[Federal Register Volume 59, Number 199 (Monday, October 17, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-25603]
[[Page Unknown]]
[Federal Register: October 17, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34819; File No. SR-BSE-94-12]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by Boston Stock Exchange, Inc. Relating to Its Specialist
Performance Evaluation Program
October 11, 1994.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on October
3, 1994, as subsequently amended on October 6, 1994,\1\ the Boston
Stock Exchange, Inc. (``BSE'' or ``Exchange'') filed with the
Securities and Exchange Commission (``Commission'' or ``SEC'') the
proposed rule change as described in Items I, II and III 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.
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\1\Amendment No. 1 corrected certain typographical errors in the
proposal.
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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'').\2\
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\2\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), at which point
the initial pilot program ceased to exist as a separate program.
Commission approval of the BSE's current SPEP pilot program expires
on December 31, 1994. See Securities Exchange Act Release No. 33341
(December 15, 1993), 58 FR 67875 (December 22, 1993) (File No. SR-
BSE-93-16).
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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 IV 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,\3\ 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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\3\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. Sec. 5(a) and 7.
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Selection 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.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 (``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 (i.e., for 1, 299 shares or less)\4\ in BEACON 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 canceled. 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 7 points since it falls
in the 21 to 25 second range. This calculation will comprise 15% of the
overall evaluation program.
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\4\Telephone conversation between Karen Aluise, Assistant Vice
President, BSE, and Beth Stekler, Attorney, Division of Market
Regulation, SEC, on September 23, 1993.
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)\5\ 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.\6\ Thus if a specialist receives a total of 100 market and
marketable limit orders and holds ten (10) of them for more than 25
seconds, his/her raw score of 10% would receive 9 points since it falls
in the 6 to 10 percent range. This calculation will comprise 15% of the
overall evaluation program.
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\5\Unlike Turnaround Time, see supra text accompanying note 4,
Holding Orders Without Action is not limited to those orders
guaranteed automatic execution through BEACON.
\6\According to the BSE, 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. Telephone conversations
between Karen Aluise, Assistant Vice President, BSE, and Beth
Stekler, Attorney, Division of Market Regulation, SEC, on September
23, 1993.
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
------------------------------------------------------------------------
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 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/her raw score would be 50% and would
receive 9 points since it falls in the 46 to 50 percent range. This
calculation will comprise 25% 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
ether 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/her raw score would be 90% and would
receive 8 points since 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
------------------------------------------------------------------------
Percentage of orders Points
------------------------------------------------------------------------
96-100....................................................... 10
91-95........................................................ 9
86-90........................................................ 8
81-85........................................................ 7
76-80........................................................ 6
71-75........................................................ 5
66-70........................................................ 4
61-65........................................................ 3
55-60........................................................ 2
55 and below................................................. 1
------------------------------------------------------------------------
In addition, several changes have been made to the questionnaire
(SPEQ) in view of the adoption of the objective measures which have
made some questions obsolete. The minimum acceptance 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/she would
receive 4 points since it falls in the 50 to 54 weighted raw score
range. The questionnaire will comprise 20% of the overall evaluation
program.
------------------------------------------------------------------------
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 for 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 >BB0 (25%)....................... 8 2.00
Questionnaire (20%)................................. 4 0.80
-------------------
7.45
------------------------------------------------------------------------
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 to discuss ways of improving
performance. If performance does not improve in the subsequent period,
the specialist will appear before the Market Performance Committee for
appropriate action, as described below.\8\
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\7\A specialist is deficient in any measure if he/she scores
below the minimum adequate performance thresholds set forth below.
See infra, text accompanying note 10.
\8\The Commission notes that, in the event a specialist's
performance does not improve, SPEP's Supplemental Material
authorizes the Market Performance Committee to take the following
actions: suspending the specialist's trading account privilege,
suspending his/her alternate specialist account privilege or
reallocating his/her specialty stocks.
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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 Market Performance Committee and the
Committee will take action to address the deficient performance as
provided for in Paragraph 2156.10-.60.\9\ A specialist who is ranked in
the bottom ten percent 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 Performance Improvement Action Committee of potential
performance problems.
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\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\
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\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.
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 (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 Performance Improvement Action Committee of potential
performance problems. However, a deficient score on the questionnaire
may result in performance improvement action where 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
The basis under the Act for the proposed rule change is Section
6(b)(5) 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 natural market system.
B. Self-Regulatory Organization's Statement on Burden on Competition
No burden on competition is perceived by the adoption of the
proposed rule change.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants or Others
Comments have been neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the publication of this notice in the Federal
Register or within such other period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. 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 provisions
of 5 U.S.C. Sec. 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
BSE. All submissions should refer to File No. SR-BSE-94-12 and should
be submitted by November 7, 1994.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-25603 Filed 10-14-94; 8:45 am]
BILLING CODE 8010-01-M
