[Federal Register Volume 61, Number 6 (Tuesday, January 9, 1996)]
[Notices]
[Pages 672-676]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-236]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36668 ; File No. SR-BSE-95-16]
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 22, 1996.
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 December 14, 1995, 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
[[Page 673]]
been prepared by the self-regulatory organization. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The BSE seeks a twelve-month extension of its Specialist
Performance Evaluation Program (``SPEP'').\3\
\3\ The SEC 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 SEC 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 exist 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''); and
35187 (December 30, 1994), 60 FR 2406 (January 9, 1995). SEC
approval of the current pilot program expires on December 31, 1995.
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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 incorporate certain
objective measures into the Exchange's SPEP. The evaluation program,
using the BEACON system,\4\ 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.
\4\ 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, Paras. 2654-55.
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Selection criteria for eligible orders include regulator 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.g., 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, a 10 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 10 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 25 seconds will receive seven points as it
falls in the 21 to 25 second range. This calculation will comprise 15%
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
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The second measure is Holding Orders Without Action, which measures
the number of market and marketable limit orders (all sizes included)
\5\ that are held without action for greater than 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.\6\ Thus, if a specialist
receives a total of 100 market and marketable limit orders and holds 10
of them for more than 25 seconds, his or her raw score of 10% would
receive nine points as it falls in the six to 10 percent range. This
calculation will comprise 15% of the overall evaluation program.
\5\ Unlike Turnaround Time, Holding Orders Without Action is not
limited to those orders guaranteed automatic execution through
BEACON.
\6\ 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
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Percentage of orders Points
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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
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The 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 10 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 25% of the overall evaluation program.
Trading Between the Quote
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Percentage of orders Points
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51 and up................................................. 10
46-50..................................................... 9
41-45..................................................... 8
36-40..................................................... 7
31-35..................................................... 6
26-30..................................................... 5
21-25..................................................... 4
[[Page 674]]
16-20..................................................... 3
11-15..................................................... 2
0-10...................................................... 1
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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 size larger than the BBO size. Thus,
if a specialist receives a total of 10 market and marketable limit
orders which exceed the BBO size and executes nine of the orders in
size 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 25% 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
56-60..................................................... 2
55 and below.............................................. 1
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In addition, several changes have been made to the Specialist
Performance Evaluation Questionnaire in view of the adoption of the
objective measures which have made some questions obsolete. The minimum
acceptable raw score for each question remains at 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 20% of the overall evaluation program.
Questionnaire
------------------------------------------------------------------------
Weighted raw score Points
------------------------------------------------------------------------
83 and above.............................................. 10
77-82..................................................... 9
72-76..................................................... 8
66-71..................................................... 7
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 7.45:
------------------------------------------------------------------------
Weighted
Measure Points points
------------------------------------------------------------------------
Turnaround Time (15%)......................... 7 1.05
Holding Orders Without Action (15%)........... 9 1.35
Trading Between the Quote (25%)............... 9 2.25
Executions in Size > BBO (25%)................ 8 2.00
Questionnaire (20%)........................... 4 0.80
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7.45
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The rule has been amended to reflect that any specialist who is
deficient \7\ in any one of the objective measures for two out of three
consecutive review periods 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.\8\
\7\ 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.
\8\ 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 two out of three consecutive review periods 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.\9\ 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.
\9\ 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: \10\
\10\ 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 5.80
Turnaround Time--below 21.0 seconds (8 points)
Holding Orders Without Action--below 21.0% (7 points)
Trading Between the Quote--at or above 26.0% (5 points)
Executions in Size > BBO--at or above 76.0% (6 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 5.80.
The Exchange requests an extension of the current pilot program for
a twelve-month period to begin on January 1, 1995. This 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 \11\ 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.
\11\ 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 Others
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
[[Page 675]]
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 provisions of 5 U.S.C.
552, will be available for inspection and copying at the Commission's
Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.
20549. 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-95-16 and should be submitted by January 30,
1996.
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.\12\ 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.
\12\ Rule 11b-1, 17 CFR 240.11b-1; BSE Rules Ch. XV, para.
2155.01.
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In its order approving the incorporation of objective measures of
performance,\13\ 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.
\13\ 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 September 1993, October 1994, and December 1995, 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, and the first two review periods of 1995. 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 specialists carry out certain aspects (i.e., timeliness of
execution, price improvement and market depth) of their
responsibilities as specialists.
The Commission also has reviewed the BSE's experience with its
minimum adequate performance thresholds. Although it appears that these
standards have been helpful in identifying some specialists with
potential performance problems, as well as providing an incentive for
improved market making performance, the Commission notes that the
acceptable levels of performance have not been revised since the
inception of the pilot and, as discussed below, should be reviewed.
Finally, the Commission continues to believe that, taking the SPEP
as a whole, most potential performance problems should be brought to
the attention of the appropriate committee. In terms of the BSE's
response to the deficiencies it identified, the BSE should examine its
SPEP to ensure that adequate corrective actions are taken with respect
to each deficient specialist.
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 current pilot program for an additional
twelve-month period, expiring December 31, 1996. This twelve-month
period will allow the Exchange to respond to the Commission's concerns
about the SPEP, as set forth below. First, the Commission expects the
BSE to evaluate the incorporation of additional objective criteria, so
that the Exchange can conduct a thorough analysis of specialist
performance.\14\ At the same time, the BSE should assess whether each
measure, as well as the questionnaire, is assigned an appropriate
weight.\15\ Moreover, the Commission expects the Exchange 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. 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. Finally, the BSE should 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. The Commission
would have difficulty granting permanent approval to a SPEP that did
not include a satisfactory response to the concerns described above.
\14\ 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).
\15\ In this regard, because of the substantial overlap between
Turnaround Time and Holding Orders Without Action, the SEC
recommends that the BSE consider either having only one measure in
this category (i.e., timeliness of execution) or reducing the
weights of the existing measures, which together account for 30% of
the current SPEP.
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The Commission therefore requests that the BSE submit a report to
the Commission, by September 16, 1996, describing its experience with
the pilot. At a minimum, this report should contain data, for the last
review period of 1995 and the first two review periods of 1996, on (1)
the number of specialists who fell below acceptable levels of
performance for each objective measure,\16\ 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
[[Page 676]]
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, revise the minimum
adequate performance thresholds and the assigned weights for each
measure, 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 16, 1996, as a proposed rule change pursuant to Section 19(b)
of the Act.
\16\ For each objective measure, the SEC 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 for an additional
twelve-month period 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)\17\ requirement that the rules of the 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.
\17\ 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 \18\ and Rule 11b-1 thereunder \19\ 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.
\18\ 15 U.S.C. 78k(b).
\19\ 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 on an uninterrupted basis 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.\20\
Accordingly, the Commission believes that it is consistent with the Act
to accelerate approval of the proposed rule change.
\20\ See February 1993 Approval Order, supra note 3.
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It is therefore ordered, pursuant to Section 19(b)(2) \21\ that the
proposed rule change is hereby approved on a pilot basis until December
31, 1996.
\21\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\22\
\22\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-236 Filed 1-8-96; 8:45 am]
BILLING CODE 8010-01-M
