Self-Regulatory Organizations; Boston Stock Exchange, Inc.; Notice of Filing of Amendment No. 3 to the Proposed Rule Change and Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Amendments No. 1 and 3 Thereto, To Adopt a Universal Price Improvement Period for Public Customer Orders, 4028-4035 [E8-1037]
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Federal Register / Vol. 73, No. 15 / Wednesday, January 23, 2008 / Notices
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The Amex 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. In addition, as required under
Rule 19b–4(f)(6)(iii),10 the Amex
provided the Commission with written
notice of its intention to file the
proposed rule change, along with a brief
description of the text of the proposed
rule change, at least five business days
prior to filing the proposal with the
Commission. Therefore, the proposed
rule change has become effective
pursuant to Section 19(b)(3)(A) of the
Act 11 and Rule 19b–4(f)(6)
thereunder.12
The Amex has requested that the
Commission waive the 30-day operative
delay for competitive reasons. The
Commission hereby grants the Amex’s
request.13 AOOs and AOQs are
substantially similar to order types that
have been established on other
exchanges.14 The Amex’s proposal does
not appear to raise any novel regulatory
issues. Therefore, the Commission
believes that waiving the 30-day
operative delay is consistent with the
protection of investors and the public
interest.
At any time within 60 days of the
filing of the proposed rule change, the
Commission may summarily abrogate
such 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.
10 17
CFR 240.19b–4(f)(6)(iii).
U.S.C. 78s(b)(3)(A).
12 17 CFR 240.19b–4(f)(6).
13 For purposes of waiving the 30-day operative
delay, the Commission has considered the
proposal’s impact on efficiency, competition, and
capital formation. See 15 U.S.C. 78c(f).
14 See note 7, supra. See also Philadelphia Stock
Exchange Rule 185(b)(1)(D) (providing for Limit
Orders and Reserve Orders with Do Not Route
instructions).
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11 15
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Comments may be submitted by any of
the following methods:
SECURITIES AND EXCHANGE
COMMISSION
Electronic Comments
[Release No. 34–57157; File No. SR–BSE–
2006–16]
• 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–Amex–2008–03 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–Amex–2008–03. 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 Amex. 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 publicly available. All
submissions should refer to File
Number SR–Amex–2008–03 and should
be submitted on or before February 13,
2008.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.15
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8–1054 Filed 1–22–08; 8:45 am]
BILLING CODE 8011–01–P
15 17
PO 00000
CFR 200.30–3(a)(12).
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Self-Regulatory Organizations; Boston
Stock Exchange, Inc.; Notice of Filing
of Amendment No. 3 to the Proposed
Rule Change and Order Granting
Accelerated Approval of Proposed
Rule Change, as Modified by
Amendments No. 1 and 3 Thereto, To
Adopt a Universal Price Improvement
Period for Public Customer Orders
January 15, 2008.
I. Introduction
On December 11, 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 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposal to amend the
rules of the Boston Options Exchange
(‘‘BOX’’) to adopt a Universal Price
Improvement Period (‘‘UPIP’’), an
auction that offers the opportunity for
price improvement for eligible Public
Customer orders. On February 1, 2007,
BSE filed Amendment No. 1 to the
proposed rule change. The proposed
rule change, as amended, was published
for comment in the Federal Register on
February 9, 2007.3 The Commission
received three comment letters
regarding the proposal.4 BSE filed
Amendment No. 2 to the proposed rule
change and a response to the comment
letters on November 19, 2007.5 On
December 13, 2007, BSE withdrew
Amendment No. 2 and filed
Amendment No. 3 to the proposed rule
change. The Commission is publishing
this notice to solicit comments on the
proposed rule change, as amended, from
interested persons and is
simultaneously approving the proposed
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 55230
(February 2, 2007), 72 FR 6302 (‘‘Notice’’).
4 See letter from Michael T. Bickford, Senior Vice
President, American Stock Exchange LLC
(‘‘Amex’’), to Nancy M. Morris, Secretary,
Commission, dated March 2, 2007 (‘‘Amex Letter’’);
letter from Michael J. Simon, Secretary,
International Securities Exchange, LLC (‘‘ISE’’), to
Nancy M. Morris, Secretary, Commission, dated
March 5, 2007 (‘‘ISE Letter’’); and letter from
Matthew B. Hinerfeld, Managing Director and
Deputy General Counsel, Citadel Investment Group,
L.L.C. (‘‘Citadel’’), to Nancy Morris, Secretary,
Commission, dated March 6, 2007 (‘‘Citadel
Letter’’).
5 See letter to Nancy M. Morris, Secretary,
Commission, from John Katovich, Chief Legal
Officer, BSE, dated November 19, 2007 (‘‘BSE
Letter’’).
2 17
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Federal Register / Vol. 73, No. 15 / Wednesday, January 23, 2008 / Notices
rule change, as modified by
Amendments No. 1 and 3, on an
accelerated basis.
II. Description of the Proposal
A. UPIP Eligibility
BOX will automatically initiate a
UPIP auction for Public Customer
orders 6 (‘‘Eligible Orders’’) provided
certain conditions have been satisfied.7
For example, the Eligible Order must be
a Limit, Market, or BOX-Top Order that
is marketable against the National Best
Bid or Offer (‘‘NBBO’’).8 Further, a Price
Improvement Period (‘‘PIP’’) auction or
UPIP auction in the same series cannot
already be underway and, if the NBBO
is locked or crossed, the BOX Best Bid
or Offer (‘‘BBO’’) on the same side of the
market as the Eligible Order must not
equal the NBBO.
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B. The UPIP Auction
The UPIP will be three seconds or
less, as determined by BOX on a classby-class basis.9 BOX will inform
Options Participants as to the duration
of the UPIP auctions by publishing a
Regulatory Circular. Upon initiation of a
UPIP auction, the Box Trading Host will
transmit a broadcast message
(‘‘Broadcast Message’’) to Options
Participants informing them of the
auction’s initiation, the relevant details
of the UPIP Order 10 (i.e., the UPIP
Order’s series, size, and side of the
market), the end time of the auction,
and the applicable Start Price.11 The
6 ‘‘Public Customer’’ means a person that is not
a broker or dealer in securities. See Section 1(a)(50),
Chapter I of the BOX Rules.
7 See proposed Section 29(e), Chapter V of the
BOX Rules.
8 An Eligible Order also must be for a series of
options that is open for trading and cannot indicate
a minimum quantity condition or be an Inbound
Inter-Market Linkage P/A order. See proposed
Section 29(e)(v), Chapter V of the BOX Rules. In
Amendment No. 3, the Exchange clarified that a
‘‘Fill and Kill’’ order is not included in the
definition of an Eligible Order. See proposed
Section 29(e)(vi), Chapter V of the BOX Rules.
9 The Exchange clarified in Amendment No. 3
that the UPIP auction shall be permitted on a classby-class basis. See proposed Section 29(f), Chapter
V of the BOX Rules. Amendment No. 3 also amends
proposed Section 29(g), Chapter V of the BOX Rules
to provide that if a UPIP Order was previously
processed as a Directed Order accompanied by a
Guaranteed Directed Order (‘‘GDO’’) pursuant to
Chapter VI, Section 5(c)(iii)(2) of BOX Rules, the
duration of the UPIP will not be less than the time
the GDO is required to be withheld from trading
with the Directed Order as provided in Chapter VI,
Section 5(c)(iii)(2)(b)(4) of the BOX Rules. See
proposed Section 29(g), Chapter V of the BOX
Rules.
10 Upon commencement of the UPIP auction the
‘‘Eligible Order’’ is referred to as the ‘‘UPIP Order.’’
11 The Start Price is defined as the minimum/
maximum (buy/sell) price at which an
Improvement Order must be submitted. See
proposed Section 29(h), Chapter V of the BOX
Rules.
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15:17 Jan 22, 2008
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Start Price will be one improvement
increment (e.g., a penny) better than the
NBBO if the BBO is equal to the NBBO.
If the BBO does not equal the NBBO, the
Start Price will be the NBBO. The same
conditions apply with respect to the
Start Price whether or not the NBBO is
locked or crossed.
UPIP Orders can be modified and
cancelled at any time prior to the
conclusion of the UPIP auction. The
cancellation of a UPIP Order will result
in the subsequent cancellation of all
related Improvement Orders and the
UPIP auction.12 Certain modifications of
a UPIP Order will not result in the
termination of the UPIP auction.13
The UPIP Order will be ‘‘stopped’’
against any quote(s) or order(s) on the
BOX Book that is marketable against the
UPIP Order at the time the UPIP Order
is received by the Trading Host (‘‘Initial
BOX Book Quote’’) up to the aggregate
size of the Initial Box Book Quote
(‘‘Initial Aggregate Quote Size’’).14
A modification or cancellation of the
Initial BOX Book Quote during the UPIP
auction that would decrease the Initial
Aggregate Quote Size below the size of
the UPIP Order, at the commencement
of the UPIP auction, will cause the UPIP
auction to immediately terminate. Such
modification or cancellation will only
be processed after the UPIP Order has
been executed. An Options Participant
who is part of the Initial Box Book
Quote, and whose cancellation or
modification of its order or quote causes
the UPIP auction to terminate, will have
its order or quote placed at the end of
the quote and order queue at the
applicable price level on the BOX Book.
Any modification or cancellation of the
Initial BOX Book Quote that does not
cause the Initial Aggregate Quote Size to
decrease below the size of the UPIP
Order, however, will be processed
immediately by the Trading Host
without penalty and the UPIP auction
will continue.15
12 In Amendment No. 3, the Exchange clarified
that the cancellation of a UPIP Order will result in
the cancellation of the related Improvement Orders
and the UPIP auction itself.
13 Such modifications are: The reduction of a
UPIP Order quantity; the recharacterization of the
UPIP Order type from a Limit Order to a BOX Top
or Market Order; and an improvement of the UPIP
Order’s original limit price. Any other modification
will result in the termination of the UPIP auction.
See proposed Section 29(n), Chapter V of the BOX
Rules.
14 The Initial BOX Book Quote is defined as the
quote(s) and/or order(s) on the BOX Book at the best
price, on the opposite side, and in the same series
as the Eligible Order at the time the Trading Host
receives it. The Initial Aggregate Quote Size is
defined as the aggregate size of the Initial BOX Book
Quote. See proposed Section 29(o), Chapter V of the
BOX Rules.
15 Any orders or quotes on the opposite side of
the UPIP Order that are received by the BOX Book
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4029
C. Improvement Orders
Any Options Participant may submit
an Improvement Order in response to a
Broadcast Message for an impending
UPIP auction.16 Improvement Orders
will be visible to all Options
Participants, can be submitted in
increments of one cent, and must equal
or improve the Start Price. Improvement
Orders may be cancelled or modified by
the Options Participant prior to the
conclusion of the UPIP auction. An
increase in the quantity of the
Improvement Order or modification of
the Improvement Order’s limit price
will result in the creation of a new
Improvement Order reflecting the
revised terms and the cancellation of the
original Improvement Order. At the
conclusion of a UPIP auction, the
unexecuted portion of an Improvement
Order will be cancelled by the Trading
Host.17
1. Proprietary Improvement Orders
An Options Participant who submits
an Eligible Order to BOX, which order
starts a UPIP, and subsequently submits
a Proprietary Improvement Order will
be last in time priority at all price levels
in the relevant UPIP auction. However,
if the Proprietary Improvement Order is
generated by an automated quotation
system that operates independently
from the existence or non-existence of
the pending Eligible Order prior to its
submission to BOX, the Options
Participant’s Proprietary Improvement
Order will be treated like an ordinary
Improvement Order and qualify for
execution at each price level without
prejudice.18
UPIP will default any Proprietary
Improvement Order to the end of the
priority queue in the UPIP.19 If an
Options Participant desires to have its
status in the queue changed and be
exempted from the rule, then the
Options Participant would need to
affirmatively identify its orders from an
automated quotation system as the
Exchange deems necessary.20
after the UPIP auction has commenced (i.e., orders
that are not otherwise part of the Initial BOX Book
Quote) may be cancelled or modified without
causing the UPIP auction to terminate. See
proposed Section 29(o), Chapter V of the BOX
Rules.
16 Improvement Orders are those orders
submitted to a UPIP auction in response to a
Broadcast Message by Options Participants that are
on the opposite side of the market as the UPIP
Order. See proposed Section 29(j), Chapter V of the
BOX Rules.
17 See Amendment No. 3.
18 See proposed Section 29(k), Chapter V of the
BOX Rules.
19 See BSE Letter, supra note 5, at 7.
20 Id.
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Federal Register / Vol. 73, No. 15 / Wednesday, January 23, 2008 / Notices
2. Executing Participant Improvement
Orders
An Executing Participant is a Market
Maker that systemically indicates its
willingness to accept and receive
Directed Orders.21 An Executing
Participant that receives a Directed
Order that is released to the BOX Book
will be last in priority at all price levels
for any Improvement Order or quote
submitted to a subsequent UPIP auction
related to that Directed Order.22 Time
priority will prevail between a
Proprietary Improvement Order and an
Improvement Order submitted by an
Executing Participant.23
In Amendment No. 3, BSE addressed
the instance in which a Directed Order
with an attached GDO has been entered
into the UPIP auction and the UPIP
auction is prematurely terminated
because of a modification to or
cancellation of an order or quote that is
a component of the Initial BOX Book
Quote or the receipt of a same side,
executable order. When a UPIP auction
is prematurely terminated in such
circumstances, subsequent to the
execution of the UPIP Order pursuant to
Chapter V, section 29(p) of the BOX
Rules, the GDO will be permitted to
immediately execute directly against the
remaining size of the UPIP Order.24 This
means that a GDO will be permitted to
execute against the remaining size of the
UPIP Order prior to three seconds
having elapsed, but only if there is no
other interest on BOX at the same (or
better) price as the GDO.25 It will be
considered conduct inconsistent with
just and equitable principles of trade for
an Executing Participant to directly or
indirectly enter, modify or cancel quotes
or orders on BOX for the purpose of
disrupting, prematurely terminating or
manipulating any Improvement
Auction, including a UPIP auction.26
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3. Customer Price Improvement Orders
(‘‘CPOs’’)
Similar to the CPO in the PIP, OFPs
may provide Public Customers with
access to the UPIP auction through a
CPO, provided certain conditions have
21 See Section 5(c)(i), Chapter VI of the BOX
Rules.
22 See proposed Section 29(l), Chapter V of the
BOX Rules.
23 See Amendment No. 3 and proposed Sections
29(o)(i) and 29(s)(ii) of the Box Rules.
24 See proposed Section 5(c)(iii)(2)(b)(4), Chapter
VI of the BOX Rules and Amendment No. 3.
25 See telephone conference among William
Easley, Vice Chairman, BOX; Lisa Fall, General
Counsel, BOX; Wayne Pestone, Bingham
McCutchen LLP; and Heather Seidel, Assistant
Director, Division of Trading and Markets
(‘‘Division’’), Commission, on January 11, 2008.
26 See proposed Section 5(c)(iii)(2)(b)(4), Chapter
VI of the BOX Rules and Amendment No. 3.
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15:17 Jan 22, 2008
Jkt 214001
been met. The CPO must indicate the
price at which the order will be placed
in the BOX Book (‘‘BOX Book Reference
Price’’) as well as the price at which the
Public Customer would like to
participate in any UPIP that may occur
while the order is on the BOX Book
(‘‘CPO Auction Reference Price’’).27
Further, the terms of the CPO shall
include the size of the order. In order for
the CPO to be eligible for participation
in a UPIP auction, the BOX Book
Reference Price must equal the BBO at
the commencement of a UPIP auction.28
The CPO may also benefit from
enhanced time priority pursuant to
NBBO Prime.
4. NBBO Prime
An Improvement Order or multiple
Improvement Orders may be designated
as NBBO Prime (‘‘NBBO Prime Order’’)
in a particular UPIP auction. The NBBO
Prime designation is only applicable for
a UPIP auction, not the PIP, and
generally confers time priority to a
particular Improvement Order over
other Improvement Orders and
Unrelated Orders with the same price.29
Any Improvement Order may be eligible
for the NBBO Prime designation in a
UPIP auction.
In order to be designated as NBBO
Prime, the same beneficial account 30 for
whom the Options Participant is
submitting the NBBO Prime Order must
have quotes or orders on the BOX Book
that are on the opposite side of the UPIP
Order (‘‘NBBO Prime Participant
Quote’’). The NBBO Prime Participant
Quote must be equal to the NBBO and
must have been on the BOX Book prior
to the time the Eligible Order was
presented to the Trading Host. An
NBBO Prime Order will only have
enhanced time priority for size of its
NBBO Prime Participant Quote. Any
residual quantity of the NBBO Prime
Order will be handled in accordance
with the normal time priority rules.
Priority among NBBO Prime Orders at
the same price will be based on the
relevant Trading Host order receipt time
stamp of each NBBO Prime Participant
Quote. NBBO Prime Orders retain their
27 The BOX Book reference price must be stated
in standard five-cent or ten-cent increments, and
the CPO Auction Reference Price must be stated in
one-cent increments. See proposed Section 29(m)(i),
Chapter V of the BOX Rules.
28 A CPO must be in the same series and on
opposite side of the UPIP Order. See proposed
Section 29(m)(iii), (iv), Chapter V of the BOX Rules.
29 See proposed Section 30, Chapter V of the BOX
Rules.
30 For purposes of NBBO Prime, a ‘‘beneficial
account’’ means the underlying type of account
(e.g., customer, broker-dealer, market maker, etc.)
on whose behalf the Participant is trading. See
Notice, supra note 3, at note 14.
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priority even if the NBBO Prime
Participant’s Quote is subsequently
modified or cancelled during the
relevant UPIP auction.
An Options Participant seeking
priority through the NBBO Prime
designation must indicate to the Trading
Host the order number of the NBBO
Prime Participant Quote when the
Options Participant submits the
Improvement Order for the same
beneficial account. In addition, the
Options Participant may indicate
whether the NBBO Prime Participant
Quote size should be decremented to
reflect any execution of the NBBO Prime
Order. In the absence of such an
indication, the Trading Host will not
decrement the NBBO Prime Participant
Quote. Market Makers will not be
required to identify their relevant order
number but will need to indicate to the
Trading Host that their applicable
NBBO Prime Participation Quote size
should be decremented; otherwise their
NBBO Prime Participation Quote size
will remain unchanged on the BOX
Book.31
D. Execution in the UPIP
At the conclusion of the UPIP auction,
including in the event of a premature
termination, the UPIP Order will be
matched against the best prevailing
orders (including Improvement Orders,
CPOs, and Unrelated Orders) and quotes
(including the Initial Box Book Quote)
submitted during the UPIP auction that
are equal to or better than the Start
Price, in accordance with the price/time
algorithm in section 16(a) of Chapter V,
with the following exceptions to time
priority: (1) As provided in proposed
paragraphs (k), (l), and (o) of section 29,
Chapter V, regarding Proprietary
Improvement Orders and Improvement
Orders submitted by Executing
Participants; 32 and (2) as provided in
proposed paragraphs (b) to (d) of section
30, Chapter V, regarding NBBO Prime
Orders.33 Further, in no circumstances
will an order for a non-market maker
broker-dealer account of an Options
Participant be executed ahead of a
Public Customer order(s) or a non-BOX
Options Participant broker-dealer
order(s) at the same price within the
UPIP auction. This means that no order
for the account of a non-market maker
Options Participant will be executed
31 See proposed Section 29(j)(iv), Chapter V of the
BOX Rules.
32 See supra notes 18 through 23 and
accompanying text.
33 See proposed Section 29(p), Chapter V of the
BOX Rules. See also Amendment No. 3, which
clarifies these exceptions in proposed Section 29(p),
Chapter V, the substance of which were discussed
in the Notice, supra note 3.
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Federal Register / Vol. 73, No. 15 / Wednesday, January 23, 2008 / Notices
ahead of the order(s) of any Public
Customers or non-members of BOX.34
At the conclusion of the UPIP auction,
the UPIP Order will be filtered to
prevent a trade-through of the NBBO at
the conclusion of the auction and will
not execute against orders or quotes at
prices inferior to the NBBO except in
the following circumstances: (1) In
accordance with Chapter XII, section
3(e) of BOX Rules; 35 or (2) the away
options exchange posting the NBBO is
conducting a trading rotation in that
options class.36 If the UPIP Order cannot
be executed on BOX at or better than the
NBBO, it will be routed to another
market center(s) posting the NBBO.
Any unexecuted portion of the UPIP
Order not executed in the UPIP auction
will be released to the Box Book and
handled as provided in section 16,
Chapter V of the BOX Rules, except that
a quote or order on the BOX Book that
is for the same beneficial account as an
Improvement Order that executed
against the UPIP Order in the UPIP
auction and that was on the BOX Book
before the UPIP Order was received by
BOX will have time priority over other
quotes and orders on the BOX Book
(except customer orders).37
ebenthall on PROD1PC69 with NOTICES
E. Treatment of Unrelated Orders in the
UPIP
Unrelated Orders that are submitted
to the Trading Host during a UPIP
auction that are on the opposite side of
the market from a UPIP Order and are
executable against the NBBO will be
executed immediately against the UPIP
Order at the mid-point of the (i) NBBO
and (ii) the best of the UPIP
Improvement Order, the UPIP Start
Price or the NBBO.38 If the Unrelated
Order on the opposite side of the market
as the UPIP Order has a quantity equal
to or greater than the UPIP Order, the
34 See proposed Section 29(p), Chapter V of the
BOX Rules and Amendment No. 3.
35 Chapter XII, Section 3(e) of the BOX Rules
states that ‘‘[u]nder circumstances where the
Options Official determines that quotes from one or
more particular away markets in one or more
classes of options are not reliable, the Options
Official may direct the Market Operations Center
(‘MOC’) to exclude the unreliable quotes from the
determination of the NBBO in the particular
class(es).’’
36 The original filing provided that only the
quantity of the UPIP Order that exceeded the Initial
Aggregate Quote Size was filtered at the conclusion
of the UPIP auction. The Exchange modified the
rule text in Amendment No. 3 to apply the NBBO
trade-through filter to the entire size of the UPIP
Order.
37 See proposed Section 16(a)(iv), Chapter V of
the BOX Rules. In Amendment No. 3, BSE clarified
that such order on the BOX Book will receive only
time priority. See Amendment No. 3.
38 See proposed Section 29(s)(i), Chapter V of the
BOX Rules. Any rounding required will be to the
benefit of the Unrelated Order. Id.
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15:17 Jan 22, 2008
Jkt 214001
UPIP auction will terminate. Otherwise,
the immediate execution of the
Unrelated Order against the UPIP Order
will not cause the termination of the
UPIP auction and the auction will
continue. Conversely, an Unrelated
Order that is on the same side of the
market as the UPIP Order that is
executable against the NBBO will cause
the UPIP to immediately terminate and
the UPIP Order will be executed
pursuant to proposed section 29(p) of
Chapter V of the BOX Rules.39
In Amendment No. 3, BSE amended
paragraph (s) of section 29, Chapter V of
the BOX Rules to emphasize that it will
be considered conduct inconsistent with
just and equitable principles of trade for
any Options Participant to enter
Unrelated Orders into BOX for the
purpose of disrupting or manipulating
any UPIP auction, including purposely
causing premature termination.40
III. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change, as amended, 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–2006–16 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 BSE–2006–16. 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
39 If the Unrelated Order is still UPIP eligible, a
new UPIP will commence. If the Unrelated Order
is no longer UPIP eligible, the order will go on the
BOX Book. See telephone conference among
William Easley, Vice Chairman, BOX; Lisa Fall,
General Counsel, BOX; and Heather Seidel,
Division, Commission, on December 21, 2007.
40 See Amendment No. 3.
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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 BSE. 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–2006–16 and should
be submitted on or before February 13,
2008.
IV. Discussion
After careful consideration of the
amended proposal and the comment
letters, the Commission finds that the
proposed rule change is consistent with
the requirements of the Act and the
rules and regulations thereunder
applicable to a national securities
exchange 41 and, in particular, the
requirements of section 6 of the Act.42
Specifically, the Commission finds that
the proposed rule change is consistent
with section 6(b)(5) of the Act,43 which
requires, among other things, that the
rules of a national securities exchange
be designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
Significant aspects of the proposal are
discussed below.
The Commission notes that the UPIP
is similar to BOX’s existing price
improvement auction, the PIP, and other
price improvement mechanisms, such
as the Price Improvement Mechanism
(‘‘PIM’’) of the ISE, that initiate auctions
in penny increments through which
exchange participants compete to
potentially price improve a customer
order. However, unlike the PIP, in the
UPIP customer orders do not depend on
41 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
42 15 U.S.C. 78f.
43 15 U.S.C. 78f(b)(5).
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the ability of at least one party to
guarantee price improvement for the full
size of the Customer Order.44
A. Price Competition
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One commenter believes that the
UPIP auction would encourage Market
Makers to post wide and shallow quotes
and discourage Market Makers from
quoting aggressively until the UPIP
auction begins because: (1) The most
desirable orders will bypass the
centralized auction; (2) after a UPIP
auction is completed, the centralized
auction will be exposed to UPIP
‘‘rejects;’’ and (3) the UPIP Order can be
cancelled or modified but orders on the
top of the BOX Book when the auction
starts cannot.45 This commenter also
believes that transparency will suffer
because market participants will hide
their true trading interest until a UPIP
auction begins.46
Another commenter believes that the
ability of a Participant to modify or
cancel a UPIP Order, while the quotes
and orders on the top of the BOX Book
will essentially be frozen, will provide
a three-second option or ‘‘second-look’’
opportunity for the Participant that
submitted the UPIP Order to the
detriment of the quotes and orders at the
top of the book.47 The commenter
believes that this could severely limit
the amount of liquidity Market Makers
would be willing to provide on BOX.
This commenter further believes that
the dissemination of Improvement
Orders during the UPIP auction, which
allows the Participant that entered the
UPIP Order to monitor the amount of
price improvement being offered (if
any), compounds the ‘‘second look’’
problem.48 This commenter also
believes that this inability to cancel or
modify an order at the top of the BOX
Book raises customer protection issues,
and that customers and their brokers
should be made aware that cancelling or
modifying their orders on the BOX Book
44 The Commission notes that the Simple Auction
Liaison System of the Chicago Board Options
Exchange, Incorporated (‘‘CBOE’’), which provides
for the automatic initiation of an auction process in
certain circumstances for any order that is eligible
for automatic execution by the Hybrid System, also
does not depend on a contra-side order. See
Securities Exchange Act Release No. 54229 (July 27,
2006), 71 FR 44058 (August 3, 2006) (SR–CBOE–
2005–90).
45 See Citadel Letter, supra note 4, at 1 to 2 and
4.
46 Id. at 4.
47 See ISE Letter, supra note 4, at 1 to 2. See also
Citadel Letter, supra note 4, at 4 (stating that the
ability of the UPIP Order to cancel will give
investors a free option to cancel their orders based
on intervening market movements, while orders at
the top of the book are frozen).
48 See ISE Letter, supra note 4, at 2–3.
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may actually cause them to be executed
at an undesirable price.49
In response, BSE notes that in general
BOX Market Makers have several
meaningful incentives to consistently
quote at or establish the NBBO,
including: (1) An open and competing
market maker structure with no
specialist/designated primary market
maker and no regulatory limits to the
number of market makers appointed in
a given class; (2) low costs to enter the
market; (3) low transaction costs; (4)
price and time priority on the BOX
Book; and (5) anonymous trading on the
BOX Book.50 Further, BSE notes that the
UPIP rules allow certain Improvement
Order to be designated as NBBO Prime
Orders. An NBBO Prime designation
confers time priority in a UPIP auction
to a particular Improvement Order over
other Improvement Orders and
Unrelated Orders with the same price
upon satisfaction of certain conditions.
To be eligible to be designated NBBO
Prime, the same beneficial account for
whom the Options Participant is acting
and that is seeking the NBBO Prime
designation must have had a quote or
order on the BOX Book on the opposite
side of the UPIP Order equal to the
NBBO prior to receipt of the UPIP Order
by the Trading Host. BSE believes that
this requirement will encourage all
Options Participants to compete
aggressively to match or establish a new
NBBO. 51
The Commission does not believe
that, given the overall structure of BOX
and the NBBO Prime functionality, the
UPIP auction will discourage aggressive
quoting on BOX. The availability of the
NBBO Prime functionality is designed
to encourage market makers and other
market participants to aggressively post
quotes or limit orders on the BOX Book,
to be the first to match the NBBO, or to
establish a new NBBO, because those
participants will have time priority in
the UPIP auction. Further, because
NBBO Prime Orders only receive
enhanced time priority for the quantity
that does not exceed the size of the
related order that was on the BOX Book,
market participants may be incented to
post greater size in order to receive
priority on a larger allocation. Finally,
with regard to BSE’s proposal to allow
Public Customers to cancel UPIP
Orders, BSE states that, because the
UPIP does not guarantee price
improvement, the ability to cancel a
49 Id.
at 1 to 2.
BSE Letter, supra note 5, at 2.
51 Id. NBBO Prime is similar to the ‘‘Market
Maker Prime’’ (‘‘MMP’’) designation in a PIP
auction that is awarded to a Market Maker that is
first to establish a quote on BOX equal to the NBBO
or establish a new NBBO.
50 See
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UPIP Order is necessary to allow an
OFP to manage an order that has not
been executed and for which no trade
confirmation has been issued.52 The
Commission believes that the ability for
UPIP Orders to be cancelled is
consistent with the Act.
B. NBBO Prime Requirements
One commenter doubts the
technological feasibility of the NBBO
Prime functionality because firms
seeking NBBO Prime status will be
required to specify the number of their
order on the BOX Book that was first in
time priority at the top of the BOX
Book.53 BSE represents that the
requirement to provide the unique order
identifier to BOX for the appropriate
order on the BOX Book utilizes the same
technology that firms currently use to
cancel or modify orders on BOX and
that an OFP cannot be certified to trade
on BOX unless it can perform this
task.54 The Commission therefore does
not believe this requirement should
place an unreasonable burden on
Options Participants to be able to avail
themselves of the NBBO Prime
functionality.
C. ‘‘Freezing’’ Top of the Book Quotes
and Orders
As noted above, two commenters
expressed concerns about BSE’s
proposal to prohibit orders and quotes
at the top of the BOX Book at the
commencement of a UPIP auction to be
cancelled.55 In response, BSE stated that
‘‘freezing’’ certain quotes and orders on
the BOX Book at the start of a UPIP
auction is necessary to comply with the
Quote Rule,56 and disagrees that quotes
or orders on the BOX Book held firm in
this manner will be disadvantaged. BSE
believes such orders and quotes will be
treated as the entering participant
intends—i.e., executable at the limit
price when matched with a contra-side
order and cancellable only when there
is no pending execution.
Rule 602 under the Act requires a
responsible broker or dealer to execute
orders to buy or sell a security presented
to it by another broker or dealer, or any
other person belonging to a category of
persons with whom such responsible
broker or dealer customarily deals, at a
price at least as favorable to such buyer
or seller as the responsible broker’s or
dealer’s published bid or published
offer in any amount up to its published
52 See
BSE Letter, supra note 5, at 4.
Citadel Letter, supra note 4, at note 12.
54 See BSE Letter, supra note 5, at note 10.
55 See supra note 47 and accompanying text.
56 17 CFR 242.602.
53 See
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quotation size.57 Therefore, the
Commission agrees that the ‘‘stop’’
feature is necessary to ensure market
participants’ compliance with Rule 602
under the Act and believes that it is
consistent with the Act. The
Commission notes, however, that BOX
Participants should, as with any order
type or exchange functionality, take
steps necessary to ensure their
customers understand the operation of
the UPIP auction with respect to
incoming orders and orders resting on
the BOX Book.
D. Private Auctions
One commenter argues that, because
the broadcast message commencing a
UPIP auction and the responding
Improvement Orders will only be
accessible to BOX participants and will
not be publicly disseminated, only BOX
Participants will know the ‘‘true’’ BOX
market.58
Under the Commission’s Quote Rule,
an exchange is required to collect,
process, and make available to quotation
vendors the best bid, the best offer, and
aggregate quotation sizes for each
subject security listed or admitted to
unlisted trading privileges which is
communicated on any national
securities exchange by any responsible
broker or dealer.59 The Commission
believes that because the UPIP auction
is at most only 3 seconds in length, it
is analogous to the open outcry auctions
conducted on floor-based exchanges,
where auction prices are not widely
disseminated and are available only for
the order that initiated the auction and
other orders in the crowd at that
particular time.60 Accordingly, the
Commission finds the UPIP auction to
be consistent with the Quote Rule.
One commenter notes that unlike the
PIP, the proposed UPIP auction does not
require at least three market makers to
quote in an options series before a UPIP
may be initiated.61 The Commission
does not believe that the Act requires an
exchange to have market makers in an
auction. Although Market Makers could
be an important source of liquidity in
the UPIP auction, they likely will not be
the only source. Any Options
57 Id.
58 See
Citadel Letter, supra note 4, at 4.
CFR 242.602(a)(i).
60 See Securities Exchange Act Release Nos.
49068 (January 14, 2003), 68 FR 3062 (January 22,
2003) (Commission approval establishing trading
rules for BOX, including rules for the PIP); 49323
(February 26, 2004), 69 FR 10087 (March 3, 2004)
(Commission approval establishing rules for PIM);
and 53222 (February 3, 2006), 71 FR 7089 (February
10, 2006) (Commission approval establishing rules
for CBOE’s Automated Improvement Mechanism
(‘‘AIM’’)).
61 See ISE Letter, supra note 4, at 3.
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Participant can submit an Improvement
Order in a UPIP Auction, on its own
behalf or on behalf of a customer.
Further, the Auto Auction Order
(‘‘AAO’’) 62 and CPO are specifically
designed to allow customers to more
easily participate in an Improvement
Auction, including the UPIP. The
Commission therefore believes that the
proposal not to require minimum
market maker participation in the UPIP
is consistent with the Act.
Another commenter notes that the
proposal provides that the duration of
the UPIP will be 3 seconds or less as
determined by the Board on a case-bycase basis and questions whether a UPIP
duration of less than 3 seconds would
result in a meaningful auction.63 This
commenter also inquires how Options
Participants will be informed about the
exposure time of UPIP auctions if they
are reduced. The Commission believes
that BSE’s response that BOX will
inform Options Participants regarding
the duration of the UPIP auctions by
publishing a Regulatory Circular is
consistent with the Act.64 The
Commission also notes that the UPIP
auction is designed to provide an
opportunity for price improvement for
certain orders, without a guarantee to a
facilitating firm. Thus, the Commission
does not believe that the UPIP auction
raises the same potential conflict
concerns as an auction where there is a
guarantee from a facilitating firm. The
Commission therefore believes that the
duration of the UPIP auction, as
proposed, is consistent with the Act.
E. NBBO Protection
A commenter requested clarification
as to what would occur in a UPIP
auction if the BBO does not equal the
NBBO and there are no Improvement
Orders entered during the UPIP auction.
Specifically, this commenter asked if
the UPIP Order would be executed at
the NBBO, or if the UPIP Order would
be routed through the Options
Intermarket Linkage to a better away
market.65 This commenter further asked
at what price the UPIP Order is
executed if the NBBO changes during
the UPIP auction.66 Similarly, another
commenter noted that the UPIP Order
would not execute against a better price
if the NBBO changes during the UPIP
Auction.67
62 See Securities Exchange Act Release No. 56186
(August 2, 2007), 72 FR 44593 (August 8, 2007)
(approving the AAO functionality on BOX).
63 See Amex Letter, supra note 4, at 4.
64 See BSE Letter, supra note 5, at 6.
65 See Amex Letter, supra note 4, at 2.
66 Id.
67 See Citadel Letter, supra note 4, at 6.
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4033
BSE responded that the UPIP Order is
not guaranteed an execution at the
NBBO.68 At the conclusion of the UPIP
auction, the UPIP Order will be matched
against the best prevailing orders or
quotes, whether Improvement Orders,
Unrelated Orders, or the Initial BOX
Book Quote, that are equal to or better
than the Start Price, which is at least as
good a price as the NBBO at the
commencement of the auction.69 In
addition, at the conclusion of the UPIP
auction the entire UPIP Order will be
filtered to prevent BOX from executing
any portion of the UPIP Order at a price
inferior to the NBBO at the end of the
UPIP auction. If the UPIP Order cannot
be executed on BOX at or better than the
NBBO, then the UPIP Order will be
routed through Intermarket Linkage to
another market displaying the NBBO at
the conclusion of the UPIP auction.70
The Commission believes that BSE
adequately clarified this aspect of the
proposal, as amended, and that it is
consistent with the Act.
F. Compliance With the Act
1. Quote Rule
One commenter believes that the
ability to cancel Improvement Orders
during a UPIP auction is inconsistent
with the purpose and intent of BOX’s
firm quote rule. This commenter argues
that an Options Participant would have
a free look at the UPIP Order during the
auction and could withdraw its
Improvement Order if the market moved
unfavorably.71
The Commission’s Quote Rule
requires a responsible broker or dealer
to execute any order presented to it at
its published price and up to the full
amount of its published size.72 Because
no order would be presented to execute
against an Improvement Order until the
end of the UPIP auction, the
Commission believes that the ability to
cancel an Improvement Order prior to
the termination of the UPIP auction
does not violate the Quote Rule.
2. Section 11(a) of the Act
Section 11(a) of the Act prohibits a
member of a national securities
exchange from effecting transactions on
that exchange for its own account, the
account of an associated person, or an
account over which it or its associated
person exercises discretion, unless an
68 See
BSE Letter, supra note 5, at 5.
matching shall occur in compliance with
the priority provisions of proposed Chapter V,
Section 29(p) of the BOX Rules.
70 See BSE Letter, supra note 5, at 5 and Chapter
V, Section 29(q) of the BOX Rules.
71 See Amex Letter, supra note 4, at 3.
72 17 CFR 242.602(b)(2).
69 Such
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exception applies.73 Section 11(a)(1)(G)
and Rule 11a1–1(T) under the Act
provide an exception to the general
prohibition in section 11(a) on an
exchange member effecting transactions
for its own account. Specifically, a
member that ‘‘is primarily engaged in
the business of underwriting and
distributing securities by other persons,
selling securities to customer, and
acting as broker, or any one or more of
such activities, and whose gross income
normally is derived principally from
such business and related activities’’ 74
and effects a transaction in compliance
with the requirements in Rule 11a1–
1(T)(a) 75 may effect a transaction for its
own account. Among other things, Rule
11a1–1(T)(a)(3) requires that an
exchange member presenting a bid or
offer for its own account or the account
of another member shall grant priority
to any bid or offer at the same price for
the account of a non-member of the
exchange.76
BSE’s proposal provides that ‘‘no
order for a non-market maker brokerdealer account of an Options Participant
will be executed before Public Customer
order(s) and non-BOX Options
Participant broker-dealer order(s) at the
same price.’’ 77 Because BSE’s proposed
rules will require Options Participants
that are not Market Makers to yield
priority in the UPIP auction to all nonmember orders,78 the Commission
believes that the proposal is consistent
with the yielding requirements in
section 11(a)(1)(G) and Rule 11a1–1(T)
under the Act. However, the
Commission notes that, in addition to
yielding priority to non-member orders
at the same price, members also must
meet the other requirements under
section 11(a)(1)(G) and Rule 11a1–1(T)
to effect transactions for their own
accounts in reliance on this exception
(or satisfy the requirements of another
exception).
H. Interaction Among UPIP and PIP
One commenter asks for more clarity
on the interaction of the PIP, UPIP, and
directed order functionalities.82 In
response, BSE noted that a PIP or a UPIP
auction will not run simultaneously
with another PIP or UPIP auction in the
same series, nor will PIP or UPIP
auctions interact, queue, or overlap in
any manner.83 BSE states that any order
that is received while a UPIP is
underway for the same series, which
would otherwise meet the price
conditions to initiate a UPIP auction,
will cause the UPIP auction to
immediately terminate.84 Further, any
order that is received while a PIP
auction is underway, that would
otherwise meet the price conditions to
initiate a UPIP will interact with the PIP
as an Unrelated Order under the PIP
rules.85 Any request to initiate a PIP
(including from a market maker that has
received a directed order) while a PIP or
UPIP is already in progress in the same
series will be rejected.86 The
73 15
79 See
74 15
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U.S.C. 78k(a).
U.S.C. 78k(a)(1)(G)(i). Paragraph (b) of Rule
11a1–1(T) under the Act provides that the
requirements of Section 11(a)(1)(G)(i) of the Act are
met if during its preceding fiscal year more than
50% of the member’s gross revenues was derived
from one or more of the sources specified in that
section. In addition to any revenue which
independently meets the requirements of Section
11(a)(1)(G)(i), revenue derived from any transaction
specified in paragraph (A), (B), or (D) of Section
11(a)(1) of the Act or specified in Rule 11a1–4(T)
shall be deemed to be revenue derived from one or
more of the sources specified in Section
11(a)(1)(G)(i).
75 15 U.S.C. 78k(a)(1)(G)(ii).
76 17 CFR 240.11a1–1(T)(a)(3).
77 See proposed Section 29(p), Chapter V of the
BOX Rules.
78 See Amendment No. 3.
G. Surveillance
The proposal provides that the UPIP
will default any Proprietary
Improvement Order to the end of the
priority queue in the UPIP unless the
Options Participant affirmatively
identifies that its order was generated by
an automated quotation system that
operates independently from the
existence or non-existence of a pending
UPIP Order. A commenter questioned
how the BOX system will differentiate
between proprietary orders that have or
have not been generated by automated
quotation systems, and what standard (if
any) will be used for making a
determination that a particular system is
an automated quotation system.79 BSE
has represented that it will surveil for
compliance with this rule through its
current examination program.80 BSE
also notes that ISE uses a similar
mechanism for its Directed Order
process.81
80 See
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Amex Letter, supra note 4, at 3 to 4.
BSE Letter, supra note 5, at 7.
81 Id.
82 See ISE Letter, supra note 4, at 3. For example,
this commenter noted that when a market maker
receives a directed order on BOX, it must either
initiate a PIP or release the order to the market
within three seconds. Therefore, if there is a UPIP
in progress at the time the directed order is
received, the market maker cannot initiate a PIP. Id.
at note 3.
83 See proposed Section 18, Chapter V,
Supplementary Material .02 and proposed Section
29, Chapter V, Supplementary Material .01 of the
BOX Rules.
84 See proposed Section 29(s), Chapter V of the
BOX Rules.
85 See proposed Chapter V, Section 18(i) of the
BOX Rules.
86 Id. and BSE Letter, supra note 5, at 6.
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Commission believes that BSE has
adequately clarified the interaction
among the UPIP, PIP, and directed
orders.87
One commenter questioned whether
the AAO would interact in a UPIP
Auction.88 In response, BSE clarifies
that the recently approved AAO will be
able to interact in a UPIP.89
BSE also notes that the Limit Order
that is associated with the AAO that is
priced at the standard minimum trading
increment of five or ten cents can start
a UPIP if, at its rounded price, it would
be executable at the NBBO.90
I. Penny Pilot
One commenter argues that the Penny
Pilot Program 91 initiative should
prohibit the approval of the UPIP. This
commenter believes that the UPIP will
distort Penny Pilot data.92 Another
commenter believes that the Penny Pilot
is the appropriate method to approach
penny pricing in the options market
because it is a fair and transparent
environment.93
As discussed above, with respect to
the commenters’ substantive arguments,
the Commission believes the proposed
rule change is consistent with the Act.
The Commission has previously
approved exchange proposals to trade in
penny increments, including BSE’s
PIP.94 The Commission believes it is
consistent with the Act to approve the
87 Another commenter believes that the
Commission should not approve the proposed rule
change until it has addressed the issue of whether
market makers will be able to unfairly discriminate
against certain customers when the UPIP or PIP
auctions are used in conjunction with a Directed
Order process without anonymity. See Amex Letter,
supra note 4, at 2–3. The Commission believes that
the issue of anonymity in the Directed Order
process is more appropriately addressed in the
context of the BSE proposed rule change on that
issue. See Securities Exchange Act Release Nos.
56014 (July 5, 2007), 72 FR 38104 (July 12, 2007)
(SR–BSE–2007–31) (extending to January 31, 2008
the effective date of Section 5(c)(i), Chapter 6 of the
BOX Rules, which allows the BOX Trading Host to
identify to an Executing Participant the identity of
the firm entering a Directed Order); and 53357
(February 23, 2006), 71 FR 10730 (March 2, 2006)
(SR–BSE–2005–52) (notice of proposed rule change
to permit Executing Participants to choose the firms
from which they will accept Directed Orders while
providing complete anonymity for Directed Orders
that are passed on to the Executing Participant for
possible representation in a PIP auction).
88 See ISE Letter, supra note 4, at 3.
89 See BSE Letter, supra note 5, at note 26.
90 Id.
91 The Penny Pilot was approved by the
Commission to allow BOX to quote certain options
series in pennies on a pilot basis. See e.g.,
Securities Exchange Act Release No. 55155 (January
23, 2007), 72 FR 4741 (February 1, 2007) (SR–BSE–
2006–49).
92 See Citadel Letter, supra note 4, at 7.
93 See ISE Letter, supra note 4, at 3 to 4.
94 See Securities Exchange Act Release Nos.
49068 (PIP); 49323 (PIM); and 53222 (AIM), supra
note 60.
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BSE’s initiative designed to allow
trading in penny increments.95
J. Acceleration of Proposed Rule Change
as Amended
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.96 The Commission believes
that the changes made in Amendment
No. 3 generally strengthen the proposal.
In Amendment No. 3, BSE made several
changes to clarify its rules,97 respond to
commenters,98 and comply with the
requirements of the Act.99 The
Commission believes that it has
received and fully considered
substantial, meaningful comments with
respect to the BSE’s proposal, as
amended, and that Amendment No. 3
does not raise issues that warrant
further delay. For these reasons, the
Commission finds good cause,
consistent with section 19(b)(2) of the
Act,100 to grant accelerated approval of
the proposed rule change, as amended.
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V. Conclusion
It is therefore ordered, pursuant to
section 19(b)(2) of the Act,101 that the
95 The Exchange has represented that it will
provide the Commission with statistics regarding
the UPIP for those classes included in the Penny
Pilot. See BSE Letter, supra note 5, at 8.
96 See Notice, supra note 3.
97 See, e.g., BSE clarifies that: The definition of
an Eligible Order does not include ‘‘fill or kill’’
orders; the UPIP auction will only be available for
certain classes of options as determined from timeto-time by BOX; the cancellation of the UPIP Order
will result in the cancellation of the related
Improvement Orders and the UPIP auction itself;
any unexecuted portion of an Improvement Order
will be cancelled; time priority will prevail between
a Proprietary Improvement Order and an
Improvement Order submitted by an Executing
Participant; and in the instance when a UPIP is
concluded, only time priority will be granted to an
order on the BOX Book that executes against the
remaining portion of a UPIP Order if that order has
been placed for the same beneficial account as an
Improvement Order in the UPIP auction.
98 See, e.g., BSE revises the proposal to apply its
NBBO trade-through filter at the conclusion of the
UPIP auction.
99 See, e.g., BSE revises the proposal to provide
that: In no circumstances will the orders for a nonmarket maker broker-dealer account of an Options
Participant be executed before a Public Customer or
non-BOX Options Participant at the same price in
the UPIP; and it will be conduct inconsistent with
just and equitable principles of trade for (1) any
Options Participant to enter Unrelated Orders into
BOX for the purpose of disrupting or manipulating
any UPIP auction, including purposely causing
premature termination or (2) for an Executing
Participant to directly or indirectly enter, modify,
or cancel quotes or orders on BOX for the purpose
of disrupting, prematurely terminating or
manipulating any Improvement Auction.
100 15 U.S.C. 78s(b)(2).
101 15 U.S.C. 78s(b)(2).
VerDate Aug<31>2005
15:17 Jan 22, 2008
Jkt 214001
proposed rule change (SR–BSE–2006–
16), as amended, be, and it hereby is,
approved on an accelerated basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.102
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8–1037 Filed 1–22–08; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–57153; File No. SR–ISE–
2008–04]
Self-Regulatory Organizations;
International Securities Exchange,
LLC; Notice of Filing and Immediate
Effectiveness of Proposed Rule
Change, as Modified by Amendment
No. 1 Thereto, Relating to Fee Waiver
January 15, 2008.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on January 2,
2008, the International Securities
Exchange, LLC (‘‘ISE’’ or ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been substantially prepared by ISE.
ISE has designated this proposal as one
establishing or changing a due, fee, or
other charge applicable only to a
member under Section 19(b)(3)(A) of the
Act,3 and Rule 19b–4(f)(2) thereunder,4
which renders the proposal effective
upon filing with the Commission. On
January 15, 2008, ISE submitted
Amendment No. 1 to the proposed rule
change.5 The Commission is publishing
this notice to solicit comments on the
proposed rule change, as amended, from
interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
ISE is proposing a one-time waiver of
the annual renewal fee for Registered
Representatives.
102 17
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).
4 17 CFR 240.19b–4(f)(2).
5 For purposes of calculating the 60-day period
within which the Commission may summarily
abrogate the proposed rule change under Section
19(b)(3)(C) of the Act, the Commission considers
the period to commence on January 15, 2008, the
date on which the Exchange filed Amendment No.
1. See 15 U.S.C. 78s(b)(3)(C).
1 15
PO 00000
Frm 00115
Fmt 4703
Sfmt 4703
4035
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
ISE 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. ISE has prepared
summaries, set forth in Sections A, B,
and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Pursuant to ISE Rules 601, 602, and
603, members are required to
electronically file a Uniform
Application for Securities Industry
Registration or Transfer (Form U4) with
the Web CRD System operated by the
Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) when
registering, transferring, or terminating a
registered person. Pursuant to the
Exchange’s Schedule of Fees, members
pay fees related to these U4 filings,
which are collected by FINRA on behalf
of the Exchange. In particular, members
are assessed an annual renewal fee of
$55 for each Registered Representative.
The purpose of this rule filing is to
grant a one-time waiver of the $55
annual renewal fee for Registered
Representatives for 2008. The Exchange
updated its rules regarding its
registration requirements in June 2007,6
which resulted in some members
registering a substantial number of
representatives with the Exchange for
the first time in the later part of 2007.
Specifically, the Exchange initially
requested that members comply with
the revised registration requirements by
no later than October 31, 2007, but
subsequently extended this date until
January 31, 2008. Because the 2008
annual renewal fee is assessed based on
the number of Registered
Representatives a member has registered
with the ISE on the Web CRD system at
the beginning of 2008, any member that
registered its representatives prior to the
end of 2007 would be assessed the
annual renewal fee for each Registered
Representative, whereas those firms that
waited until after January 1, 2008 to
register their representatives would not
6 See Securities Exchange Act Release No. 55899
(June 12, 2007), 72 FR 33794 (June 19, 2007) (SR–
ISE–2007–30).
E:\FR\FM\23JAN1.SGM
23JAN1
]]>Agencies
[Federal Register Volume 73, Number 15 (Wednesday, January 23, 2008)]
[Notices]
[Pages 4028-4035]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-1037]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-57157; File No. SR-BSE-2006-16]
Self-Regulatory Organizations; Boston Stock Exchange, Inc.;
Notice of Filing of Amendment No. 3 to the Proposed Rule Change and
Order Granting Accelerated Approval of Proposed Rule Change, as
Modified by Amendments No. 1 and 3 Thereto, To Adopt a Universal Price
Improvement Period for Public Customer Orders
January 15, 2008.
I. Introduction
On December 11, 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 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposal to amend the rules of the Boston Options Exchange (``BOX'') to
adopt a Universal Price Improvement Period (``UPIP''), an auction that
offers the opportunity for price improvement for eligible Public
Customer orders. On February 1, 2007, BSE filed Amendment No. 1 to the
proposed rule change. The proposed rule change, as amended, was
published for comment in the Federal Register on February 9, 2007.\3\
The Commission received three comment letters regarding the
proposal.\4\ BSE filed Amendment No. 2 to the proposed rule change and
a response to the comment letters on November 19, 2007.\5\ On December
13, 2007, BSE withdrew Amendment No. 2 and filed Amendment No. 3 to the
proposed rule change. The Commission is publishing this notice to
solicit comments on the proposed rule change, as amended, from
interested persons and is simultaneously approving the proposed
[[Page 4029]]
rule change, as modified by Amendments No. 1 and 3, on an accelerated
basis.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 55230 (February 2,
2007), 72 FR 6302 (``Notice'').
\4\ See letter from Michael T. Bickford, Senior Vice President,
American Stock Exchange LLC (``Amex''), to Nancy M. Morris,
Secretary, Commission, dated March 2, 2007 (``Amex Letter''); letter
from Michael J. Simon, Secretary, International Securities Exchange,
LLC (``ISE''), to Nancy M. Morris, Secretary, Commission, dated
March 5, 2007 (``ISE Letter''); and letter from Matthew B.
Hinerfeld, Managing Director and Deputy General Counsel, Citadel
Investment Group, L.L.C. (``Citadel''), to Nancy Morris, Secretary,
Commission, dated March 6, 2007 (``Citadel Letter'').
\5\ See letter to Nancy M. Morris, Secretary, Commission, from
John Katovich, Chief Legal Officer, BSE, dated November 19, 2007
(``BSE Letter'').
---------------------------------------------------------------------------
II. Description of the Proposal
A. UPIP Eligibility
BOX will automatically initiate a UPIP auction for Public Customer
orders \6\ (``Eligible Orders'') provided certain conditions have been
satisfied.\7\ For example, the Eligible Order must be a Limit, Market,
or BOX-Top Order that is marketable against the National Best Bid or
Offer (``NBBO'').\8\ Further, a Price Improvement Period (``PIP'')
auction or UPIP auction in the same series cannot already be underway
and, if the NBBO is locked or crossed, the BOX Best Bid or Offer
(``BBO'') on the same side of the market as the Eligible Order must not
equal the NBBO.
---------------------------------------------------------------------------
\6\ ``Public Customer'' means a person that is not a broker or
dealer in securities. See Section 1(a)(50), Chapter I of the BOX
Rules.
\7\ See proposed Section 29(e), Chapter V of the BOX Rules.
\8\ An Eligible Order also must be for a series of options that
is open for trading and cannot indicate a minimum quantity condition
or be an Inbound Inter-Market Linkage P/A order. See proposed
Section 29(e)(v), Chapter V of the BOX Rules. In Amendment No. 3,
the Exchange clarified that a ``Fill and Kill'' order is not
included in the definition of an Eligible Order. See proposed
Section 29(e)(vi), Chapter V of the BOX Rules.
---------------------------------------------------------------------------
B. The UPIP Auction
The UPIP will be three seconds or less, as determined by BOX on a
class-by-class basis.\9\ BOX will inform Options Participants as to the
duration of the UPIP auctions by publishing a Regulatory Circular. Upon
initiation of a UPIP auction, the Box Trading Host will transmit a
broadcast message (``Broadcast Message'') to Options Participants
informing them of the auction's initiation, the relevant details of the
UPIP Order \10\ (i.e., the UPIP Order's series, size, and side of the
market), the end time of the auction, and the applicable Start
Price.\11\ The Start Price will be one improvement increment (e.g., a
penny) better than the NBBO if the BBO is equal to the NBBO. If the BBO
does not equal the NBBO, the Start Price will be the NBBO. The same
conditions apply with respect to the Start Price whether or not the
NBBO is locked or crossed.
---------------------------------------------------------------------------
\9\ The Exchange clarified in Amendment No. 3 that the UPIP
auction shall be permitted on a class-by-class basis. See proposed
Section 29(f), Chapter V of the BOX Rules. Amendment No. 3 also
amends proposed Section 29(g), Chapter V of the BOX Rules to provide
that if a UPIP Order was previously processed as a Directed Order
accompanied by a Guaranteed Directed Order (``GDO'') pursuant to
Chapter VI, Section 5(c)(iii)(2) of BOX Rules, the duration of the
UPIP will not be less than the time the GDO is required to be
withheld from trading with the Directed Order as provided in Chapter
VI, Section 5(c)(iii)(2)(b)(4) of the BOX Rules. See proposed
Section 29(g), Chapter V of the BOX Rules.
\10\ Upon commencement of the UPIP auction the ``Eligible
Order'' is referred to as the ``UPIP Order.''
\11\ The Start Price is defined as the minimum/maximum (buy/
sell) price at which an Improvement Order must be submitted. See
proposed Section 29(h), Chapter V of the BOX Rules.
---------------------------------------------------------------------------
UPIP Orders can be modified and cancelled at any time prior to the
conclusion of the UPIP auction. The cancellation of a UPIP Order will
result in the subsequent cancellation of all related Improvement Orders
and the UPIP auction.\12\ Certain modifications of a UPIP Order will
not result in the termination of the UPIP auction.\13\
---------------------------------------------------------------------------
\12\ In Amendment No. 3, the Exchange clarified that the
cancellation of a UPIP Order will result in the cancellation of the
related Improvement Orders and the UPIP auction itself.
\13\ Such modifications are: The reduction of a UPIP Order
quantity; the recharacterization of the UPIP Order type from a Limit
Order to a BOX Top or Market Order; and an improvement of the UPIP
Order's original limit price. Any other modification will result in
the termination of the UPIP auction. See proposed Section 29(n),
Chapter V of the BOX Rules.
---------------------------------------------------------------------------
The UPIP Order will be ``stopped'' against any quote(s) or order(s)
on the BOX Book that is marketable against the UPIP Order at the time
the UPIP Order is received by the Trading Host (``Initial BOX Book
Quote'') up to the aggregate size of the Initial Box Book Quote
(``Initial Aggregate Quote Size'').\14\
---------------------------------------------------------------------------
\14\ The Initial BOX Book Quote is defined as the quote(s) and/
or order(s) on the BOX Book at the best price, on the opposite side,
and in the same series as the Eligible Order at the time the Trading
Host receives it. The Initial Aggregate Quote Size is defined as the
aggregate size of the Initial BOX Book Quote. See proposed Section
29(o), Chapter V of the BOX Rules.
---------------------------------------------------------------------------
A modification or cancellation of the Initial BOX Book Quote during
the UPIP auction that would decrease the Initial Aggregate Quote Size
below the size of the UPIP Order, at the commencement of the UPIP
auction, will cause the UPIP auction to immediately terminate. Such
modification or cancellation will only be processed after the UPIP
Order has been executed. An Options Participant who is part of the
Initial Box Book Quote, and whose cancellation or modification of its
order or quote causes the UPIP auction to terminate, will have its
order or quote placed at the end of the quote and order queue at the
applicable price level on the BOX Book. Any modification or
cancellation of the Initial BOX Book Quote that does not cause the
Initial Aggregate Quote Size to decrease below the size of the UPIP
Order, however, will be processed immediately by the Trading Host
without penalty and the UPIP auction will continue.\15\
---------------------------------------------------------------------------
\15\ Any orders or quotes on the opposite side of the UPIP Order
that are received by the BOX Book after the UPIP auction has
commenced (i.e., orders that are not otherwise part of the Initial
BOX Book Quote) may be cancelled or modified without causing the
UPIP auction to terminate. See proposed Section 29(o), Chapter V of
the BOX Rules.
---------------------------------------------------------------------------
C. Improvement Orders
Any Options Participant may submit an Improvement Order in response
to a Broadcast Message for an impending UPIP auction.\16\ Improvement
Orders will be visible to all Options Participants, can be submitted in
increments of one cent, and must equal or improve the Start Price.
Improvement Orders may be cancelled or modified by the Options
Participant prior to the conclusion of the UPIP auction. An increase in
the quantity of the Improvement Order or modification of the
Improvement Order's limit price will result in the creation of a new
Improvement Order reflecting the revised terms and the cancellation of
the original Improvement Order. At the conclusion of a UPIP auction,
the unexecuted portion of an Improvement Order will be cancelled by the
Trading Host.\17\
---------------------------------------------------------------------------
\16\ Improvement Orders are those orders submitted to a UPIP
auction in response to a Broadcast Message by Options Participants
that are on the opposite side of the market as the UPIP Order. See
proposed Section 29(j), Chapter V of the BOX Rules.
\17\ See Amendment No. 3.
---------------------------------------------------------------------------
1. Proprietary Improvement Orders
An Options Participant who submits an Eligible Order to BOX, which
order starts a UPIP, and subsequently submits a Proprietary Improvement
Order will be last in time priority at all price levels in the relevant
UPIP auction. However, if the Proprietary Improvement Order is
generated by an automated quotation system that operates independently
from the existence or non-existence of the pending Eligible Order prior
to its submission to BOX, the Options Participant's Proprietary
Improvement Order will be treated like an ordinary Improvement Order
and qualify for execution at each price level without prejudice.\18\
---------------------------------------------------------------------------
\18\ See proposed Section 29(k), Chapter V of the BOX Rules.
---------------------------------------------------------------------------
UPIP will default any Proprietary Improvement Order to the end of
the priority queue in the UPIP.\19\ If an Options Participant desires
to have its status in the queue changed and be exempted from the rule,
then the Options Participant would need to affirmatively identify its
orders from an automated quotation system as the Exchange deems
necessary.\20\
---------------------------------------------------------------------------
\19\ See BSE Letter, supra note 5, at 7.
\20\ Id.
---------------------------------------------------------------------------
[[Page 4030]]
2. Executing Participant Improvement Orders
An Executing Participant is a Market Maker that systemically
indicates its willingness to accept and receive Directed Orders.\21\ An
Executing Participant that receives a Directed Order that is released
to the BOX Book will be last in priority at all price levels for any
Improvement Order or quote submitted to a subsequent UPIP auction
related to that Directed Order.\22\ Time priority will prevail between
a Proprietary Improvement Order and an Improvement Order submitted by
an Executing Participant.\23\
---------------------------------------------------------------------------
\21\ See Section 5(c)(i), Chapter VI of the BOX Rules.
\22\ See proposed Section 29(l), Chapter V of the BOX Rules.
\23\ See Amendment No. 3 and proposed Sections 29(o)(i) and
29(s)(ii) of the Box Rules.
---------------------------------------------------------------------------
In Amendment No. 3, BSE addressed the instance in which a Directed
Order with an attached GDO has been entered into the UPIP auction and
the UPIP auction is prematurely terminated because of a modification to
or cancellation of an order or quote that is a component of the Initial
BOX Book Quote or the receipt of a same side, executable order. When a
UPIP auction is prematurely terminated in such circumstances,
subsequent to the execution of the UPIP Order pursuant to Chapter V,
section 29(p) of the BOX Rules, the GDO will be permitted to
immediately execute directly against the remaining size of the UPIP
Order.\24\ This means that a GDO will be permitted to execute against
the remaining size of the UPIP Order prior to three seconds having
elapsed, but only if there is no other interest on BOX at the same (or
better) price as the GDO.\25\ It will be considered conduct
inconsistent with just and equitable principles of trade for an
Executing Participant to directly or indirectly enter, modify or cancel
quotes or orders on BOX for the purpose of disrupting, prematurely
terminating or manipulating any Improvement Auction, including a UPIP
auction.\26\
---------------------------------------------------------------------------
\24\ See proposed Section 5(c)(iii)(2)(b)(4), Chapter VI of the
BOX Rules and Amendment No. 3.
\25\ See telephone conference among William Easley, Vice
Chairman, BOX; Lisa Fall, General Counsel, BOX; Wayne Pestone,
Bingham McCutchen LLP; and Heather Seidel, Assistant Director,
Division of Trading and Markets (``Division''), Commission, on
January 11, 2008.
\26\ See proposed Section 5(c)(iii)(2)(b)(4), Chapter VI of the
BOX Rules and Amendment No. 3.
---------------------------------------------------------------------------
3. Customer Price Improvement Orders (``CPOs'')
Similar to the CPO in the PIP, OFPs may provide Public Customers
with access to the UPIP auction through a CPO, provided certain
conditions have been met. The CPO must indicate the price at which the
order will be placed in the BOX Book (``BOX Book Reference Price'') as
well as the price at which the Public Customer would like to
participate in any UPIP that may occur while the order is on the BOX
Book (``CPO Auction Reference Price'').\27\ Further, the terms of the
CPO shall include the size of the order. In order for the CPO to be
eligible for participation in a UPIP auction, the BOX Book Reference
Price must equal the BBO at the commencement of a UPIP auction.\28\ The
CPO may also benefit from enhanced time priority pursuant to NBBO
Prime.
---------------------------------------------------------------------------
\27\ The BOX Book reference price must be stated in standard
five-cent or ten-cent increments, and the CPO Auction Reference
Price must be stated in one-cent increments. See proposed Section
29(m)(i), Chapter V of the BOX Rules.
\28\ A CPO must be in the same series and on opposite side of
the UPIP Order. See proposed Section 29(m)(iii), (iv), Chapter V of
the BOX Rules.
---------------------------------------------------------------------------
4. NBBO Prime
An Improvement Order or multiple Improvement Orders may be
designated as NBBO Prime (``NBBO Prime Order'') in a particular UPIP
auction. The NBBO Prime designation is only applicable for a UPIP
auction, not the PIP, and generally confers time priority to a
particular Improvement Order over other Improvement Orders and
Unrelated Orders with the same price.\29\ Any Improvement Order may be
eligible for the NBBO Prime designation in a UPIP auction.
---------------------------------------------------------------------------
\29\ See proposed Section 30, Chapter V of the BOX Rules.
---------------------------------------------------------------------------
In order to be designated as NBBO Prime, the same beneficial
account \30\ for whom the Options Participant is submitting the NBBO
Prime Order must have quotes or orders on the BOX Book that are on the
opposite side of the UPIP Order (``NBBO Prime Participant Quote''). The
NBBO Prime Participant Quote must be equal to the NBBO and must have
been on the BOX Book prior to the time the Eligible Order was presented
to the Trading Host. An NBBO Prime Order will only have enhanced time
priority for size of its NBBO Prime Participant Quote. Any residual
quantity of the NBBO Prime Order will be handled in accordance with the
normal time priority rules. Priority among NBBO Prime Orders at the
same price will be based on the relevant Trading Host order receipt
time stamp of each NBBO Prime Participant Quote. NBBO Prime Orders
retain their priority even if the NBBO Prime Participant's Quote is
subsequently modified or cancelled during the relevant UPIP auction.
---------------------------------------------------------------------------
\30\ For purposes of NBBO Prime, a ``beneficial account'' means
the underlying type of account (e.g., customer, broker-dealer,
market maker, etc.) on whose behalf the Participant is trading. See
Notice, supra note 3, at note 14.
---------------------------------------------------------------------------
An Options Participant seeking priority through the NBBO Prime
designation must indicate to the Trading Host the order number of the
NBBO Prime Participant Quote when the Options Participant submits the
Improvement Order for the same beneficial account. In addition, the
Options Participant may indicate whether the NBBO Prime Participant
Quote size should be decremented to reflect any execution of the NBBO
Prime Order. In the absence of such an indication, the Trading Host
will not decrement the NBBO Prime Participant Quote. Market Makers will
not be required to identify their relevant order number but will need
to indicate to the Trading Host that their applicable NBBO Prime
Participation Quote size should be decremented; otherwise their NBBO
Prime Participation Quote size will remain unchanged on the BOX
Book.\31\
---------------------------------------------------------------------------
\31\ See proposed Section 29(j)(iv), Chapter V of the BOX Rules.
---------------------------------------------------------------------------
D. Execution in the UPIP
At the conclusion of the UPIP auction, including in the event of a
premature termination, the UPIP Order will be matched against the best
prevailing orders (including Improvement Orders, CPOs, and Unrelated
Orders) and quotes (including the Initial Box Book Quote) submitted
during the UPIP auction that are equal to or better than the Start
Price, in accordance with the price/time algorithm in section 16(a) of
Chapter V, with the following exceptions to time priority: (1) As
provided in proposed paragraphs (k), (l), and (o) of section 29,
Chapter V, regarding Proprietary Improvement Orders and Improvement
Orders submitted by Executing Participants; \32\ and (2) as provided in
proposed paragraphs (b) to (d) of section 30, Chapter V, regarding NBBO
Prime Orders.\33\ Further, in no circumstances will an order for a non-
market maker broker-dealer account of an Options Participant be
executed ahead of a Public Customer order(s) or a non-BOX Options
Participant broker-dealer order(s) at the same price within the UPIP
auction. This means that no order for the account of a non-market maker
Options Participant will be executed
[[Page 4031]]
ahead of the order(s) of any Public Customers or non-members of
BOX.\34\
---------------------------------------------------------------------------
\32\ See supra notes 18 through 23 and accompanying text.
\33\ See proposed Section 29(p), Chapter V of the BOX Rules. See
also Amendment No. 3, which clarifies these exceptions in proposed
Section 29(p), Chapter V, the substance of which were discussed in
the Notice, supra note 3.
\34\ See proposed Section 29(p), Chapter V of the BOX Rules and
Amendment No. 3.
---------------------------------------------------------------------------
At the conclusion of the UPIP auction, the UPIP Order will be
filtered to prevent a trade-through of the NBBO at the conclusion of
the auction and will not execute against orders or quotes at prices
inferior to the NBBO except in the following circumstances: (1) In
accordance with Chapter XII, section 3(e) of BOX Rules; \35\ or (2) the
away options exchange posting the NBBO is conducting a trading rotation
in that options class.\36\ If the UPIP Order cannot be executed on BOX
at or better than the NBBO, it will be routed to another market
center(s) posting the NBBO.
---------------------------------------------------------------------------
\35\ Chapter XII, Section 3(e) of the BOX Rules states that
``[u]nder circumstances where the Options Official determines that
quotes from one or more particular away markets in one or more
classes of options are not reliable, the Options Official may direct
the Market Operations Center (`MOC') to exclude the unreliable
quotes from the determination of the NBBO in the particular
class(es).''
\36\ The original filing provided that only the quantity of the
UPIP Order that exceeded the Initial Aggregate Quote Size was
filtered at the conclusion of the UPIP auction. The Exchange
modified the rule text in Amendment No. 3 to apply the NBBO trade-
through filter to the entire size of the UPIP Order.
---------------------------------------------------------------------------
Any unexecuted portion of the UPIP Order not executed in the UPIP
auction will be released to the Box Book and handled as provided in
section 16, Chapter V of the BOX Rules, except that a quote or order on
the BOX Book that is for the same beneficial account as an Improvement
Order that executed against the UPIP Order in the UPIP auction and that
was on the BOX Book before the UPIP Order was received by BOX will have
time priority over other quotes and orders on the BOX Book (except
customer orders).\37\
---------------------------------------------------------------------------
\37\ See proposed Section 16(a)(iv), Chapter V of the BOX Rules.
In Amendment No. 3, BSE clarified that such order on the BOX Book
will receive only time priority. See Amendment No. 3.
---------------------------------------------------------------------------
E. Treatment of Unrelated Orders in the UPIP
Unrelated Orders that are submitted to the Trading Host during a
UPIP auction that are on the opposite side of the market from a UPIP
Order and are executable against the NBBO will be executed immediately
against the UPIP Order at the mid-point of the (i) NBBO and (ii) the
best of the UPIP Improvement Order, the UPIP Start Price or the
NBBO.\38\ If the Unrelated Order on the opposite side of the market as
the UPIP Order has a quantity equal to or greater than the UPIP Order,
the UPIP auction will terminate. Otherwise, the immediate execution of
the Unrelated Order against the UPIP Order will not cause the
termination of the UPIP auction and the auction will continue.
Conversely, an Unrelated Order that is on the same side of the market
as the UPIP Order that is executable against the NBBO will cause the
UPIP to immediately terminate and the UPIP Order will be executed
pursuant to proposed section 29(p) of Chapter V of the BOX Rules.\39\
---------------------------------------------------------------------------
\38\ See proposed Section 29(s)(i), Chapter V of the BOX Rules.
Any rounding required will be to the benefit of the Unrelated Order.
Id.
\39\ If the Unrelated Order is still UPIP eligible, a new UPIP
will commence. If the Unrelated Order is no longer UPIP eligible,
the order will go on the BOX Book. See telephone conference among
William Easley, Vice Chairman, BOX; Lisa Fall, General Counsel, BOX;
and Heather Seidel, Division, Commission, on December 21, 2007.
---------------------------------------------------------------------------
In Amendment No. 3, BSE amended paragraph (s) of section 29,
Chapter V of the BOX Rules to emphasize that it will be considered
conduct inconsistent with just and equitable principles of trade for
any Options Participant to enter Unrelated Orders into BOX for the
purpose of disrupting or manipulating any UPIP auction, including
purposely causing premature termination.\40\
---------------------------------------------------------------------------
\40\ See Amendment No. 3.
---------------------------------------------------------------------------
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, 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-2006-16 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 BSE-2006-16. 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 BSE. 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-2006-16 and should be
submitted on or before February 13, 2008.
IV. Discussion
After careful consideration of the amended proposal and the comment
letters, the Commission finds that the proposed rule change is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange
\41\ and, in particular, the requirements of section 6 of the Act.\42\
Specifically, the Commission finds that the proposed rule change is
consistent with section 6(b)(5) of the Act,\43\ which requires, among
other things, that the rules of a national securities exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general, to protect investors and the public
interest. Significant aspects of the proposal are discussed below.
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\41\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
\42\ 15 U.S.C. 78f.
\43\ 15 U.S.C. 78f(b)(5).
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The Commission notes that the UPIP is similar to BOX's existing
price improvement auction, the PIP, and other price improvement
mechanisms, such as the Price Improvement Mechanism (``PIM'') of the
ISE, that initiate auctions in penny increments through which exchange
participants compete to potentially price improve a customer order.
However, unlike the PIP, in the UPIP customer orders do not depend on
[[Page 4032]]
the ability of at least one party to guarantee price improvement for
the full size of the Customer Order.\44\
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\44\ The Commission notes that the Simple Auction Liaison System
of the Chicago Board Options Exchange, Incorporated (``CBOE''),
which provides for the automatic initiation of an auction process in
certain circumstances for any order that is eligible for automatic
execution by the Hybrid System, also does not depend on a contra-
side order. See Securities Exchange Act Release No. 54229 (July 27,
2006), 71 FR 44058 (August 3, 2006) (SR-CBOE-2005-90).
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A. Price Competition
One commenter believes that the UPIP auction would encourage Market
Makers to post wide and shallow quotes and discourage Market Makers
from quoting aggressively until the UPIP auction begins because: (1)
The most desirable orders will bypass the centralized auction; (2)
after a UPIP auction is completed, the centralized auction will be
exposed to UPIP ``rejects;'' and (3) the UPIP Order can be cancelled or
modified but orders on the top of the BOX Book when the auction starts
cannot.\45\ This commenter also believes that transparency will suffer
because market participants will hide their true trading interest until
a UPIP auction begins.\46\
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\45\ See Citadel Letter, supra note 4, at 1 to 2 and 4.
\46\ Id. at 4.
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Another commenter believes that the ability of a Participant to
modify or cancel a UPIP Order, while the quotes and orders on the top
of the BOX Book will essentially be frozen, will provide a three-second
option or ``second-look'' opportunity for the Participant that
submitted the UPIP Order to the detriment of the quotes and orders at
the top of the book.\47\ The commenter believes that this could
severely limit the amount of liquidity Market Makers would be willing
to provide on BOX. This commenter further believes that the
dissemination of Improvement Orders during the UPIP auction, which
allows the Participant that entered the UPIP Order to monitor the
amount of price improvement being offered (if any), compounds the
``second look'' problem.\48\ This commenter also believes that this
inability to cancel or modify an order at the top of the BOX Book
raises customer protection issues, and that customers and their brokers
should be made aware that cancelling or modifying their orders on the
BOX Book may actually cause them to be executed at an undesirable
price.\49\
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\47\ See ISE Letter, supra note 4, at 1 to 2. See also Citadel
Letter, supra note 4, at 4 (stating that the ability of the UPIP
Order to cancel will give investors a free option to cancel their
orders based on intervening market movements, while orders at the
top of the book are frozen).
\48\ See ISE Letter, supra note 4, at 2-3.
\49\ Id. at 1 to 2.
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In response, BSE notes that in general BOX Market Makers have
several meaningful incentives to consistently quote at or establish the
NBBO, including: (1) An open and competing market maker structure with
no specialist/designated primary market maker and no regulatory limits
to the number of market makers appointed in a given class; (2) low
costs to enter the market; (3) low transaction costs; (4) price and
time priority on the BOX Book; and (5) anonymous trading on the BOX
Book.\50\ Further, BSE notes that the UPIP rules allow certain
Improvement Order to be designated as NBBO Prime Orders. An NBBO Prime
designation confers time priority in a UPIP auction to a particular
Improvement Order over other Improvement Orders and Unrelated Orders
with the same price upon satisfaction of certain conditions. To be
eligible to be designated NBBO Prime, the same beneficial account for
whom the Options Participant is acting and that is seeking the NBBO
Prime designation must have had a quote or order on the BOX Book on the
opposite side of the UPIP Order equal to the NBBO prior to receipt of
the UPIP Order by the Trading Host. BSE believes that this requirement
will encourage all Options Participants to compete aggressively to
match or establish a new NBBO. \51\
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\50\ See BSE Letter, supra note 5, at 2.
\51\ Id. NBBO Prime is similar to the ``Market Maker Prime''
(``MMP'') designation in a PIP auction that is awarded to a Market
Maker that is first to establish a quote on BOX equal to the NBBO or
establish a new NBBO.
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The Commission does not believe that, given the overall structure
of BOX and the NBBO Prime functionality, the UPIP auction will
discourage aggressive quoting on BOX. The availability of the NBBO
Prime functionality is designed to encourage market makers and other
market participants to aggressively post quotes or limit orders on the
BOX Book, to be the first to match the NBBO, or to establish a new
NBBO, because those participants will have time priority in the UPIP
auction. Further, because NBBO Prime Orders only receive enhanced time
priority for the quantity that does not exceed the size of the related
order that was on the BOX Book, market participants may be incented to
post greater size in order to receive priority on a larger allocation.
Finally, with regard to BSE's proposal to allow Public Customers to
cancel UPIP Orders, BSE states that, because the UPIP does not
guarantee price improvement, the ability to cancel a UPIP Order is
necessary to allow an OFP to manage an order that has not been executed
and for which no trade confirmation has been issued.\52\ The Commission
believes that the ability for UPIP Orders to be cancelled is consistent
with the Act.
---------------------------------------------------------------------------
\52\ See BSE Letter, supra note 5, at 4.
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B. NBBO Prime Requirements
One commenter doubts the technological feasibility of the NBBO
Prime functionality because firms seeking NBBO Prime status will be
required to specify the number of their order on the BOX Book that was
first in time priority at the top of the BOX Book.\53\ BSE represents
that the requirement to provide the unique order identifier to BOX for
the appropriate order on the BOX Book utilizes the same technology that
firms currently use to cancel or modify orders on BOX and that an OFP
cannot be certified to trade on BOX unless it can perform this
task.\54\ The Commission therefore does not believe this requirement
should place an unreasonable burden on Options Participants to be able
to avail themselves of the NBBO Prime functionality.
---------------------------------------------------------------------------
\53\ See Citadel Letter, supra note 4, at note 12.
\54\ See BSE Letter, supra note 5, at note 10.
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C. ``Freezing'' Top of the Book Quotes and Orders
As noted above, two commenters expressed concerns about BSE's
proposal to prohibit orders and quotes at the top of the BOX Book at
the commencement of a UPIP auction to be cancelled.\55\ In response,
BSE stated that ``freezing'' certain quotes and orders on the BOX Book
at the start of a UPIP auction is necessary to comply with the Quote
Rule,\56\ and disagrees that quotes or orders on the BOX Book held firm
in this manner will be disadvantaged. BSE believes such orders and
quotes will be treated as the entering participant intends--i.e.,
executable at the limit price when matched with a contra-side order and
cancellable only when there is no pending execution.
---------------------------------------------------------------------------
\55\ See supra note 47 and accompanying text.
\56\ 17 CFR 242.602.
---------------------------------------------------------------------------
Rule 602 under the Act requires a responsible broker or dealer to
execute orders to buy or sell a security presented to it by another
broker or dealer, or any other person belonging to a category of
persons with whom such responsible broker or dealer customarily deals,
at a price at least as favorable to such buyer or seller as the
responsible broker's or dealer's published bid or published offer in
any amount up to its published
[[Page 4033]]
quotation size.\57\ Therefore, the Commission agrees that the ``stop''
feature is necessary to ensure market participants' compliance with
Rule 602 under the Act and believes that it is consistent with the Act.
The Commission notes, however, that BOX Participants should, as with
any order type or exchange functionality, take steps necessary to
ensure their customers understand the operation of the UPIP auction
with respect to incoming orders and orders resting on the BOX Book.
---------------------------------------------------------------------------
\57\ Id.
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D. Private Auctions
One commenter argues that, because the broadcast message commencing
a UPIP auction and the responding Improvement Orders will only be
accessible to BOX participants and will not be publicly disseminated,
only BOX Participants will know the ``true'' BOX market.\58\
---------------------------------------------------------------------------
\58\ See Citadel Letter, supra note 4, at 4.
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Under the Commission's Quote Rule, an exchange is required to
collect, process, and make available to quotation vendors the best bid,
the best offer, and aggregate quotation sizes for each subject security
listed or admitted to unlisted trading privileges which is communicated
on any national securities exchange by any responsible broker or
dealer.\59\ The Commission believes that because the UPIP auction is at
most only 3 seconds in length, it is analogous to the open outcry
auctions conducted on floor-based exchanges, where auction prices are
not widely disseminated and are available only for the order that
initiated the auction and other orders in the crowd at that particular
time.\60\ Accordingly, the Commission finds the UPIP auction to be
consistent with the Quote Rule.
---------------------------------------------------------------------------
\59\ 17 CFR 242.602(a)(i).
\60\ See Securities Exchange Act Release Nos. 49068 (January 14,
2003), 68 FR 3062 (January 22, 2003) (Commission approval
establishing trading rules for BOX, including rules for the PIP);
49323 (February 26, 2004), 69 FR 10087 (March 3, 2004) (Commission
approval establishing rules for PIM); and 53222 (February 3, 2006),
71 FR 7089 (February 10, 2006) (Commission approval establishing
rules for CBOE's Automated Improvement Mechanism (``AIM'')).
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One commenter notes that unlike the PIP, the proposed UPIP auction
does not require at least three market makers to quote in an options
series before a UPIP may be initiated.\61\ The Commission does not
believe that the Act requires an exchange to have market makers in an
auction. Although Market Makers could be an important source of
liquidity in the UPIP auction, they likely will not be the only source.
Any Options Participant can submit an Improvement Order in a UPIP
Auction, on its own behalf or on behalf of a customer. Further, the
Auto Auction Order (``AAO'') \62\ and CPO are specifically designed to
allow customers to more easily participate in an Improvement Auction,
including the UPIP. The Commission therefore believes that the proposal
not to require minimum market maker participation in the UPIP is
consistent with the Act.
---------------------------------------------------------------------------
\61\ See ISE Letter, supra note 4, at 3.
\62\ See Securities Exchange Act Release No. 56186 (August 2,
2007), 72 FR 44593 (August 8, 2007) (approving the AAO functionality
on BOX).
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Another commenter notes that the proposal provides that the
duration of the UPIP will be 3 seconds or less as determined by the
Board on a case-by-case basis and questions whether a UPIP duration of
less than 3 seconds would result in a meaningful auction.\63\ This
commenter also inquires how Options Participants will be informed about
the exposure time of UPIP auctions if they are reduced. The Commission
believes that BSE's response that BOX will inform Options Participants
regarding the duration of the UPIP auctions by publishing a Regulatory
Circular is consistent with the Act.\64\ The Commission also notes that
the UPIP auction is designed to provide an opportunity for price
improvement for certain orders, without a guarantee to a facilitating
firm. Thus, the Commission does not believe that the UPIP auction
raises the same potential conflict concerns as an auction where there
is a guarantee from a facilitating firm. The Commission therefore
believes that the duration of the UPIP auction, as proposed, is
consistent with the Act.
---------------------------------------------------------------------------
\63\ See Amex Letter, supra note 4, at 4.
\64\ See BSE Letter, supra note 5, at 6.
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E. NBBO Protection
A commenter requested clarification as to what would occur in a
UPIP auction if the BBO does not equal the NBBO and there are no
Improvement Orders entered during the UPIP auction. Specifically, this
commenter asked if the UPIP Order would be executed at the NBBO, or if
the UPIP Order would be routed through the Options Intermarket Linkage
to a better away market.\65\ This commenter further asked at what price
the UPIP Order is executed if the NBBO changes during the UPIP
auction.\66\ Similarly, another commenter noted that the UPIP Order
would not execute against a better price if the NBBO changes during the
UPIP Auction.\67\
---------------------------------------------------------------------------
\65\ See Amex Letter, supra note 4, at 2.
\66\ Id.
\67\ See Citadel Letter, supra note 4, at 6.
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BSE responded that the UPIP Order is not guaranteed an execution at
the NBBO.\68\ At the conclusion of the UPIP auction, the UPIP Order
will be matched against the best prevailing orders or quotes, whether
Improvement Orders, Unrelated Orders, or the Initial BOX Book Quote,
that are equal to or better than the Start Price, which is at least as
good a price as the NBBO at the commencement of the auction.\69\ In
addition, at the conclusion of the UPIP auction the entire UPIP Order
will be filtered to prevent BOX from executing any portion of the UPIP
Order at a price inferior to the NBBO at the end of the UPIP auction.
If the UPIP Order cannot be executed on BOX at or better than the NBBO,
then the UPIP Order will be routed through Intermarket Linkage to
another market displaying the NBBO at the conclusion of the UPIP
auction.\70\ The Commission believes that BSE adequately clarified this
aspect of the proposal, as amended, and that it is consistent with the
Act.
---------------------------------------------------------------------------
\68\ See BSE Letter, supra note 5, at 5.
\69\ Such matching shall occur in compliance with the priority
provisions of proposed Chapter V, Section 29(p) of the BOX Rules.
\70\ See BSE Letter, supra note 5, at 5 and Chapter V, Section
29(q) of the BOX Rules.
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F. Compliance With the Act
1. Quote Rule
One commenter believes that the ability to cancel Improvement
Orders during a UPIP auction is inconsistent with the purpose and
intent of BOX's firm quote rule. This commenter argues that an Options
Participant would have a free look at the UPIP Order during the auction
and could withdraw its Improvement Order if the market moved
unfavorably.\71\
---------------------------------------------------------------------------
\71\ See Amex Letter, supra note 4, at 3.
---------------------------------------------------------------------------
The Commission's Quote Rule requires a responsible broker or dealer
to execute any order presented to it at its published price and up to
the full amount of its published size.\72\ Because no order would be
presented to execute against an Improvement Order until the end of the
UPIP auction, the Commission believes that the ability to cancel an
Improvement Order prior to the termination of the UPIP auction does not
violate the Quote Rule.
---------------------------------------------------------------------------
\72\ 17 CFR 242.602(b)(2).
---------------------------------------------------------------------------
2. Section 11(a) of the Act
Section 11(a) of the Act prohibits a member of a national
securities exchange from effecting transactions on that exchange for
its own account, the account of an associated person, or an account
over which it or its associated person exercises discretion, unless an
[[Page 4034]]
exception applies.\73\ Section 11(a)(1)(G) and Rule 11a1-1(T) under the
Act provide an exception to the general prohibition in section 11(a) on
an exchange member effecting transactions for its own account.
Specifically, a member that ``is primarily engaged in the business of
underwriting and distributing securities by other persons, selling
securities to customer, and acting as broker, or any one or more of
such activities, and whose gross income normally is derived principally
from such business and related activities'' \74\ and effects a
transaction in compliance with the requirements in Rule 11a1-1(T)(a)
\75\ may effect a transaction for its own account. Among other things,
Rule 11a1-1(T)(a)(3) requires that an exchange member presenting a bid
or offer for its own account or the account of another member shall
grant priority to any bid or offer at the same price for the account of
a non-member of the exchange.\76\
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\73\ 15 U.S.C. 78k(a).
\74\ 15 U.S.C. 78k(a)(1)(G)(i). Paragraph (b) of Rule 11a1-1(T)
under the Act provides that the requirements of Section
11(a)(1)(G)(i) of the Act are met if during its preceding fiscal
year more than 50% of the member's gross revenues was derived from
one or more of the sources specified in that section. In addition to
any revenue which independently meets the requirements of Section
11(a)(1)(G)(i), revenue derived from any transaction specified in
paragraph (A), (B), or (D) of Section 11(a)(1) of the Act or
specified in Rule 11a1-4(T) shall be deemed to be revenue derived
from one or more of the sources specified in Section 11(a)(1)(G)(i).
\75\ 15 U.S.C. 78k(a)(1)(G)(ii).
\76\ 17 CFR 240.11a1-1(T)(a)(3).
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BSE's proposal provides that ``no order for a non-market maker
broker-dealer account of an Options Participant will be executed before
Public Customer order(s) and non-BOX Options Participant broker-dealer
order(s) at the same price.'' \77\ Because BSE's proposed rules will
require Options Participants that are not Market Makers to yield
priority in the UPIP auction to all non-member orders,\78\ the
Commission believes that the proposal is consistent with the yielding
requirements in section 11(a)(1)(G) and Rule 11a1-1(T) under the Act.
However, the Commission notes that, in addition to yielding priority to
non-member orders at the same price, members also must meet the other
requirements under section 11(a)(1)(G) and Rule 11a1-1(T) to effect
transactions for their own accounts in reliance on this exception (or
satisfy the requirements of another exception).
---------------------------------------------------------------------------
\77\ See proposed Section 29(p), Chapter V of the BOX Rules.
\78\ See Amendment No. 3.
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G. Surveillance
The proposal provides that the UPIP will default any Proprietary
Improvement Order to the end of the priority queue in the UPIP unless
the Options Participant affirmatively identifies that its order was
generated by an automated quotation system that operates independently
from the existence or non-existence of a pending UPIP Order. A
commenter questioned how the BOX system will differentiate between
proprietary orders that have or have not been generated by automated
quotation systems, and what standard (if any) will be used for making a
determination that a particular system is an automated quotation
system.\79\ BSE has represented that it will surveil for compliance
with this rule through its current examination program.\80\ BSE also
notes that ISE uses a similar mechanism for its Directed Order
process.\81\
---------------------------------------------------------------------------
\79\ See Amex Letter, supra note 4, at 3 to 4.
\80\ See BSE Letter, supra note 5, at 7.
\81\ Id.
---------------------------------------------------------------------------
H. Interaction Among UPIP and PIP
One commenter asks for more clarity on the interaction of the PIP,
UPIP, and directed order functionalities.\82\ In response, BSE noted
that a PIP or a UPIP auction will not run simultaneously with another
PIP or UPIP auction in the same series, nor will PIP or UPIP auctions
interact, queue, or overlap in any manner.\83\ BSE states that any
order that is received while a UPIP is underway for the same series,
which would otherwise meet the price conditions to initiate a UPIP
auction, will cause the UPIP auction to immediately terminate.\84\
Further, any order that is received while a PIP auction is underway,
that would otherwise meet the price conditions to initiate a UPIP will
interact with the PIP as an Unrelated Order under the PIP rules.\85\
Any request to initiate a PIP (including from a market maker that has
received a directed order) while a PIP or UPIP is already in progress
in the same series will be rejected.\86\ The Commission believes that
BSE has adequately clarified the interaction among the UPIP, PIP, and
directed orders.\87\
---------------------------------------------------------------------------
\82\ See ISE Letter, supra note 4, at 3. For example, this
commenter noted that when a market maker receives a directed order
on BOX, it must either initiate a PIP or release the order to the
market within three seconds. Therefore, if there is a UPIP in
progress at the time the directed order is received, the market
maker cannot initiate a PIP. Id. at note 3.
\83\ See proposed Section 18, Chapter V, Supplementary Material
.02 and proposed Section 29, Chapter V, Supplementary Material .01
of the BOX Rules.
\84\ See proposed Section 29(s), Chapter V of the BOX Rules.
\85\ See proposed Chapter V, Section 18(i) of the BOX Rules.
\86\ Id. and BSE Letter, supra note 5, at 6.
\87\ Another commenter believes that the Commission should not
approve the proposed rule change until it has addressed the issue of
whether market makers will be able to unfairly discriminate against
certain customers when the UPIP or PIP auctions are used in
conjunction with a Directed Order process without anonymity. See
Amex Letter, supra note 4, at 2-3. The Commission believes that the
issue of anonymity in the Directed Order process is more
appropriately addressed in the context of the BSE proposed rule
change on that issue. See Securities Exchange Act Release Nos. 56014
(July 5, 2007), 72 FR 38104 (July 12, 2007) (SR-BSE-2007-31)
(extending to January 31, 2008 the effective date of Section
5(c)(i), Chapter 6 of the BOX Rules, which allows the BOX Trading
Host to identify to an Executing Participant the identity of the
firm entering a Directed Order); and 53357 (February 23, 2006), 71
FR 10730 (March 2, 2006) (SR-BSE-2005-52) (notice of proposed rule
change to permit Executing Participants to choose the firms from
which they will accept Directed Orders while providing complete
anonymity for Directed Orders that are passed on to the Executing
Participant for possible representation in a PIP auction).
---------------------------------------------------------------------------
One commenter questioned whether the AAO would interact in a UPIP
Auction.\88\ In response, BSE clarifies that the recently approved AAO
will be able to interact in a UPIP.\89\
---------------------------------------------------------------------------
\88\ See ISE Letter, supra note 4, at 3.
\89\ See BSE Letter, supra note 5, at note 26.
---------------------------------------------------------------------------
BSE also notes that the Limit Order that is associated with the AAO
that is priced at the standard minimum trading increment of five or ten
cents can start a UPIP if, at its rounded price, it would be executable
at the NBBO.\90\
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\90\ Id.
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I. Penny Pilot
One commenter argues that the Penny Pilot Program \91\ initiative
should prohibit the approval of the UPIP. This commenter believes that
the UPIP will distort Penny Pilot data.\92\ Another commenter believes
that the Penny Pilot is the appropriate method to approach penny
pricing in the options market because it is a fair and transparent
environment.\93\
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\91\ The Penny Pilot was approved by the Commission to allow BOX
to quote certain options series in pennies on a pilot basis. See
e.g., Securities Exchange Act Release No. 55155 (January 23, 2007),
72 FR 4741 (February 1, 2007) (SR-BSE-2006-49).
\92\ See Citadel Letter, supra note 4, at 7.
\93\ See ISE Letter, supra note 4, at 3 to 4.
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As discussed above, with respect to the commenters' substantive
arguments, the Commission believes the proposed rule change is
consistent with the Act. The Commission has previously approved
exchange proposals to trade in penny increments, including BSE's
PIP.\94\ The Commission believes it is consistent with the Act to
approve the
[[Page 4035]]
BSE's initiative designed to allow trading in penny increments.\95\
---------------------------------------------------------------------------
\94\ See Securities Exchange Act Release Nos. 49068 (PIP); 49323
(PIM); and 53222 (AIM), supra note 60.
\95\ The Exchange has represented that it will provide the
Commission with statistics regarding the UPIP for those classes
included in the Penny Pilot. See BSE Letter, supra note 5, at 8.
---------------------------------------------------------------------------
J. Acceleration of Proposed Rule Change as Amended
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.\96\ The Commission
believes that the changes made in Amendment No. 3 generally strengthen
the proposal. In Amendment No. 3, BSE made several changes to clarify
its rules,\97\ respond to commenters,\98\ and comply with the
requirements of the Act.\99\ The Commission believes that it has
received and fully considered substantial, meaningful comments with
respect to the BSE's proposal, as amended, and that Amendment No. 3
does not raise issues that warrant further delay. For these reasons,
the Commission finds good cause, consistent with section 19(b)(2) of
the Act,\100\ to grant accelerated approval of the proposed rule
change, as amended.
---------------------------------------------------------------------------
\96\ See Notice, supra note 3.
\97\ See, e.g., BSE clarifies that: The definition of an
Eligible Order does not include ``fill or kill'' orders; the UPIP
auction will only be available for certain classes of options as
determined from time-to-time by BOX; the cancellation of the UPIP
Order will result in the cancellation of the related Improvement
Orders and the UPIP auction itself; any unexecuted portion of an
Improvement Order will be cancelled; time priority will prevail
between a Proprietary Improvement Order and an Improvement Order
submitted by an Executing Participant; and in the instance when a
UPIP is concluded, only time priority will be granted to an order on
the BOX Book that executes against the remaining portion of a UPIP
Order if that order has been placed for the same beneficial account
as an Improvement Order in the UPIP auction.
\98\ See, e.g., BSE revises the proposal to apply its NBBO
trade-through filter at the conclusion of the UPIP auction.
\99\ See, e.g., BSE revises the proposal to provide that: In no
circumstances will the orders for a non-market maker broker-dealer
account of an Options Participant be executed before a Public
Customer or non-BOX Options Participant at the same price in the
UPIP; and it will be conduct inconsistent with just and equitable
principles of trade for (1) any Options Participant to enter
Unrelated Orders into BOX for the purpose of disrupting or
manipulating any UPIP auction, including purposely causing premature
termination or (2) for an Executing Participant to directly or
indirectly enter, modify, or cancel quotes or orders on BOX for the
purpose of disrupting, prematurely terminating or manipulating any
Improvement Auction.
\100\ 15 U.S.C. 78s(b)(2).
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V. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\101\ that the proposed rule change (SR-BSE-2006-16), as amended,
be, and it hereby is, approved on an accelerated basis.
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\101\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\102\
---------------------------------------------------------------------------
\102\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-1037 Filed 1-22-08; 8:45 am]
BILLING CODE 8011-01-P
