Self-Regulatory Organizations; Boston Stock Exchange, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Clarify How the BOX Trading Host Systematically Filters All Orders Against the National Best Bid and Offer, 44596-44599 [E7-15434]

Download as PDF 44596 Federal Register / Vol. 72, No. 152 / Wednesday, August 8, 2007 / Notices method to approach penny pricing in the options markets, rather than a mechanism that bypasses auction market principles.27 As discussed above, with respect to the commenter’s substantive arguments, the Commission believes the AAO functionality is consistent with the Act. Further, the Commission notes that the proposal, as amended, is intended to make it easier for Public Customers to participate in the PIP (or other future Improvement Auctions), which already allows trading in penny increments. In addition, pursuant to the amended proposal, AAOs may only be entered in series that are limited to quoting in standard increments greater than one cent. The Commission believes it is consistent with the Act to allow BSE to implement another initiative designed to allow limited trading in penny increments at the same time it participates in the Penny Pilot Program. D. Accelerated Approval The Commission finds good cause to approve the proposal prior to the thirtieth day after the proposal was published for comment in the Federal Register. The proposed rule change, as modified by Amendment No. 1, was published for full notice and comment.28 Amendment No. 2, which limits the AAO functionality to Public Customer accounts, and in a series for which the standard trading increment is greater than one cent, modifies the proposal in response to issues raised by a commenter. For these reasons, the Commission finds good cause, consistent with section 19(b)(2) of the Act, to grant accelerated approval to the proposed rule change. V. Conclusion It is therefore ordered, pursuant to section 19(b)(2) of the Act,29 that the proposed rule change (SR–BSE–2006– 56), as modified by Amendments No. 1 and 2, be, and it hereby is, approved on an accelerated basis. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.30 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–15431 Filed 8–7–07; 8:45 am] sroberts on PROD1PC70 with NOTICES BILLING CODE 8010–01–P ISE Letter, supra note 4, at 3. Notice, supra note 3. 29 15 U.S.C. 78s(b)(2). 30 17 CFR 200.30–3(a)(12). SECURITIES AND EXCHANGE COMMISSION [Release No. 34–56185; File No. SR–BSE– 2007–39] Self-Regulatory Organizations; Boston Stock Exchange, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Clarify How the BOX Trading Host Systematically Filters All Orders Against the National Best Bid and Offer August 2, 2007. Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on July 30, 2007, the Boston Stock Exchange, Inc. (‘‘Exchange’’ or ‘‘BSE’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been substantially prepared by the Exchange. The Exchange has designated the proposed rule change as a noncontroversial rule change pursuant to section 19(b)(3)(A)(iii) of the Act 3 and Rule 19b–4(f)(6) thereunder,4 which renders the proposed rule change effective upon filing with the Commission. 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 Exchange proposes to amend the rules of the Boston Options Exchange (‘‘BOX’’) to clarify how the BOX Trading Host systematically filters all orders against the National Best Bid and Offer (‘‘NBBO’’) to ensure that a trade-through to the detriment of the inbound order does not occur, and that the customer’s interests are protected by making sure that any execution of its order on BOX is at a price at least as good as the best price available on any of the other options exchanges. The proposed rule filing also seeks to clarify how BOX currently processes such orders when the NBBO is either locked or crossed. The text of the proposed rule change is set forth below; new text is in italics and deleted text is in brackets. 27 See 30 17 28 See 1 15 VerDate Aug<31>2005 19:14 Aug 07, 2007 Jkt 211001 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A)(iii). PO 00000 Frm 00114 Fmt 4703 Sfmt 4703 RULES OF THE BOSTON OPTIONS EXCHANGE FACILITY Chapter V Sec. 16 Execution and Price/Time Priority (a)—No change. (b) Filtering of BOX In-Bound Orders [to Prevent Trade-Throughs]. i. With the exception of Improvement Orders and Primary Improvement Orders submitted during a PIP (which are processed in accordance with section 18 of this Chapter V) and Directed Orders (which are processed in accordance with section 5, subsections b and c, of Chapter VI) [A]all inbound orders to BOX (whether on behalf of Customers, non-BOX Participant brokerdealer proprietary accounts or market makers at other exchanges) as well as inbound Principal (‘‘P’’) and Principal as Agent (‘‘P/A’’) (see Chapter XII, ‘‘Intermarket Linkage Rules’’, herein) orders received via InterMarket Linkage will be filtered by the Trading Host prior to entry on the BOX Book to ensure that these orders will not [execute at price outside the current NBBO (‘‘trade-throughs’’).]: 1) in the case of a sell order, execute at a price below the NBBO bid price -or2) in the case of a buy order, execute at a price above the NBBO offer price. All of the filtering rules described in this section are independent of whether the NBBO is locked or crossed or not, except where the BOX best price on the same side of the market as the inbound order has crossed, or is crossed by, the opposite side NBBO, the order will be routed, if eligible, or rejected immediately. ii.–iv.—No change. 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. E:\FR\FM\08AUN1.SGM 08AUN1 44597 Federal Register / Vol. 72, No. 152 / Wednesday, August 8, 2007 / Notices A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The purpose of the proposed rule change is to amend the BOX Rules to describe how the BOX Trading Host systematically filters all orders against the NBBO to ensure that a trade-through to the detriment of the inbound order does not occur. The proposal also describes how customers’ interests are protected by making sure that any execution of his order on BOX is at a price at least as good as the best price available on any of the other options exchanges. BOX’s responsibility to the inbound customer or broker-dealer order is to ensure that its execution is at the best price available across all markets at that moment. Presently, BOX processes trades irrespective of whether the NBBO is locked, crossed, or ‘‘normal.’’ As a result of this practice, there is the potential to cause a trade-through. The purpose of this rule filing is to amend the BOX rules to recognize that only the price on the side of the NBBO opposite to the inbound order needs to be taken into account when filtering inbound orders, regardless of whether the NBBO is locked, crossed, or ‘‘normal,’’ and regardless of whether BOX is presently part of the NBBO on the opposite side from the order. The Exchange has obtained exemptive relief for any tradethroughs that occur as a result of this practice.5 The following examples illustrate BOX’s proposed processing of NBBO filtering: Example 1: Bid Example 2: Bid sroberts on PROD1PC70 with NOTICES Offer 10 @ 2.00 ............ 2.00 ...................... 20 @ 2.10 2.10 Offer BOX Trading Host receives an order to sell 20 ‘‘at market.’’ Inbound sell order executed for 10 at 2.00 on BOX. The remaining ten are exposed 6 internally at 2.00 and, if not executed, will be routed to the exchange disseminating the best price or rejected to sender. Example 3: Bid Offer BOX .......... 10 @ 2.00 ............ 20 @ 2.10 NBBO ....... 2.05 ...................... 2.10 BOX Trading Host receives an order to sell 10 ‘‘at market.’’ Inbound sell order exposed internally at 2.05 on BOX; and if not executed, will be routed to the exchange disseminating the best price or rejected to sender. Example 4: Bid Offer BOX .......... 10 @ 2.00 ............ 20 @ 2.10 NBBO ....... 2.00 ...................... 2.00 BOX Trading Host receives an order to sell 10 ‘‘at market.’’ Inbound sell order executed at 2.00 on BOX since this is best price available nationally for a seller. Example 5: Bid Offer BOX .......... 10 @ 2.00 ............ 20 @ 2.10 NBBO ....... 2.05 ...................... 2.05 BOX Trading Host receives an order to sell 10 ‘‘at market.’’ Inbound sell order exposed internally at 2.05 on BOX; and if not executed, will be routed to the exchange disseminating the best price or rejected to sender. Example 6: Bid Offer BOX .......... 10 @ 2.00 ............ 20 @ 2.10 NBBO ....... 2.00 ...................... 2.10 BOX Trading Host receives an order to sell 10 ‘‘at market.’’ Inbound sell order executed at 2.00 on BOX. BOX .......... NBBO ....... Bid Offer BOX .......... 10 @ 2.00 ............ 20 @ 2.10 NBBO ....... 2.00 ...................... 1.95 BOX Trading Host receives an order to sell 10 ‘‘at market.’’ Inbound sell order executed at 2.00 on BOX since this is best price available nationally for a seller. Example 7: Bid BOX .......... NBBO ....... Offer 10 @ 2.00 ............ 2.00 ...................... 20 @ 2.10 1.95 Bid Offer BOX Trading Host receives an order to sell 20 ‘‘at market.’’ Inbound sell order executed for 10 at 2.00 on BOX since this is best price available nationally for a seller. The remaining 10 are exposed internally at 2.00, and if not executed, will be routed to the exchange disseminating the best price or rejected to sender. Example 8: Bid Offer BOX .......... 10 @ 2.00 ............ 20 @ 2.10 NBBO ....... 2.05 ...................... 1.95 BOX Trading Host receives an order to sell 10 ‘‘at market.’’ Inbound sell order exposed internally at 2.05 on BOX; if not executed, will be routed to the exchange disseminating the best price or rejected to sender. In the following example (Example 9), the BOX best price on the same side of the market as the inbound order is crossed by the opposite side NBBO. In this particular case, it is impractical to expose the inbound executable order at the opposite NBBO as in the previous examples since BOX is already showing a better offer (of 2.10 versus the NBBO exposure price of 2.15) with which nobody has traded. In this unique circumstance (where the same side BBO on BOX is crossed by the opposite side NBBO), BOX will immediately route the order to the exchange disseminating the best price, if possible, or reject the order back to the sender. Example 9: Bid Offer BOX .......... 10 @ 2.00 ............ 20 @ 2.10 NBBO ....... 2.15 ...................... 2.05 BOX Trading Host receives an order to sell 10 ‘‘at market.’’ Inbound sell order routed immediately to the exchange disseminating the best price at 2.15 or rejected back to sender. As illustrated by the above examples, the BOX NBBO filtering process ensures that a sell order is never executed on BOX at a price inferior to the best bid available at the other options exchanges; similarly, any order to buy an option would not be executed on BOX at price worse than the best offer available elsewhere at that moment. BOX believes that in the case of a crossed NBBO, it is in the inbound customer order’s interest to execute at the best price on the opposite side of the NBBO on BOX, where possible, as this is much quicker than routing to an away exchange. In connection with proposed rule change, the Exchange has respectfully current rule requirement for separate firms. Such policies and procedures must, at a minimum, include information barriers that prevent the flow of non-public information between a member organization’s ETF specialist on the one hand and the member organization’s 19:14 Aug 07, 2007 Jkt 211001 PO 00000 Frm 00115 Fmt 4703 Sfmt 4703 E:\FR\FM\08AUN1.SGM 08AUN1 VerDate Aug<31>2005 specialist in an associated 44598 Federal Register / Vol. 72, No. 152 / Wednesday, August 8, 2007 / Notices requested an exemption, pursuant to Rule 608(e) of Regulation NMS, from the requirement of Rule 608(c) of Regulation NMS that the Exchange comply with and enforce compliance by its members with the requirements of Section 8(c) of the Plan for the Purpose of Creating and Operating an Intermarket Options Linkage (‘‘the Plan’’) in the limited circumstance where a trade-through occurs due to an execution when the NBBO is crossed by the disseminated market of another options exchange, or BOX’s disseminated market crosses the NBBO, and BOX’s price 7 on the opposite side of the market for the incoming order establishes, or is equal to, the NBBO. To the same extent and subject to the same limitations, the Exchange has requested exemptive relief from the requirement in Rule 608(c) of Regulation NMS that the Exchange comply with section 4(b) of the Plan by enforcing compliance by its members with the provisions of section 8(c) of the Plan. The Commission has granted the requested exemption.8 2. Statutory Basis The Exchange believes that the proposal is consistent with the requirements of Section 6(b) of the Act 9 in general, and Section 6(b)(5) of the Act 10 in particular, in that it is designed to promote just and equitable principles of trade, to perfect the mechanism of a free and open market and the national market system, and to protect investors and the public interest by clarifying how the BOX Trading Host systematically filters all orders against the NBBO to ensure that a trade-through to the detriment of the inbound order does not occur. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others The Exchange has neither solicited nor received comments on the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The Exchange has designated the proposed rule change as one that: (1) Does not significantly affect the protection of investors or the public interest; (2) does not impose any significant burden on competition; and (3) does not become operative for 30 days from the date of filing, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest. Therefore, the foregoing rule change has become effective pursuant to section 19(b)(3)(A) of the Act 11 and subparagraph (f)(6) of Rule 19b–4 thereunder.12 The Exchange has asked the Commission to waive the operative delay to permit the proposed rule change to become operative prior to the 30th day after filing so that the Exchange can clarify the conditions under which BOX provides automatic executions during times of crossed markets, thus allowing the maximum potential number of orders to be handled electronically on the Exchange. The Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest.13 Waiving the delay will allow the Exchange’s clarifications of the operation of the BOX Trading Host’s filtering of orders against the NBBO to become operative immediately. Waiving the delay will also allow the proposal to become operative simultaneously with the trade-through exemption granted to the Exchange as of July 30, 2007,14 the date the proposed rule change was filed. Therefore, the Commission designates the proposal operative upon filing. At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate the rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and 11 15 sroberts on PROD1PC70 with NOTICES 7 BOX’s price could be either BOX’s disseminated price or it could be a Participant response to the exposure of the incoming order pursuant to Chapter V, Section 16(b) of BOX Rules. Therefore, an incoming order during a crossed market must execute at a price equal to the NBBO on the opposite side of the incoming order. 8 See supra note 5. 9 15 U.S.C. 78f(b). 10 15 U.S.C. 78f(b)(5). VerDate Aug<31>2005 19:14 Aug 07, 2007 Jkt 211001 U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(6). As required under Rule 19b–4(f)(6)(iii), the Exchange provided the Commission with written notice of its intent to file the proposed rule change at least five business before doing so. 13 For purposes only of waiving the 30-day operative delay, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 14 See supra note 5. 12 17 PO 00000 Frm 00116 Fmt 4703 Sfmt 4703 arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml ); or • Send an e-mail to rulecomments@sec.gov. Please include File No. SR–BSE–2007–39 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–BSE–2007–39. 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 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, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. 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 File Number SR–BSE–2007–39 and should be submitted on or before August 29, 2007. E:\FR\FM\08AUN1.SGM 08AUN1 Federal Register / Vol. 72, No. 152 / Wednesday, August 8, 2007 / Notices For the Commission, by the Division of Market Regulation, pursuant to delegated authority.15 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–15434 Filed 8–7–07; 8:45 am] to make technical corrections where necessary and to be in harmony with analogous rules of FICC’s affiliated clearing agency, the National Securities Clearing Corporation (‘‘NSCC’’). 1. Membership Types BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–56182; File No. SR–FICC– 2006–19] Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Granting Approval of Proposed Rule Change Relating to Membership, Definitions, and the Electronic Pool Notification Service August 1, 2007. I. Introduction On December 13, 2006, the Fixed Income Clearing Corporation (‘‘FICC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) a proposed rule change pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder 2 to restructure FICC’s Government Securities Division’s (‘‘GSD’’) membership standards and membership requirements, update various definitions, and make technical changes to GSD’s rules and to FICC’s Mortgage-Backed Securities Division’s (‘‘MBSD’’) Electronic Pool Notification (‘‘EPN’’) rules. The proposed rule change was published for comment in the Federal Register on March 29, 2007.3 No comment letters were received on the proposal. This order approves the proposal. sroberts on PROD1PC70 with NOTICES II. Description of the Proposal A. Membership Rules FICC is revising its rules concerning membership types, the membership application process, and the ongoing requirements of GSD members into a format that FICC believes will make such rules easier to locate and to understand by applicants and members. To accomplish this, FICC is amending current Rule 2 (retitled ‘‘Members’’), is moving much of the content of current Rule 2 into a new Rule 2A (‘‘Initial Membership Requirements’’), and is revising Rule 3 (retitled ‘‘Ongoing Membership Requirements’’). Other rules and provisions are being modified 15 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 Securities Exchange Act Release No. 55515 (Mar. 22, 2006), 72 FR 14839. 1 15 VerDate Aug<31>2005 19:14 Aug 07, 2007 Jkt 211001 FICC’s current Rule 2 (‘‘ComparisonOnly and Netting Members’’) sets forth the types of GSD memberships, eligibility requirements, application procedures, and member reporting requirements. FICC is revising Rule 2 to establish each GSD membership type: Comparison-Only Members, Netting Members, Sponsoring Members, Sponsored Members, and Funds-Only Settling Bank Members. Substantially all other provisions contained in the current Rule 2 are being moved to either new Rule 2A or revised Rule 3. One exception to this is that FICC is deleting current Rule 2, Section 4 (‘‘Financial Reports by Netting Applicants). FICC states that the rationale for such deletion is that FICC already advises applicants during the application process of the required financial reports depending on the category of membership for which is being applied and on the applicant entity type. In addition, FICC is setting forth in revised Rule 3 the financial reports that must be submitted by members to FICC on an ongoing basis. FICC is also deleting section 1(f) of Rule 2, which provides that applicants that have been approved for membership must execute and deliver to FICC a membership agreement. This provision is redundant with existing Rule 2, Section 3, which will now appear in new Rule 2A, Section 7. 2. Consolidation of Membership Standards and Requirements Prior to this rule change, the membership qualifications, financial standards, and operational requirements for each membership type were set forth in Rule 2 (‘‘Comparison-Only and Netting Members’’), Rule 3 (‘‘Financial Responsibility, Operational Capability and Other Membership Standards of Comparison-Only and Netting Members’’), and Rule 4 (‘‘Clearing Fund, Watch List and Loss Allocation’’). To consolidate this information, FICC is creating a new Rule 2A (‘‘Initial Membership Requirements’’) that will establish the initial membership eligibility requirements for all membership types and will set forth the process of membership application and evaluation. In addition, FICC is restructuring Rule 3 (‘‘Ongoing Membership Requirements’’) to contain all current GSD rule provisions PO 00000 Frm 00117 Fmt 4703 Sfmt 4703 44599 regarding the continuing requirements of members. The restructuring will encompass three substantive changes: (a) Immediate Placement on the Watch List. FICC is deleting current Rule 3, Section 1(d)(iii) that automatically disqualifies an applicant from becoming a member if the applicant is subject to any action or condition, the existence of which would require the applicant to be placed on FICC’s Watch List if it were already a member. FICC believes that eliminating such provision will not diminish FICC’s ability to deny membership to an unworthy applicant because FICC will still retain under other sections of its rules the discretion to deny membership based on the applicant’s underlying financial, operational, or character issues. Moreover, FICC’s credit risk matrix enables FICC to place such applicant directly on FICC’s watch list for closer monitoring. (b) Additional Reporting Requirements. FICC is adding new language to proposed Rule 3, Section 2 (‘‘Reports by Netting Members’’) that will require members to provide FICC with (i) reports from their independent auditors on internal controls [in revised Rule 3, Section 2(b)(ii)] and (ii) a copy of any letter granting an extension of time by a regulatory authority to a member with respect to the submission of a report [in revised Rule 3, Section 2(h), para. 2]. (c) Annual Audited Financial Statements. FICC is removing the current requirement in Rule 2, Section 4(a) that audited annual financial statements submitted by netting members be ‘‘without qualification.’’ FICC believes that a qualification in an annual audited financial statement should not warrant automatic denial of membership because a qualification may not always be material. In addition, the event that triggered a qualification may have been corrected by the applicant or member by the time the applicant or member submits its financial statement for review by FICC. Going forward, FICC will analyze qualifications in GSD netting member financial statements on a case-by-case basis. Other conforming and nonsubstantive changes are being made within the rules to accommodate this restructuring and to update crossreferences where applicable. E:\FR\FM\08AUN1.SGM 08AUN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 72, Number 152 (Wednesday, August 8, 2007)]
[Notices]
[Pages 44596-44599]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-15434]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56185; File No. SR-BSE-2007-39]


Self-Regulatory Organizations; Boston Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Clarify How the BOX Trading Host Systematically Filters All Orders 
Against the National Best Bid and Offer

August 2, 2007.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 30, 2007, the Boston Stock Exchange, Inc. (``Exchange'' or 
``BSE'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been substantially prepared by the Exchange. 
The Exchange has designated the proposed rule change as a non-
controversial rule change pursuant to section 19(b)(3)(A)(iii) of the 
Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ which renders the proposed 
rule change effective upon filing with the Commission. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
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    \30\ 17 CFR 200.30-3(a)(12).
    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend the rules of the Boston Options 
Exchange (``BOX'') to clarify how the BOX Trading Host systematically 
filters all orders against the National Best Bid and Offer (``NBBO'') 
to ensure that a trade-through to the detriment of the inbound order 
does not occur, and that the customer's interests are protected by 
making sure that any execution of its order on BOX is at a price at 
least as good as the best price available on any of the other options 
exchanges. The proposed rule filing also seeks to clarify how BOX 
currently processes such orders when the NBBO is either locked or 
crossed. The text of the proposed rule change is set forth below; new 
text is in italics and deleted text is in brackets.

RULES OF THE BOSTON OPTIONS EXCHANGE FACILITY

Chapter V
Sec. 16 Execution and Price/Time Priority
    (a)--No change.
    (b) Filtering of BOX In-Bound Orders [to Prevent Trade-Throughs].
    i. With the exception of Improvement Orders and Primary Improvement 
Orders submitted during a PIP (which are processed in accordance with 
section 18 of this Chapter V) and Directed Orders (which are processed 
in accordance with section 5, subsections b and c, of Chapter VI) 
[A]all inbound orders to BOX (whether on behalf of Customers, non-BOX 
Participant broker-dealer proprietary accounts or market makers at 
other exchanges) as well as inbound Principal (``P'') and Principal as 
Agent (``P/A'') (see Chapter XII, ``Intermarket Linkage Rules'', 
herein) orders received via InterMarket Linkage will be filtered by the 
Trading Host prior to entry on the BOX Book to ensure that these orders 
will not [execute at price outside the current NBBO (``trade-
throughs'').]:
    1) in the case of a sell order, execute at a price below the NBBO 
bid price

-or-

    2) in the case of a buy order, execute at a price above the NBBO 
offer price.
    All of the filtering rules described in this section are 
independent of whether the NBBO is locked or crossed or not, except 
where the BOX best price on the same side of the market as the inbound 
order has crossed, or is crossed by, the opposite side NBBO, the order 
will be routed, if eligible, or rejected immediately.
    ii.-iv.--No change.

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.

[[Page 44597]]

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

1. Purpose
    The purpose of the proposed rule change is to amend the BOX Rules 
to describe how the BOX Trading Host systematically filters all orders 
against the NBBO to ensure that a trade-through to the detriment of the 
inbound order does not occur. The proposal also describes how 
customers' interests are protected by making sure that any execution of 
his order on BOX is at a price at least as good as the best price 
available on any of the other options exchanges.
    BOX's responsibility to the inbound customer or broker-dealer order 
is to ensure that its execution is at the best price available across 
all markets at that moment. Presently, BOX processes trades 
irrespective of whether the NBBO is locked, crossed, or ``normal.'' As 
a result of this practice, there is the potential to cause a trade-
through. The purpose of this rule filing is to amend the BOX rules to 
recognize that only the price on the side of the NBBO opposite to the 
inbound order needs to be taken into account when filtering inbound 
orders, regardless of whether the NBBO is locked, crossed, or 
``normal,'' and regardless of whether BOX is presently part of the NBBO 
on the opposite side from the order. The Exchange has obtained 
exemptive relief for any trade-throughs that occur as a result of this 
practice.\5\
---------------------------------------------------------------------------

    \5\ See letter from Elizabeth K. King, Associate Director, 
Division of Market Regulation, Commission, to John Katovich, Chief 
Legal Officer, Exchange, dated July 30, 2007. See also letter from 
John Katovich, Chief Legal Officer, Exchange, to Nancy M. Morris, 
Secretary, Commission, dated July 30, 2007.
---------------------------------------------------------------------------

    The following examples illustrate BOX's proposed processing of NBBO 
filtering:
    Example 1:

------------------------------------------------------------------------
                                          Bid                Offer
------------------------------------------------------------------------
BOX.............................  10 @ 2.00..........  20 @ 2.10
NBBO............................   2.00..............  2.10
      BOX Trading Host receives an order to sell 10 ``at market.''
               Inbound sell order executed at 2.00 on BOX.
------------------------------------------------------------------------

    Example 2:
---------------------------------------------------------------------------

    \6\ Exposure time will be set according to the NBBO Exposure 
time period as referenced in the BOX Rules. See BOX Rules, Chapter 
V, Section 16(b)(iii).

------------------------------------------------------------------------
                                          Bid                Offer
------------------------------------------------------------------------
BOX.............................  10 @ 2.00..........  20 @ 2.10
NBBO............................  2.00...............  2.10
      BOX Trading Host receives an order to sell 20 ``at market.''
Inbound sell order executed for 10 at 2.00 on BOX. The remaining ten are
 exposed \6\ internally at 2.00 and, if not executed, will be routed to
    the exchange disseminating the best price or rejected to sender.
------------------------------------------------------------------------

    Example 3:

------------------------------------------------------------------------
                                          Bid                Offer
------------------------------------------------------------------------
BOX.............................  10 @ 2.00..........  20 @ 2.10
NBBO............................  2.05...............  2.10
      BOX Trading Host receives an order to sell 10 ``at market.''
    Inbound sell order exposed internally at 2.05 on BOX; and if not
executed, will be routed to the exchange disseminating the best price or
                           rejected to sender.
------------------------------------------------------------------------

    Example 4:

------------------------------------------------------------------------
                                          Bid                Offer
------------------------------------------------------------------------
BOX.............................  10 @ 2.00..........  20 @ 2.10
NBBO............................  2.00...............  2.00
      BOX Trading Host receives an order to sell 10 ``at market.''
   Inbound sell order executed at 2.00 on BOX since this is best price
                   available nationally for a seller.
------------------------------------------------------------------------

    Example 5:

------------------------------------------------------------------------
                                          Bid                Offer
------------------------------------------------------------------------
BOX.............................  10 @ 2.00..........  20 @ 2.10
NBBO............................  2.05...............  2.05
      BOX Trading Host receives an order to sell 10 ``at market.''
    Inbound sell order exposed internally at 2.05 on BOX; and if not
executed, will be routed to the exchange disseminating the best price or
                           rejected to sender.
------------------------------------------------------------------------

    Example 6:

------------------------------------------------------------------------
                                          Bid                Offer
------------------------------------------------------------------------
BOX.............................  10 @ 2.00..........  20 @ 2.10
NBBO............................  2.00...............  1.95
      BOX Trading Host receives an order to sell 10 ``at market.''
   Inbound sell order executed at 2.00 on BOX since this is best price
                   available nationally for a seller.
------------------------------------------------------------------------

    Example 7:

------------------------------------------------------------------------
                                          Bid                Offer
------------------------------------------------------------------------
BOX.............................  10 @ 2.00..........  20 @ 2.10
NBBO............................  2.00...............  1.95
      BOX Trading Host receives an order to sell 20 ``at market.''
  Inbound sell order executed for 10 at 2.00 on BOX since this is best
  price available nationally for a seller. The remaining 10 are exposed
 internally at 2.00, and if not executed, will be routed to the exchange
           disseminating the best price or rejected to sender.
------------------------------------------------------------------------

    Example 8:

------------------------------------------------------------------------
                                          Bid                Offer
------------------------------------------------------------------------
BOX.............................  10 @ 2.00..........  20 @ 2.10
NBBO............................  2.05...............  1.95
      BOX Trading Host receives an order to sell 10 ``at market.''
 Inbound sell order exposed internally at 2.05 on BOX; if not executed,
 will be routed to the exchange disseminating the best price or rejected
                               to sender.
------------------------------------------------------------------------

    In the following example (Example 9), the BOX best price on the 
same side of the market as the inbound order is crossed by the opposite 
side NBBO. In this particular case, it is impractical to expose the 
inbound executable order at the opposite NBBO as in the previous 
examples since BOX is already showing a better offer (of 2.10 versus 
the NBBO exposure price of 2.15) with which nobody has traded.
    In this unique circumstance (where the same side BBO on BOX is 
crossed by the opposite side NBBO), BOX will immediately route the 
order to the exchange disseminating the best price, if possible, or 
reject the order back to the sender.
    Example 9:

------------------------------------------------------------------------
                                          Bid                Offer
------------------------------------------------------------------------
BOX.............................  10 @ 2.00..........  20 @ 2.10
NBBO............................  2.15...............  2.05
      BOX Trading Host receives an order to sell 10 ``at market.''
 Inbound sell order routed immediately to the exchange disseminating the
             best price at 2.15 or rejected back to sender.
------------------------------------------------------------------------

    As illustrated by the above examples, the BOX NBBO filtering 
process ensures that a sell order is never executed on BOX at a price 
inferior to the best bid available at the other options exchanges; 
similarly, any order to buy an option would not be executed on BOX at 
price worse than the best offer available elsewhere at that moment. BOX 
believes that in the case of a crossed NBBO, it is in the inbound 
customer order's interest to execute at the best price on the opposite 
side of the NBBO on BOX, where possible, as this is much quicker than 
routing to an away exchange.
    In connection with proposed rule change, the Exchange has 
respectfully

[[Page 44598]]

requested an exemption, pursuant to Rule 608(e) of Regulation NMS, from 
the requirement of Rule 608(c) of Regulation NMS that the Exchange 
comply with and enforce compliance by its members with the requirements 
of Section 8(c) of the Plan for the Purpose of Creating and Operating 
an Intermarket Options Linkage (``the Plan'') in the limited 
circumstance where a trade-through occurs due to an execution when the 
NBBO is crossed by the disseminated market of another options exchange, 
or BOX's disseminated market crosses the NBBO, and BOX's price \7\ on 
the opposite side of the market for the incoming order establishes, or 
is equal to, the NBBO. To the same extent and subject to the same 
limitations, the Exchange has requested exemptive relief from the 
requirement in Rule 608(c) of Regulation NMS that the Exchange comply 
with section 4(b) of the Plan by enforcing compliance by its members 
with the provisions of section 8(c) of the Plan. The Commission has 
granted the requested exemption.\8\
---------------------------------------------------------------------------

    \7\ BOX's price could be either BOX's disseminated price or it 
could be a Participant response to the exposure of the incoming 
order pursuant to Chapter V, Section 16(b) of BOX Rules. Therefore, 
an incoming order during a crossed market must execute at a price 
equal to the NBBO on the opposite side of the incoming order.
    \8\ See supra note 5.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Act \9\ in general, and Section 
6(b)(5) of the Act \10\ in particular, in that it is designed to 
promote just and equitable principles of trade, to perfect the 
mechanism of a free and open market and the national market system, and 
to protect investors and the public interest by clarifying how the BOX 
Trading Host systematically filters all orders against the NBBO to 
ensure that a trade-through to the detriment of the inbound order does 
not occur.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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

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

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The Exchange has designated the proposed rule change as one that: 
(1) Does not significantly affect the protection of investors or the 
public interest; (2) does not impose any significant burden on 
competition; and (3) does not become operative for 30 days from the 
date of filing, or such shorter time as the Commission may designate if 
consistent with the protection of investors and the public interest. 
Therefore, the foregoing rule change has become effective pursuant to 
section 19(b)(3)(A) of the Act \11\ and subparagraph (f)(6) of Rule 
19b-4 thereunder.\12\ The Exchange has asked the Commission to waive 
the operative delay to permit the proposed rule change to become 
operative prior to the 30th day after filing so that the Exchange can 
clarify the conditions under which BOX provides automatic executions 
during times of crossed markets, thus allowing the maximum potential 
number of orders to be handled electronically on the Exchange.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change at least five 
business before doing so.
---------------------------------------------------------------------------

    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public 
interest.\13\ Waiving the delay will allow the Exchange's 
clarifications of the operation of the BOX Trading Host's filtering of 
orders against the NBBO to become operative immediately. Waiving the 
delay will also allow the proposal to become operative simultaneously 
with the trade-through exemption granted to the Exchange as of July 30, 
2007,\14\ the date the proposed rule change was filed. Therefore, the 
Commission designates the proposal operative upon filing.
---------------------------------------------------------------------------

    \13\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \14\ See supra note 5.
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate the rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml ); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File No. SR-BSE-2007-39 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-BSE-2007-39. 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 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, 100 F Street, NE., Washington, DC 
20549, on official business days between the hours of 10 a.m. and 3 
p.m. 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 File Number SR-BSE-2007-39 and should be submitted on 
or before August 29, 2007.


[[Page 44599]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
---------------------------------------------------------------------------

    \15\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-15434 Filed 8-7-07; 8:45 am]
BILLING CODE 8010-01-P

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