[Federal Register Volume 62, Number 17 (Monday, January 27, 1997)]
[Notices]
[Pages 3931-3935]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-1818]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38182; File No. SR-BSE-96-13]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the Boston
Stock Exchange, Inc. Relating to Its Specialist Performance Evaluation
Program
January 17, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on January 6, 1997,\3\ the Boston Stock Exchange, Inc. (``BSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons and to
grant accelerated approval to the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ On January 6 and January 10, 1997, the BSE filed Amendment
Nos. 1 and 2, respectively, with the Commission, the substance of
which have been incorporated into this notice.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The BSE seeks a twelve-month extension of its Specialist
Performance Evaluation Program (``SPEP'').\4\
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\4\ The Commission initially approved the BSE's SPEP pilot
program in Securities Exchange Act Release No. 22993 (March 10,
1986), 51 FR 8298 (March 14, 1986) (File No. SR-BSE-84-04). The
Commission subsequently extended the pilot program in Securities
Exchange Act Release Nos. 26162 (October 6, 1988), 53 FR 40301
(October 14, 1988) (File No. SR-BSE-87-06); 27656 (January 30,
1990), 55 FR 4296 (February 7, 1990) (File No. SR-BSE-90-01); 28919
(February 26, 1991), 56 FR 9990 (March 8, 1991) (File No. SR-BSE-91-
01); and 30401 (February 24, 1992), 57 FR 7413 (March 2, 1992) (File
No. SR-BSE-92-01). The BSE was permitted to incorporate objective
measures of specialist performance into its pilot program in
Securities Exchange Act Release No. 31890 (February 19, 1993), 58 FR
11647 (February 26, 1993) (File No. SR-BSE-92-04) (``February 1993
Approval Order''), at which point the initial pilot program ceased
to exit as a separate program. The current pilot program was
subsequently extended in Securities Exchange Act Release Nos. 33341,
(December 15, 1993) 58 FR 67875 (December 22, 1993) (``December 1993
Approval Order''); 35187 (December 30, 1994), 60 FR 2406 (January 9,
1995); and 36668 (January 2, 1996), 61 FR 672 (January 9, 1996)
(January 1996 Approval Order) (Pilot extended until December 31,
1996).
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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 self-regulatory organization
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 III below. The self-regulatory
organization 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
The purpose of the proposed rule change is to request an extension
of the Exchange's SPEP pilot program. The evaluation program, using the
BEACON
[[Page 3932]]
system,\5\ looks at all incoming orders routed to a specialist for
execution. A record of all action on these orders is accumulated in a
separate file from which four calculations are run.
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\5\ BEACON is the BSE's automated order-routing and execution
system. BEACON provides a guarantee of execution for market and
marketable limit orders up to and including 1,299 shares. In
addition, BEACON can be used to transmit orders not subject to
automatic execution. See BSE Rules, Ch. XXXIII, Secs. 2654-55.
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Section criteria for eligible orders include regular buy and sell
market and marketable limit orders only. Orders marked buy minus or
sell plus are excluded, as are crosses and all orders with qualifiers
(e.q., market-on-close, stop, stop limit, all or none, etc.). The order
entry date must equal the order execution date.
For each of the measures, including the Specialist Performance
Evaluation Questionnaire (``SPEQ''), a ten point scale will be applied
to a range of scores. Based on the raw score for each measure, the
respective specialist will receive an associated score between one and
ten points, which will be weighted as indicated for each measure.
The first measure is Turnaround Time, which calculates the average
number of seconds for all eligible orders based on the number of
seconds between the receipt of a guaranteed market or marketable limit
order in BEACON (i.e., for 1299 shares or less) and the execution,
partial execution, stopping or cancellation of the order. An order that
is moved from the auto-ex screen to the manual screen will accumulate
time until executed, partially executed, stopped or cancelled. This
calculation will not be in effect until the individual stock has opened
on the primary market. Certain situations, such as trading halts and
periods where the BEACON system is off auto-ex floorwide, will result
in blocks of time being excluded from the calculation. A specialist who
averaged a raw score of twenty-five (25) seconds will receive seven
points because it falls in the twenty-one (21) to twenty-five (25)
second range. This calculation will comprise 20% of the overall
evaluation program.
Turnaround Time
------------------------------------------------------------------------
Time in seconds Points
------------------------------------------------------------------------
1-10.......................................................... 10
11-15......................................................... 9
16-20......................................................... 8
21-25......................................................... 7
26-30......................................................... 6
31-35......................................................... 5
36-40......................................................... 4
41-45......................................................... 3
46-50......................................................... 2
51 and up..................................................... 1
------------------------------------------------------------------------
The second measure is Holding Orders Without Action, which measures
the number of market and marketable limit orders (all sizes included)
\6\ that are held without action for greater than twenty-five (25)
seconds. As in the Turnaround Time calculation, a stop, cancellation,
execution or partial execution stops the clock. The same exclusions
which apply in the Turnaround Time calculation also apply here.\7\
Thus, if a specialist receives a total of 100 market and marketable
limit orders and holds ten of them for more than twenty-five seconds,
his or her raw score of 10% would receive nine points as it falls in
the six to ten percent range. This calculation will comprise 5% of the
overall evaluation program.
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\6\ Unlike Turnaround Time, Holding Orders Without Action is not
limited to those orders guaranteed automatic execution through
BEACON.
\7\ The Holding Orders Without Action calculation will not be in
effect until the individual stock has opened on the primary market.
In addition, certain situations, such as trading halts and periods
where the BEACON system is off auto-ex floorwide, will result in
blocks of time being excluded from the Holding Orders Without Action
calculation. See December 1993 Approval Order.
Holding Orders Without Action
------------------------------------------------------------------------
Percentage of orders Points
------------------------------------------------------------------------
0-5........................................................... 10
6-10.......................................................... 9
11-15......................................................... 8
16-20......................................................... 7
21-25......................................................... 6
26-30......................................................... 5
31-35......................................................... 4
36-40......................................................... 3
41-45......................................................... 2
46 and up..................................................... 1
------------------------------------------------------------------------
This third measure is Trading Between the Quote, which measures the
number of market and marketable limit orders that are executed between
the best consolidated bid and offer where the spread is greater than
\1/8\th. Thus, if a specialist receives ten market and marketable limit
orders where the spread between the best consolidated bid and offer is
greater than \1/8\th, and such specialist executes five of the orders
between the bid and offer, his or her raw score would be 50% and would
receive nine points as it falls in the 46 to 50 percent range. This
calculation will comprise 35% of the overall evaluation program.
Trading Between the Quote
------------------------------------------------------------------------
Percentage of orders Points
------------------------------------------------------------------------
51 and up..................................................... 10
46-50......................................................... 9
41-45......................................................... 8
36-40......................................................... 7
31-35......................................................... 6
26-30......................................................... 5
21-25......................................................... 4
16-20......................................................... 3
11-15......................................................... 2
0-10.......................................................... 1
------------------------------------------------------------------------
The fourth measure is Executions in Size Greater than BBO, which
measures the number of market and marketable limit orders which exceed
the BBO size and are executed in a size larger than the BBO size. Thus,
if a specialist receives a total of ten market and marketable limit
orders which exceed the BBO size and executes nine of the orders in
sizes larger than the BBO size, his or her raw score would be 90% and
would receive eight points as it falls in the 86 to 90 percent range.
This calculation will comprise 35% of the overall evaluation program.
Executions in Size Greater Than BBO
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Percentage of orders Points
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96-100........................................................ 10
91-95......................................................... 9
86-90......................................................... 8
81-85......................................................... 7
76-80......................................................... 6
71-75......................................................... 5
66-70......................................................... 4
61-65......................................................... 3
56-50......................................................... 2
55 and below.................................................. 1
------------------------------------------------------------------------
The fifth measure is the SPEQ.\8\ The minimum acceptable raw score
for each question is 4.5. Thus, if a specialist receives a raw score of
4.5 for each question for a weighted raw score (based on the weights
for each question within the questionnaire) of 50.0052, he or she would
receive four points as it falls in the 50 to 54 weighted score range.
The questionnaire will comprise 5% of the overall evaluation program.
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\8\ Several changes were made to the SPEQ in view of the
adoption of the objective measures which have made some questions
obsolete. See the January 1996 Approval Order.
Questionnaire
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Weighted raw score Points
------------------------------------------------------------------------
83 and above.................................................. 10
77-82......................................................... 9
72-76......................................................... 8
66-71......................................................... 7
[[Page 3933]]
61-65......................................................... 6
55-60......................................................... 5
50-54......................................................... 4
44-49......................................................... 3
38-43......................................................... 2
37 and below.................................................. 1
------------------------------------------------------------------------
Using the examples from each measure above, the following weighted
point totals would result in an overall program score of 8.0:
------------------------------------------------------------------------
Weighted
Measure Points points
------------------------------------------------------------------------
Turnaround Time (20%)............................... 7 1.40
Holding Orders Without Action (5%).................. 9 0.45
Trading Between the Quote (35%)..................... 9 3.15
Executions in Size BBO (35%)............ 8 2.80
Questionnaire (5%).................................. 4 0.20
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....... 8.00
------------------------------------------------------------------------
Any specialist who is deficient \9\ in any one of the objective
measures for any review period will be required to appear before the
Performance Improvement Action Committee (``PIAC'') to discuss ways of
improving performance. If performance does not improve in the
subsequent period, the specialist will appear before the Market
Performance Committee (``MPC'') for appropriate action, as described
below.\10\
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\9\ A specialist is deficient in any measure if he or she scores
below the minimum adequate performance thresholds set forth below.
See infra text accompanying note 10.
\10\ The SEC notes that, in the event a specialist's performance
does not improve, the Supplemental Material to the SPEP authorizes
the MPC to take the following actions: suspending the specialist's
trading account privilege, suspending his or her alternate
specialist account privilege, or reallocating his or her specialty
stocks. See BSE Rules, Ch. XV, para. 2156.10-2156.60.
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Any specialist who falls below the threshold level for the overall
evaluation program for any review period will be required to appear
before the MPC, which will take action to address the deficient
performance as provided for in the Supplemental Material to the
SPEP.\11\ A specialist who is ranked in the bottom 10% of the overall
evaluation program but who is above the threshold level for the overall
program will be subject to staff review to determine if there is
sufficient reason to warrant informing the PIAC of potential
performance problems.
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\11\ See supra note 8.
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The following threshold scores have been set at which a specialist
will be deemed to have adequately performed: \12\
\12\ A specialist who receives a score that is below a minimum
adequate performance threshold will be deemed to be deficient in
that measure. See supra note 7.
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Overall Evaluation Score--at or above weighted score of 6.70
Turnaround Time--below 21.0 seconds (8 points)
Holding Orders Without Action--below 21.0% (7 points)
Trading Between the Quote--at or above 31.0% (6 points)
Executions in Size > BBO--at or above 81.0% (7 points)
Questionnaire--at or above weighted score of 50.0 (4 points)
Due to the subjectiveness of the questionnaire, a specialist who is
deficient on the questionnaire alone will be subject to review by
Exchange staff to determine if there is sufficient reason to warrant
informing the PIAC of potential performance problems. However, a
deficient score on the questionnaire may result in a performance
improvement action when it lowers the overall program score below 6.70.
The Exchange requests an extension of the current pilot program
through December 31, 1997. This approximate twelve-month period will
enable the Exchange to further evaluate the appropriateness of the
measures and their respective weights, as well as the effectiveness of
the overall evaluation program.
2. Statutory Basis
Section 6(b)(5) of the Act \13\ is the basis of the proposed rule
change in that the SPEP results weigh heavily in stock allocation
decisions and, as a result, specialists are encouraged to improve their
market quality and administrative duties, thereby promoting just and
equitable principles of trade and aiding in the perfection of a free
and open market and a national market system.
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\13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Other
No written comments were either solicited or received.
III. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
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 provision
of 5 U.S.C. 552, will be available for inspection and copying at the
Commission's Public Reference Room. Copies of such filing will also be
available for inspection and copying at the principal office of the
Exchange. All submissions should refer to File No. SR-BSE-96-13 and
should be submitted by February 18, 1997.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
The Commission believes that specialists play a crucial role in
providing stability, liquidity, and continuity to the trading of
stocks. Among the obligations imposed upon specialists by the Exchange,
and by the Act and the rules promulgated thereunder, is the maintenance
of fair and orderly markets in their designated securities.\14\ To
ensure that specialists fulfill these obligations, it is important that
the Exchange conduct effective oversight of their performance. The
BSE's SPEP is critical to this oversight.
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\14\ Rule 11b-1, 17 CFR 240.11b-1; BSE Rules Ch. XV, para.
2155.01.
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In its 1993 order approving the incorporation of objective measures
of performance,\15\ the Commission asked the Exchange to monitor the
effectiveness of the amended SPEP. Specifically, the Commission
requested information about the number of specialists who fell below
acceptable levels of performance for each objective measure, the
questionnaire and the overall program; and about the specific measures
in which each such specialist was deficient. The Commission also
requested information about the number of specialists who, as a result
of each condition for review, were referred to the PIAC and/or the MPC;
and about the type of action taken with respect to each such deficient
specialist. In September
[[Page 3934]]
1993, October 1994, December 1995 and January 1997, the BSE submitted
to the Commission monitoring reports regarding its amended SPEP. The
reports describe the BSE's experience with the pilot program during
1993, 1994, 1994 and the first two periods of 1996.
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\15\ For a description of the Commission's rationale for
approving the incorporation of objective measures of performance
into the BSE's SPEP on a pilot basis, see February 1993 Approval
Order, supra note 3. The discussion in the aforementioned order is
incorporated by reference into this order.
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In its January 1996 Approval Order extending the pilot program, the
Commission set forth concerns with the pilot program. The Commission
reviewed the BSE's experience with its minimum adequate performance
thresholds and noted that the acceptable levels of performance had not
been revised since the beginning of the pilot and should be reviewed.
The Commission also stated that taking the SPEP as a whole, most
potential performance problems needed to be brought to the attention of
the appropriate committee and that the BSE should examine its SPEP to
ensure that adequate corrective actions are taken with respect to each
deficient specialist. The BSE addressed these concerns and certain
changes to the SPEP were approved by the Commission, as discussed in
more detail below. However, the Commission believes that the Exchange
should continue to monitor these concerns.
In terms of the overall scope of the SPEP, the Commission continues
to believe that objective measures, together with a floor broker
questionnaire, should generate sufficiently detailed information to
enable the Exchange to make accurate assessments of specialist
performance. In this regard, the objective criteria have been useful in
identifying how well specialist carry out certain aspects (i.e.,
timeliness of execution, price improvement and market depth) of their
responsibilities as specialists. In conclusion, although the Commission
believes the BSE should evaluate means to strengthen its performance
oversight program, the pilot has been a positive first step towards
developing a more effective SPEP. Accordingly, the Commission believes
that it is appropriate to extend the pilot program for an approximate
twelve-month period, expiring December 31, 1997.
This period will allow the Exchange to respond to the Commission's
continuing concerns about the SPEP. First, the Commission expects the
BSE to continue to evaluate the incorporation of additional objective
criteria,\16\ so that the Exchange can conduct a thorough analysis of
specialist performance.\17\ At the same time, the BSE should continue
to assess whether each measure, as well as the questionnaire, is
assigned an appropriate weight.\18\ In addition, the Commission expects
the Exchange to continue to conduct an on-going examination of its
minimum adequate performance thresholds, in order to ensure that they
continue to be set at appropriate levels.\19\ The Commission also
continues to believe that relative performance rankings that subject
the bottom 10% of all specialist units to review by an Exchange
committee are an important part of an effective evaluation program. The
BSE should continue to closely monitor the conditions for review and
should take steps to ensure that all specialists whose performance is
deficient and/or diverges widely from the best units will be subject to
meaningful review. In the Commission's opinion, a meaningful review
process would ensure that adequate corrective actions are taken with
respect to each deficient specialist.\20\ The Commission would have
difficulty granting permanent approval to a SPEP that did not include a
satisfactory response to the concerns described above.
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\16\ The Commission notes that in a previous rule change
proposal, the Exchange stated it was currently engaged in an effort
to develop other measures of performance for inclusion in the SPEP
and hoped to file for modification to the program in the near
future. See Securities Exchange Act Release No. 37581 (August 19,
1996), 61 FR 43797 (August 26, 1996) (August 1996 Release). No new
objective performance measures have been added at this time.
\17\ For example, the BSE could develop additional measures of
market depth, such as how often the specialist's quote exceeds 500
shares or how often the BSE quote, in size, is larger than the BBO
(excluding quotes for 100 shares). Another possible objective
criteria could measure quote performance (i.e., how often the BSE
specialist's quote, in price, is alone at or tied with the BBO).
\18\ The Commission had recommended in its January 1996 Approval
Order that the BSE consider either having only one measure out of
the Turnaround Time and Holding Orders Without Action categories or
reducing the weights of the existing measures, which together
accounted for 30% of the current SPEP, because of the substantial
overlap between those two measures. In response to this
recommendation, the BSE did reduce the weights of these two measures
to 25% of the overall program. In addition, the decrease in these
two categories, as well as a decrease in the weight of the SPEQ to
5%, enabled the Exchange to increase the weight of each of the other
objective criteria from 25% to 35%. See August 1996 Release.
\19\ In response to this recommendation, which was also included
in the January 1996 Approval Order, the BSE revised some of the
minimum adequate performance levels. The revised levels provide a
higher benchmark for acceptable specialist performance on the
Exchange, which in turn benefits the execution of public orders on
the BSE and further the protection of investors. See August 1996
Release.
\20\ In response to these comments, the BSE revised its review
process by tightening the standards for committee review for
substandard specialist performance both in the overall program and
in individual measures. The criteria for PIAC review for substandard
performance in any one objective measure was reduced from two out of
three consecutive review periods to any one review period. The
criteria for MPC review of substandard performance in any one
objective measure was reduced from three out of four consecutive
review periods to two out of three consecutive review periods, while
MPC review for substandard overall performance was reduced from two
out of three consecutive review periods to any one review period.
See August 1996 Release.
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The Commission therefore requests that the BSE submit a report to
the Commission, by September 17, 1997, describing its experience with
the pilot. At a minimum, this report should contain data, for the last
review period of 1996 and the first two review periods of 1997, on (1)
the number of specialists who fell below acceptable levels of
performance for each objective measure,\21\ the questionnaire and the
overall program, and the specific measures in which each such
specialist was deficient; (2) the number of specialists who, as a
result of the objective measures, appeared before the PIAC for informal
counseling; (3) the number of such specialists then referred to the MPC
and the type of action taken; (4) the number of specialists who, as a
result of the overall program, appeared before the MPC and the type of
action taken; (5) the number of specialists who, as a result of the
questionnaire or falling in the bottom 10% were referred by the
Exchange staff to the PIAC and the type of action taken (this should
include the number of specialists then referred to the MPC and the type
of action taken by that Committee); and (6) a list of stocks
reallocated due to substandard performance and the particular unit
involved. The report also should discuss the specific action taken by
the BSE to develop additional objective measures and address the other
concerns noted above. Any requests to modify this pilot, to extend its
effectiveness or to seek permanent approval for the SPEP should be
submitted to the Commission by September 17, 1997, as a proposed rule
change pursuant to Section 19(b) of the Act.
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\21\ For each objective measure, the Commission also requests
that the BSE provide the mean and median scores.
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For the reasons discussed above, the Commission finds that the
BSE's proposal to extend its SPEP pilot program until December 31, 1997
is consistent with the requirements of Sections 6 and 11 of the Act and
the rules and regulations thereunder applicable to a national
securities exchange. Specifically, the Commission finds that the
proposed rule change is consistent with the Section 6(b)(5) \22\
requirement that the rules of the
[[Page 3935]]
Exchange be designed to promote just and equitable principles of trade,
to remove impediments to and perfect the mechanism of a free and open
market and a national market system, and, in general, to protect
investors and the public interest.
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\22\ 15 U.S.C. 78f(b)(5).
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Further, the Commission finds that the proposal is consistent with
Section 11(b) of the Act \23\ and Rule 11b-1 thereunder \24\ which
allow securities exchanges to promulgate rules relating to specialists
in order to maintain fair and orderly markets and to remove impediments
to and perfect the mechanism of a national market system.
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\23\ 15 U.S.C. 78k(b).
\23\ 17 CFR 240.11b-1.
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The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of publication of
notice thereof in the Federal Register. This will permit the pilot
program to continue and allow the BSE time to consider improvements to
its program. In addition, the rule change that implemented the pilot
program was published in the Federal Register for the full comment
period, and no comments were received.\25\ Accordingly, the Commission
believes that it is consistent with the Act to accelerate approval of
the proposed rule change.
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\25\ See February 1993 Approval Order, supra note 3.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\26\ that the proposed rule change (File No. SR-BSE-96-13) is hereby
approved on a pilot basis until December 31, 1997.
\26\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-1818 Filed 1-24-97; 8:45 am]
BILLING CODE 8010-01-M
