Self-Regulatory Organizations; Boston Stock Exchange, Inc.; Order Granting Approval of Proposed Rule Change and Notice of Filing and Order Granting Accelerated Approval to Amendment No. 2 Relating to the Implementation of the Second Phase of the Boston Equities Exchange (“BeX”) Trading System, 59161-59169 [E6-16580]
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Federal Register / Vol. 71, No. 194 / Friday, October 6, 2006 / Notices
the Linkage Plan Participant Markets to
one another, has been approved and
will become operative on October 1,
2006. The Linkage Plan provides for a
mechanism for charging for orders
executed in each Participant Market
using the information about a clearing
or Sponsoring Member. Certain markets
have indicated that they may be unable
to supply clearing or Sponsoring
Member information on orders routed
through the Linkage to other markets,
thus under these proposed rule changes,
the participants have agreed to bill each
other directly, based on data supplied
by SIAC.
The Exchanges and Nasdaq each have
requested that the Commission approve
their proposed rule changes on an
accelerated basis. The Exchanges and
Nasdaq state that they expect the
Linkage Plan to become operative on
October 1, 2006, and that accelerated
approval would permit each Exchange
and Nasdaq to implement exchange to
exchange billing procedures at the start
of the Linkage Plan’s operation,
allowing Linkage Plan participants who
do not have a Sponsoring Member at
each destination market, to use the
Linkage Plan and pay fees directly to the
other Linkage Plan participants.
The Commission finds good cause,
pursuant to Section 19(b)(2) of the Act,
for approving the proposed rule changes
prior to the thirtieth day after the date
of publication of notice in the Federal
Register. Granting accelerated approval
would permit the Exchanges and
Nasdaq to implement exchange to
exchange billing procedures at the start
of the Linkage Plan’s operation enabling
Linkage Plan participants who were not
able to find a Sponsoring Member at
each of the destination markets, to use
the Linkage Plan and pay fees directly
to another Linkage Plan participant.
Accordingly, the Commission finds
that there is good cause, consistent with
Section 19(b)(2) of the Act, to approve
the proposed rule changes on an
accelerated basis.
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V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act, that the
proposed rule changes (SR–Amex–
2006–85; SR–BSE–2006–41; SR–CBOE–
2006–80; SR–CHX–2006–28; SR–
NASDAQ–2006–038; SR–NSX–2006–11;
SR–NYSEArca–2006–69; SR–Phlx–
2006–58) are hereby approved on an
accelerated basis.
12 17
CFR 200.30–3(a)(12).
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59161
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.12
Nancy M. Morris,
Secretary.
[FR Doc. E6–16565 Filed 10–5–06; 8:45 am]
order approves the proposed rule
change, grants accelerated approval to
Amendment No. 2 to the proposed rule
change, and solicits comments from
interested persons on Amendment No.
2.
BILLING CODE 8011–01–P
II. Summary Description of the
Proposal
SECURITIES AND EXCHANGE
COMMISSION
BeX is an electronic securities
communications and trading facility for
equity securities designed to be used by
BSE Members, including Electronic
Access Members, and their customers.
BeX, a facility of the Exchange, was
developed, and is owned and operated,
by BSX Group, LLC (‘‘BSX’’).5 The
Commission recently approved rules to
implement the first phase of BeX,6
which is limited to securities listed
otherwise than on the NASDAQ Stock
Market LLC (‘‘Nasdaq’’) for which the
BSE obtained unlisted trading privileges
(‘‘UTP’’) after June 30, 2006 (‘‘BeX Phase
I’’). The Exchange now proposes to
implement the second phase of BeX
(‘‘BeX Phase II’’) as a fully-automated
electronic book for the display and
execution of orders in securities listed
on any exchange through introducing
new, as well as amending certain
existing, Rules of the Board of
Governors (‘‘BSE Rules’’).7 The BSE also
proposes to implement new Exchange
rules to satisfy the requirements of
Regulation NMS.8
BeX is a fully-automated electronic
book for the display and matching of
orders in eligible securities, without the
participation of a specialist.9 Securities
traded on BeX cannot also be traded by
a BSE specialist.10 The Exchange has
indicated that implementation of BeX is
scheduled to occur on October 30, 2006.
Accordingly, there no longer will be any
specialist participation in any
transactions on the BSE or otherwise as
of such implementation. The Exchange,
however, proposes to add rules to
[Release No. 34–54546; File No. SR–BSE–
2006–30]
Self-Regulatory Organizations; Boston
Stock Exchange, Inc.; Order Granting
Approval of Proposed Rule Change
and Notice of Filing and Order
Granting Accelerated Approval to
Amendment No. 2 Relating to the
Implementation of the Second Phase
of the Boston Equities Exchange
(‘‘BeX’’) Trading System
September 29, 2006.
I. Introduction
On August 3, 2006, the Boston Stock
Exchange, Inc. (‘‘BSE’’ or ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934, as amended
(‘‘Act’’),1 and Rule 19b–4 thereunder,2 a
proposed rule change in connection
with the implementation of the second
phase of the Boston Equities Exchange
(‘‘BeX’’) trading system. In addition, in
connection with satisfying the
requirements of Regulation NMS under
the Act, the BSE proposes several new
order types; rules to prevent locked or
crossed quotations; a new order routing
system; and an order protection rule.
The proposed rule change was
published for comment in the Federal
Register on August 16, 2006.3 The
Commission received no comments
regarding the proposal. On September
29, 2006, the BSE filed Amendment No.
2 to the proposed rule change.4 This
1 15
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 54291
(August 8, 2006), 71 FR 47264.
4 In Amendment No. 2, BSE made several changes
to the proposed rule change, including: (1)
introducing a new order type to be known as a NonDisplayed Order; (2) amending the definition of a
Preferred Price Cross and ISO Cross; (3) clarifying
when certain provisions relating to Regulation NMS
become effective; (4) adding provisions for the
handling of odd-lot and mixed-lot orders, including
the ranking and display of odd-lots and mixed-lots;
(5) clarifying the ranking and display of Reserve
Orders; (6) adding a provision relating to the
anonymity of trades executed by a Member against
itself; (7) adding a provision relating to access to
BeX by Sponsored Participants; (8) stating that, for
purposes of Section 11(a) of the Act (15 U.S.C.
78k(a)) and Rule 11a2–2(T) (17 CFR 240.11a2–2(T))
thereunder, all orders for the accounts of Exchange
PO 00000
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members will be transmitted to the BeX trading
system from off the floor (since the Exchange no
longer will have any physical trading floor) by
electronic means; and (9) making several clarifying
changes and correcting several technical errors
contained in the rule text. Amendment No. 1 was
withdrawn by BSE on September 29, 2006.
5 See Securities Exchange Act Release No. 54364
(August 25, 2006), 71 FR 52185 (September 1, 2006)
(approving the BeX facility and its governance
structure).
6 See Securities Exchange Act Release No. 54365
(August 25, 2006), 71 FR 52192 (September 1, 2006)
(‘‘BeX Phase I Order’’).
7 The BeX trading rules will be located in Chapter
XXXVII of the BSE Rules.
8 The rules relating to Regulation NMS
requirements will be located in Chapter XXXVIII of
the BSE Rules.
9 See BeX Phase I Order, supra note 6.
10 See Chapter XXXVII, Section 1 of the BSE
Rules.
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Federal Register / Vol. 71, No. 194 / Friday, October 6, 2006 / Notices
permit participation by market makers
in BeX as part of the instant proposed
rule change.
In connection with satisfying the
requirements of Regulation NMS, the
Exchange proposes to offer several
execution enhancements, including
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 BeX facility and in accordance with
the implementation of Regulation NMS.
The Exchange expects that initially the
current trading rules of the BSE will
remain largely intact,11 as
supplemented by the BeX Phase I rules
previously approved by the
Commission, and the rule changes
contained herein relating to the BeX
facility, including rule changes required
under Regulation NMS.
III. Discussion
After careful review, the Commission
finds that the proposed rule change, as
amended, is consistent with the Act and
the rules and regulations promulgated
thereunder applicable to a national
securities exchange 12 and, in particular,
with the requirements of Section 6(b) of
the Act.13 Specifically, the Commission
finds that approval of the proposed rule
change is consistent with Section 6(b)(5)
of the Act 14 in that it is designed to
facilitate transactions in securities; to
prevent fraudulent and manipulative
acts and practices; to promote just and
equitable principles of trade; to foster
cooperation and coordination with
persons engaged in regulating, clearing,
settling, processing information with
respect to, and facilitating transactions
in securities; to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system; and, in general, to protect
investors and the public interest.
cprice-sewell on PROD1PC66 with NOTICES
A. Eligible Securities
Under the rules approved in
connection with BeX Phase I, all
11 The Exchange has represented that within
thirty days of full implementation of the BeX
trading system, it intends to file a proposed rule
change under Section 19(b)(1) of the Act, which
will be designed to eliminate all rules that are no
longer applicable as a result of the transition from
the traditional floor-based model of trading to the
all-electronic BeX platform. The Exchange notes, for
example, that rules related to specialists will be
removed as there will no longer be any specialist
participation in any transactions on the BSE or
otherwise.
12 In approving this proposal, the Commission has
considered the proposed rule’s impact on
efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
13 15 U.S.C. 78f(b).
14 15 U.S.C. 78f(b)(5).
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14:52 Oct 05, 2006
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securities eligible for trading on the
Exchange that are listed otherwise than
on Nasdaq for which the BSE obtains
UTP after June 30, 2006 would be
eligible for trading in the BeX. The
Exchange has proposed to amend this
definition to allow all securities eligible
for trading on the Exchange to be
eligible for trading in the BeX. In
Amendment No. 2, the Exchange
proposes to allow the BeX to accept and
execute mixed-lot and odd-lot orders in
Nasdaq Global Market securities and
Nasdaq Capital Market securities. BeX
will continue to only accept and display
round-lot orders for securities listed on
exchanges other than the Nasdaq.
The Commission finds that the
Exchange’s proposal to expand the
category securities eligible to be traded
on BeX is consistent with the Act.
B. Eligible Orders
Under BeX Phase I, 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 (‘‘IOC’’),’’
‘‘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,’’ ‘‘mid-point cross,’’ and
‘‘post primary cross.’’ 15 The Exchange
has proposed to amend Chapter XXXVII,
Section 2 of the BSE Rules to add the
following additional orders types as part
of BeX Phase II: ‘‘reserve order,’’
‘‘minimum quantity order,’’ ‘‘preferred
price cross,’’ ‘‘automatic immediate or
cancel’’ (‘‘AIOC’’), ‘‘best price
intermarket sweep order’’ (‘‘BPISO’’),
‘‘ISO cross order,’’ ‘‘price-penetrating
ISO,’’ ‘‘cancel on corporate action
order,’’ and ‘‘non-displayed order.’’ 16
Best price intermarket sweep, pricepenetrating ISO, ISO Cross and AIOC
orders would not be eligible for
submission to BeX until February 5,
2007, which is the Trading Phase Date
under Regulation NMS.17 Descriptions
of the proposed order types are as
follows:
Reserve Order: A reserve order is 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 could not be an IOC order or
15 These order types were approved in the BeX
Phase I approval orders. See supra note 6.
16 These new order types are being proposed in
connection with the proposed rules relating to
Regulation NMS but will be located in Chapter
XXXVII of the BeX Rules.
17 See Securities Exchange Act Release No. 53829
(May 18, 2006), 71 FR 30038 (May 24, 2006).
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Sfmt 4703
market order. The displayed portion of
a reserve order (not the reserve portion)
would be ranked at the specified limit
price and the time of order entry with
its initial display quantity. If the
displayed portion of a reserve order is
decremented such that an odd-lot
quantity remains from the initial
displayed quantity, the odd-lot quantity
would not be displayed, but would keep
its ranking in time priority. If the
displayed portion of a reserve order is
decremented such that a mixed-lot
quantity remains from the initial
displayed quantity, only the round lot
portion of the mixed-lot quantity would
be displayed, but both the round-lot and
odd-lot portions of the mixed-lot
quantity would keep their rankings in
time priority. A reserve order would be
replenished when the initial display
quantity had been executed in its
entirety.
As proposed, the displayed portion of
a reserve order would be replenished
for: (1) The initial display quantity; or
(2) if the remaining reserve quantity is
smaller than the initial display quantity,
the entire reserve quantity; provided
that any odd-lot amount or odd-lot
portion of the mixed-lot would not be
displayable, but would nevertheless be
ranked in time priority as of the time it
would have been displayed as a part of
the replenishment had it not been an
odd-lot quantity and would be handled
in accordance with the applicable
provisions of Chapter XXXVII, Section
3(i) of the BSE Rules.
Minimum Quantity Order: A
minimum quantity order is an order
subject to the provisions of Chapter
XXXVII, Section 6 of the BSE Rules
(Orders to be Reduced and Increased on
Ex-Date), that, upon entry, would be
executed at least at its minimum
quantity or the order would be
cancelled. If executed in part, the
remaining quantity would remain in the
book and follow the execution rule for
the order type. A stop limit order could
be designated as a minimum quantity
order and, at the election of the order,
would be handled pursuant to Chapter
XXXVII, Section 3(j) of the BSE Rules.
Preferred Price Cross Order: A
preferred price cross order is a twosided cross order with a ‘‘preferred limit
price’’ set by the Member. A preferred
limit price would be the limit price at
which the two-sided cross order would
be executed, if it is better than the best
bid and offer displayed on BeX and
equal to or better than the National Best
Bid or National Best Offer. When the
preferred limit price does not meet the
above conditions, the execution price of
the order would be the closest price
above or below the preferred limit price,
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such that the execution price is better
than the best bid and offer displayed on
BeX and equal to or better than the
National Best Bid or National Best Offer
by a Minimum Price Variation.18 For
example, if the best bid and offer
displayed on BeX is 2.00 to 2.05 and the
National Best Bid and Offer is 2.01 to
2.05, and the Preferred Limit Price is
1.99, the order would execute at 2.01.
When the best bid and offer on BeX are
equal to the National Best Bid and Offer
and are one Minimum Price Variation
apart, the execution price will be at the
midpoint of the National Best Bid and
Offer. For example, if the Best Bid and
Offer displayed on BeX is 2.00 to 2.01,
the National Best Bid and Offer is 2.00
to 2.01, and the Preferred Limit Price is
1.99, the order would execute at 2.005.
AIOC Order: An automatic immediate
or cancel order would be an order
received on BeX that would 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 would not be routed to
another Trading Center. AIOC, unlike
IOC orders, cannot be submitted until
February 5, 2007, or an exemption from
the ITS Plan is obtained.
Best Price ISO: A BPISO is an order
marked as required by Rule 600(b)(30)
of Regulation NMS that would 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 a BPISO, would not take any
of the actions described in Chapter
XXXVIII, Section 4 of the BSE Rules to
prevent an improper trade through.
BPISOs would not be eligible for
submission to BeX until February 5,
2007.
Price-Penetrating ISO: A pricepenetrating ISO is an order marked as
required by Rule 600(b)(30) of
Regulation NMS that would 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. Pricepenetrating ISOs would be executed
against any eligible orders at the BSE
through multiple price points (including
any undisplayed orders). The BSE, in
executing these orders, would not take
18 ‘‘Minimum Price Variation’’ is defined in
Chapter II, Section 41 of the BSE Rules. The
Exchange has proposed to amend this definition to
account for the situation where a Preferred Price
Cross Order is executed at a price that is one half
the Minimum Price Variation.
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14:52 Oct 05, 2006
Jkt 211001
any of the actions described in proposed
Chapter XXXVIII, Section 4 of the BSE
Rules to prevent an improper tradethrough, as defined therein. Pricepenetrating ISOs would not be eligible
for submission to BeX until February 5,
2007.
ISO Cross Order: An ISO cross order
is a two-sided order that, upon receipt,
would be executed without any action
on the part of the Exchange to prevent
an improper trade-through. The cross
price must be priced better than the best
bid or offer displayed in BeX. ISO Cross
orders would not be eligible for
submission to BeX until February 5,
2007, or an exemption from the ITS Plan
is obtained.
Cancel on Corporate Action Order: An
order designated as a cancel on
corporate action order would be
cancelled in the event of a dividend,
distribution or stock split in the subject
security.
Non-Displayed Order: A nondisplayed order is a limit order, limit or
close order or stop limit order that is not
displayed in BeX, but the order would
remain available for potential execution
against all incoming orders until
executed in its entirety or cancelled. In
the event a non-displayed order that
crosses the National Best Bid or Offer is
entered, that order would either be
cancelled or, at the instruction of the
member entering the order, routed to an
away Trading Center(s). Similarly, if a
non-displayed order already on the BeX
book crosses the National Best Bid or
Offer as a result of movement in the
marketplace, that order would either be
cancelled or, at the instruction of the
member entering the order, routed to an
away Trading Center(s). Non-displayed
orders required to be routed to an away
Trading Center(s) would be routed as
displayed orders.
The Commission believes that these
order types are appropriate in the
context of the trading services proposed
to be offered by the BeX facility and are
consistent with the Act. In addition, the
BSE’s proposal regarding reserve orders
and non-displayed orders comport with
rules the Commission previously
approved for other exchanges.19 The
Commission notes that these order types
should help provide market participants
with flexibility in executing transactions
that meet the specific requirements of
the order type.
C. Access
The Exchange proposes that BeX
would be available for entry and
execution of orders by Member
Organizations and Sponsored
19 See,
PO 00000
e.g., NYSE Arca Rule 7.31(h)(3).
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59163
Participants with authorized access. To
obtain authorized access to BeX, each
Sponsored Participant would be
required to enter into a BeX Participant
Agreement. A Sponsored Participant
could obtain authorized access to BeX
only if such access is authorized in
advance by one or more Sponsoring
Member Organizations. Sponsored
Participants would be required to enter
into and maintain customer agreements
with one or more Sponsoring Member
Organizations establishing the proper
relationship(s) and account(s) through
which the Sponsored Participant may
trade on BeX. Such customer
agreement(s) would be required to
incorporate the sponsorship provisions
set forth in proposed Chapter XXXVII,
Section 5 of the BSE Rules. The
proposed rule change sets forth the
requirements and procedures to be
followed by the Sponsored Participant
and the Sponsoring Member
Organization.
The Commission believes that the
proposed sponsored access provisions
are appropriate and notes that they
comport with rules the Commission
previously approved for other
exchanges.20
D. Compliance With Intermarket
Trading System (‘‘ITS’’) Plan
As set forth in Chapter XXXVII,
Section 3(j) of the BSE Rules, 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. For
example, marketable orders that would
trade through 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. In addition, 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.21
E. Ranking and Display of Orders for
Undisplayed Orders and Odd-Lot and
Mixed-Lot Orders
As set forth in Chapter XXXVII,
Section 3(i) of the BSE Rules, displayed
20 See,
e.g., NYSE Arca Rule 7.29.
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.
21 Similarly,
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Federal Register / Vol. 71, No. 194 / Friday, October 6, 2006 / Notices
orders on BeX would be ranked in
price/time priority. Within each price
level, orders would be ranked in time
priority based on the time the order is
displayed. As noted above, the
Exchange proposes to allow reserve
orders (i.e., part of the order is
displayed) and non-displayed orders
(i.e., no part of the order is displayed).
Under the Exchange’s proposed
amendment to Chapter XXXVII, Section
3(i) of the BSE Rules, reserve quantities
of reserve orders would be considered
displayed when replenished.
Undisplayed orders on BeX, such as
non-displayed orders and reserve
quantities of reserve orders, would be
ranked after all other displayed orders at
that price level and would be ranked in
time priority among all undisplayed
orders. The Exchange provided the
following example of the ranking
process between displayed and
undisplayed orders:
At 9:30 a.m., a reserve order to buy
500 shares is entered. The initial display
quantity is 200 shares and the
undisplayed reserve quantity is 300
shares.
At 9:32 a.m., a non-displayed order to
buy 300 shares is entered.
At 9:33 a.m., a reserve order to buy
200 shares is entered. The initial display
quantity is 100 shares and the
undisplayed reserve quantity is also 100
shares.
At 9:34 a.m., an order to sell 1,000
shares at market is entered.
Assuming all the buy orders are at the
same price level, the 1,000 shares will
execute against the following orders:
200 shares of the displayed portion of
the 9:30 a.m. reserve order. 100 shares
of the displayed portion of the 9:33 a.m.
reserve order. 300 shares of the
undisplayed reserve quantity of the 9:30
a.m. reserve order. 300 shares of the
undisplayed portion of the 9:32 a.m.
non-display order. 100 shares of the
undisplayed reserve quantity of the 9:33
a.m. reserve order.
The proposed revision to Chapter
XXXVII, Section 3(i) of the BSE Rules
also sets forth the handling of odd-lot
and mixed-lot portions for reserve
orders. In addition, the proposed rule
revision states that while BeX would
only accept and display round-lot
orders for securities listed on exchanges
other than Nasdaq, it would accept oddlot and mixed-lot orders for Nasdaq
Global Market securities and Nasdaq
Capital Market securities. The proposed
amendment to Chapter XXXVII, Section
3(i) of the BSE Rules would indicate
how odd-lot share amounts would be
handled in BeX for these Nasdaq-listed
securities.
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14:52 Oct 05, 2006
Jkt 211001
The Commission believes that the
proposed rule revisions relating to
ranking and display of orders, including
odd-lot and mixed-lot portions of
reserve orders and the handling of oddlot and mixed-lot components of orders
for Nasdaq securities, are consistent
with the Act.
F. Anonymity
The Exchange has proposed to amend
Chapter XXXVII, Section 3(i) of the BSE
Rules to state that BeX will provide pretrade anonymity for all submitted
orders, except as otherwise permitted by
the proposed rule. All display-eligible
orders (non-displayed orders and
reserve portions of reserve orders are
not display-eligible) at all price levels
on the BeX would be displayed to all
Members on an anonymous basis and
transactions executed on the BeX would
be processed anonymously.22
Transaction reports would indicate the
details of the transaction, but would 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 would be under an
obligation to divulge the name of the
buying or selling firm in any
transaction. Except as otherwise
provided for in the BSE Rules, no
Member would be permitted to 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.
BeX would 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
22 The Exchange indicated that it intends to
request a limited exemption from the staff of the
Commission 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 would not recommend enforcement action to
the Commission if, in lieu of making and preserving
a separate record, BSE Members rely on the BSE’s
retention of the identities of the BSE Members that
execute anonymous trades through BeX to satisfy
the requirements of Rules 17a–3(a)(1) and 17a–4(a)
under the Act, 17 CFR 240.17a–3(a)(1) and 17a–4(a),
respectively. The Exchange has represented that it
will not implement the anonymity feature of BeX
unless and until the requested relief is granted.
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firm, and NSCC determines not to
guarantee the settlement of the
Member’s trades; (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; or (4)
unless otherwise instructed by a
Member, BeX would reveal to a
Member, no later than the end of the
day on the date an anonymous trade
was executed, when the Member’s quote
or order has been decremented by
another quote or order submitted by that
same Member.
To satisfy Members’ recordkeeping
obligations under Rules 17a–3(a)(1) 23
and 17a–4(a) 24 under the Act, the
Exchange would retain for the period
specified in Rule 17a–4(a) the identity
of each Member that executes an
anonymous transaction described in
Chapter XXXVII, Section 3(i)(iii) of the
BSE Rules. BeX would retain
information in its original form or a
form approved under Rule 17a–6 under
the Act.25 Members would 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.
The Commission believes that the
proposed BSE rule relating to
anonymity is appropriate in the context
of the trading services proposed to be
offered by BeX and is consistent with
the Act. The Commission notes that the
proposed rule is consonant with the
rules of other exchanges that the
Commission previously has approved.26
G. Market Makers
BSE Members would be permitted to
apply for Market Maker status.27 An
applicant would file an application for
Market Maker status on a form
prescribed by the Exchange.
Applications would be reviewed by the
Exchange, which would consider factors
including, but not limited to, capital
operations, personnel, technical
resources, and disciplinary history. No
Member would be permitted to act as a
Market Maker in any security unless
such Member had been approved as a
Market Maker in a security by the
Exchange pursuant to the BSE Rules and
the Exchange had not suspended or
canceled such approval. Approved
Market Makers would be designated as
dealers on the Exchange for all purposes
23 17
CFR 240.17a–3(a)(1).
CFR 240.17a–4(a).
25 17 CFR 240.17a–6.
26 See, e.g., NYSE Arca Rule 7.41.
27 See proposed Chapter XXXVII, Section 8 of the
BSE Rules (Approval of Market Makers).
24 17
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under the Act and the rules and
regulations thereunder.
An applicant’s Market Maker status
would become effective upon receipt by
the Member of notice of an approval by
the Exchange. In the event that an
application was disapproved by the
Exchange, the applicant would 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 could 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 could
withdraw its Market Maker status by
giving written notice to the Exchange.
Such withdrawal would become
effective on the tenth business day
following the Exchange’s receipt of the
notice. A Market Maker who failed to
give a ten-day written notice of
withdrawal to the Exchange would be
subject to formal disciplinary action
pursuant to Chapter XXX of the BSE
Rules. Subsequent to withdrawal, the
Member would not be permitted to reapply as a Market Maker for a period of
six months.
A Market Maker would 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.28 Assignment of the
security would 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 could 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; and (6) the
character of the market for the security,
e.g., price, volatility, and relative
liquidity. A Market Maker’s assignment
in a security could be terminated by the
Exchange if the Market Maker fails to
enter quotations in the security within
five business days after the Market
Maker’s assignment in the security
becomes effective. Moreover, the
28 See
Chapter XXXVII, Section 9 of the BSE
Rules (Assignment of Market Maker in a Security).
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Exchange could limit the number of
Market Makers in a security upon prior
written notice to Members.
Market Makers would be selected by
the Exchange based on, but 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 could voluntarily
terminate its assignment in a security by
providing the Exchange with a one-day
written notice of such termination. A
Market Maker that failed to give
advanced written notice of termination
to the Exchange could be subject to
formal disciplinary action pursuant to
Chapter XXX of the BSE Rules.
Furthermore, the Exchange could
suspend or terminate any assignment of
a Market Maker in a security or
securities whenever, in the Exchange’s
judgment, the interests of a fair and
orderly market are best served by such
action. A Member would be permitted
to seek review of any action taken by the
Exchange, 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 of the
BSE Rules.
Members assigned as Market Makers
in one or more securities traded on the
BeX would be required to 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.29 The
responsibilities and duties of a Market
Maker specifically would include, but
not be limited to, the following: (1)
Maintaining continuous, two-sided
quotes in those securities in which the
Market Maker is assigned to trade; (2)
maintaining adequate minimum capital
in accordance with Rule 15(c)3–1 under
Act; 30 (3) remaining in good standing
with the Exchange; (4) informing the
Exchange of any material change in
financial or operational condition or in
personnel; and (5) clearing and settling
transactions through the facilities of a
registered clearing agency. This last
requirement could 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. A Market Maker
would be required to satisfy the
responsibilities and duties during BeX’s
29 See proposed Chapter XXXVII, Section 10 of
the BSE Rules (Obligations of Market Makers).
30 17 CFR 240.15c3–1.
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59165
primary trading session on all days in
which the Exchange is open for
business.
If the Exchange found 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 would 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.
A Market Maker would be permitted
to apply to the Exchange to withdraw
temporarily from its Market Maker
status in the securities in which it is
assigned. The Market Maker would be
required to 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 would act
promptly on such request and, if the
request were granted, the Exchange
could temporarily reassign the securities
to another Market Maker.
Market Makers would be required to
maintain minimum performance
standards at levels determined from
time to time by the Exchange. Such
levels would vary depending on the
price, liquidity, and volatility of the
security in which the Market Maker is
assigned. The performance
measurements would include: (1)
Percent of time at the National Best Bid
or National Best Offer; (2) percent of
executions priced better than the
National Best Bid or National Best Offer;
(3) average displayed size; (4) average
quoted spread; and (5) 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
would be permitted to engage in other
business activities, or be affiliated with
a broker-dealer that engages in Other
Business Activities (as defined below),
only if there is an Information Barrier
(also commonly referred to as ‘‘Chinese
Wall’’) between the market making
activities and the other business
activities.31 ‘‘Other Business Activities’’
would 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.
The Exchange’s proposed rule on
limitations on dealings would require
that market making functions be
physically separated from the locations
31 See proposed Chapter XXXVII, Section 11 of
the BSE Rules (Limitations on Dealings).
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in which Other Business Activities are
conducted. The proposal also would
establish minimum requirements for the
procedures to be 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 barrier’s other side. In
addition, the proposal sets forth the
items of information to be furnished in
writing to the Exchange by the Member
implementing an information barrier.
Absent the Exchange finding a
Member’s information barriers
acceptable, a Market Maker could not
conduct Other Business Activities.
A Member or an affiliate of the
Member would be permitted 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 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.
The Commission believes that the
Exchange’s proposed rules regarding
Market Makers for BeX are appropriate
and consistent with the Act. The
Commission notes that the Exchange’s
rules are substantially similar to rules of
other exchanges that it has previously
approved.32
H. Application of ‘‘Effect v. Execute’’
Exemption From Section 11(a) of the
Act
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When the Commission approved BeX
Phase I,33 the Commission found, based
upon representations made by the
Exchange,34 that BeX Phase I satisfied
32 See,
e.g., NYSE Arca Rule 7.26.
BeX Phase I Order, supra note 6.
34 See Letter from William C. Meehan, General
Counsel, BSE, to Kelly M. Riley, Assistant Director,
Division of Market Regulation, Commission, dated
June 2, 2006; Letter from William C. Meehan,
General Counsel, BSE, to Kelly M. Riley, Assistant
33 See
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the requirements of Rule 11a2–2(T) 35
under Section 11(a) of the Act.36 With
respect to Rule 11a2–2(T)’s off-floor
requirement,37 the Commission found
that orders sent, by electronic means,
from the Exchange’s physical trading
floor could be considered to be sent
from ‘‘off-floor’’ for purposes of the BeX
trading system.38 In reaching this
conclusion, the Commission relied,
among other things, upon the
Exchange’s statement that securities
traded on the BeX trading system would
not be traded on the Exchange’s
physical floor and, therefore, the BeX
trading system could be considered
essentially a different, separate ‘‘trading
floor.’’ 39
In connection with the proposed rule
change to implement BeX Phase II, the
Exchange updated certain
representations it made to the
Commission to reflect changes being
made in BeX Phase II. Specifically, the
Exchange stated that upon
implementation of BeX Phase II, all
transactions on the Exchange will take
place within the BeX electronic trading
facility, and the Exchange’s physical
trading floor will cease to exist.
Accordingly, the Exchange has
represented that in BeX Phase II, all
orders for the accounts of Exchange
members will be transmitted to the BeX
trading system from off the floor (since
the Exchange no longer will have any
physical trading floor) by electronic
means.40 The Exchange has stated that,
other than the elimination of the
physical trading floor, all of the other
representations it made to the
Commission in connection with BeX
Phase I remain true and correct in all
respects for BeX Phase II.41 Therefore,
the Commission believes that BeX Phase
II satisfies the requirements of Rule
11a2–2(T).
Director, Division, Commission, dated August 8,
2006.
35 17 CFR 240.11a2–2(T).
36 15 U.S.C. 78k(a).
37 See 17 CFR 240.11a2–2(T)(a)(2)(ii).
38 See BeX Phase I Order, supra note 6, at 52197.
39 See id. In the BeX Phase I Order, the
Commission also noted that Exchange members on
the Exchange’s physical trading floor would not
have a time/place advantage with regard to the
securities traded in the BeX trading system, and
that members present on the Exchange’s physical
trading floor would see information about orders at
the top of the BeX trading system only after that
information had been sent to the securities
information processor for dissemination to the
public.
40 See Amendment No. 2.
41 See id.
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I. Regulation NMS
1. Locking and Crossing Quotations in
NMS Stocks
In accordance with the requirements
of Rule 610 of Regulation NMS, 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. The
proposed rule states that it will not
become effective until February 5, 2007,
or an earlier appropriate exemption
from the ITS Plan is obtained.
For purposes of this proposed rule, a
‘‘crossing quotation’’ would 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 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 proposed rule, a
‘‘locking quotation’’ would 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 a 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.
The proposed rule would provide four
exceptions from the prohibition on
locking or crossing protected quotations.
The proposed rule would except: (1)
Those quotations 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; (2) those quotations
displayed at a time when the protected
bid was higher than a protected offer in
the NMS stock; (3) those automated
quotations where the BSE member
displaying such automated quotation
simultaneously routed an ISO order to
execute against the full displayed size of
any locked or crossed protected
quotation; and (4) those manual
quotations that locked or crossed
another manual quotation, and the BSE
member displaying the locking or
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crossing manual quotation
simultaneously routed an ISO to execute
against the full displayed size of the
locked or crossed manual quotation.
The Commission believes that the
proposed rule on locking or crossing
quotations is consistent with Rule
610(d) of Regulation NMS.
2. Order Routing
The BSE has proposed a rule, in
accordance with the requirements of
Regulation NMS, that would govern the
order routing process.42
The BSE would only route an eligible
order when the order has not been
executed in its entirety on BeX due to
the requirements of Chapter XXXVIII,
Section 4, paragraph (a) of the BSE
Rules, consistent with Rule 611of
Regulation NMS, and the terms of the
order permit routing to another Trading
Center for execution. The BSE has
determined that eligible orders would
be orders that are designated by the
customer to execute or route. IOC,
AIOC, all ISO order types and FOK
orders would not be designated to
execute or route.
Orders would be routed either in their
entirety or as component orders to an
away Trading Center(s). Orders would
be routed, consistent with Rule 611 of
Regulation NMS, to the Trading
Center(s) publishing any better-priced
Protected Bid(s) or Protected Offer(s) for
execution against such Protected Bid(s)
or Protected Offer(s) for the full
displayed size of the Protected
Quotation. The remaining portion of the
order, if any, will be executed, or ranked
and displayed on the BSE book, in
accordance with the terms of such order
and would be handled in the manner
described in Chapter XXXVII, Section 3
of the BSE Rules.
Eligible orders would 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
would 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 be routed to
another Trading Center priced at the
Protected Quote published by the
Trading Center.
As stated above, the Exchange would
route orders to other Trading Centers
42 See Chapter XXXVIII, Section 3 of the BSE
Rules (Order Routing).
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under certain circumstances (‘‘Routing
Services’’). The Exchange would
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 would be routed (‘‘MemberExchange Agreement’’); (2) an
agreement between the Exchange and
each third-party broker-dealer that
would 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’’).
The Exchange would 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 Sections 6(b)(4) and (5)
of the Act 43 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 would license the
necessary routing technology for use
within its own systems and accordingly
would control the logic that determines
when, how, and where orders are routed
away to other Trading Centers.
The Exchange would 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 would include terms and
conditions that enable the Exchange to
comply with these proposed
requirements.
As noted above, if an order that is
eligible for routing cannot be executed
in its entirety on the BSE, consistent
43 15
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59167
with the requirements of Rule 611 of
Regulation NMS, the order would be
routed to the applicable Trading
Center(s). 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
routed away to another Trading Center
would be processed subject to
applicable trading rules of the relevant
away Trading Center. Where an order is
not fully executed at the away Trading
Center(s), the order would be executed,
or ranked and displayed on the BSE
book in accordance with the terms of
such order and would be handled in the
manner described in Chapter XXXVII,
Section 3 of the BSE Rules.
The Commission finds that the
Exchange’s proposal to provide
outbound Routing Services, and the
proposed rules governing such services,
are consistent with the Act. The
Commission notes that the Exchange’s
proposed outbound routing
functionality is not the exclusive means
for accessing better priced quotes in
other market centers, should an order
not be executable on the BeX facility.
Accordingly, the Exchange’s Routing
Services are optional, and a Member is
free to route its orders to other market
centers through alternative means.
3. Order Protection Requirements Rule
The BSE, in accordance with the
requirements of Regulation NMS, has
proposed an order protection
requirements rule that would prohibit
trades from being executed on the BSE
if the execution would result in an
improper trade-through under Rule 611
of Regulation NMS.44 If the execution of
an order on the Exchange would cause
an improper trade-through, that order, if
eligible to route, would be routed to the
appropriate Trading Center(s) or, if not,
automatically cancelled. The proposed
rule states that it will not become
effective until February 5, 2007.
The proposed order protection
requirements rule would contain several
exceptions that are exceptions under
Rule 611 of Regulation NMS, including:
A crossed markets exception, a self-help
exception, a non-regular way cross
exception, a single priced opening,
44 See proposed Chapter XXXVIII, Section 4 of the
BSE Rules (‘‘Order Protection Requirements’’).
Under the proposed rule, an order would not be
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 (a ‘‘trade-through’’), or
if its execution would be improper under Rule 611
of Regulation NMS (together, an ‘‘improper tradethrough’’).
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reopening or closing trade exception, an
inbound ISO exception, a stop order
exception, and an exception for a
benchmark order executed at the BSE.45
In addition, the BSE would be able to
disregard the bid or offer of a Trading
Center if it is identified by the Trading
Center a manual quotation. If a purchase
or sale of an NMS stock qualifies for an
exception to the Order Protection Rule
under Regulation NMS, the BSE would
attach an appropriate modifier approved
by the operating committee of the
relevant national market system plan.46
The Exchange represents that it
intends to operate as an automated
trading system that displays bids and
offers that qualify as automated
quotations under the definition set out
in Rule 600(b)(3) of Regulation NMS,
with manual capabilities in the event it
is unable to generate automated
quotations. Among other things, if the
BSE has not accepted two or more AIOC
orders sent as sequential test messages,
the BSE would attach a ‘‘manual’’
identifier to the bids and offers it makes
publicly available. Additionally,
immediately upon receiving an alert as
a result of its periodic processes that the
Exchange’s trading system has taken
more than two seconds to process two
or more AIOC orders in a symbol sent
as sequential messages, the Market
Operations Center (‘‘MOC’’) would
automatically attach a ‘‘manual’’
identifier to the bids and offers it makes
publicly available.
Once the BSE has made any required
systems changes, or otherwise
determined that its quotations satisfied
the requirements of Rule 600(b)(3) of
Regulation NMS, and conducted
applicable tests to confirm that the
Exchange’s quotes qualify as automated
quotations, the Exchange would remove
the ‘‘manual’’ identifier from the bids
and offers that are made publicly
available. The Exchange also would
notify other Trading Centers that its
quotations are automated by
announcing that fact through an
appropriate mechanism for
communicating with other Trading
Centers.
The Commission believes that the
Exchange’s rules governing order
protection requirements are consistent
with Rule 611 of Regulation NMS.
45 According to the Exchange, BeX does not
presently provide for non-regular was cross orders
or benchmark orders, although these order types
may be introduced in the future through an
appropriate proposed rule change to be filed with
the Commission.
46 If a trade is executed pursuant to the ISO
exception of Rule 611(b)(5) or (6) and the self-help
exception of Rule 611(b)(1), the trade will be
identified as executed pursuant to the ISO
exception.
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IV. Accelerated Approval of
Amendment No. 2
The Commission finds good cause for
approving Amendment No. 2 to the
proposed rule change prior to the
thirtieth day after publishing notice of
Amendment No. 2 in the Federal
Register pursuant to Section 19(b)(2) of
the Act.47
In Amendment No. 2, the Exchange:
(1) Introduced a new order type to be
known as a non-displayed order; (2)
amended the definition of a preferred
price cross and ISO cross; (3) clarified
when certain provisions related to
Regulation NMS become effective; (4)
added provisions for the handling of
odd-lot and mixed-lot orders, including
the ranking and display of odd-lots and
mixed-lots; (5) clarified the ranking and
display of Reserve Orders; (6) added a
provision relating to the anonymity of
trades executed by a Member against
itself; (7) added a provision relating to
access to BeX by Sponsored
Participants; (8) stating that, for
purposes of Section 11(a) of the Act (15
U.S.C. 78k(a)) and Rule 11a2–2(T) (17
CFR 240.11a2–2(T)) thereunder, all
orders for the accounts of Exchange
members will be transmitted to the BeX
trading system from off the floor (since
the Exchange no longer will have any
physical trading floor) by electronic
means; and (9) making several clarifying
changes and correcting several technical
errors contained in the rule text.
The Commission notes that the
proposal to amend the definition of a
preferred price cross order to require it
to execute at better than the best bid and
offer displayed on BeX and equal to or
better than the National Best Bid or
National Best Offer is a clarifying
change that comports with the
requirements for cross orders on BeX
previously approved by the
Commission.48 Amendment No. 2 made
a similar change with respect to the
definition of an ISO cross order. The
Commission further notes that other
exchanges have rules in place similar to
the rules proposed by the Exchange
relating to non-displayed orders, odd-lot
and mixed-lot orders, anonymity of
trades executed by a Member against
itself, and access by Sponsored
Participants. Finally, Amendment No. 2
contains several clarifying and technical
changes that do not affect the substance
of the proposed rule change.
Accordingly, the Commission believes
that accelerating approval of
Amendment No. 2 raises no new or
novel issues of regulatory concern and
47 15
U.S.C. 78s(b)(2).
note 6 supra.
48 See
PO 00000
Frm 00099
Fmt 4703
Sfmt 4703
therefore the Commission believes its
implementation should not be delayed.
The Commission also believes that
accelerated approval is reasonable
because it should help to ensure that the
appropriate rules are in place at the
Exchange at the time that the BSE’s final
technical specifications with respect to
Regulation NMS must be published.
Further, the Exchange’s representation
with respect to the applicability of Rule
11a2–2(T) to trading on BeX simply
updates a representation previously
provided to the Commission.
For the reasons noted above, the
Commission finds good cause for
approving Amendment No. 2 to the
proposed rule change prior to the
thirtieth day after publishing notice of
Amendment No. 2 in the Federal
Register pursuant to Section 19(b)(2) of
the Act.49
V. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning Amendment No.
2, including whether Amendment No. 2
is consistent with the Act. Comments
may be submitted by any of the
following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://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,
Station Place, 100 F Street, NE.,
Washington, DC 20549–1090.
All submissions should refer to File
Number 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 (https://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
49 15 U.S.C. 78s(b)(2). Pursuant to Section 19(b)(2)
of the Act, the Commission may not approve any
proposed rule change, or amendment thereto, prior
to the thirtieth day after the date of publication of
the notice thereof, unless the Commission finds
good cause for so doing.
E:\FR\FM\06OCN1.SGM
06OCN1
Federal Register / Vol. 71, No. 194 / Friday, October 6, 2006 / Notices
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for inspection and copying in
the Commission’s Public Reference
Room. Copies of such filing also will be
available for inspection and copying at
the principal office of the Exchange. 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 wish to make available publicly. All
submissions should refer to Amendment
No. 2 of File Number SR–BSE–2006–30
and should be submitted on or before
October 27, 2006.
VI. Conclusion
For the foregoing reasons, the
Commission finds that the proposed
rule change, as amended, is consistent
with the Act and the rules and
regulations thereunder applicable to a
national securities exchange, and, in
particular, with Section 6(b)(5) of the
Act.50
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,51 that the
proposed rule change (SR–BSE–2006–
30) is approved and Amendment No. 2
is approved on an accelerated basis.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.52
Nancy M. Morris,
Secretary.
[FR Doc. E6–16580 Filed 10–5–06; 8:45 am]
BILLING CODE 8011–01–P
(‘‘CBOE’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the CBOE. The Exchange filed the
proposal as a ‘‘non-controversial’’
proposed rule change pursuant to
section 19(b)(3)(A)(iii) of the Act 3 and
Rule 19b–4(f)(6) thereunder.4 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
The CBOE proposes to amend CBOE
Rule 8.3 relating to Market-Maker
appointments to include DXL options
on the Hybrid 2.0 Platform. The text of
the proposed rule change is available on
the Exchange’s Web site https://
www.cboe.com, at the Exchange’s Office
of the Secretary and at the Commission.
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.
SECURITIES AND EXCHANGE
COMMISSION
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
[Release No. 34–54533; File No. SR–CBOE–
2006–79]
1. Purpose
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change to Include DXL Options
on the Hybrid 2.0 Platform
cprice-sewell on PROD1PC66 with NOTICES
September 28, 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
September 22, 2006, the Chicago Board
Options Exchange, Incorporated
U.S.C. 78f(b)(5).
U.S.C. 78s(b)(2).
52 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
The purpose of this rule change is to
amend CBOE Rule 8.3 in connection
with CBOE’s determination to trade
options based on 1⁄10 the Value of The
Dow Jones Industrial Average (DXL) on
the Hybrid 2.0 Platform.5 Specifically,
CBOE proposes to amend Rule 8.3(c)(iv)
to delete the reference to DXL options
in the table listing the non-Hybrid
option classes and their related
appointment costs. As a Hybrid 2.0
Class, DXL would fall within the
appointment cost structure set forth in
CBOE Rule 8.3(c)(i), and based on its
trading volume, initially be included in
50 15
51 15
VerDate Aug<31>2005
14:52 Oct 05, 2006
3 15
U.S.C. 78s(b)(3)(A)(iii).
CFR 240.19b–4(f)(6).
5 CBOE Rule 1.1(aaa) defines Hybrid Trading
System and Hybrid 2.0 Platform.
4 17
Jkt 211001
PO 00000
Frm 00100
Fmt 4703
Sfmt 4703
59169
Tier E with an appointment cost of .01.6
As a result, it would have an
appointment cost that is identical to its
current appointment cost.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the Act
and the rules and regulations under the
Act applicable to a national securities
exchange and, in particular, the
requirements of section 6(b) of the Act.7
Specifically, the Exchange believes the
proposed rule change is consistent with
the requirements of section 6(b)(5) 8 that
the rules of an exchange be designed to
promote just and equitable principles of
trade, to prevent fraudulent and
manipulative acts and, in general, to
protect investors and the public interest.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
CBOE 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 neither received nor
solicited written comments on the
proposal.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing rule does not (i)
significantly affect the protection of
investors or the public interest; (ii)
impose any significant burden on
competition; and (iii) become operative
for 30 days from the date on which it
was filed, or such shorter time as the
Commission may designate if consistent
with the protection of investors and the
public interest, provided that the
Exchange has given the Commission
written notice of its intent to file the
proposed rule change prior to the date
6 CBOE Rules 8.3 and 8.4 provide that MarketMakers and RMMs, respectively, can create a
Virtual Trading Crowd (‘‘VTC’’) Appointment,
which confers the right to quote electronically in a
certain number of products selected from various
‘‘Tiers.’’ Currently, there are five Tiers (Tiers A, B,
C, D, and E) that are structured according to trading
volume statistics, an ‘‘A++’’ Tier which consists of
options on the CBOE Volatility Index (VIX), and an
‘‘A+’’ Tier which consists of two option classes—
options on Standard & Poor’s Depositary Receipts
(SPY) and options on the Nasdaq-100 Index
Tracking Stock (QQQQ). These Tiers are also
utilized for purposes of determining DPM and eDPM membership ownership requirements as
provided in CBOE Rules 8.85 and 8.92,
respectively.
7 15 U.S.C. 78f(b).
8 15 U.S.C. 78f(b)(5).
E:\FR\FM\06OCN1.SGM
06OCN1
]]>Agencies
[Federal Register Volume 71, Number 194 (Friday, October 6, 2006)]
[Notices]
[Pages 59161-59169]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-16580]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-54546; File No. SR-BSE-2006-30]
Self-Regulatory Organizations; Boston Stock Exchange, Inc.; Order
Granting Approval of Proposed Rule Change and Notice of Filing and
Order Granting Accelerated Approval to Amendment No. 2 Relating to the
Implementation of the Second Phase of the Boston Equities Exchange
(``BeX'') Trading System
September 29, 2006.
I. Introduction
On August 3, 2006, the Boston Stock Exchange, Inc. (``BSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934, as amended (``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change in connection with the
implementation of the second phase of the Boston Equities Exchange
(``BeX'') trading system. In addition, in connection with satisfying
the requirements of Regulation NMS under the Act, the BSE proposes
several new order types; rules to prevent locked or crossed quotations;
a new order routing system; and an order protection rule. The proposed
rule change was published for comment in the Federal Register on August
16, 2006.\3\ The Commission received no comments regarding the
proposal. On September 29, 2006, the BSE filed Amendment No. 2 to the
proposed rule change.\4\ This order approves the proposed rule change,
grants accelerated approval to Amendment No. 2 to the proposed rule
change, and solicits comments from interested persons on Amendment No.
2.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 54291 (August 8,
2006), 71 FR 47264.
\4\ In Amendment No. 2, BSE made several changes to the proposed
rule change, including: (1) introducing a new order type to be known
as a Non-Displayed Order; (2) amending the definition of a Preferred
Price Cross and ISO Cross; (3) clarifying when certain provisions
relating to Regulation NMS become effective; (4) adding provisions
for the handling of odd-lot and mixed-lot orders, including the
ranking and display of odd-lots and mixed-lots; (5) clarifying the
ranking and display of Reserve Orders; (6) adding a provision
relating to the anonymity of trades executed by a Member against
itself; (7) adding a provision relating to access to BeX by
Sponsored Participants; (8) stating that, for purposes of Section
11(a) of the Act (15 U.S.C. 78k(a)) and Rule 11a2-2(T) (17 CFR
240.11a2-2(T)) thereunder, all orders for the accounts of Exchange
members will be transmitted to the BeX trading system from off the
floor (since the Exchange no longer will have any physical trading
floor) by electronic means; and (9) making several clarifying
changes and correcting several technical errors contained in the
rule text. Amendment No. 1 was withdrawn by BSE on September 29,
2006.
---------------------------------------------------------------------------
II. Summary Description of the Proposal
BeX is an electronic securities communications and trading facility
for equity securities designed to be used by BSE Members, including
Electronic Access Members, and their customers. BeX, a facility of the
Exchange, was developed, and is owned and operated, by BSX Group, LLC
(``BSX'').\5\ The Commission recently approved rules to implement the
first phase of BeX,\6\ which is limited to securities listed otherwise
than on the NASDAQ Stock Market LLC (``Nasdaq'') for which the BSE
obtained unlisted trading privileges (``UTP'') after June 30, 2006
(``BeX Phase I''). The Exchange now proposes to implement the second
phase of BeX (``BeX Phase II'') as a fully-automated electronic book
for the display and execution of orders in securities listed on any
exchange through introducing new, as well as amending certain existing,
Rules of the Board of Governors (``BSE Rules'').\7\ The BSE also
proposes to implement new Exchange rules to satisfy the requirements of
Regulation NMS.\8\
---------------------------------------------------------------------------
\5\ See Securities Exchange Act Release No. 54364 (August 25,
2006), 71 FR 52185 (September 1, 2006) (approving the BeX facility
and its governance structure).
\6\ See Securities Exchange Act Release No. 54365 (August 25,
2006), 71 FR 52192 (September 1, 2006) (``BeX Phase I Order'').
\7\ The BeX trading rules will be located in Chapter XXXVII of
the BSE Rules.
\8\ The rules relating to Regulation NMS requirements will be
located in Chapter XXXVIII of the BSE Rules.
---------------------------------------------------------------------------
BeX is a fully-automated electronic book for the display and
matching of orders in eligible securities, without the participation of
a specialist.\9\ Securities traded on BeX cannot also be traded by a
BSE specialist.\10\ The Exchange has indicated that implementation of
BeX is scheduled to occur on October 30, 2006. Accordingly, there no
longer will be any specialist participation in any transactions on the
BSE or otherwise as of such implementation. The Exchange, however,
proposes to add rules to
[[Page 59162]]
permit participation by market makers in BeX as part of the instant
proposed rule change.
---------------------------------------------------------------------------
\9\ See BeX Phase I Order, supra note 6.
\10\ See Chapter XXXVII, Section 1 of the BSE Rules.
---------------------------------------------------------------------------
In connection with satisfying the requirements of Regulation NMS,
the Exchange proposes to offer several execution enhancements,
including 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 BeX facility and in accordance with the implementation of
Regulation NMS. The Exchange expects that initially the current trading
rules of the BSE will remain largely intact,\11\ as supplemented by the
BeX Phase I rules previously approved by the Commission, and the rule
changes contained herein relating to the BeX facility, including rule
changes required under Regulation NMS.
---------------------------------------------------------------------------
\11\ The Exchange has represented that within thirty days of
full implementation of the BeX trading system, it intends to file a
proposed rule change under Section 19(b)(1) of the Act, which will
be designed to eliminate all rules that are no longer applicable as
a result of the transition from the traditional floor-based model of
trading to the all-electronic BeX platform. The Exchange notes, for
example, that rules related to specialists will be removed as there
will no longer be any specialist participation in any transactions
on the BSE or otherwise.
---------------------------------------------------------------------------
III. Discussion
After careful review, the Commission finds that the proposed rule
change, as amended, is consistent with the Act and the rules and
regulations promulgated thereunder applicable to a national securities
exchange \12\ and, in particular, with the requirements of Section 6(b)
of the Act.\13\ Specifically, the Commission finds that approval of the
proposed rule change is consistent with Section 6(b)(5) of the Act \14\
in that it is designed to facilitate transactions in securities; to
prevent fraudulent and manipulative acts and practices; to promote just
and equitable principles of trade; to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities; to remove impediments to and perfect the mechanism of a
free and open market and a national market system; and, in general, to
protect investors and the public interest.
---------------------------------------------------------------------------
\12\ In approving this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
\13\ 15 U.S.C. 78f(b).
\14\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
A. Eligible Securities
Under the rules approved in connection with BeX Phase I, all
securities eligible for trading on the Exchange that are listed
otherwise than on Nasdaq for which the BSE obtains UTP after June 30,
2006 would be eligible for trading in the BeX. The Exchange has
proposed to amend this definition to allow all securities eligible for
trading on the Exchange to be eligible for trading in the BeX. In
Amendment No. 2, the Exchange proposes to allow the BeX to accept and
execute mixed-lot and odd-lot orders in Nasdaq Global Market securities
and Nasdaq Capital Market securities. BeX will continue to only accept
and display round-lot orders for securities listed on exchanges other
than the Nasdaq.
The Commission finds that the Exchange's proposal to expand the
category securities eligible to be traded on BeX is consistent with the
Act.
B. Eligible Orders
Under BeX Phase I, 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 (``IOC''),'' ``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,'' ``mid-point cross,'' and ``post primary
cross.'' \15\ The Exchange has proposed to amend Chapter XXXVII,
Section 2 of the BSE Rules to add the following additional orders types
as part of BeX Phase II: ``reserve order,'' ``minimum quantity order,''
``preferred price cross,'' ``automatic immediate or cancel''
(``AIOC''), ``best price intermarket sweep order'' (``BPISO''), ``ISO
cross order,'' ``price-penetrating ISO,'' ``cancel on corporate action
order,'' and ``non-displayed order.'' \16\ Best price intermarket
sweep, price-penetrating ISO, ISO Cross and AIOC orders would not be
eligible for submission to BeX until February 5, 2007, which is the
Trading Phase Date under Regulation NMS.\17\ Descriptions of the
proposed order types are as follows:
---------------------------------------------------------------------------
\15\ These order types were approved in the BeX Phase I approval
orders. See supra note 6.
\16\ These new order types are being proposed in connection with
the proposed rules relating to Regulation NMS but will be located in
Chapter XXXVII of the BeX Rules.
\17\ See Securities Exchange Act Release No. 53829 (May 18,
2006), 71 FR 30038 (May 24, 2006).
---------------------------------------------------------------------------
Reserve Order: A reserve order is 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 could not be an IOC order or market order.
The displayed portion of a reserve order (not the reserve portion)
would be ranked at the specified limit price and the time of order
entry with its initial display quantity. If the displayed portion of a
reserve order is decremented such that an odd-lot quantity remains from
the initial displayed quantity, the odd-lot quantity would not be
displayed, but would keep its ranking in time priority. If the
displayed portion of a reserve order is decremented such that a mixed-
lot quantity remains from the initial displayed quantity, only the
round lot portion of the mixed-lot quantity would be displayed, but
both the round-lot and odd-lot portions of the mixed-lot quantity would
keep their rankings in time priority. A reserve order would be
replenished when the initial display quantity had been executed in its
entirety.
As proposed, the displayed portion of a reserve order would be
replenished for: (1) The initial display quantity; or (2) if the
remaining reserve quantity is smaller than the initial display
quantity, the entire reserve quantity; provided that any odd-lot amount
or odd-lot portion of the mixed-lot would not be displayable, but would
nevertheless be ranked in time priority as of the time it would have
been displayed as a part of the replenishment had it not been an odd-
lot quantity and would be handled in accordance with the applicable
provisions of Chapter XXXVII, Section 3(i) of the BSE Rules.
Minimum Quantity Order: A minimum quantity order is an order
subject to the provisions of Chapter XXXVII, Section 6 of the BSE Rules
(Orders to be Reduced and Increased on Ex-Date), that, upon entry,
would be executed at least at its minimum quantity or the order would
be cancelled. If executed in part, the remaining quantity would remain
in the book and follow the execution rule for the order type. A stop
limit order could be designated as a minimum quantity order and, at the
election of the order, would be handled pursuant to Chapter XXXVII,
Section 3(j) of the BSE Rules.
Preferred Price Cross Order: A preferred price cross order is a
two-sided cross order with a ``preferred limit price'' set by the
Member. A preferred limit price would be the limit price at which the
two-sided cross order would be executed, if it is better than the best
bid and offer displayed on BeX and equal to or better than the National
Best Bid or National Best Offer. When the preferred limit price does
not meet the above conditions, the execution price of the order would
be the closest price above or below the preferred limit price,
[[Page 59163]]
such that the execution price is better than the best bid and offer
displayed on BeX and equal to or better than the National Best Bid or
National Best Offer by a Minimum Price Variation.\18\ For example, if
the best bid and offer displayed on BeX is 2.00 to 2.05 and the
National Best Bid and Offer is 2.01 to 2.05, and the Preferred Limit
Price is 1.99, the order would execute at 2.01. When the best bid and
offer on BeX are equal to the National Best Bid and Offer and are one
Minimum Price Variation apart, the execution price will be at the
midpoint of the National Best Bid and Offer. For example, if the Best
Bid and Offer displayed on BeX is 2.00 to 2.01, the National Best Bid
and Offer is 2.00 to 2.01, and the Preferred Limit Price is 1.99, the
order would execute at 2.005.
---------------------------------------------------------------------------
\18\ ``Minimum Price Variation'' is defined in Chapter II,
Section 41 of the BSE Rules. The Exchange has proposed to amend this
definition to account for the situation where a Preferred Price
Cross Order is executed at a price that is one half the Minimum
Price Variation.
---------------------------------------------------------------------------
AIOC Order: An automatic immediate or cancel order would be an
order received on BeX that would 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 would not be routed to another Trading
Center. AIOC, unlike IOC orders, cannot be submitted until February 5,
2007, or an exemption from the ITS Plan is obtained.
Best Price ISO: A BPISO is an order marked as required by Rule
600(b)(30) of Regulation NMS that would 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 a BPISO, would not take any of the actions described
in Chapter XXXVIII, Section 4 of the BSE Rules to prevent an improper
trade through. BPISOs would not be eligible for submission to BeX until
February 5, 2007.
Price-Penetrating ISO: A price-penetrating ISO is an order marked
as required by Rule 600(b)(30) of Regulation NMS that would 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. Price-penetrating ISOs would be executed against any
eligible orders at the BSE through multiple price points (including any
undisplayed orders). The BSE, in executing these orders, would not take
any of the actions described in proposed Chapter XXXVIII, Section 4 of
the BSE Rules to prevent an improper trade-through, as defined therein.
Price-penetrating ISOs would not be eligible for submission to BeX
until February 5, 2007.
ISO Cross Order: An ISO cross order is a two-sided order that, upon
receipt, would be executed without any action on the part of the
Exchange to prevent an improper trade-through. The cross price must be
priced better than the best bid or offer displayed in BeX. ISO Cross
orders would not be eligible for submission to BeX until February 5,
2007, or an exemption from the ITS Plan is obtained.
Cancel on Corporate Action Order: An order designated as a cancel
on corporate action order would be cancelled in the event of a
dividend, distribution or stock split in the subject security.
Non-Displayed Order: A non-displayed order is a limit order, limit
or close order or stop limit order that is not displayed in BeX, but
the order would remain available for potential execution against all
incoming orders until executed in its entirety or cancelled. In the
event a non-displayed order that crosses the National Best Bid or Offer
is entered, that order would either be cancelled or, at the instruction
of the member entering the order, routed to an away Trading Center(s).
Similarly, if a non-displayed order already on the BeX book crosses the
National Best Bid or Offer as a result of movement in the marketplace,
that order would either be cancelled or, at the instruction of the
member entering the order, routed to an away Trading Center(s). Non-
displayed orders required to be routed to an away Trading Center(s)
would be routed as displayed orders.
The Commission believes that these order types are appropriate in
the context of the trading services proposed to be offered by the BeX
facility and are consistent with the Act. In addition, the BSE's
proposal regarding reserve orders and non-displayed orders comport with
rules the Commission previously approved for other exchanges.\19\ The
Commission notes that these order types should help provide market
participants with flexibility in executing transactions that meet the
specific requirements of the order type.
---------------------------------------------------------------------------
\19\ See, e.g., NYSE Arca Rule 7.31(h)(3).
---------------------------------------------------------------------------
C. Access
The Exchange proposes that BeX would be available for entry and
execution of orders by Member Organizations and Sponsored Participants
with authorized access. To obtain authorized access to BeX, each
Sponsored Participant would be required to enter into a BeX Participant
Agreement. A Sponsored Participant could obtain authorized access to
BeX only if such access is authorized in advance by one or more
Sponsoring Member Organizations. Sponsored Participants would be
required to enter into and maintain customer agreements with one or
more Sponsoring Member Organizations establishing the proper
relationship(s) and account(s) through which the Sponsored Participant
may trade on BeX. Such customer agreement(s) would be required to
incorporate the sponsorship provisions set forth in proposed Chapter
XXXVII, Section 5 of the BSE Rules. The proposed rule change sets forth
the requirements and procedures to be followed by the Sponsored
Participant and the Sponsoring Member Organization.
The Commission believes that the proposed sponsored access
provisions are appropriate and notes that they comport with rules the
Commission previously approved for other exchanges.\20\
---------------------------------------------------------------------------
\20\ See, e.g., NYSE Arca Rule 7.29.
---------------------------------------------------------------------------
D. Compliance With Intermarket Trading System (``ITS'') Plan
As set forth in Chapter XXXVII, Section 3(j) of the BSE Rules, 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. For example, marketable orders that would trade through
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. In addition, 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.\21\
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\21\ 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.
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E. Ranking and Display of Orders for Undisplayed Orders and Odd-Lot and
Mixed-Lot Orders
As set forth in Chapter XXXVII, Section 3(i) of the BSE Rules,
displayed
[[Page 59164]]
orders on BeX would be ranked in price/time priority. Within each price
level, orders would be ranked in time priority based on the time the
order is displayed. As noted above, the Exchange proposes to allow
reserve orders (i.e., part of the order is displayed) and non-displayed
orders (i.e., no part of the order is displayed). Under the Exchange's
proposed amendment to Chapter XXXVII, Section 3(i) of the BSE Rules,
reserve quantities of reserve orders would be considered displayed when
replenished. Undisplayed orders on BeX, such as non-displayed orders
and reserve quantities of reserve orders, would be ranked after all
other displayed orders at that price level and would be ranked in time
priority among all undisplayed orders. The Exchange provided the
following example of the ranking process between displayed and
undisplayed orders:
At 9:30 a.m., a reserve order to buy 500 shares is entered. The
initial display quantity is 200 shares and the undisplayed reserve
quantity is 300 shares.
At 9:32 a.m., a non-displayed order to buy 300 shares is entered.
At 9:33 a.m., a reserve order to buy 200 shares is entered. The
initial display quantity is 100 shares and the undisplayed reserve
quantity is also 100 shares.
At 9:34 a.m., an order to sell 1,000 shares at market is entered.
Assuming all the buy orders are at the same price level, the 1,000
shares will execute against the following orders: 200 shares of the
displayed portion of the 9:30 a.m. reserve order. 100 shares of the
displayed portion of the 9:33 a.m. reserve order. 300 shares of the
undisplayed reserve quantity of the 9:30 a.m. reserve order. 300 shares
of the undisplayed portion of the 9:32 a.m. non-display order. 100
shares of the undisplayed reserve quantity of the 9:33 a.m. reserve
order.
The proposed revision to Chapter XXXVII, Section 3(i) of the BSE
Rules also sets forth the handling of odd-lot and mixed-lot portions
for reserve orders. In addition, the proposed rule revision states that
while BeX would only accept and display round-lot orders for securities
listed on exchanges other than Nasdaq, it would accept odd-lot and
mixed-lot orders for Nasdaq Global Market securities and Nasdaq Capital
Market securities. The proposed amendment to Chapter XXXVII, Section
3(i) of the BSE Rules would indicate how odd-lot share amounts would be
handled in BeX for these Nasdaq-listed securities.
The Commission believes that the proposed rule revisions relating
to ranking and display of orders, including odd-lot and mixed-lot
portions of reserve orders and the handling of odd-lot and mixed-lot
components of orders for Nasdaq securities, are consistent with the
Act.
F. Anonymity
The Exchange has proposed to amend Chapter XXXVII, Section 3(i) of
the BSE Rules to state that BeX will provide pre-trade anonymity for
all submitted orders, except as otherwise permitted by the proposed
rule. All display-eligible orders (non-displayed orders and reserve
portions of reserve orders are not display-eligible) at all price
levels on the BeX would be displayed to all Members on an anonymous
basis and transactions executed on the BeX would be processed
anonymously.\22\ Transaction reports would indicate the details of the
transaction, but would 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 would be under an
obligation to divulge the name of the buying or selling firm in any
transaction. Except as otherwise provided for in the BSE Rules, no
Member would be permitted to 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.
---------------------------------------------------------------------------
\22\ The Exchange indicated that it intends to request a limited
exemption from the staff of the Commission 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 would not recommend
enforcement action to the Commission if, in lieu of making and
preserving a separate record, BSE Members rely on the BSE's
retention of the identities of the BSE Members that execute
anonymous trades through BeX to satisfy the requirements of Rules
17a-3(a)(1) and 17a-4(a) under the Act, 17 CFR 240.17a-3(a)(1) and
17a-4(a), respectively. The Exchange has represented that it will
not implement the anonymity feature of BeX unless and until the
requested relief is granted.
---------------------------------------------------------------------------
BeX would 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; (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; or (4) unless otherwise instructed by a Member, BeX would reveal
to a Member, no later than the end of the day on the date an anonymous
trade was executed, when the Member's quote or order has been
decremented by another quote or order submitted by that same Member.
To satisfy Members' recordkeeping obligations under Rules 17a-
3(a)(1) \23\ and 17a-4(a) \24\ under the Act, the Exchange would retain
for the period specified in Rule 17a-4(a) the identity of each Member
that executes an anonymous transaction described in Chapter XXXVII,
Section 3(i)(iii) of the BSE Rules. BeX would retain information in its
original form or a form approved under Rule 17a-6 under the Act.\25\
Members would 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.
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\23\ 17 CFR 240.17a-3(a)(1).
\24\ 17 CFR 240.17a-4(a).
\25\ 17 CFR 240.17a-6.
---------------------------------------------------------------------------
The Commission believes that the proposed BSE rule relating to
anonymity is appropriate in the context of the trading services
proposed to be offered by BeX and is consistent with the Act. The
Commission notes that the proposed rule is consonant with the rules of
other exchanges that the Commission previously has approved.\26\
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\26\ See, e.g., NYSE Arca Rule 7.41.
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G. Market Makers
BSE Members would be permitted to apply for Market Maker
status.\27\ An applicant would file an application for Market Maker
status on a form prescribed by the Exchange. Applications would be
reviewed by the Exchange, which would consider factors including, but
not limited to, capital operations, personnel, technical resources, and
disciplinary history. No Member would be permitted to act as a Market
Maker in any security unless such Member had been approved as a Market
Maker in a security by the Exchange pursuant to the BSE Rules and the
Exchange had not suspended or canceled such approval. Approved Market
Makers would be designated as dealers on the Exchange for all purposes
[[Page 59165]]
under the Act and the rules and regulations thereunder.
An applicant's Market Maker status would become effective upon
receipt by the Member of notice of an approval by the Exchange. In the
event that an application was disapproved by the Exchange, the
applicant would 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.
---------------------------------------------------------------------------
\27\ See proposed Chapter XXXVII, Section 8 of the BSE Rules
(Approval of Market Makers).
---------------------------------------------------------------------------
Market Maker status could 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 could withdraw its Market Maker
status by giving written notice to the Exchange. Such withdrawal would
become effective on the tenth business day following the Exchange's
receipt of the notice. A Market Maker who failed to give a ten-day
written notice of withdrawal to the Exchange would be subject to formal
disciplinary action pursuant to Chapter XXX of the BSE Rules.
Subsequent to withdrawal, the Member would not be permitted to re-apply
as a Market Maker for a period of six months.
A Market Maker would 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.\28\ Assignment of the
security would 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 could
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; and (6) the
character of the market for the security, e.g., price, volatility, and
relative liquidity. A Market Maker's assignment in a security could be
terminated by the Exchange if the Market Maker fails to enter
quotations in the security within five business days after the Market
Maker's assignment in the security becomes effective. Moreover, the
Exchange could limit the number of Market Makers in a security upon
prior written notice to Members.
---------------------------------------------------------------------------
\28\ See Chapter XXXVII, Section 9 of the BSE Rules (Assignment
of Market Maker in a Security).
---------------------------------------------------------------------------
Market Makers would be selected by the Exchange based on, but 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 could voluntarily terminate its assignment in a
security by providing the Exchange with a one-day written notice of
such termination. A Market Maker that failed to give advanced written
notice of termination to the Exchange could be subject to formal
disciplinary action pursuant to Chapter XXX of the BSE Rules.
Furthermore, the Exchange could suspend or terminate any assignment of
a Market Maker in a security or securities whenever, in the Exchange's
judgment, the interests of a fair and orderly market are best served by
such action. A Member would be permitted to seek review of any action
taken by the Exchange, 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 of the BSE
Rules.
Members assigned as Market Makers in one or more securities traded
on the BeX would be required to 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.\29\ The
responsibilities and duties of a Market Maker specifically would
include, but not be limited to, the following: (1) Maintaining
continuous, two-sided quotes in those securities in which the Market
Maker is assigned to trade; (2) maintaining adequate minimum capital in
accordance with Rule 15(c)3-1 under Act; \30\ (3) remaining in good
standing with the Exchange; (4) informing the Exchange of any material
change in financial or operational condition or in personnel; and (5)
clearing and settling transactions through the facilities of a
registered clearing agency. This last requirement could 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. A Market Maker would be required to satisfy
the responsibilities and duties during BeX's primary trading session on
all days in which the Exchange is open for business.
---------------------------------------------------------------------------
\29\ See proposed Chapter XXXVII, Section 10 of the BSE Rules
(Obligations of Market Makers).
\30\ 17 CFR 240.15c3-1.
---------------------------------------------------------------------------
If the Exchange found 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 would 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.
A Market Maker would be permitted to apply to the Exchange to
withdraw temporarily from its Market Maker status in the securities in
which it is assigned. The Market Maker would be required to 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 would act promptly on such request and, if the
request were granted, the Exchange could temporarily reassign the
securities to another Market Maker.
Market Makers would be required to maintain minimum performance
standards at levels determined from time to time by the Exchange. Such
levels would vary depending on the price, liquidity, and volatility of
the security in which the Market Maker is assigned. The performance
measurements would include: (1) Percent of time at the National Best
Bid or National Best Offer; (2) percent of executions priced better
than the National Best Bid or National Best Offer; (3) average
displayed size; (4) average quoted spread; and (5) 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 would be permitted to engage in
other business activities, or be affiliated with a broker-dealer that
engages in Other Business Activities (as defined below), only if there
is an Information Barrier (also commonly referred to as ``Chinese
Wall'') between the market making activities and the other business
activities.\31\ ``Other Business Activities'' would 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.
---------------------------------------------------------------------------
\31\ See proposed Chapter XXXVII, Section 11 of the BSE Rules
(Limitations on Dealings).
---------------------------------------------------------------------------
The Exchange's proposed rule on limitations on dealings would
require that market making functions be physically separated from the
locations
[[Page 59166]]
in which Other Business Activities are conducted. The proposal also
would establish minimum requirements for the procedures to be
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 barrier's other
side. In addition, the proposal sets forth the items of information to
be furnished in writing to the Exchange by the Member implementing an
information barrier. Absent the Exchange finding a Member's information
barriers acceptable, a Market Maker could not conduct Other Business
Activities.
A Member or an affiliate of the Member would be permitted 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 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.
The Commission believes that the Exchange's proposed rules
regarding Market Makers for BeX are appropriate and consistent with the
Act. The Commission notes that the Exchange's rules are substantially
similar to rules of other exchanges that it has previously
approved.\32\
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\32\ See, e.g., NYSE Arca Rule 7.26.
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H. Application of ``Effect v. Execute'' Exemption From Section 11(a) of
the Act
When the Commission approved BeX Phase I,\33\ the Commission found,
based upon representations made by the Exchange,\34\ that BeX Phase I
satisfied the requirements of Rule 11a2-2(T) \35\ under Section 11(a)
of the Act.\36\ With respect to Rule 11a2-2(T)'s off-floor
requirement,\37\ the Commission found that orders sent, by electronic
means, from the Exchange's physical trading floor could be considered
to be sent from ``off-floor'' for purposes of the BeX trading
system.\38\ In reaching this conclusion, the Commission relied, among
other things, upon the Exchange's statement that securities traded on
the BeX trading system would not be traded on the Exchange's physical
floor and, therefore, the BeX trading system could be considered
essentially a different, separate ``trading floor.'' \39\
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\33\ See BeX Phase I Order, supra note 6.
\34\ See Letter from William C. Meehan, General Counsel, BSE, to
Kelly M. Riley, Assistant Director, Division of Market Regulation,
Commission, dated June 2, 2006; Letter from William C. Meehan,
General Counsel, BSE, to Kelly M. Riley, Assistant Director,
Division, Commission, dated August 8, 2006.
\35\ 17 CFR 240.11a2-2(T).
\36\ 15 U.S.C. 78k(a).
\37\ See 17 CFR 240.11a2-2(T)(a)(2)(ii).
\38\ See BeX Phase I Order, supra note 6, at 52197.
\39\ See id. In the BeX Phase I Order, the Commission also noted
that Exchange members on the Exchange's physical trading floor would
not have a time/place advantage with regard to the securities traded
in the BeX trading system, and that members present on the
Exchange's physical trading floor would see information about orders
at the top of the BeX trading system only after that information had
been sent to the securities information processor for dissemination
to the public.
---------------------------------------------------------------------------
In connection with the proposed rule change to implement BeX Phase
II, the Exchange updated certain representations it made to the
Commission to reflect changes being made in BeX Phase II. Specifically,
the Exchange stated that upon implementation of BeX Phase II, all
transactions on the Exchange will take place within the BeX electronic
trading facility, and the Exchange's physical trading floor will cease
to exist. Accordingly, the Exchange has represented that in BeX Phase
II, all orders for the accounts of Exchange members will be transmitted
to the BeX trading system from off the floor (since the Exchange no
longer will have any physical trading floor) by electronic means.\40\
The Exchange has stated that, other than the elimination of the
physical trading floor, all of the other representations it made to the
Commission in connection with BeX Phase I remain true and correct in
all respects for BeX Phase II.\41\ Therefore, the Commission believes
that BeX Phase II satisfies the requirements of Rule 11a2-2(T).
---------------------------------------------------------------------------
\40\ See Amendment No. 2.
\41\ See id.
---------------------------------------------------------------------------
I. Regulation NMS
1. Locking and Crossing Quotations in NMS Stocks
In accordance with the requirements of Rule 610 of Regulation NMS,
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. The
proposed rule states that it will not become effective until February
5, 2007, or an earlier appropriate exemption from the ITS Plan is
obtained.
For purposes of this proposed rule, a ``crossing quotation'' would
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 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 proposed rule, a ``locking
quotation'' would 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 a 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.
The proposed rule would provide four exceptions from the
prohibition on locking or crossing protected quotations. The proposed
rule would except: (1) Those quotations 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; (2) those quotations displayed at a time when the protected
bid was higher than a protected offer in the NMS stock; (3) those
automated quotations where the BSE member displaying such automated
quotation simultaneously routed an ISO order to execute against the
full displayed size of any locked or crossed protected quotation; and
(4) those manual quotations that locked or crossed another manual
quotation, and the BSE member displaying the locking or
[[Page 59167]]
crossing manual quotation simultaneously routed an ISO to execute
against the full displayed size of the locked or crossed manual
quotation.
The Commission believes that the proposed rule on locking or
crossing quotations is consistent with Rule 610(d) of Regulation NMS.
2. Order Routing
The BSE has proposed a rule, in accordance with the requirements of
Regulation NMS, that would govern the order routing process.\42\
---------------------------------------------------------------------------
\42\ See Chapter XXXVIII, Section 3 of the BSE Rules (Order
Routing).
---------------------------------------------------------------------------
The BSE would only route an eligible order when the order has not
been executed in its entirety on BeX due to the requirements of Chapter
XXXVIII, Section 4, paragraph (a) of the BSE Rules, consistent with
Rule 611of Regulation NMS, and the terms of the order permit routing to
another Trading Center for execution. The BSE has determined that
eligible orders would be orders that are designated by the customer to
execute or route. IOC, AIOC, all ISO order types and FOK orders would
not be designated to execute or route.
Orders would be routed either in their entirety or as component
orders to an away Trading Center(s). Orders would be routed, consistent
with Rule 611 of Regulation NMS, to the Trading Center(s) publishing
any better-priced Protected Bid(s) or Protected Offer(s) for execution
against such Protected Bid(s) or Protected Offer(s) for the full
displayed size of the Protected Quotation. The remaining portion of the
order, if any, will be executed, or ranked and displayed on the BSE
book, in accordance with the terms of such order and would be handled
in the manner described in Chapter XXXVII, Section 3 of the BSE Rules.
Eligible orders would 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 would 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 be routed to another Trading Center priced at the Protected Quote
published by the Trading Center.
As stated above, the Exchange would route orders to other Trading
Centers under certain circumstances (``Routing Services''). The
Exchange would 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 would be routed (``Member-Exchange
Agreement''); (2) an agreement between the Exchange and each third-
party broker-dealer that would 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'').
The Exchange would 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 Sections
6(b)(4) and (5) of the Act \43\ 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.
---------------------------------------------------------------------------
\43\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------
As provider of the Routing Services, the Exchange would license the
necessary routing technology for use within its own systems and
accordingly would control the logic that determines when, how, and
where orders are routed away to other Trading Centers.
The Exchange would 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 would include terms and conditions that
enable the Exchange to comply with these proposed requirements.
As noted above, if an order that is eligible for routing cannot be
executed in its entirety on the BSE, consistent with the requirements
of Rule 611 of Regulation NMS, the order would be routed to the
applicable Trading Center(s). 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
routed away to another Trading Center would be processed subject to
applicable trading rules of the relevant away Trading Center. Where an
order is not fully executed at the away Trading Center(s), the order
would be executed, or ranked and displayed on the BSE book in
accordance with the terms of such order and would be handled in the
manner described in Chapter XXXVII, Section 3 of the BSE Rules.
The Commission finds that the Exchange's proposal to provide
outbound Routing Services, and the proposed rules governing such
services, are consistent with the Act. The Commission notes that the
Exchange's proposed outbound routing functionality is not the exclusive
means for accessing better priced quotes in other market centers,
should an order not be executable on the BeX facility. Accordingly, the
Exchange's Routing Services are optional, and a Member is free to route
its orders to other market centers through alternative means.
3. Order Protection Requirements Rule
The BSE, in accordance with the requirements of Regulation NMS, has
proposed an order protection requirements rule that would prohibit
trades from being executed on the BSE if the execution would result in
an improper trade-through under Rule 611 of Regulation NMS.\44\ If the
execution of an order on the Exchange would cause an improper trade-
through, that order, if eligible to route, would be routed to the
appropriate Trading Center(s) or, if not, automatically cancelled. The
proposed rule states that it will not become effective until February
5, 2007.
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\44\ See proposed Chapter XXXVIII, Section 4 of the BSE Rules
(``Order Protection Requirements''). Under the proposed rule, an
order would not be 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 (a ``trade-through''), or if its execution
would be improper under Rule 611 of Regulation NMS (together, an
``improper trade-through'').
---------------------------------------------------------------------------
The proposed order protection requirements rule would contain
several exceptions that are exceptions under Rule 611 of Regulation
NMS, including: A crossed markets exception, a self-help exception, a
non-regular way cross exception, a single priced opening,
[[Page 59168]]
reopening or closing trade exception, an inbound ISO exception, a stop
order exception, and an exception for a benchmark order executed at the
BSE.\45\ In addition, the BSE would be able to disregard the bid or
offer of a Trading Center if it is identified by the Trading Center a
manual quotation. If a purchase or sale of an NMS stock qualifies for
an exception to the Order Protection Rule under Regulation NMS, the BSE
would attach an appropriate modifier approved by the operating
committee of the relevant national market system plan.\46\
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\45\ According to the Exchange, BeX does not presently provide
for non-regular was cross orders or benchmark orders, although these
order types may be introduced in the future through an appropriate
proposed rule change to be filed with the Commission.
\46\ If a trade is executed pursuant to the ISO exception of
Rule 611(b)(5) or (6) and the self-help exception of Rule 611(b)(1),
the trade will be identified as executed pursuant to the ISO
exception.
---------------------------------------------------------------------------
The Exchange represents that it intends to operate as an automated
trading system that displays bids and offers that qualify as automated
quotations under the definition set out in Rule 600(b)(3) of Regulation
NMS, with manual capabilities in the event it is unable to generate
automated quotations. Among other things, if the BSE has not accepted
two or more AIOC orders sent as sequential test messages, the BSE would
attach a ``manual'' identifier to the bids and offers it makes publicly
available. Additionally, immediately upon receiving an alert as a
result of its periodic processes that the Exchange's trading system has
taken more than two seconds to process two or more AIOC orders in a
symbol sent as sequential messages, the Market Operations Center
(``MOC'') would automatically attach a ``manual'' identifier to the
bids and offers it makes publicly available.
Once the BSE has made any required systems changes, or otherwise
determined that its quotations satisfied the requirements of Rule
600(b)(3) of Regulation NMS, and conducted applicable tests to confirm
that the Exchange's quotes qualify as automated quotations, the
Exchange would remove the ``manual'' identifier from the bids and
offers that are made publicly available. The Exchange also would notify
other Trading Centers that its quotations are automated by announcing
that fact through an appropriate mechanism for communicating with other
Trading Centers.
The Commission believes that the Exchange's rules governing order
protection requirements are consistent with Rule 611 of Regulation NMS.
IV. Accelerated Approval of Amendment No. 2
The Commission finds good cause for approving Amendment No. 2 to
the proposed rule change prior to the thirtieth day after publishing
notice of Amendment No. 2 in the Federal Register pursuant to Section
19(b)(2) of the Act.\47\
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\47\ 15 U.S.C. 78s(b)(2).
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In Amendment No. 2, the Exchange: (1) Introduced a new order type
to be known as a non-displayed order; (2) amended the definition of a
preferred price cross and ISO cross; (3) clarified when certain
provisions related to Regulation NMS become effective; (4) added
provisions for the handling of odd-lot and mixed-lot orders, including
the ranking and display of odd-lots and mixed-lots; (5) clarified the
ranking and display of Reserve Orders; (6) added a provision relating
to the anonymity of trades executed by a Member against itself; (7)
added a provision relating to access to BeX by Sponsored Participants;
(8) stating that, for purposes of Section 11(a) of the Act (15 U.S.C.
78k(a)) and Rule 11a2-2(T) (17 CFR 240.11a2-2(T)) thereunder, all
orders for the accounts of Exchange members will be transmitted to the
BeX trading system from off the floor (since the Exchange no longer
will have any physical trading floor) by electronic means; and (9)
making several clarifying changes and correcting several technical
errors contained in the rule text.
The Commission notes that the proposal to amend the definition of a
preferred price cross order to require it to execute at better than the
best bid and offer displayed on BeX and equal to or better than the
National Best Bid or National Best Offer is a clarifying change that
comports with the requirements for cross orders on BeX previously
approved by the Commission.\48\ Amendment No. 2 made a similar change
with respect to the definition of an ISO cross order. The Commission
further notes that other exchanges have rules in place similar to the
rules proposed by the Exchange relating to non-displayed orders, odd-
lot and mixed-lot orders, anonymity of trades executed by a Member
against itself, and access by Sponsored Participants. Finally,
Amendment No. 2 contains several clarifying and technical changes that
do not affect the substance of the proposed rule change.
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\48\ See note 6 supra.
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Accordingly, the Commission believes that accelerating approval of
Amendment No. 2 raises no new or novel issues of regulatory concern and
therefore the Commission believes its implementation should not be
delayed. The Commission also believes that accelerated approval is
reasonable because it should help to ensure that the appropriate rules
are in place at the Exchange at the time that the BSE's final technical
specifications with respect to Regulation NMS must be published.
Further, the Exchange's representation with respect to the
applicability of Rule 11a2-2(T) to trading on BeX simply updates a
representation previously provided to the Commission.
For the reasons noted above, the Commission finds good cause for
approving Amendment No. 2 to the proposed rule change prior to the
thirtieth day after publishing notice of Amendment No. 2 in the Federal
Register pursuant to Section 19(b)(2) of the Act.\49\
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\49\ 15 U.S.C. 78s(b)(2). Pursuant to Section 19(b)(2) of the
Act, the Commission may not approve any proposed rule change, or
amendment thereto, prior to the thirtieth day after the date of
publication of the notice thereof, unless the Commission finds good
cause for so doing.
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V. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 2, including whether Amendment No. 2
is consistent with the Act. Comments may be submitted by any of the
following methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@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, Station Place, 100 F
Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number 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 (https://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
[[Page 59169]]
proposed rule change between the Commission and any person, other than
those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying in the Commission's Public Reference Room. Copies of such
filing also will be available for inspection and copying at the
principal office of the Exchange. 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 wish to make available publicly. All submissions should refer to
Amendment No. 2 of File Number SR-BSE-2006-30 and should be submitted
on or before October 27, 2006.
VI. Conclusion
For the foregoing reasons, the Commission finds that the proposed
rule change, as amended, is consistent with the Act and the rules and
regulations thereunder applicable to a national securities exchange,
and, in particular, with Section 6(b)(5) of the Act.\50\
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\50\ 15 U.S.C. 78f(b)(5).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\51\ that the proposed rule change (SR-BSE-2006-30) is approved and
Amendment No. 2 is approved on an accelerated basis.
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\51\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\52\
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\52\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-16580 Filed 10-5-06; 8:45 am]
BILLING CODE 8011-01-P
