Market Maker may voluntarily terminate its assignment in a security by providing the Exchange with a one-day written notice of such termination. A Market Maker that fails to give advanced written notice of termination to the Exchange may be subject to formal disciplinary action pursuant to Chapter XXX. (f) The Exchange may suspend or terminate any assignment of a Market Maker in a security or securities under this Section whenever, in the PO 00000 Frm 00104 Fmt 4703 Sfmt 4703 Exchange’s judgment, the interests of a fair and orderly market are best served by such action. (g) A Member may seek review of any action taken by the Exchange pursuant to this Rule, including the denial of the application for, or the termination or suspension of, a Market Maker’s assignment in a security or securities, in accordance with Chapter XXX. Section 10. Obligations of Market Makers (a) General. Members who are assigned as Market Makers in one or more securities traded on the BeX must engage in a course of dealings for their own account to assist in the maintenance, insofar as reasonably practicable, of fair and orderly markets on the BeX in accordance with this Section. The responsibilities and duties of a Market Maker specifically include, but are not limited to, the following: (1) Maintain continuous, two-sided quotes in those securities in which the Market Maker is assigned to trade; (2) Maintain adequate minimum capital in accordance with Rule 15(c)3– 1 promulgated under the Securities Exchange Act of 1934; (3) Remain in good standing with the Exchange; (4) Inform the Exchange 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 agency. This requirement may be satisfied by direct participation, use of direct clearing services, or by entry into a correspondent clearing arrangement with another Member that clears trades through such agency. (b) A Market Maker must satisfy the responsibilities and duties as set forth in paragraph (a) of this Section during the Primary Trading Session on all days in which the Exchange is open for business. (c) If the Exchange finds any substantial or continued failure by a Market Maker to engage in a course of dealings as specified in paragraph (a) of this Rule, such Market Maker will be subject to disciplinary action or suspension or revocation of the assignment by the Exchange in one or more of the securities in which the Market Maker is assigned. Nothing in this Section will limit any other power of the Board of Directors under the Bylaws, Rules, or procedures of the Exchange with respect to the Market Maker’s Membership status or in respect of any violation by a Market Maker of the provisions of this Rule. In accordance with Chapter XXX, a E:\FR\FM\16AUN1.SGM 16AUN1 Federal Register / Vol. 71, No. 158 / Wednesday, August 16, 2006 / Notices jlentini on PROD1PC65 with NOTICES Member may seek review of actions taken by the Exchange pursuant to this Section. (d) Temporary Withdrawal. A Market Maker may apply to the Exchange to withdraw temporarily from its Market Maker status in the securities in which it is assigned. The Market Maker must base its request on demonstrated legal or regulatory requirements that necessitate its temporary withdrawal, or provide the Exchange an opinion of counsel certifying that such legal or regulatory basis exists. The Exchange will act promptly on such request and, if the request is granted, the Exchange may temporarily reassign the securities to another Market Maker. (e) Market Makers will be required to maintain minimum performance standards the levels of which may be determined from time to time by the Exchange. Such levels will vary depending on the price, liquidity, and volatility of the security in which the Market Maker is assigned. The performance measurements will include (i) percent of time at the National Best Bid or National Best Offer; (ii) percent of executions better than the National Best Bid or National Best Offer; (iii) average displayed size; (iv) average quoted spread; and (v) in the event the security is a derivative security, the ability of the Market Maker to transact in underlying markets. Section 11. Limitations on Dealings (a) General. A Market Maker on the Exchange may engage in Other Business Activities, or it may be affiliated with a broker-dealer that engages in Other Business Activities, only if there is an Information Barrier (also commonly referred to as ‘‘Chinese Wall’’) between the market making activities and the Other Business Activities. ‘‘Other Business Activities’’ mean: (1) conducting an investment banking or public securities business; or (2) making markets in the options overlying the security in which it makes markets. (b) Information Barrier. For the purposes of this rule, an Information Barrier is an organizational structure in which: (1) The market making functions are conducted in a physical location separate from the locations in which the Other Business Activities are conducted, in a manner that effectively impedes the free flow of communications between persons engaged in the market making functions and persons conducting the Other Business Activities. However, upon request and not on his/her own initiative, a person engaged in the market making functions may furnish to VerDate Aug<31>2005 20:24 Aug 15, 2006 Jkt 208001 persons at the same firm or an affiliated firm (‘‘affiliated persons’’), the same sort of market information that the person engaged in the market making function would make available in the normal course of its market making activity to any other person. The person engaged in the market making function must provide such information to affiliated persons in the same manner that he/she would make such information available to a non-affiliated person. (2) There are procedures implemented to prevent the use of material nonpublic corporate or market information in the possession of persons on one side of the barrier from influencing the conduct of persons on the other side of the barrier. These procedures, at a minimum, must provide that: (A) the person performing the function of a Market Maker does not take advantage of knowledge of pending transactions, order flow information, corporate information or recommendations arising from the Other Business Activities; and (B) all information pertaining to the Market Maker’s positions and trading activities is kept confidential and not made available to persons on the other side of the Information Barrier. (3) Persons on one side of the barrier may not exercise influence or control over persons on the other side of the barrier, provided that: (A) the market making function and the Other Business Activities may be under common management as long as any general management oversight does not conflict with or compromise the Market Maker’s responsibilities under the Rules of the Exchange. (c) Documenting and Reporting of Information Barrier Procedures. A Member implementing an Information Barrier pursuant to this Section shall submit to the Exchange a written statement setting forth: (1) The manner in which it intends to satisfy the conditions in paragraph (b) of this Section, and the compliance and audit procedures it proposes to implement to ensure that the Information Barrier is maintained; (2) The names and titles of the person or persons responsible for maintenance and surveillance of the procedures; (3) A commitment to provide the Exchange with such information and reports as the Exchange may request relating to its transactions; (4) A commitment to take appropriate remedial action against any person violating this Section or the Member’s internal compliance and audit procedures adopted pursuant to subparagraph (c)(1) of this Section, and PO 00000 Frm 00105 Fmt 4703 Sfmt 4703 47267 that it recognizes that the Exchange may take appropriate remedial action, including (without limitation) reallocation of securities in which it serves as a Market Maker, in the event of such a violation; (5) Whether the Member or an affiliate intends to clear its proprietary trades and, if so, the procedures established to ensure that information with respect to such clearing activities will not be used to compromise the Member’s Information Barrier, which procedures, at a minimum, must be the same as those used by the Member or the affiliate to clear for unaffiliated third parties; and (6) That it recognizes that any trading by a person while in possession of material, non-public information received as a result of the breach of the internal controls required under this Rule may be a violation of Rules 10b– 5 and 14e–3 under the Exchange Act or one or more other provisions of the Exchange Act, the rules thereunder or the Rules of the Exchange, and that the Exchange intends to review carefully any such trading of which it becomes aware to determine whether a violation has occurred. (d) Approval of Information Barrier Procedures. The written statement required by paragraph (c) of this Section must detail the internal controls that the Member will implement to satisfy each of the conditions stated in that Section, and the compliance and audit procedures proposed to implement and ensure that the controls are maintained. If the Exchange determines that the organizational structure and the compliance and audit procedures proposed by the Member are acceptable under this Section, the Exchange shall so inform the Member, in writing. Absent the Exchange finding a Member’s Information Barrier procedures acceptable, a Market Maker may not conduct Other Business Activities. (e) Clearing Arrangements. Subparagraph (c)(5) permits a Member or an affiliate of the Member to clear the Member’s Market Maker transactions if it establishes procedures to ensure that information with respect to such clearing activities will not be used to compromise the Information Barrier. In this regard: (1) The procedures must provide that any information pertaining to Market Maker securities positions and trading activities, and information derived from any clearing and margin financing arrangements, may be made available only to those employees (other than employees actually performing clearing and margin functions) specifically E:\FR\FM\16AUN1.SGM 16AUN1 47268 Federal Register / Vol. 71, No. 158 / Wednesday, August 16, 2006 / Notices authorized under this Rule to have access to such information or to other employees in senior management positions who are involved in exercising general managerial oversight with respect to the market making activity. (2) Any margin financing arrangements must be sufficiently flexible so as not to limit the ability of any Market Maker to meet market making or other obligations under the Exchange’s Rules. Chapter XXXVIII—Regulation NMS jlentini on PROD1PC65 with NOTICES Section 1. Definitions (a) ‘‘Automated Quotation’’ means a quotation displayed by a trading center that: (i) Permits an incoming order to be marked as immediate-or-cancel; (ii) Immediately and automatically executes an order marked as immediateor-cancel against the displayed quotation up to its full size; (iii) Immediately and automatically cancels any unexecuted portion of an order marked as immediate-or-cancel without routing the order elsewhere; (iv) Immediately and automatically transmits a response to the sender of an order marked as immediate-or-cancel indicating the action taken with respect to such order; and (v) Immediately and automatically displays information that updates the displayed quotation to reflect any change to its material terms. (b) ‘‘Manual Quotation’’ means any quotation other than an automated quotation. (c) ‘‘Protected Bid’’ or ‘‘Protected Offer’’ means a quotation in an NMS stock that: (i) Is displayed by an automated trading center; (ii) Is disseminated pursuant to an effective national market system plan; and (iii) Is an automated quotation that is the best bid or best offer of a national securities exchange, the best bid or best offer of The Nasdaq Stock Market Inc., or the best bid or best offer of a national securities association other than the best bid or best offer of The Nasdaq Stock Market, Inc. (d) ‘‘Protected Quotation’’ means a Protected Bid or a Protected Offer. (e) ‘‘Regular Way’’ means bids, offers, and transactions that embody the standard terms and conditions of a market. (f) ‘‘Trading Center’’ means a national securities exchange or national securities association that operates an SRO trading facility, an alternative trading system, an exchange market maker, an OTC market maker, or any VerDate Aug<31>2005 20:24 Aug 15, 2006 Jkt 208001 other broker or dealer that executes orders internally by trading as principal or crossing orders as agent. Section 2. Locking or Crossing Quotations in NMS Stocks. (a) Definitions. For purposes of this Rule, the following definitions shall apply: (i) The terms automated quotation, effective national market system plan, intermarket sweep order, manual quotation, NMS stock, protected quotation, regular trading hours, and trading center shall have the meanings set forth in SEC Rule 600(b) of Regulation NMS under the Securities Exchange Act of 1934. (ii) The term crossing quotation shall mean the display of a bid for an NMS stock during regular trading hours at a price that is higher than the price of an offer for such NMS stock previously disseminated pursuant to an effective national market system plan, or the display of an offer for an NMS stock during regular trading hours at a price that is lower than the price of a bid for such NMS stock previously disseminated pursuant to an effective national market system plan. (iii) The term locking quotation shall mean the display of a bid for an NMS stock during regular trading hours at a price that equals the price of an offer for such NMS stock previously disseminated pursuant to an effective national market system plan, or the display of an offer for an NMS stock during regular trading hours at a price that equals the price of a bid for such NMS stock previously disseminated pursuant to an effective national market system plan. (b) Prohibition. Except for quotations that fall within the provisions of paragraph (d) of this Rule, members of the Exchange shall reasonably avoid displaying, and shall not engage in a pattern or practice of displaying, any quotations that lock or cross a protected quotation, and any manual quotations that lock or cross a quotation previously disseminated pursuant to an effective national market system plan. (c) Manual quotations. If a member of the Exchange displays a manual quotation that locks or crosses a quotation previously disseminated pursuant to an effective national market system plan, such member of the Exchange shall promptly either withdraw the manual quotation or route an intermarket sweep order to execute against the full displayed size of the locked or crossed quotation. (d) Exceptions. (i) The locking or crossing quotation was displayed at a time when the PO 00000 Frm 00106 Fmt 4703 Sfmt 4703 trading center displaying the locked or crossed quotation was experiencing a failure, material delay, or malfunction of its systems or equipment. (ii) The locking or crossing quotation was displayed at a time when a protected bid was higher than a protected offer in the NMS stock. (iii) The locking or crossing quotation was an automated quotation, and the member of the Exchange displaying such automated quotation simultaneously routed an intermarket sweep order to execute against the full displayed size of any locked or crossed protected quotation. (iv) The locking or crossing quotation was a manual quotation that locked or crossed another manual quotation, and the member of the Exchange displaying the locking or crossing manual quotation simultaneously routed an intermarket sweep order to execute against the full displayed size of the locked or crossed manual quotation. Section 3. Order Routing (a) Eligible Orders are any orders that are designated by the customer to execute or route. IOC, AIOC, all ISO order types and FOK orders shall not be designated to execute or route. (b) If any Eligible Order requiring routing to another Trading Center has not been executed in its entirety and the terms of the order require that it be routed to another Trading Center for execution it shall be routed as follows: (i) Limit Orders shall be routed either in their entirety or as component orders to an away Trading Center(s) as limit orders. Limit Orders will be routed to the Trading Center(s) publishing the best Protected Bid or Protected Offer and will execute against the best Protected Bid or Protected Offer superior or equal to the limit price for the full number of available shares at the away Trading Center(s). The remaining portion of the order, if any, shall be ranked and displayed on the BSE book in accordance with the terms of such order. Market Orders shall be routed in their entirety or as component orders to an away Trading Center(s) as IOC Market Orders. If the Market Order routed to an away Trading Center is not executed in its entirety at the away Trading Center, the BSE would attempt to match the residual or declined Market Order against then available trading interest on the BSE book. Any remaining unmatched trading interest would then be handled in the manner described in Chapter XXXVIII, Section 3 of these proposed rules. (ii) If the BSE system cannot execute or book an Eligible Order it will route the Eligible Order to another Trading E:\FR\FM\16AUN1.SGM 16AUN1 Federal Register / Vol. 71, No. 158 / Wednesday, August 16, 2006 / Notices jlentini on PROD1PC65 with NOTICES Center on behalf of the Member who submitted the Eligible Order if that Member is a member or subscriber of the away Trading Center, or in the case where the Member is not a member or subscriber of the away Trading Center the order will be routed on behalf of that Member through a third-party broker dealer, or ‘‘give up,’’ that is a member or subscriber of the away Trading Center and, if not executed in its entirety at the away Trading Center, would be handled in the manner described in subsection (b)(i), above. Commentary: As described above, the Exchange will route orders to other trading centers under certain circumstances (‘‘Routing Services’’). The Exchange will provide its Routing Services pursuant to the terms of three separate agreements: (1) An agreement between the Exchange and each Member on whose behalf orders will be routed (‘‘MemberExchange Agreement’’); (2) an agreement between the Exchange and each third-party broker-dealer that will serve as a ‘‘give-up’’ on an away Trading Center when the Member on whose behalf an order is routed is not also a member or subscriber of the away Trading Center (‘‘Give-Up Agreement’’); and (3) an agreement between the Exchange and a third-party service provider (‘‘Technology Provider’’) pursuant to which the Exchange licenses the routing technology used by the Exchange for its Routing Services (‘‘Exchange-Technology Provider Agreement’’). .01 (a) The Exchange will provide its Routing Services in compliance with these rules and with the provisions of the Act and the rules thereunder, including, but not limited to, the requirements in Section 6(b)(4) and (5) of the Act that the rules of a national securities exchange provide for the equitable allocation of reasonable dues, fees, and other charges among its members and issuers and other persons using its facilities, and not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers. (b) As provider of the Routing Services, the Exchange will license the necessary routing technology for use within its own systems and accordingly will control the logic that determines when, how, and where orders are routed away to other Trading Centers. (c) The Exchange will establish and maintain procedures and internal controls reasonably designed to adequately restrict the flow of confidential and proprietary information between the Exchange (including its facilities) and the VerDate Aug<31>2005 20:24 Aug 15, 2006 Jkt 208001 Technology Provider, and, to the extent the Technology Provider reasonably receives confidential and proprietary information, that adequately restrict the use of such information by the Technology Provider to legitimate business purposes necessary for the licensing of routing technology. (d) The Exchange-Technology Provider Agreement will include terms and conditions that enable the Exchange to comply with this Commentary .01. * * * * * (iii) The order that is routed away shall remain outside the BSE for a prescribed period of time and may be executed in whole or in part subject to the applicable trading rules of the relevant Trading Center. While an order remains outside the Exchange, it shall have no time standing, relative to other orders received from BSE Members at the same price which may be executed against orders in the BSE book. Requests from Members to cancel their orders while the order is routed away to another Trading Center and remains outside the Exchange shall be processed, subject to the applicable trading rules of the relevant Trading Center. (iv) Where an order or portion of an order is routed away and is not executed either in whole or in part at the other Trading Center (i.e., all attempts at the fill are declined or timed out), the order shall be ranked, displayed and eligible for execution on the BSE book in accordance with the terms of such order. Section 4. Order Protection Requirements (a) An order is not eligible for execution on the BSE if its execution is at a price that is lower than a Protected Bid or higher than a Protected Offer (‘‘Trade-Through’’), or if its execution would be improper under SEC Rule 611 of Regulation NMS (together an ‘‘improper trade-through’’). If the execution of an order on the Exchange would cause an improper trade-through, that order shall be routed to another appropriate market or, if not designated to route, automatically cancelled. (b) Exceptions. Purchases and sales of NMS stocks will be excepted from Section 4, paragraph (a) above, and an appropriate modifier approved by the operating committee of the relevant national market system plan for an NMS stock will be attached to the trade before it is publicly reported, in the following circumstances that are exceptions under Rule 611 of Regulation NMS: (i) Crossed markets. If a trade is executed on the BSE while the National PO 00000 Frm 00107 Fmt 4703 Sfmt 4703 47269 Best Bid or National Best Offer is crossed; (ii) Other exceptions. (1) a non-regular way cross, (2) a single-price opening, reopening or closing trade; (3) an inbound ISO; or (4) a benchmark order is executed at the BSE. (c) In any transaction for or with a customer, a Member and persons associated with a Member shall use reasonable diligence to ascertain the best market for the subject security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions. In all customer transactions, a Member and persons associated with a Member shall comply with all applicable best execution requirements. (d) Trade-through policies and procedures. In determining whether a trade on the BSE would create an improper trade-through, the BSE will adhere to the terms of the ITS Plan (so long as it is in effect and is applicable to the BSE) and the applicable provisions of Reg NMS (when it takes effect), as well as to the following policies and procedures to the extent the policies and procedures are consistent with the terms of the ITS Plan and Reg NMS: (i) Clock synchronization and timing of the determination of improper tradethroughs. The BSE’s systems shall routinely, throughout the trading day, use processes that capture the time reflected on the atomic clock operated by the National Institute of Standards and Technology and shall automatically make adjustments to the time recorded in the BSE to ensure that the period between the two times will not exceed 500 milliseconds. The BSE shall determine whether a trade would create an improper trade-through based on the most recent National Best Bid and National Best Offer that has been received and processed by the BSE’s systems. (ii) Manual quotations of other markets. The BSE shall disregard another Trading Center’s bid or offer if it is identified by the other Trading Center as a manual quotation. (iii) Self-help exception. The BSE will apply the self-help exception to SEC Rule 611, and the BSE will disregard a Trading Center’s bid and offer, if: (A) The other Trading Center has publicly announced that it is not disseminating automated quotations; (B) The other Trading Center has repeatedly failed to respond within one second to an incoming AIOC or ISO E:\FR\FM\16AUN1.SGM 16AUN1 jlentini on PROD1PC65 with NOTICES 47270 Federal Register / Vol. 71, No. 158 / Wednesday, August 16, 2006 / Notices order (after adjusting for order transmission time); (C) The BSE will notify the other Trading Center immediately after having made use of the self-help exception by using an appropriate mechanism for communicating with other Trading Centers. The BSE will continue to apply the self-help exception until the other Trading Center has provided reasonable assurance to the BSE or, more generally, to the public that the problems have been corrected. (e) The BSE is designed, under the rules set out in this Chapter, to display bids and offers that qualify as automated quotations under the definition set out in SEC Rule 600(b)(3). The BSE shall use the following procedures for determining whether the quotes should be identified as ‘‘manual’’: (i) Periodic testing. The Market Operations Center (‘‘MOC’’) will have a real time monitoring tool, which will check the elapsed time between receipt of every AIOC order (any order type) and the corresponding response to each AIOC order by the trading system. A predetermined threshold will be set to generate an alert for any instances where the elapsed time between order receipt and response exceeds the preset limit. (ii) Adding the ‘‘manual’’ identifier. Immediately upon receiving an alert from the processes described above in subparagraph (e)(i) that the Exchange’s trading system has not accepted and properly handled two or more AIOC orders in a symbol sent as sequential messages the MOC shall append a ‘‘manual’’ identifier to the bids and offers it makes publicly available in that symbol. (iii) Returning to automated quotations. Once the Exchange has made any required systems changes, or has otherwise determined that its quotations satisfy the requirements of SEC Rule 600(b)(3), and has conducted the applicable test(s) set out above to confirm that the Exchange’s quotes qualify as ‘‘automated quotations,’’ the Exchange shall remove the ‘‘manual’’ identifier from the bids and offers that are made publicly available. The Exchange also shall notify other Trading Centers that its quotations are automated by announcing that fact over the squawk box or other similar functionality available for communications with other Trading Centers. VerDate Aug<31>2005 20:24 Aug 15, 2006 Jkt 208001 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 In the BeX Facility Filing, the BSE proposed rules to implement the first phase of a new electronic trading facility, called BeX. BeX, which was developed by and is owned and operated by BSX Group, LLC (‘‘BSX’’), is an electronic securities communications and trading facility intended for the use of BSE Members, including Electronic Access Members, and their customers.7 In this rule filing, the Exchange proposes to implement the second phase of the BeX as a fullyautomated electronic book for the display and execution of orders in securities listed on any Exchange through the introduction of new rules as well as by amending certain existing rules (‘‘BeX Phase II’’). All such issues would not be assigned to a specialist. The new rules will be located in Chapter XXXVII of the Exchange’s Rules of the Board of Governors (‘‘BSE Rules’’). The BSE also proposes to implement rules to satisfy the requirements of Regulation NMS. These rules will be located in Chapter XXXVIII of the BSE Rules. The Exchange previously proposed to institute rules governing BeX as a new fully-automated electronic book that would display and match eligible orders in these securities, without the participation of a specialist.8 As of January 1, 2007, there will no longer be any specialist participation in any transactions on the BSE or otherwise. For competitive reasons, the Exchange considered that proposal to be vitally important to its ability to attract and 7 See 8 See PO 00000 BeX Governance Filing, nogte 4, supra. BeX Facility Filing, note 5, supra. Frm 00108 Fmt 4703 Sfmt 4703 retain order flow to the BSE and continues in that belief.9 Prior to implementation of the first phase of the BeX, BSE Specialists would quote and trade approximately 300 securities. The BSE Floor Broker community would routinely receive baskets of securities that contained orders and cross trades in securities which were not quoted by BSE Specialists. As such, the orders and cross trades for securities not traded on the BSE would have to be routed to other trading centers (‘‘Trading Centers’’) for execution. Thus, the Exchange was not able to retain order flow that had been directed to the BSE. Moreover, BSE Floor Brokers were hampered in their ability to attract more sources of order flow to the Exchange, because a percentage of the order flow they do attract was eventually routed to other Trading Centers for execution. The other Trading Centers include those that have the capability to post and execute orders in securities that are not continuously quoted or traded by any Member in a market making capacity, including other exchanges that have rules governing the same type of electronic book functionality that the BSE is now seeking to employ.10 BeX allows Exchange Members, whether or not they are on the Exchange’s floor, to enter orders into the BeX for possible execution. Additionally, in connection with satisfying the requirements of Regulation NMS, the Exchange proposes to offer several execution enhancements, such as eight additional order types, a rule aimed at the prevention of locked or crossed markets, electronic order routing, and an order protection rule as it transitions to a fully electronic trading venue with its proposed BeX facility and in accordance with the implementation of Regulation NMS. Under the BeX facility, the BSE expects that the current trading rules of the BSE will remain largely intact, with the exception of certain rule proposal changes filed with the Commission 9 The BSE intends to request from the staff of the Commission a limited exemption from paragraph (a)(2)(i)(A) of Rule 10b–10 under the Act on its own behalf and/or on behalf of its Members who execute trades on the BeX. The exemption request will be limited to those trades that BSE Members execute on BeX with other BSE Members when using the anonymous feature of BeX’s electronic trading system. The BSE also intends to request assurance that the Commission staff will not recommend enforcement action to the Commission if, in lieu of making and preserving a separate record, BSE Members rely on BSE’s retention of the identities of the BSE Members that execute anonymous trades through BeX to satisfy the requirements of Rules 10a–3(a)(1) and 17a–4(a) under the Act. 10 See, e.g., Chicago Stock Exchange (‘‘Chx’’) Rules, Article XXA. E:\FR\FM\16AUN1.SGM 16AUN1 jlentini on PROD1PC65 with NOTICES Federal Register / Vol. 71, No. 158 / Wednesday, August 16, 2006 / Notices regarding the BeX facility and the rule changes contained herein related to the BeX facility and required under Regulation NMS. The additional order types, rule aimed at prevention of locked and crossed markets, electronic order routing, and order protection rule proposed herein would be options available to BSE members in addition to that which is currently available under the Exchange’s existing rule set. Eligible securities and eligible orders. Under the proposed rules submitted in connection with the first phase of the BeX,11 all securities eligible for trading on the Exchange that are not assigned to a specialist would be traded in the BeX. Orders sent to the BeX would be required to be specifically designated for handling in the BeX. The BeX accepts only round-lot market and limit orders. Orders eligible for execution in the BeX may be designated as one of the following existing BSE order types: ‘‘at the close,’’ ‘‘at the opening or at the opening only,’’ ‘‘day,’’ ‘‘do not increase (DNI),’’ ‘‘do not reduce (DNR),’’ ‘‘fill or kill,’’ ‘‘good ‘till cancel,’’ ‘‘immediate or cancel,’’ ‘‘limit, limited or limited price,’’ ‘‘market,’’ ‘‘stop limit,’’ or ‘‘stop,’’ ‘‘cross,’’ ‘‘cross with size,’’ ‘‘good ‘till date (GTD),’’ ‘‘good ‘till time (GTT),’’ ‘‘limit or close,’’ or ‘‘mid-point cross.’’ In addition to the existing order types set forth above, orders may also be designated as one of the following new order types: ‘‘reserve order’’, ‘‘minimum quantity order,’’ ‘‘preferred price cross,’’ ‘‘automatic immediate or cancel (‘‘AIOC’’), ‘‘best price intermarket sweep’’ (‘‘BPISO’’), ‘‘ISO cross orders,’’ ‘‘price-penetrating orders’’ and ‘‘cancel on corporate action orders.’’ It should be noted that AIOC, BPISO, ISO cross and price-penetrating orders are being proposed in connection with the proposed rules related to Regulation NMS but will be located in the same chapter as the new order types being proposed in connection with BeX Phase II. Descriptions of the proposed order types are as follows: ‘‘Reserve Order’’: A Limit Order with a portion of the size displayed and with a reserve portion of the size that is not displayed. The displayed portion of Reserve Orders (not the reserve portion) shall be ranked at the specified limit price and the time of order entry. If the displayed portion of the Reserve Order is decremented such that fewer than 100 shares are displayed, the displayed portion of the Reserve Order shall be replenished for: (a) The displayed amount; or (b) the entire reserve amount, if the remaining reserve 11 See BeX Facility Filing, note 5, supra. VerDate Aug<31>2005 20:24 Aug 15, 2006 Jkt 208001 amount is smaller than the displayed amount. Upon replenishment the reserve portion shall be submitted and ranked at the specified limit price and time of replenishment. A Reserve Order cannot be an IOC Order or Market Order. ‘‘Minimum Quantity’’: A Minimum Quantity Order is an Order subject to the provisions of Chapter XXXVII, Section 6, that, upon entry, must be executed at least at its minimum quantity or it will be cancelled. If executed in part, the remaining quantity remains in the book and follows the execution rule of the order price type. A Stop Limit Order can be a minimum quantity and execution possibility will be checked at the election of the Order. ‘‘Preferred Price Cross’’: A Cross Order with a preferred limit price and an optional preferred tick, both set by the Member.12 A preferred limit price is the limit price the cross order will be executed at if it is equal to or better than the National Best Bid or Offer (‘‘Preferred Limit Price’’). The optional preferred tick is the amount of ticks beyond the preferred limit price at which the two-sided cross order may be executed (‘‘Optional Preferred Tick’’). The Preferred Price Cross order cannot be executed at a price that is more than the preferred limit price plus the amount of optional preferred ticks or less than the preferred limit price minus the amount of optional preferred ticks. If the Preferred Price Cross cannot be executed at the Preferred Limit Price, the execution price of the Cross will be determined by the Trading System to be the closest price to the Preferred Limit Price, respecting the Optional Preferred Tick and the National Best Bid or Offer. AIOC Order: An automatic immediate or cancel order is an order received on BeX that will execute immediately and automatically, either in whole or in part, at or better than its limit price, with any unexecuted balance of the order to be immediately cancelled. The unexecuted portion of the order will not be routed to another Trading Center. Best Price ISO: A best price intermarket sweep order is an order marked as required by Rule 600(b)(30) under the Act that is to be executed against any orders at the Exchange’s Best Bid or Best Offer (including any undisplayed orders at that price) as soon 12 The Exchange represents that a Preferred Price Cross Order must satisfy the conditions of either a Cross Order or a Cross with Size Order. Telephone call between Brian D. Donnelly, Assistant Vice President of Regulation & Compliance, and Dan Hamm, Vice President of Trading Systems, BSE, and Nancy Sanow, Assistant Director, and Ira Brandriss, Special Counsel, Division of Market Regulation, Commission on August 4, 2006. PO 00000 Frm 00109 Fmt 4703 Sfmt 4703 47271 as the order is received by the BSE, with any unexecuted balance of the order to be immediately cancelled. The BSE, in executing the Best Price ISO, shall not take any of the actions described in Chapter XXXVIII, Section 4 to prevent an improper trade through. Price-Penetrating ISO: An order marked as required by Rule 600(b)(30) under the Act that is to be executed at or better than its limit price as soon as the order is received by the BSE, with any unexecuted balance of the order to be immediately cancelled. Orders marked as price-penetrating ISO shall be executed against any eligible orders at the BSE (including any reserve size or other undisplayed orders, through multiple price points). The BSE, in executing these orders, shall not take any of the actions described in Chapter XXXVIII, Section 4 to prevent an improper trade-through. ISO Cross: A two sided order that, upon receipt, will be executed without any action on the part of the Exchange to prevent an improper trade through. The Member submitting an ISO Cross is responsible for checking all protected quotes and must send one or more ISO orders to other Trading Centers displaying a price better than the cross price. Cancel on Corporate Action: In the event of a dividend, distribution or stock split (‘‘Corporate Action’’), the order in the limit book will be cancelled. Compliance with Intermarket Trading System (‘‘ITS’’) Plan. As set forth in the BeX Facility Filing, to ensure compliance with the ITS Plan (as long as it remains in effect), otherwise eligible orders would be cancelled or routed away in certain circumstances. Specifically, if an order in an ITS eligible security crosses or locks the National Best Bid or National Best Offer at the time that it is received, the order would be immediately cancelled to ensure compliance with the ITS Plan’s rules relating to locked markets.13 Marketable orders that would tradethough the National Best Bid or National Best Offer would either be cancelled or be routed to the market(s) showing the National Best Bid or National Best Offer at the order-entering firm’s instructions.14 13 Similarly, if an order in a listed security locks or crosses the Best Bid or Best Offer in BeX at the time it is received, but not the National Best Bid or National Best Offer, the order would be executed according to BeX’s matching algorithm, and any remaining portion would be immediately cancelled, if it would lock or cross the National Best Bid or National Best Offer. 14 See BeX Facility Filing, proposed BSE Rule, Chapter XXXVII, Section 3, Paragraph (j)(i) and (iii). E:\FR\FM\16AUN1.SGM 16AUN1 47272 Federal Register / Vol. 71, No. 158 / Wednesday, August 16, 2006 / Notices Ranking and Display of Orders Except as otherwise permitted by Section 3, paragraphs (v)–(vi) of the BSE Rules, all orders at all price levels on the BeX shall be displayed to all Members on an anonymous basis and transactions executed on the BeX will be processed anonymously.15 The transaction reports will indicate the details of the transaction, but will not reveal contra party identities. No Member having the right to trade through the facilities of BeX and who has been a party to or has knowledge of an execution shall be under obligation to divulge the name of the buying or selling firm in any transaction. Except as otherwise permitted by the supplementary material in Section 3, no Member shall transmit through the facilities of BeX any information regarding a bid, offer, other indication of an order, or the Member’s identity, to another Member until permission to disclose and transmit such bid, offer, other indication of an order, or the Member’s identity has been obtained from the originating Member or the originating Member affirmatively elects to disclose its identity. The BeX will reveal the identity of a Member in the following circumstances: (1) For regulatory purposes or to comply with an order of a court or arbitrator; (2) when the National Securities Clearing Corporation (‘‘NSCC’’) ceases to act for a Member or the Member’s clearing firm, and NSCC determines not to guarantee the settlement of the Member’s trades; or (3) on risk management reports provided to the contra party of the Member or Member’s clearing firm each day by 4 p.m. (E.S.T.) which disclose trading activity on the aggregate dollar value basis. In order to satisfy Members’ record keeping obligations under Rules 17a– 3(a)(1) and 17a–4(a) under the Act, BSE shall retain for the period specified in Rule 17a–4(a) the identity of each Member that executes an anonymous transaction described in paragraph (i)(iii) of this rule. The information shall be retained by the BeX in its original form or a form approved under Rule 17a–6. Members shall retain the obligation to comply with Rules 17a– 3(a)(1) and 17a–4(a) under the Act whenever they possess the identity of their contra party. jlentini on PROD1PC65 with NOTICES Market Makers BSE Members may apply for Market Maker status. An applicant shall file an application for Market Maker status on such form as the Exchange may 15 See note 9, supra. VerDate Aug<31>2005 20:24 Aug 15, 2006 Jkt 208001 prescribe. Applications shall be reviewed by the Exchange, which shall consider such factors including, but not limited to capital operations, personnel, technical resources, and disciplinary history. No Member shall act as a Market Maker in any security unless such Member has been approved as a Market Maker in a security by the Exchange pursuant to the BSE Rules and the Exchange has not suspended or canceled such approval. Approved Market Makers are designated as dealers on the Exchange for all purposes under the Act the rules and regulations thereunder. An applicant’s Market Maker status shall become effective upon receipt by the Member of notice of an approval by the Exchange. In the event that an application is disapproved by the Exchange, the applicant shall have an opportunity to be heard upon the specific grounds for the denial, in accordance with the provisions of Chapter XXX of the BSE Rules. Market Maker status may be suspended or terminated by the Exchange upon a determination of any substantial or continued failure by such Market Maker to engage in dealings in accordance with the BSE Rules. Likewise, any Market Maker may withdraw its Market Maker status by giving written notice to the Exchange. Such withdrawal shall become effective on the tenth business day following the Exchange’s receipt of the notice. A Market Maker who fails to give a tenday written notice of withdrawal to the Exchange may be subject to formal disciplinary action pursuant to Chapter XXX. Subsequent to withdrawal, the Member shall not be permitted to reapply as a Market Maker for a period of six months. A Market Maker may be assigned a newly authorized security or a security already admitted to dealings on the BeX by filing an assignment request form with the Exchange. Assignment of the security shall become effective on the first business day following the Exchange’s approval of the assignment. In considering the approval of the assignment of the Market Maker in a security, the Exchange may consider: (1) The financial resources available to the Market Maker; (2) the Market Maker’s experience, expertise and past performance in making markets, including the Market Maker’s performance in other securities; (3) the Market Maker’s operational capability; (4) the maintenance and enhancement of competition among Market Makers in each security in which they are assigned; (5) the existence of satisfactory arrangements for clearing the Market PO 00000 Frm 00110 Fmt 4703 Sfmt 4703 Maker’s transactions; (6) the character of the market for the security, e.g., price, volatility, and relative liquidity. A Market Maker’s assignment in a security may be terminated by the Exchange if the Market Maker fails to enter quotations in the security within five (5) business days after the Market Maker’s assignment in the security becomes effective. Moreover, the Exchange may limit the number of Market Makers in a security upon prior written notice to Members. Market Makers shall be selected by the Exchange based on, but is not limited to, the following: Experience with making markets in equities; adequacy of capital; willingness to promote the BeX as a marketplace; issuer preference; operational capacity; support personnel; and history of adherence to Exchange rules and securities laws. A Market Maker may voluntarily terminate its assignment in a security by providing the Exchange with a one-day written notice of such termination. A Market Maker that fails to give advanced written notice of termination to the Exchange may be subject to formal disciplinary action pursuant to Chapter XXX. Furthermore, the Exchange may suspend or terminate any assignment of a Market Maker in a security or securities under Chapter XXXVII, Section 9 whenever, in the Exchange’s judgment, the interests of a fair and orderly market are best served by such action. A Member may seek review of any action taken by the Exchange pursuant to this Rule, including the denial of the application for, or the termination or suspension of, a Market Maker’s assignment in a security or securities, in accordance with Chapter XXX. Members who are assigned as Market Makers in one or more securities traded on the BeX must engage in a course of dealings for their own account to assist in the maintenance, insofar as reasonably practicable, of fair and orderly markets on the BeX in accordance with this Section. The responsibilities and duties of a Market Maker specifically include, but are not limited to, the following: (1) Maintain continuous, two-sided quotes in those securities in which the Market Maker is assigned to trade; (2) maintain adequate minimum capital in accordance with Rule 15(c)3–1 promulgated under Act; (3) remain in good standing with the Exchange; (4) inform the Exchange of any material change in financial or operational condition or in personnel; (5) clear and settle transactions through the facilities of a registered clearing agency. This requirement may be E:\FR\FM\16AUN1.SGM 16AUN1 jlentini on PROD1PC65 with NOTICES Federal Register / Vol. 71, No. 158 / Wednesday, August 16, 2006 / Notices satisfied by direct participation, use of direct clearing services, or by entry into a correspondent clearing arrangement with another Member that clears trades through such agency. A Market Maker must satisfy the responsibilities and duties during the Primary Trading Session on all days in which the Exchange is open for business. If the Exchange finds any substantial or continued failure by a Market Maker to engage in a course of dealings as specified in the applicable BSE Rules, such Market Maker will be subject to disciplinary action or suspension or revocation of the assignment by the Exchange in one or more of the securities in which the Market Maker is assigned. Nothing in this Section will limit any other power of the Board of Directors under the Bylaws, Rules, or procedures of the Exchange with respect to the Market Maker’s Membership status or in respect of any violation by a Market Maker of the provisions of this Rule. In accordance with Chapter XXX, a Member may seek review of actions taken by the Exchange pursuant to this Section. A Market Maker may apply to the Exchange to withdraw temporarily from its Market Maker status in the securities in which it is assigned. The Market Maker must base its request on demonstrated legal or regulatory requirements that necessitate its temporary withdrawal, or provide the Exchange an opinion of counsel certifying that such legal or regulatory basis exists. The Exchange will act promptly on such request and, if the request is granted, the Exchange may temporarily reassign the securities to another Market Maker. Market Makers will be required to maintain minimum performance standards the levels of which may be determined from time to time by the Exchange. Such levels will vary depending on the price, liquidity, and volatility of the security in which the Market Maker is assigned. The performance measurements will include (i) percent of time at the National Best Bid or National Best Offer; (ii) percent of executions better than the National Best Bid or National Best Offer; (iii) average displayed size; (iv) average quoted spread; and (v) in the event the security is a derivative security, the ability of the Market Maker to transact in underlying markets. A Market Maker on the Exchange may engage in Other Business Activities, or it may be affiliated with a broker-dealer that engages in Other Business Activities, only if there is an Information Barrier (also commonly referred to as ‘‘Chinese Wall’’) between VerDate Aug<31>2005 20:24 Aug 15, 2006 Jkt 208001 the market making activities and the Other Business Activities. ‘‘Other Business Activities’’ mean: (1) Conducting an investment banking or public securities business; or (2) making markets in the options overlying the security in which it makes markets. A Member or an affiliate of the Member may clear the Member’s Market Maker transactions if it establishes procedures to ensure that information with respect to such clearing activities will not be used to compromise the Information Barrier. In this regard: (1) The procedures must provide that any information pertaining to Market Maker securities positions and trading activities, and information derived from any clearing and margin financing arrangements, may be made available only to those employees (other than employees actually performing clearing and margin functions) specifically authorized under this Rule to have access to such information or to other employees in senior management positions who are involved in exercising general managerial oversight with respect to the market making activity; and (2) any margin financing arrangements must be sufficiently flexible so as not to limit the ability of any Market Maker to meet market making or other obligations under the Exchange’s Rules. Locked and Crossed BSE Members would have an obligation to reasonably avoid displaying, and avoid engaging in a pattern or practice of displaying any quotations that lock or cross a protected quotation, and any manual quotations that lock or cross a quotation previously disseminated pursuant to an effective national market system plan. This rule would be contained in new Chapter XXXVIII, Section 2 of the BSE Rules. For purposes of this rule a ‘‘crossing quotation’’ would mean the display of a bid for a NMS stock during regular trading hours at a price that is higher than the price of an offer for such NMS stock previously disseminated pursuant to an effective national market system plan, or the display of an offer for a NMS stock during regular trading hours at a price that is lower than the price of a bid for such NMS stock previously disseminated pursuant to an effective national market system plan. For purposes of this rule, a ‘‘locking quotation’’ would mean the display of a bid for a NMS stock during regular trading hours at a price that equals the price of an offer for such NMS stock previously disseminated pursuant to an effective national market system plan, or the display of an offer for a NMS stock PO 00000 Frm 00111 Fmt 4703 Sfmt 4703 47273 during regular trading hours at a price that equals the price of a bid for such NMS stock previously disseminated pursuant to an effective national market system plan. The rule would provide for four exceptions from the prohibition on locking or crossing protected quotations. First, the rule would except those quotations displayed at a time when the trading customer displaying the locked or crossed quotation was experiencing a failure, material delay or malfunction of its systems or equipment. Second, the rule would also except those quotations displayed at a time when the protected bid was higher than a protected offer in the NMS stock. Third, the rule would except those automated quotations where the BSE member displaying such automated quotation simultaneously routed an intermarket sweep order to execute against the full displayed size of any locked or crossed protected quotation. For example, if there is a reserve size behind the displayed size of the previously displayed protected quotation, its price may not change even after execution of the intermarket sweep order. Fourth, the rule would except those manual quotations that locked or crossed another manual quotation, and the BSE member displaying the locking or crossing manual quotation simultaneously routed an intermarket sweep order to execute against the full displayed size of the locked or crossed manual quotation. The rule does not specify any procedures for reconciling unintentional locks/crosses when both quotations are automated as trading should continue and market forces will reconcile the lock/cross. Market forces are likely to generate orders that will quickly resolve the lock/cross quotations. Order Routing The BSE is proposing a rule, in accordance with Regulation NMS, that would govern the order routing process. The rules on electronic order routing would be contained in new Chapter XXXVIII, Section 3. The BSE will only route an Eligible Order when the order has not been executed in its entirety and the terms of the order require routing to another Trading Center for execution. The BSE has determined that Eligible Orders are orders that are designated by the customer to execute or route. IOC, AIOC, all ISO order types and FOK orders shall not be designated to execute or route. Limit Orders shall be routed either in their entirety or as component orders to an away Trading Center(s). Limit Orders will be routed to the Trading Center(s) E:\FR\FM\16AUN1.SGM 16AUN1 47274 Federal Register / Vol. 71, No. 158 / Wednesday, August 16, 2006 / Notices jlentini on PROD1PC65 with NOTICES publishing the best Protected Bid or Protected Offer and will execute against the best Protected Bid or Protected Offer superior or equal to the limit price for the full number of available shares at the away Trading Center(s). The remaining portion of the order, if any, shall be ranked and displayed on the BSE book in accordance with the terms of such order. Market Orders shall be routed in their entirety or as component orders to an away Trading Center(s) as IOC Market Orders. If a Market Order routed to an away Trading Center is not executed in its entirety at the away Trading Center, the BSE would attempt to match the residual or declined Market Order against then available trading interest on the BSE book. Any remaining unmatched trading interest would then be handled in the manner described in Chapter XXXVIII, Section 3 of these proposed rules.16 Eligible Orders will be routed on behalf of the Member who submitted the Eligible Order if that Member is a member or subscriber of the away Trading Center or, in the case where the Member is not a member or subscriber of the away Trading Center, the order will be routed through a third party broker dealer, or ‘‘give up,’’ that is a member or subscriber of the away Trading Center pursuant to the terms of an agreement entered into between the BSE and that third party broker dealer which agreement is described below. The Eligible Order would route to another Trading Center as a limit order priced at the quote published by the Trading Center (an ISO). As stated above, the Exchange will route orders to other trading centers under certain circumstances (‘‘Routing Services’’). The Exchange will provide its Routing Services pursuant to the terms of three separate agreements: (1) An agreement between the Exchange and each Member on whose behalf orders will be routed (‘‘MemberExchange Agreement’’); (2) an agreement between the Exchange and each third-party broker-dealer that will serve as a ‘‘give-up’’ on an away trading center when the Member on whose behalf an order is routed is not also a member or subscriber of the away trading center (‘‘Give-Up Agreement’’); and (3) an agreement between the 16 The Exchange has advised that it intends to file an amendment to the proposed rule change that sets forth more clearly the handling by BeX of the remainder of an order that has been routed to an away Trading Center. Telephone call between Brian D. Donnelly, Assistant Vice President of Regulation & Compliance, and Dan Hamm, Vice President of Trading Systems, BSE, and Nancy Sanow, Assistant Director, and Ira Brandriss, Special Counsel, Division of Market Regulation, Commission on August 4, 2006. VerDate Aug<31>2005 20:24 Aug 15, 2006 Jkt 208001 Exchange and a third-party service provider (‘‘Technology Provider’’) pursuant to which the Exchange licenses the routing technology used by the Exchange for its Routing Services (‘‘Exchange-Technology Provider Agreement’’). The Exchange will provide its Routing Services in compliance with these rules and with the provisions of the Act and the rules thereunder, including, but not limited to, the requirements in Section 6(b)(4) and (5) of the Act that the rules of a national securities exchange provide for the equitable allocation of reasonable dues, fees, and other charges among its members and issuers and other persons using its facilities, and not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers. As provider of the Routing Services, the Exchange will license the necessary routing technology for use within its own systems and accordingly will control the logic that determines when, how, and where orders are routed away to other trading centers. The Exchange will establish and maintain procedures and internal controls reasonably designed to adequately restrict the flow of confidential and proprietary information between the Exchange (including its facilities) and the Technology Provider, and, to the extent the Technology Provider reasonably receives confidential and proprietary information, that adequately restrict the use of such information by the Technology Provider to legitimate business purposes necessary for the licensing of routing technology. The Exchange-Technology Provider Agreement will include terms and conditions that enable the Exchange to comply with all of its applicable Rules. As stated above, if an Eligible Order has not been executed in its entirety on the BSE, the order would route to another Trading Center as a limit order priced at the quote published by the Trading Center (an ISO). ISOs Orders routed to other Trading Centers would remain outside the BSE for a prescribed time period during which such orders could be executed (in whole or in part) or declined. While an order remains outside the BSE, it would have no time standing relative to others received from BSE Members at the same price that could be executed against interest on the BSE book. Requests from BSE Members to cancel their orders while the ISO is routed away to another Trading Center and remains outside the BSE would be processed subject to applicable trading rules of the relevant away Trading Center. When routing an PO 00000 Frm 00112 Fmt 4703 Sfmt 4703 order away to another Trading Center, the BSE would utilize such electronic intermarket linkages and order delivery facilities as could be approved by the BSE Board from time to time, subject to such applicable requirements as could be agreed to with the relevant Trading Center, subject to Commission approval or a proposed rule change submitted in accordance with Rule 19b–4 under the Act. Where an order or portion of an order is routed away and is not executed either in whole or in part at the other Trading Center (i.e., all attempts at the fill are declined or timed out), the order shall be ranked, displayed and eligible for execution on the BSE book in accordance with the terms of such order. In the event that a marketable order routed from the BSE to another Trading Center is not executed in its entirety at the other Trading Center’s quote, the BSE would attempt to match the residual or declined market order against then available trading interest on the BSE book. Any remaining unmatched trading interest would then be handled in the manner described in Chapter XXXVIII, Section 3 of these proposed rules. Order Protection Rule The BSE, in accordance with the requirements of Regulation NMS, is proposing an order protection rule that would be contained in new Chapter XXXVIII, Section 4. The proposed rule would prohibit trades from being executed on the BSE if the execution would result in an improper tradethrough, i.e., at a price lower than a Protected Bid or higher than a Protected Offer. If the execution of an order on the Exchange would cause an improper trade-through, that order would be routed to another appropriate market or, if designated as ‘‘do not route,’’ automatically cancelled. Members, however, would still be subject to all applicable best execution requirements. The BSE does provide for several exceptions to the trade-through rule. Some of the exceptions include: a crossed markets exception, a nonregular way cross exception, a single priced opening, reopening or closing trade exception, an inbound ISO exception, a stop order exception and a benchmark order executed at the BSE exception. If a purchase or sale of an NMS stock does qualify for an exception to the order protection rule, an appropriate modifier approved by the operating committee of the relevant national market system plan for an NMS stock will be attached to the trade before it is publicly reported. E:\FR\FM\16AUN1.SGM 16AUN1 jlentini on PROD1PC65 with NOTICES Federal Register / Vol. 71, No. 158 / Wednesday, August 16, 2006 / Notices The BSE would be an automated trading system which displays bids and offers that qualify as automated quotations under the definition set out in Rule 600(b)(3) under the Act, with manual capabilities in the event the automated trading feature is not available. In order to determine whether a trade would constitute an improper tradethrough the BSE’s systems would routinely, throughout the trading day, synchronize their time clocks and would immediately make adjustments to the time recorded in the BSE to ensure that the period between the two times would not exceed 500 milliseconds. If another market is displaying a manual quotation, the BSE would be able to disregard that market’s bid or offer. The BSE would also be able to disregard another Trading Center’s bid and offer if: the other market has publicly announced that it is not disseminating automated quotations and/or the other market has repeatedly failed to respond within one second to an incoming AIOC or ISO order (after adjusting for order transmission time). If the BSE bypassed another Trading Center’s quote it would immediately notify the Trading Center after having used the ‘‘self-help’’ exception through an appropriate mechanism for communicating with other Trading Centers. The BSE would be able to avail itself of the self-help exception until the other Trading Center has provided reasonable assurance to the BSE or to the public that the problems have been corrected. If the BSE has not accepted two or more AIOC orders sent as sequential test messages, the BSE will attach a ‘‘manual’’ identifier to its bids and offers it makes publicly available. Additionally, immediately upon receiving an alert from the processes that the Exchange’s trading system has taken more than 2 seconds to process any one AIOC order, the MOC shall automatically attach a ‘‘manual’’ identifier to the bids and offers it makes publicly available. If for some reason the MOC is unable to attach a manual identifier, the Exchange shall announce that its quotes are manual through an appropriate mechanism for communicating with other Trading Centers. Once the BSE has made any required systems changes, or has otherwise determined that its quotations satisfy the requirements of Rule 600(b)(3) under the Act, and has conducted applicable tests set out above to confirm that the Exchange’s quotes qualify as ‘‘automatic quotations,’’ the Exchange VerDate Aug<31>2005 20:24 Aug 15, 2006 Jkt 208001 would remove the ‘‘manual’’ identifier from the bids and offers that are made publicly available. The Exchange would also have to notify other Trading Centers that its quotations are automated by announcing that fact through an appropriate mechanism for communicating with other Trading Centers. Conclusion The Exchange represents that it has designed the BeX to be a fullyautomated system that would permit eligible orders in eligible securities to match against one another, without the required participation of a specialist. The Exchange believes that this system functionality would provide all Exchange Members with an efficient way to trade securities that would protect investors and the public interest by automatically handling orders in a fair and reasonable manner. Additionally, the BSE believes that the changes proposed herein are designed to enhance competition in the U.S. equities markets, particularly given the electrification of the marketplace and other fundamental changes that are rapidly taking place. The Exchange submits that the changes proposed herein are, among other things, intended to bring the BSE into compliance with the requirements of Regulation NMS. 2. Statutory Basis The basis for this proposed rule and proposed rule change is that Exchange believes its proposals are consistent with Section 6(b) 17 of the Act and further the objectives of Section 6(b)(5) 18 of the Act in particular, because they are 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. 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 has neither solicited nor received comments on the proposed rule change. 17 15 18 15 PO 00000 U.S.C. 78f(b). U.S.C. 78f(b)(5). Frm 00113 Fmt 4703 Sfmt 4703 47275 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 self-regulatory organization 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. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–BSE–2006–30 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File No. SR–BSE–2006–30. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying at the Commission’s Public Reference Room. Copies of such filing will also be available for inspection and copying at E:\FR\FM\16AUN1.SGM 16AUN1 47276 Federal Register / Vol. 71, No. 158 / Wednesday, August 16, 2006 / Notices the principal office of the abovementioned self-regulatory organization. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you with to make available publicly. All submissions should refer to the file number in the caption above and should be submitted on or before September 6, 2006. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.19 Nancy M. Morris, Secretary. [FR Doc. E6–13400 Filed 8–15–06; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–54288; File No. SR– NASDAQ–2006–008] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order Granting Approval of a Proposed Rule Change Requiring Securities be Eligible To Participate in a Direct Registration System August 8, 2006. I. Introduction On April 27, 2006, The NASDAQ Stock Market LLC (‘‘Nasdaq’’) filed with the Securities and Exchange Commission (‘‘Commission’’) proposed rule change SR–NASDAQ–2006–008 pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’).1 Notice of the proposal was published in the Federal Register on June 7, 2006.2 Two comment letters were received.3 For the reasons discussed below, the Commission is granting approval of the proposed rule change.4 19 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 Securities Exchange Act Release No. 53913 (May 31, 2006), 71 FR 33024 (June 7, 2006) [File No. SR– NASDAQ–2006–008]. 3 Letters from Noland Cheng, Chairman, SIA Operations Committee, Securities Industry Association (June 27, 2006) and Paul Conn, President, Global Capital Markets, Computershare Limited, and Charlie Rossi, Executive Vice President, Computershare Investor Services (July 28, 2006). 4 Concurrent with the Commission’s approval of Nasdaq’s rule change, the Commission is also approving in separate orders similar rule changes proposed by the American Stock Exchange LLC (‘‘Amex’’) and the New York Stock Exchange LLC (‘‘NYSE’’). Securities Exchange Act Release Nos. 54290 (August 8, 2006) [File No. SR–Amex–2006– 40] and 54289 (August 8, 2006) [File No. SR–NYSE– 2006–29]. The Commission has also published jlentini on PROD1PC65 with NOTICES 1 15 VerDate Aug<31>2005 20:24 Aug 15, 2006 Jkt 208001 II. Description The Direct Registration System (‘‘DRS’’) allows an investor to establish either through the issuer’s transfer agent or through the investor’s broker-dealer a book-entry position on the books of the issuer and to electronically transfer her position between the transfer agent and the broker-dealer of her choice through a facility currently administered by The Depository Trust Company (‘‘DTC’’).5 DRS, therefore, enables an investor to have securities registered in her name without having a securities certificate issued to her and to electronically transfer her securities to her brokerdealer in order to effect a transaction without the risk and delays associated with the use of securities certificates. Investors holding their securities in DRS retain the rights associated with securities certificates, including such rights as control of ownership and voting rights, without having the responsibility of holding and safeguarding securities certificates. In addition, in corporate actions such as reverse stock splits and mergers, cancellation of old shares and issuance of new shares are handled electronically with no securities certificates to be returned to or received from the transfer agent. In order to reduce the number of transactions in securities for which settlement is effected by the physical delivery of securities certificates and thereby reduce the risks, costs, and delays associated with the physical delivery of securities certificates, Nasdaq is proposing to add new Section (l) to its Rule 4350 to require that all listed securities be eligible to participate in DRS.6 While the rule change requires that issuers’ securities be eligible for DRS, it does not require issuers to participate in DRS operated by DTC and would not mandate the elimination of physical certificates. As a result, subject to applicable state law and the company’s governing documents, an investor could still elect to receive a notice of a similar rule changed proposed by NYSE Arca, Inc. Securities Exchange Act Release No. 54126 (July 11, 2006), 71 FR 40768 (July 18, 2006) [File No. SR–NYSEArca–2006–31]. 5 Currently, the only registered clearing agency operating a DRS is DTC. For a detailed description of DRS and the DRS facilities administered by DTC, see Securities Exchange Act Release Nos. 37931 (November 7, 1996), 61 FR 58600 (November 15, 1996), [File No. SR–DTC–96–15] (order granting approval to establish DRS) and 41862 (September 10, 1999), 64 FR 51162 (September 21, 1999), [File No. SR–DTC–99–16] (order approving implementation of the Profile Modification System). 6 The exact text of the Nasdaq proposed rule change is set forth in its filing, which can be found at http://www.complinet.com/nasdaq/display/ display.html?rbid=1705&elementid=26. PO 00000 Frm 00114 Fmt 4703 Sfmt 4703 certificate if the issuer chose to make certificates available. Because currently the only DRS operated by a registered clearing agency is the DRS operated by DTC, in order for a security to be eligible to participate in DRS, an issuer will be required to use a transfer agent that meets DTC’s DRS transfer agent requirements, including insurance and connectivity requirements. As a result, some transfer agents acting for Nasdaq issuers may have to make changes to comply with these requirements. Certain issuers may also have to make amendments to their governing documents, such as their bylaws, to be eligible to issue securities that are not represented by certificates. To allow sufficient time for any of these changes that need to take place, Nasdaq will implement the proposed rule change January 1, 2008, for the securities of issuers with securities already listed on Nasdaq or another listed marketplace at the time the rule change is approved. Companies listing for the first time should have greater flexibility to adopt any changes required to have their securities DRS eligible, and therefore, the rule change will be applicable to new listings beginning January 1, 2007. The requirement will not apply to non-equity securities that are held in book-entry-only form. III. Comment Letters The Commission received two comment letters in support of the proposed rule change.7 The SIA Operations Committee (‘‘SIA’’), an industry organization representing broker-dealers, stated that the effect of the proposed rule change will be to reduce significantly the number of transactions in securities for which settlement is effected by the physical delivery of securities certificates thereby reducing costs, risks, and delays associated with physical settlement. The SIA also contended that by increasing the number of DRS-eligible securities, the proposed rule change is an important step in reducing the number physical certificates, a goal the SIA has long supported in its efforts to promote immobilization and dematerialization. Computershare, a registered transfer agent, stated that the proposed rule change will help immobilize and eventually dematerialize certificates in the U.S. market, which it believes will result in benefits such as cost savings, 7 Supra note 3. The SIA and Computershare’s comment letters were written in support of the three similar proposed rule changes filed by Amex, Nasdaq, and NYSE. Supra note 4. The NYSE Arca’s proposed rule change was noticed by the Commission subsequent to the date the commenters submitted their comment letters. E:\FR\FM\16AUN1.SGM 16AUN1

Agencies

[Federal Register Volume 71, Number 158 (Wednesday, August 16, 2006)]
[Notices]
[Pages 47264-47276]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-13400]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54291; File No. SR-BSE-2006-30]


 Self-Regulatory Organizations; Boston Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change Relating to the Implementation 
of the Second Phase of the Boston Equities Exchange (``BeX'') Trading 
System

August 8, 2006.
    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 August 3, 2006, the Boston Stock Exchange (``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 BSE. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    In previous rule filings, BSE proposed to establish the governance 
framework for a new electronic trading facility, as that term is 
defined in Section 3(a)(2) of the Act,\3\ which is to be called BeX,\4\ 
and to propose rules that pertain to the first phase of BeX.\5\ The 
first phase of the BeX trading system involves a fully automated 
electronic book for the display and execution of orders in securities 
listed otherwise than on The Nasdaq Stock Market for which the BSE 
obtains unlisted trading privileges (``UTP'') after June 30, 2006.
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    \3\ Under the Act, the ``term `facility' when used with respect 
to an exchange includes its premises, tangible or intangible 
property whether on the premises or not, any right to the use of 
such premises or property or any service thereof for the purpose of 
effecting or reporting a transaction on an exchange (including, 
among other things, any system of communication to or from the 
exchange, by ticker or otherwise, maintained by or with the consent 
of the exchange), and any right of the exchange to the use of any 
property or service.'' See 15 U.S.C. 78c(a)(2).
    \4\ See Securities Exchange Act Release No. 54035 (June 22, 
2006), 71 FR 37135 (June 29, 2006) (SR-BSE-2006-20) (``BeX 
Governance Filing'').
    \5\ See Securities Exchange Act Release No. 54034 (June 22, 
2006), 71 FR 37140 (June 29, 2006) (SR-BSE-2006-22) (``BeX Facility 
Filing'').
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    The proposed rules set forth below are being filed in connection 
with the implementation of the second phase of the BeX trading system. 
As of January 1, 2007, there will no longer be any specialist 
participation in any transactions on the BSE or otherwise. 
Additionally, in connection with satisfying the requirements of 
Regulation NMS, the BSE is proposing eight new order types; rules to 
prevent locked or crossed quotations; a new order routing system; and 
an order protection rule. The text of the proposed rule change is 
available on Exchange's Web site (https://www.bostonstock.com), at the 
Exchange's Office of the Secretary, and at the Commission's Public 
Reference Room.
    The text of the proposed rule change also appears below. Proposed 
new language is italicized; deleted language is in [brackets].\6\
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    \6\ For clarity, the rule text below treats the rule text 
proposed in the BeX Facility Filing as existing rule text even 
though that filing has not been approved by the Commission.
---------------------------------------------------------------------------

Rules of the Boston Stock Exchange

Chapter XXXVII--Boston Equities Exchange (``BeX'') Trading System

    The Boston Equities Exchange (``BeX'') trading system is a fully-
automated facility of the Exchange, which allows eligible orders in 
eligible securities to electronically match and execute against one 
another.

Section 1. BeX Eligible Securities

    (a) Eligible Securities. All securities eligible for trading on the 
Exchange [that are listed otherwise than on The Nasdaq Stock Market for 
which the BSE obtains unlisted trading privileges (``UTP'') after June 
30, 2006] shall be eligible for trading through BeX. Any specialist 
request to remove a security from BeX shall be considered by the 
appropriate Board Committee.

Section 2. Eligible Orders

    Subsections (a) through (b)--no change.
    (c) Eligible order types:
    (i) Orders eligible for execution in BeX may be designated as one 
of the following existing BSE order types as defined in Chapter I, 
Section 3 except that any reference in the existing BSE Rules to the 
execution of Orders as soon as ``represented at the specialist's post'' 
shall for purposes of this Section be understood to mean ``entered in 
BeX'':

(A) At the Opening or At the Opening Only Order.
(B) Day Order.
(C) Do Not Increase (DNI).
(D) Do Not Reduce (DNR).
(E) Fill or Kill.
(F) Good `Till Cancel Order.
(G) Immediate or Cancel.
(H) Limit, Limited Order or Limited Price Order.
(I) At the Close.
(J) Market Order.
(K) Stop Limit Order.
(L) Stop Order.

    With the exception of Fill or Kill and Immediate or Cancel Orders, 
a customer may append to an Order an instruction that the Order be 
routed to the market(s) displaying the National Best Bid or Offer if 
the Order would trade through the National Best Bid or Offer if 
executed on the BeX. Absent such an instruction, the order will be 
cancelled.
    (ii) Orders eligible for execution in BeX may also be designated as 
one of the following additional order types:
    (A) ``Cross'': An order to buy and sell the same security at a 
specific price better than the best bid and offer displayed in BeX and 
equal to or better than the National Best Bid and Offer. A Cross Order 
may represent interest of one or more BSE Members.
    (B) ``Cross with Size'': A Cross Order to buy and sell at least 
5,000 shares of the same security with a market value of at least 
$100,000.00 (i) at a price equal to or better than the best bid or 
offer displayed in BeX and the National Best Bid or Offer and (ii) 
where the size of the order is larger than the largest order [aggregate 
size of all interest] displayed in BeX at that price.[; and (iii) where 
neither side of the order is for the account of the BSE Member sending 
the order to BeX.]
    (C) ``Good `Till Date (GTD)'': An order to buy or sell that, if not 
executed, expires at the end of date specified in the order.
    (D) ``Good `Till Time (GTT)'': An order to buy or sell that, if not 
executed, expires at the time specified in the order.
    (E) ``Limit or Close'': A limit order to buy or sell that if not 
executed prior to the Market on Close cutoff time of 3:40 p.m., 
pursuant to Chapter II, Section 22, will automatically convert to an At 
the Close Order for inclusion in the closing process and if not so 
executed, at the close, will be cancelled.
    (F) ``Mid-Point Cross '': A two-sided order with both a buy and 
sell component combined that executes at the midpoint of the National 
Best Bid or Offer. A Mid-point Cross Order will be rejected when a 
locked or crossed

[[Page 47265]]

market exists in that security at the time the Order is received. 
Midpoint Cross Orders may be entered, quoted, executed and reported in 
increments as small as one-half of the Minimum Price Variation.
    (G) ``Reserve'': A Limit Order with a portion of the size displayed 
and with a reserve portion of the size that is not displayed. A Reserve 
Order cannot be an IOC Order or Market Order.
    (H) ``Minimum Quantity'': A Minimum Quantity Order is an order 
subject to the provisions of Chapter XXXVII, Section 6, that, upon 
entry, must be executed at least at its minimum quantity or it will be 
cancelled. If executed in part, the remaining quantity remains in the 
book and follows the execution rule of the order type. A Stop Limit 
Order can be a Minimum Quantity Order and, at the election of the 
order, will be handled pursuant to subsection (j) of Section 3.
    (I) ``Preferred Price Cross'': A Two-Sided Cross Order with a 
preferred limit price and an optional preferred tick, both set by the 
Member. A preferred limit price is the limit price the two-sided cross 
order will be executed at if it is equal to or better than the National 
Best Bid or National Best Offer (``Preferred Limit Price''). The 
optional preferred tick is the amount of ticks beyond the preferred 
limit price at which the two-sided cross order may be executed 
(``Optional Preferred Tick''). The Preferred Price Cross order cannot 
be executed at a price that is more than the preferred limit price plus 
the amount of optional preferred ticks or less than the preferred limit 
price minus the amount of optional preferred ticks. If the Preferred 
Price Cross cannot be executed at the Preferred Limit Price the 
execution price of the Cross will be determined by the Trading System 
to be the closest price to the Preferred Limit Price, respecting the 
Optional Preferred Tick and the National Best Bid or National Best 
Offer.
    (J) Best Price Intermarket Sweep Order (``BPISO''): A Best Price 
Intermarket Sweep Order (BPISO) is an order marked as required by SEC 
Rule 600(b)(30) that is to be executed against any orders at the 
Exchange's Best Bid or Best Offer (including any undisplayed orders at 
that price) as soon as the order is received by BSE, with any 
unexecuted balance of the order to be immediately cancelled. BSE, in 
executing the BPISO, shall not take any of the actions described in 
Chapter XXXVIII, Section 4 to prevent an improper trade through.
    (K) Automated Immediate or Cancel (``AIOC''): An automated 
immediate or cancel order received on BSE will execute immediately and 
automatically, either in whole or in part, at or better than its limit 
price, with any unexecuted balance of the order to be immediately 
cancelled. The unexecuted portion of the order will not be routed to 
another Trading Center.
    (L) ``Price-Penetrating ISO'': An order marked as required by SEC 
Rule 600(b)(30) that is to be executed at or better than its limit 
price as soon as the order is received by BSE, with any unexecuted 
balance of the order to be immediately cancelled. Orders marked as 
price-penetrating ISO shall be executed against any eligible orders in 
BSE (including any undisplayed orders, through multiple price points). 
BSE, in executing these orders, shall not take any of the actions 
described in Chapter XXXVIII, Section 4 to prevent an improper trade-
through.
    (M) ISO Cross Order: A two sided order that, upon receipt, will be 
executed without any action on the part of the Exchange to prevent an 
improper trade through. The Member submitting an ISO Cross is 
responsible for checking all protected quotes and must send one or more 
ISO orders to other Trading Centers displaying a price better than the 
cross price.
    (N) Cancel on Corporate Action: In the event of a dividend, 
distribution or stock split (``Corporate Action''), the order in the 
limit book will be cancelled.
    Subsection (d)--no change.
* * * Interpretations and Policies
    .01 The terms ``Best Bid'' and ``Best Offer'' shall mean, 
respectively, the highest and lowest priced order to buy and sell an 
eligible security in BeX.
    .02 The terms ``National Best Bid'' and ``National Best Offer'' 
shall mean, respectively, the highest and lowest priced order or quote 
to buy and sell a BeX eligible security displayed in the consolidated 
quotation system for the security.

Section 3. Operation of BeX

    Subsections (a)-(f)--no change.
    (g) Post-Primary Trading Session (PPS). The BeX PPS will operate 
from the time when the primary market disseminates its closing price 
until [4:30] 6:30 p.m. During the BeX PPS only cross orders at a 
specific price may be submitted.
    Subsection (h)--no change.
    (i) Ranking and Display of Orders
    (i)-(ii)--no change
    (iii) The displayed portion of Reserve Orders (not the reserve 
portion) shall be ranked at the specified limit price and the time of 
order entry. If the displayed portion of the Reserve Order is 
decremented such that fewer than 100 shares are displayed, the 
displayed portion of the Reserve Order shall be replenished for: a) The 
displayed amount; or b) the entire reserve amount, if the remaining 
reserve amount is smaller than the displayed amount. Upon replenishment 
the reserve portion shall be submitted and ranked at the specified 
limit price and time of replenishment.
    (iv) Except as otherwise permitted by Section 3, paragraphs (v)-
(vi) below, all orders at all price levels on BeX shall be displayed to 
all Members on an anonymous basis and transactions executed on BeX will 
be processed anonymously. The transaction reports will indicate the 
details of the transaction, but will not reveal contra party 
identities.
    (v) BeX will reveal the identity of a Member in the following 
circumstances:
    (A) For regulatory purposes or to comply with an order of a court 
or arbitrator;
    (B) When the National Securities Clearing Corporation (``NSCC'') 
ceases to act for a Member or the Member's clearing firm, and NSCC 
determines not to guarantee the settlement of the Member's trades; or
    (C) On risk management reports provided to the contra party of the 
Member or Member's clearing firm each day by 4 p.m. (E.S.T.) which 
disclose trading activity on the aggregate dollar value basis.
    (vi) In order to satisfy Members' record keeping obligations under 
SEC Rules 17a-3(a)(1) and 17a-4(a), BSE shall retain for the period 
specified in Rule 17a-4(a) the identity of each Member that executes an 
anonymous transaction described in paragraph (i)(iii) of this rule. The 
information shall be retained by BeX in its original form or a form 
approved under Rule 17a-6. Members shall retain the obligation to 
comply with SEC Rule 17a-3(a)(1) and 17a-4(a) whenever they possess the 
identity of their contra party.

Interpretations and Policies:

    .01 No Member having the right to trade through the facilities of 
BeX and who has been a party to or has knowledge of an execution shall 
be under obligation to divulge the name of the buying or selling firm 
in any transaction.
    .02 Except as required by paragraphs (v)-(vi), no Member shall 
transmit through the facilities of BeX any information regarding a bid, 
offer, other indication of an order, or the Member's identity, to 
another Member until permission to disclose and transmit such bid, 
offer, other indication of an order, or the Member 's identity has been 
obtained from the originating

[[Page 47266]]

Member or the originating Member affirmatively elects to disclose its 
identity.
    Subsections (j) through (k)--no change.

Section 4. Cancellation of Transactions

    Subsection (a)--no change.

Section 5. Handling of Clearly Erroneous Transactions

    Subsection (a)--no change.

Section 6. Orders To Be Reduced and Increased on Ex-Date

    Subsections (a) through (d)--no change.

Section 7. Application of BSE Rules

    Subsection (a)--no change.

Section 8. Approval of Market Makers

    (a) No Member shall act as a Market Maker in any security unless 
such Member has been approved as a Market Maker in such security by the 
Exchange pursuant to this Section and the Exchange has not suspended or 
canceled such approval. Approved Market Makers are designated as 
dealers on the Exchange for all purposes under the Securities Exchange 
Act of 1934 and the rules and regulations thereunder.
    (b) An applicant shall file an application for Market Maker status 
on such form as the Exchange may prescribe. Applications shall be 
reviewed by the Exchange, which shall consider such factors including, 
but not limited to capital operations, personnel, technical resources, 
and disciplinary history.
    (c) An applicant's Market Maker status shall become effective upon 
receipt by the Member of notice of an approval by the Exchange. In the 
event that an application is disapproved by the Exchange, the applicant 
shall have an opportunity to be heard upon the specific grounds for the 
denial, in accordance with the provisions of Chapter XXX of the BSE 
Rules.
    (d) A Market Maker may be suspended or terminated by the Exchange 
upon a determination of any substantial or continued failure by such 
Market Maker to engage in dealings in accordance with Section 10, 
below.
    (e) Any Market Maker may withdraw its Market Maker status by giving 
written notice to the Exchange. Such withdrawal shall become effective 
on the tenth business day following the Exchange's receipt of the 
notice. A Market Maker who fails to give a ten-day written notice of 
withdrawal to the Exchange may be subject to formal disciplinary action 
pursuant to Chapter XXX. Subsequent to withdrawal, the Member shall not 
be permitted to re-apply as a Market Maker for a period of six months.

Section 9. Assignments of Market Maker in a Security

    (a) A Market Maker may be assigned a newly authorized security or 
in a security already admitted to dealings on the BeX by filing an 
assignment request form with the Exchange. Assignment of the security 
shall become effective on the first business day following the 
Exchange's approval of the assignment. In considering the approval of 
the assignment of the Market Maker in a security, the Exchange may 
consider:
    (1) the financial resources available to the Market Maker;
    (2) the Market Maker's experience, expertise and past performance 
in making markets, including the Market Maker's performance in other 
securities;
    (3) the Market Maker's operational capability;
    (4) the maintenance and enhancement of competition among Market 
Makers in each security in which they are assigned;
    (5) the existence of satisfactory arrangements for clearing the 
Market Maker's transactions;
    (6) the character of the market for the security, e.g., price, 
volatility, and relative liquidity.
    (b) A Market Maker's assignment in a security may be terminated by 
the Exchange if the Market Maker fails to enter quotations in the 
security within five (5) business days after the Market Maker's 
assignment in the security becomes effective.
    (c) The Exchange may limit the number of Market Makers in a 
security upon prior written notice to Members.
    (d) Market Makers shall be selected by the Exchange. Such selection 
shall be based on, but is not limited to, the following: experience 
with making markets in equities; adequacy of capital; willingness to 
promote the BeX as a marketplace; issuer preference; operational 
capacity; support personnel; and history of adherence to Exchange rules 
and securities laws.
    (e) Voluntary Termination of Security Registration. A Market Maker 
may voluntarily terminate its assignment in a security by providing the 
Exchange with a one-day written notice of such termination. A Market 
Maker that fails to give advanced written notice of termination to the 
Exchange may be subject to formal disciplinary action pursuant to 
Chapter XXX.
    (f) The Exchange may suspend or terminate any assignment of a 
Market Maker in a security or securities under this Section whenever, 
in the Exchange's judgment, the interests of a fair and orderly market 
are best served by such action.
    (g) A Member may seek review of any action taken by the Exchange 
pursuant to this Rule, including the denial of the application for, or 
the termination or suspension of, a Market Maker's assignment in a 
security or securities, in accordance with Chapter XXX.

Section 10. Obligations of Market Makers

    (a) General. Members who are assigned as Market Makers in one or 
more securities traded on the BeX must engage in a course of dealings 
for their own account to assist in the maintenance, insofar as 
reasonably practicable, of fair and orderly markets on the BeX in 
accordance with this Section. The responsibilities and duties of a 
Market Maker specifically include, but are not limited to, the 
following:
    (1) Maintain continuous, two-sided quotes in those securities in 
which the Market Maker is assigned to trade;
    (2) Maintain adequate minimum capital in accordance with Rule 
15(c)3-1 promulgated under the Securities Exchange Act of 1934;
    (3) Remain in good standing with the Exchange;
    (4) Inform the Exchange 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 agency. This requirement may be satisfied by direct 
participation, use of direct clearing services, or by entry into a 
correspondent clearing arrangement with another Member that clears 
trades through such agency.
    (b) A Market Maker must satisfy the responsibilities and duties as 
set forth in paragraph (a) of this Section during the Primary Trading 
Session on all days in which the Exchange is open for business.
    (c) If the Exchange finds any substantial or continued failure by a 
Market Maker to engage in a course of dealings as specified in 
paragraph (a) of this Rule, such Market Maker will be subject to 
disciplinary action or suspension or revocation of the assignment by 
the Exchange in one or more of the securities in which the Market Maker 
is assigned. Nothing in this Section will limit any other power of the 
Board of Directors under the Bylaws, Rules, or procedures of the 
Exchange with respect to the Market Maker's Membership status or in 
respect of any violation by a Market Maker of the provisions of this 
Rule. In accordance with Chapter XXX, a

[[Page 47267]]

Member may seek review of actions taken by the Exchange pursuant to 
this Section.
    (d) Temporary Withdrawal. A Market Maker may apply to the Exchange 
to withdraw temporarily from its Market Maker status in the securities 
in which it is assigned. The Market Maker must base its request on 
demonstrated legal or regulatory requirements that necessitate its 
temporary withdrawal, or provide the Exchange an opinion of counsel 
certifying that such legal or regulatory basis exists. The Exchange 
will act promptly on such request and, if the request is granted, the 
Exchange may temporarily reassign the securities to another Market 
Maker.
    (e) Market Makers will be required to maintain minimum performance 
standards the levels of which may be determined from time to time by 
the Exchange. Such levels will vary depending on the price, liquidity, 
and volatility of the security in which the Market Maker is assigned. 
The performance measurements will include (i) percent of time at the 
National Best Bid or National Best Offer; (ii) percent of executions 
better than the National Best Bid or National Best Offer; (iii) average 
displayed size; (iv) average quoted spread; and (v) in the event the 
security is a derivative security, the ability of the Market Maker to 
transact in underlying markets.

Section 11. Limitations on Dealings

    (a) General. A Market Maker on the Exchange may engage in Other 
Business Activities, or it may be affiliated with a broker-dealer that 
engages in Other Business Activities, only if there is an Information 
Barrier (also commonly referred to as ``Chinese Wall'') between the 
market making activities and the Other Business Activities. ``Other 
Business Activities'' mean:
    (1) conducting an investment banking or public securities business; 
or
    (2) making markets in the options overlying the security in which 
it makes markets.
    (b) Information Barrier. For the purposes of this rule, an 
Information Barrier is an organizational structure in which:
    (1) The market making functions are conducted in a physical 
location separate from the locations in which the Other Business 
Activities are conducted, in a manner that effectively impedes the free 
flow of communications between persons engaged in the market making 
functions and persons conducting the Other Business Activities. 
However, upon request and not on his/her own initiative, a person 
engaged in the market making functions may furnish to persons at the 
same firm or an affiliated firm (``affiliated persons''), the same sort 
of market information that the person engaged in the market making 
function would make available in the normal course of its market making 
activity to any other person. The person engaged in the market making 
function must provide such information to affiliated persons in the 
same manner that he/she would make such information available to a non-
affiliated person.
    (2) There are procedures implemented to prevent the use of material 
non-public corporate or market information in the possession of persons 
on one side of the barrier from influencing the conduct of persons on 
the other side of the barrier.
    These procedures, at a minimum, must provide that:
    (A) the person performing the function of a Market Maker does not 
take advantage of knowledge of pending transactions, order flow 
information, corporate information or recommendations arising from the 
Other Business Activities; and
    (B) all information pertaining to the Market Maker's positions and 
trading activities is kept confidential and not made available to 
persons on the other side of the Information Barrier.
    (3) Persons on one side of the barrier may not exercise influence 
or control over persons on the other side of the barrier, provided 
that:
    (A) the market making function and the Other Business Activities 
may be under common management as long as any general management 
oversight does not conflict with or compromise the Market Maker's 
responsibilities under the Rules of the Exchange.
    (c) Documenting and Reporting of Information Barrier Procedures. A 
Member implementing an Information Barrier pursuant to this Section 
shall submit to the Exchange a written statement setting forth:
    (1) The manner in which it intends to satisfy the conditions in 
paragraph (b) of this Section, and the compliance and audit procedures 
it proposes to implement to ensure that the Information Barrier is 
maintained;
    (2) The names and titles of the person or persons responsible for 
maintenance and surveillance of the procedures;
    (3) A commitment to provide the Exchange with such information and 
reports as the Exchange may request relating to its transactions;
    (4) A commitment to take appropriate remedial action against any 
person violating this Section or the Member's internal compliance and 
audit procedures adopted pursuant to subparagraph (c)(1) of this 
Section, and that it recognizes that the Exchange may take appropriate 
remedial action, including (without limitation) reallocation of 
securities in which it serves as a Market Maker, in the event of such a 
violation;
    (5) Whether the Member or an affiliate intends to clear its 
proprietary trades and, if so, the procedures established to ensure 
that information with respect to such clearing activities will not be 
used to compromise the Member's Information Barrier, which procedures, 
at a minimum, must be the same as those used by the Member or the 
affiliate to clear for unaffiliated third parties; and
    (6) That it recognizes that any trading by a person while in 
possession of material, non-public information received as a result of 
the breach of the internal controls required under this Rule may be a 
violation of Rules 10b-5 and 14e-3 under the Exchange Act or one or 
more other provisions of the Exchange Act, the rules thereunder or the 
Rules of the Exchange, and that the Exchange intends to review 
carefully any such trading of which it becomes aware to determine 
whether a violation has occurred.
    (d) Approval of Information Barrier Procedures. The written 
statement required by paragraph (c) of this Section must detail the 
internal controls that the Member will implement to satisfy each of the 
conditions stated in that Section, and the compliance and audit 
procedures proposed to implement and ensure that the controls are 
maintained. If the Exchange determines that the organizational 
structure and the compliance and audit procedures proposed by the 
Member are acceptable under this Section, the Exchange shall so inform 
the Member, in writing. Absent the Exchange finding a Member's 
Information Barrier procedures acceptable, a Market Maker may not 
conduct Other Business Activities.
    (e) Clearing Arrangements. Subparagraph (c)(5) permits a Member or 
an affiliate of the Member to clear the Member's Market Maker 
transactions if it establishes procedures to ensure that information 
with respect to such clearing activities will not be used to compromise 
the Information Barrier. In this regard:
    (1) The procedures must provide that any information pertaining to 
Market Maker securities positions and trading activities, and 
information derived from any clearing and margin financing 
arrangements, may be made available only to those employees (other than 
employees actually performing clearing and margin functions) 
specifically

[[Page 47268]]

authorized under this Rule to have access to such information or to 
other employees in senior management positions who are involved in 
exercising general managerial oversight with respect to the market 
making activity.
    (2) Any margin financing arrangements must be sufficiently flexible 
so as not to limit the ability of any Market Maker to meet market 
making or other obligations under the Exchange's Rules.

Chapter XXXVIII--Regulation NMS

Section 1. Definitions

    (a) ``Automated Quotation'' means a quotation displayed by a 
trading center that:
    (i) Permits an incoming order to be marked as immediate-or-cancel;
    (ii) Immediately and automatically executes an order marked as 
immediate-or-cancel against the displayed quotation up to its full 
size;
    (iii) Immediately and automatically cancels any unexecuted portion 
of an order marked as immediate-or-cancel without routing the order 
elsewhere;
    (iv) Immediately and automatically transmits a response to the 
sender of an order marked as immediate-or-cancel indicating the action 
taken with respect to such order; and
    (v) Immediately and automatically displays information that updates 
the displayed quotation to reflect any change to its material terms.
    (b) ``Manual Quotation'' means any quotation other than an 
automated quotation.
    (c) ``Protected Bid'' or ``Protected Offer'' means a quotation in 
an NMS stock that:
    (i) Is displayed by an automated trading center;
    (ii) Is disseminated pursuant to an effective national market 
system plan; and
    (iii) Is an automated quotation that is the best bid or best offer 
of a national securities exchange, the best bid or best offer of The 
Nasdaq Stock Market Inc., or the best bid or best offer of a national 
securities association other than the best bid or best offer of The 
Nasdaq Stock Market, Inc.
    (d) ``Protected Quotation'' means a Protected Bid or a Protected 
Offer.
    (e) ``Regular Way'' means bids, offers, and transactions that 
embody the standard terms and conditions of a market.
    (f) ``Trading Center'' means a national securities exchange or 
national securities association that operates an SRO trading facility, 
an alternative trading system, an exchange market maker, an OTC market 
maker, or any other broker or dealer that executes orders internally by 
trading as principal or crossing orders as agent.

Section 2. Locking or Crossing Quotations in NMS Stocks.

    (a) Definitions. For purposes of this Rule, the following 
definitions shall apply:
    (i) The terms automated quotation, effective national market system 
plan, intermarket sweep order, manual quotation, NMS stock, protected 
quotation, regular trading hours, and trading center shall have the 
meanings set forth in SEC Rule 600(b) of Regulation NMS under the 
Securities Exchange Act of 1934.
    (ii) The term crossing quotation shall mean the display of a bid 
for an NMS stock during regular trading hours at a price that is higher 
than the price of an offer for such NMS stock previously disseminated 
pursuant to an effective national market system plan, or the display of 
an offer for an NMS stock during regular trading hours at a price that 
is lower than the price of a bid for such NMS stock previously 
disseminated pursuant to an effective national market system plan.
    (iii) The term locking quotation shall mean the display of a bid 
for an NMS stock during regular trading hours at a price that equals 
the price of an offer for such NMS stock previously disseminated 
pursuant to an effective national market system plan, or the display of 
an offer for an NMS stock during regular trading hours at a price that 
equals the price of a bid for such NMS stock previously disseminated 
pursuant to an effective national market system plan.
    (b) Prohibition. Except for quotations that fall within the 
provisions of paragraph (d) of this Rule, members of the Exchange shall 
reasonably avoid displaying, and shall not engage in a pattern or 
practice of displaying, any quotations that lock or cross a protected 
quotation, and any manual quotations that lock or cross a quotation 
previously disseminated pursuant to an effective national market system 
plan.
    (c) Manual quotations. If a member of the Exchange displays a 
manual quotation that locks or crosses a quotation previously 
disseminated pursuant to an effective national market system plan, such 
member of the Exchange shall promptly either withdraw the manual 
quotation or route an intermarket sweep order to execute against the 
full displayed size of the locked or crossed quotation.
    (d) Exceptions.
    (i) The locking or crossing quotation was displayed at a time when 
the trading center displaying the locked or crossed quotation was 
experiencing a failure, material delay, or malfunction of its systems 
or equipment.
    (ii) The locking or crossing quotation was displayed at a time when 
a protected bid was higher than a protected offer in the NMS stock.
    (iii) The locking or crossing quotation was an automated quotation, 
and the member of the Exchange displaying such automated quotation 
simultaneously routed an intermarket sweep order to execute against the 
full displayed size of any locked or crossed protected quotation.
    (iv) The locking or crossing quotation was a manual quotation that 
locked or crossed another manual quotation, and the member of the 
Exchange displaying the locking or crossing manual quotation 
simultaneously routed an intermarket sweep order to execute against the 
full displayed size of the locked or crossed manual quotation.

Section 3. Order Routing

    (a) Eligible Orders are any orders that are designated by the 
customer to execute or route. IOC, AIOC, all ISO order types and FOK 
orders shall not be designated to execute or route.
    (b) If any Eligible Order requiring routing to another Trading 
Center has not been executed in its entirety and the terms of the order 
require that it be routed to another Trading Center for execution it 
shall be routed as follows:
    (i) Limit Orders shall be routed either in their entirety or as 
component orders to an away Trading Center(s) as limit orders. Limit 
Orders will be routed to the Trading Center(s) publishing the best 
Protected Bid or Protected Offer and will execute against the best 
Protected Bid or Protected Offer superior or equal to the limit price 
for the full number of available shares at the away Trading Center(s). 
The remaining portion of the order, if any, shall be ranked and 
displayed on the BSE book in accordance with the terms of such order. 
Market Orders shall be routed in their entirety or as component orders 
to an away Trading Center(s) as IOC Market Orders. If the Market Order 
routed to an away Trading Center is not executed in its entirety at the 
away Trading Center, the BSE would attempt to match the residual or 
declined Market Order against then available trading interest on the 
BSE book. Any remaining unmatched trading interest would then be 
handled in the manner described in Chapter XXXVIII, Section 3 of these 
proposed rules.
    (ii) If the BSE system cannot execute or book an Eligible Order it 
will route the Eligible Order to another Trading

[[Page 47269]]

Center on behalf of the Member who submitted the Eligible Order if that 
Member is a member or subscriber of the away Trading Center, or in the 
case where the Member is not a member or subscriber of the away Trading 
Center the order will be routed on behalf of that Member through a 
third-party broker dealer, or ``give up,'' that is a member or 
subscriber of the away Trading Center and, if not executed in its 
entirety at the away Trading Center, would be handled in the manner 
described in subsection (b)(i), above.

Commentary:

    As described above, the Exchange will route orders to other trading 
centers under certain circumstances (``Routing Services''). The 
Exchange will provide its Routing Services pursuant to the terms of 
three separate agreements: (1) An agreement between the Exchange and 
each Member on whose behalf orders will be routed (``Member-Exchange 
Agreement''); (2) an agreement between the Exchange and each third-
party broker-dealer that will serve as a ``give-up'' on an away Trading 
Center when the Member on whose behalf an order is routed is not also a 
member or subscriber of the away Trading Center (``Give-Up 
Agreement''); and (3) an agreement between the Exchange and a third-
party service provider (``Technology Provider'') pursuant to which the 
Exchange licenses the routing technology used by the Exchange for its 
Routing Services (``Exchange-Technology Provider Agreement'').
    .01 (a) The Exchange will provide its Routing Services in 
compliance with these rules and with the provisions of the Act and the 
rules thereunder, including, but not limited to, the requirements in 
Section 6(b)(4) and (5) of the Act that the rules of a national 
securities exchange provide for the equitable allocation of reasonable 
dues, fees, and other charges among its members and issuers and other 
persons using its facilities, and not be designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.
    (b) As provider of the Routing Services, the Exchange will license 
the necessary routing technology for use within its own systems and 
accordingly will control the logic that determines when, how, and where 
orders are routed away to other Trading Centers.
    (c) The Exchange will establish and maintain procedures and 
internal controls reasonably designed to adequately restrict the flow 
of confidential and proprietary information between the Exchange 
(including its facilities) and the Technology Provider, and, to the 
extent the Technology Provider reasonably receives confidential and 
proprietary information, that adequately restrict the use of such 
information by the Technology Provider to legitimate business purposes 
necessary for the licensing of routing technology.
    (d) The Exchange-Technology Provider Agreement will include terms 
and conditions that enable the Exchange to comply with this Commentary 
.01.
* * * * *
    (iii) The order that is routed away shall remain outside the BSE 
for a prescribed period of time and may be executed in whole or in part 
subject to the applicable trading rules of the relevant Trading Center. 
While an order remains outside the Exchange, it shall have no time 
standing, relative to other orders received from BSE Members at the 
same price which may be executed against orders in the BSE book. 
Requests from Members to cancel their orders while the order is routed 
away to another Trading Center and remains outside the Exchange shall 
be processed, subject to the applicable trading rules of the relevant 
Trading Center.
    (iv) Where an order or portion of an order is routed away and is 
not executed either in whole or in part at the other Trading Center 
(i.e., all attempts at the fill are declined or timed out), the order 
shall be ranked, displayed and eligible for execution on the BSE book 
in accordance with the terms of such order.

Section 4. Order Protection Requirements

    (a) An order is not eligible for execution on the BSE if its 
execution is at a price that is lower than a Protected Bid or higher 
than a Protected Offer (``Trade-Through''), or if its execution would 
be improper under SEC Rule 611 of Regulation NMS (together an 
``improper trade-through''). If the execution of an order on the 
Exchange would cause an improper trade-through, that order shall be 
routed to another appropriate market or, if not designated to route, 
automatically cancelled.
    (b) Exceptions. Purchases and sales of NMS stocks will be excepted 
from Section 4, paragraph (a) above, and an appropriate modifier 
approved by the operating committee of the relevant national market 
system plan for an NMS stock will be attached to the trade before it is 
publicly reported, in the following circumstances that are exceptions 
under Rule 611 of Regulation NMS:
    (i) Crossed markets. If a trade is executed on the BSE while the 
National Best Bid or National Best Offer is crossed;
    (ii) Other exceptions.
    (1) a non-regular way cross, (2) a single-price opening, reopening 
or closing trade;
    (3) an inbound ISO; or
    (4) a benchmark order is executed at the BSE.
    (c) In any transaction for or with a customer, a Member and persons 
associated with a Member shall use reasonable diligence to ascertain 
the best market for the subject security and buy or sell in such market 
so that the resultant price to the customer is as favorable as possible 
under prevailing market conditions. In all customer transactions, a 
Member and persons associated with a Member shall comply with all 
applicable best execution requirements.
    (d) Trade-through policies and procedures. In determining whether a 
trade on the BSE would create an improper trade-through, the BSE will 
adhere to the terms of the ITS Plan (so long as it is in effect and is 
applicable to the BSE) and the applicable provisions of Reg NMS (when 
it takes effect), as well as to the following policies and procedures 
to the extent the policies and procedures are consistent with the terms 
of the ITS Plan and Reg NMS:
    (i) Clock synchronization and timing of the determination of 
improper trade-throughs. The BSE's systems shall routinely, throughout 
the trading day, use processes that capture the time reflected on the 
atomic clock operated by the National Institute of Standards and 
Technology and shall automatically make adjustments to the time 
recorded in the BSE to ensure that the period between the two times 
will not exceed 500 milliseconds. The BSE shall determine whether a 
trade would create an improper trade-through based on the most recent 
National Best Bid and National Best Offer that has been received and 
processed by the BSE's systems.
    (ii) Manual quotations of other markets. The BSE shall disregard 
another Trading Center's bid or offer if it is identified by the other 
Trading Center as a manual quotation.
    (iii) Self-help exception. The BSE will apply the self-help 
exception to SEC Rule 611, and the BSE will disregard a Trading 
Center's bid and offer, if:
    (A) The other Trading Center has publicly announced that it is not 
disseminating automated quotations;
    (B) The other Trading Center has repeatedly failed to respond 
within one second to an incoming AIOC or ISO

[[Page 47270]]

order (after adjusting for order transmission time);
    (C) The BSE will notify the other Trading Center immediately after 
having made use of the self-help exception by using an appropriate 
mechanism for communicating with other Trading Centers. The BSE will 
continue to apply the self-help exception until the other Trading 
Center has provided reasonable assurance to the BSE or, more generally, 
to the public that the problems have been corrected.
    (e) The BSE is designed, under the rules set out in this Chapter, 
to display bids and offers that qualify as automated quotations under 
the definition set out in SEC Rule 600(b)(3). The BSE shall use the 
following procedures for determining whether the quotes should be 
identified as ``manual'':
    (i) Periodic testing. The Market Operations Center (``MOC'') will 
have a real time monitoring tool, which will check the elapsed time 
between receipt of every AIOC order (any order type) and the 
corresponding response to each AIOC order by the trading system. A 
predetermined threshold will be set to generate an alert for any 
instances where the elapsed time between order receipt and response 
exceeds the preset limit.
    (ii) Adding the ``manual'' identifier. Immediately upon receiving 
an alert from the processes described above in subparagraph (e)(i) that 
the Exchange's trading system has not accepted and properly handled two 
or more AIOC orders in a symbol sent as sequential messages the MOC 
shall append a ``manual'' identifier to the bids and offers it makes 
publicly available in that symbol.
    (iii) Returning to automated quotations. Once the Exchange has made 
any required systems changes, or has otherwise determined that its 
quotations satisfy the requirements of SEC Rule 600(b)(3), and has 
conducted the applicable test(s) set out above to confirm that the 
Exchange's quotes qualify as ``automated quotations,'' the Exchange 
shall remove the ``manual'' identifier from the bids and offers that 
are made publicly available. The Exchange also shall notify other 
Trading Centers that its quotations are automated by announcing that 
fact over the squawk box or other similar functionality available for 
communications with other Trading Centers.

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
    In the BeX Facility Filing, the BSE proposed rules to implement the 
first phase of a new electronic trading facility, called BeX. BeX, 
which was developed by and is owned and operated by BSX Group, LLC 
(``BSX''), is an electronic securities communications and trading 
facility intended for the use of BSE Members, including Electronic 
Access Members, and their customers.\7\ In this rule filing, the 
Exchange proposes to implement the second phase of the BeX as a fully-
automated electronic book for the display and execution of orders in 
securities listed on any Exchange through the introduction of new rules 
as well as by amending certain existing rules (``BeX Phase II''). All 
such issues would not be assigned to a specialist. The new rules will 
be located in Chapter XXXVII of the Exchange's Rules of the Board of 
Governors (``BSE Rules''). The BSE also proposes to implement rules to 
satisfy the requirements of Regulation NMS. These rules will be located 
in Chapter XXXVIII of the BSE Rules.
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    \7\ See BeX Governance Filing, nogte 4, supra.
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    The Exchange previously proposed to institute rules governing BeX 
as a new fully-automated electronic book that would display and match 
eligible orders in these securities, without the participation of a 
specialist.\8\ As of January 1, 2007, there will no longer be any 
specialist participation in any transactions on the BSE or otherwise. 
For competitive reasons, the Exchange considered that proposal to be 
vitally important to its ability to attract and retain order flow to 
the BSE and continues in that belief.\9\
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    \8\ See BeX Facility Filing, note 5, supra.
    \9\ The BSE intends to request from the staff of the Commission 
a limited exemption from paragraph (a)(2)(i)(A) of Rule 10b-10 under 
the Act on its own behalf and/or on behalf of its Members who 
execute trades on the BeX. The exemption request will be limited to 
those trades that BSE Members execute on BeX with other BSE Members 
when using the anonymous feature of BeX's electronic trading system. 
The BSE also intends to request assurance that the Commission staff 
will not recommend enforcement action to the Commission if, in lieu 
of making and preserving a separate record, BSE Members rely on 
BSE's retention of the identities of the BSE Members that execute 
anonymous trades through BeX to satisfy the requirements of Rules 
10a-3(a)(1) and 17a-4(a) under the Act.
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    Prior to implementation of the first phase of the BeX, BSE 
Specialists would quote and trade approximately 300 securities. The BSE 
Floor Broker community would routinely receive baskets of securities 
that contained orders and cross trades in securities which were not 
quoted by BSE Specialists. As such, the orders and cross trades for 
securities not traded on the BSE would have to be routed to other 
trading centers (``Trading Centers'') for execution. Thus, the Exchange 
was not able to retain order flow that had been directed to the BSE. 
Moreover, BSE Floor Brokers were hampered in their ability to attract 
more sources of order flow to the Exchange, because a percentage of the 
order flow they do attract was eventually routed to other Trading 
Centers for execution. The other Trading Centers include those that 
have the capability to post and execute orders in securities that are 
not continuously quoted or traded by any Member in a market making 
capacity, including other exchanges that have rules governing the same 
type of electronic book functionality that the BSE is now seeking to 
employ.\10\ BeX allows Exchange Members, whether or not they are on the 
Exchange's floor, to enter orders into the BeX for possible execution.
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    \10\ See, e.g., Chicago Stock Exchange (``Chx'') Rules, Article 
XXA.
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    Additionally, in connection with satisfying the requirements of 
Regulation NMS, the Exchange proposes to offer several execution 
enhancements, such as eight additional order types, a rule aimed at the 
prevention of locked or crossed markets, electronic order routing, and 
an order protection rule as it transitions to a fully electronic 
trading venue with its proposed BeX facility and in accordance with the 
implementation of Regulation NMS. Under the BeX facility, the BSE 
expects that the current trading rules of the BSE will remain largely 
intact, with the exception of certain rule proposal changes filed with 
the Commission

[[Page 47271]]

regarding the BeX facility and the rule changes contained herein 
related to the BeX facility and required under Regulation NMS. The 
additional order types, rule aimed at prevention of locked and crossed 
markets, electronic order routing, and order protection rule proposed 
herein would be options available to BSE members in addition to that 
which is currently available under the Exchange's existing rule set.
    Eligible securities and eligible orders. Under the proposed rules 
submitted in connection with the first phase of the BeX,\11\ all 
securities eligible for trading on the Exchange that are not assigned 
to a specialist would be traded in the BeX. Orders sent to the BeX 
would be required to be specifically designated for handling in the 
BeX. The BeX accepts only round-lot market and limit orders.
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    \11\ See BeX Facility Filing, note 5, supra.
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    Orders eligible for execution in the BeX may be designated as one 
of the following existing BSE order types: ``at the close,'' ``at the 
opening or at the opening only,'' ``day,'' ``do not increase (DNI),'' 
``do not reduce (DNR),'' ``fill or kill,'' ``good `till cancel,'' 
``immediate or cancel,'' ``limit, limited or limited price,'' 
``market,'' ``stop limit,'' or ``stop,'' ``cross,'' ``cross with 
size,'' ``good `till date (GTD),'' ``good `till time (GTT),'' ``limit 
or close,'' or ``mid-point cross.'' In addition to the existing order 
types set forth above, orders may also be designated as one of the 
following new order types: ``reserve order'', ``minimum quantity 
order,'' ``preferred price cross,'' ``automatic immediate or cancel 
(``AIOC''), ``best price intermarket sweep'' (``BPISO''), ``ISO cross 
orders,'' ``price-penetrating orders'' and ``cancel on corporate action 
orders.'' It should be noted that AIOC, BPISO, ISO cross and price-
penetrating orders are being proposed in connection with the proposed 
rules related to Regulation NMS but will be located in the same chapter 
as the new order types being proposed in connection with BeX Phase II. 
Descriptions of the proposed order types are as follows:
    ``Reserve Order'': A Limit Order with a portion of the size 
displayed and with a reserve portion of the size that is not displayed. 
The displayed portion of Reserve Orders (not the reserve portion) shall 
be ranked at the specified limit price and the time of order entry. If 
the displayed portion of the Reserve Order is decremented such that 
fewer than 100 shares are displayed, the displayed portion of the 
Reserve Order shall be replenished for: (a) The displayed amount; or 
(b) the entire reserve amount, if the remaining reserve amount is 
smaller than the displayed amount. Upon replenishment the reserve 
portion shall be submitted and ranked at the specified limit price and 
time of replenishment. A Reserve Order cannot be an IOC Order or Market 
Order.
    ``Minimum Quantity'': A Minimum Quantity Order is an Order subject 
to the provisions of Chapter XXXVII, Section 6, that, upon entry, must 
be executed at least at its minimum quantity or it will be cancelled. 
If executed in part, the remaining quantity remains in the book and 
follows the execution rule of the order price type. A Stop Limit Order 
can be a minimum quantity and execution possibility will be checked at 
the election of the Order.
    ``Preferred Price Cross'': A Cross Order with a preferred limit 
price and an optional preferred tick, both set by the Member.\12\ A 
preferred limit price is the limit price the cross order will be 
executed at if it is equal to or better than the National Best Bid or 
Offer (``Preferred Limit Price''). The optional preferred tick is the 
amount of ticks beyond the preferred limit price at which the two-sided 
cross order may be executed (``Optional Preferred Tick''). The 
Preferred Price Cross order cannot be executed at a price that is more 
than the preferred limit price plus the amount of optional preferred 
ticks or less than the preferred limit price minus the amount of 
optional preferred ticks. If the Preferred Price Cross cannot be 
executed at the Preferred Limit Price, the execution price of the Cross 
will be determined by the Trading System to be the closest price to the 
Preferred Limit Price, respecting the Optional Preferred Tick and the 
National Best Bid or Offer.
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    \12\ The Exchange represents that a Preferred Price Cross Order 
must satisfy the conditions of either a Cross Order or a Cross with 
Size Order. Telephone call between Brian D. Donnelly, Assistant Vice 
President of Regulation & Compliance, and Dan Hamm, Vice President 
of Trading Systems, BSE, and Nancy Sanow, Assistant Director, and 
Ira Brandriss, Special Counsel, Division of Market Regulation, 
Commission on August 4, 2006.
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    AIOC Order: An automatic immediate or cancel order is an order 
received on BeX that will execute immediately and automatically, either 
in whole or in part, at or better than its limit price, with any 
unexecuted balance of the order to be immediately cancelled. The 
unexecuted portion of the order will not be routed to another Trading 
Center.
    Best Price ISO: A best price intermarket sweep order is an order 
marked as required by Rule 600(b)(30) under the Act that is to be 
executed against any orders at the Exchange's Best Bid or Best Offer 
(including any undisplayed orders at that price) as soon as the order 
is received by the BSE, with any unexecuted balance of the order to be 
immediately cancelled. The BSE, in executing the Best Price ISO, shall 
not take any of the actions described in Chapter XXXVIII, Section 4 to 
prevent an improper trade through.
    Price-Penetrating ISO: An order marked as required by Rule 
600(b)(30) under the Act that is to be executed at or better than its 
limit price as soon as the order is received by the BSE, with any 
unexecuted balance of the order to be immediately cancelled. Orders 
marked as price-penetrating ISO shall be executed against any eligible 
orders at the BSE (including any reserve size or other undisplayed 
orders, through multiple price points). The BSE, in executing these 
orders, shall not take any of the actions described in Chapter XXXVIII, 
Section 4 to prevent an improper trade-through.
    ISO Cross: A two sided order that, upon receipt, will be executed 
without any action on the part of the Exchange to prevent an improper 
trade through. The Member submitting an ISO Cross is responsible for 
checking all protected quotes and must send one or more ISO orders to 
other Trading Centers displaying a price better than the cross price.
    Cancel on Corporate Action: In the event of a dividend, 
distribution or stock split (``Corporate Action''), the order in the 
limit book will be cancelled.
    Compliance with Intermarket Trading System (``ITS'') Plan. As set 
forth in the BeX Facility Filing, to ensure compliance with the ITS 
Plan (as long as it remains in effect), otherwise eligible orders would 
be cancelled or routed away in certain circumstances. Specifically, if 
an order in an ITS eligible security crosses or locks the National Best 
Bid or National Best Offer at the time that it is received, the order 
would be immediately cancelled to ensure compliance with the ITS Plan's 
rules relating to locked markets.\13\ Marketable orders that would 
trade-though the National Best Bid or National Best Offer would either 
be cancelled or be routed to the market(s) showing the National Best 
Bid or National Best Offer at the order-entering firm's 
instructions.\14\
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    \13\ Similarly, if an order in a listed security locks or 
crosses the Best Bid or Best Offer in BeX at the time it is 
received, but not the National Best Bid or National Best Offer, the 
order would be executed according to BeX's matching algorithm, and 
any remaining portion would be immediately cancelled, if it would 
lock or cross the National Best Bid or National Best Offer.
    \14\ See BeX Facility Filing, proposed BSE Rule, Chapter XXXVII, 
Section 3, Paragraph (j)(i) and (iii).

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[[Page 47272]]

Ranking and Display of Orders

    Except as otherwise permitted by Section 3, paragraphs (v)-(vi) of 
the BSE Rules, all orders at all price levels on the BeX shall be 
displayed to all Members on an anonymous basis and transactions 
executed on the BeX will be processed anonymously.\15\ The transaction 
reports will indicate the details of the transaction, but will not 
reveal contra party identities. No Member having the right to trade 
through the facilities of BeX and who has been a party to or has 
knowledge of an execution shall be under obligation to divulge the name 
of the buying or selling firm in any transaction. Except as otherwise 
permitted by the supplementary material in Section 3, no Member shall 
transmit through the facilities of BeX any information regarding a bid, 
offer, other indication of an order, or the Member's identity, to 
another Member until permission to disclose and transmit such bid, 
offer, other indication of an order, or the Member's identity has been 
obtained from the originating Member or the originating Member 
affirmatively elects to disclose its identity.
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    \15\ See note 9, supra.
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    The BeX will reveal the identity of a Member in the following 
circumstances: (1) For regulatory purposes or to comply with an order 
of a court or arbitrator; (2) when the National Securities Clearing 
Corporation (``NSCC'') ceases to act for a Member or the Member's 
clearing firm, and NSCC determines not to guarantee the settlement of 
the Member's trades; or (3) on risk management reports provided to the 
contra party of the Member or Member's clearing firm each day by 4 p.m. 
(E.S.T.) which disclose trading activity on the aggregate dollar value 
basis.
    In order to satisfy Members' record keeping obligations under Rules 
17a-3(a)(1) and 17a-4(a) under the Act, BSE shall retain for the period 
specified in Rule 17a-4(a) the identity of each Member that executes an 
anonymous transaction described in paragraph (i)(iii) of this rule. The 
information shall be retained by the BeX in its original form or a form 
approved under Rule 17a-6. Members shall retain the obligation to 
comply with Rules 17a-3(a)(1) and 17a-4(a) under the Act whenever they 
possess the identity of their contra party.

Market Makers

    BSE Members may apply for Market Maker status. An applicant shall 
file an application for Market Maker status on such form as the 
Exchange may prescribe. Applications shall be reviewed by the Exchange, 
which shall consider such factors including, but not limited to capital 
operations, personnel, technical resources, and disciplinary history. 
No Member shall act as a Market Maker in any security unless such 
Member has been approved as a Market Maker in a security by the 
Exchange pursuant to the BSE Rules and the Exchange has not suspended 
or canceled such approval. Approved Market Makers are designated as 
dealers on the Exchange for all purposes under the Act the rules and 
regulations thereunder.
    An applicant's Market Maker status shall become effective upon 
receipt by the Member of notice of an approval by the Exchange. In the 
event that an application is disapproved by the Exchange, the applicant 
shall have an opportunity to be heard upon the specific grounds for the 
denial, in accordance with the provisions of Chapter XXX of the BSE 
Rules.
    Market Maker status may be suspended or terminated by the Exchange 
upon a determination of any substantial or continued failure by such 
Market Maker to engage in dealings in accordance with the BSE Rules. 
Likewise, any Market Maker may withdraw its Market Maker status by 
giving written notice to the Exchange. Such withdrawal shall become 
effective on the tenth business day following the Exchange's receipt of 
the notice. A Market Maker who fails to give a ten-day written notice 
of withdrawal to the Exchange may be subject to formal disciplinary 
action pursuant to Chapter XXX. Subsequent to withdrawal, the Member 
shall not be permitted to re-apply as a Market Maker for a period of 
six months.
    A Market Maker may be assigned a newly authorized security or a 
security already admitted to dealings on the BeX by filing an 
assignment request form with the Exchange. Assignment of the security 
shall become effective on the first business day following the 
Exchange's approval of the assignment