[Federal Register Volume 60, Number 194 (Friday, October 6, 1995)]
[Notices]
[Pages 52440-52443]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-24910]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36323; File No. SR-BSE-95-14]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the Boston
Stock Exchange, Inc., Relating to its Competing Specialist Pilot
Program
September 29, 1995.
I. Introduction
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 September 25, 1995, the Boston Stock Exchange, Inc. (``BSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change, and on September 27, 1995,
Amendment No. 1 thereto,\3\ as described in Items 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.
\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4 (1994).
\3\ See letter from Karen Aluise, Assistant Vice President, BSE,
to Glen Barrentine, Senior Counsel, SEC, dated September 27, 1995.
Amendment No. 1 amended the request for an extension through June
28, 1996, to an extension through March 29, 1996.
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II. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The BSE seeks to extend the current pilot program for competing
specialists on its floor until March 29, 1996, and to adopt clarifying
language for limit order execution under the pilot. The Exchange also
proposes to expand the program to four competing specialists that may
trade up to 100 stocks each.
III. 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 extend the current
pilot program for competing specialists until March 29, 1996 and to
clarify the priority rule regarding the execution of limit orders on
the central limit book.\4\
\4\ The language of the proposed rule change is as follows, with
additions to the current rule in italics and deletions in brackets:
Because there is only one Exchange market in a security subject
to competition, all limit [Limit] orders sent to the Exchange will
be maintained by the BEACON System's central limit book and will be
[entrusted to each competing specialist are to be represented and]
executed strictly according to time priority as to receipt of the
order in the BEACON System, irrespective of firm order routing
procedures.
This rule change previously was published for public comment in
Securities Exchange Act Release No. 36100 (August 14, 1995), 60 FR
43628 (August 22, 1995), as an amendment to a BSE request for
permanent approval of the competing specialist program. See File No.
SR-BSE-95-02.
[[Page 52441]]
This competing specialist program has been operating on a pilot
basis since May 18, 1994.\5\ In addition to extending the pilot until
March 29, 1996, the Exchange proposes to expand the pilot. The program
currently provides for up to two competing specialists in a stock on
the floor of the Exchange in addition to the regular specialists. The
Exchange is seeking to increase the number of competitors from two to
four. The Exchange also proposes to increase the number of stocks per
competing specialist firm from 20 to 100 for the duration of the pilot
program.
\5\ See Securities Exchange Act Release No. 34078 (May 18,
1994), 59 FR 27082 (May 25, 1994).
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The Exchange believes that these increases are reasonable and will
enable the Exchange to further evaluate the effectiveness of the
program on a wider scale to determine if any changes are necessary to
improve the program and the Exchange's market-making function
generally. The Exchange believes the program has proven to provide
adequate protection of customer orders sent to the Exchange and has
maintained a true agency auction market for customer orders.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b)(5) of the Act in that it furthers the objectives to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, 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; and is not
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has neither solicited nor received comments on the
proposed rule change.\6\
\6\ The Commission received two comment letters regarding the
BSE's request for permanent approval of the competing specialist
program. See letter from Paula Gavin, Chair, NYSE Individual
Investors Advisory Council, to Chairman Arthur Levitt, SEC, dated
July 17, 1995 (``Gavin Letter'') (asserting that preferencing
programs deny orders the benefits and protections of auction market
trading); and letter from Robert Jennings, Faculty Fellow and
Professor of Finance, Indiana University School of Business, to
Jonathan Katz, Secretary, SEC, dated June 30, 1995 (containing a
preliminary draft of an academic paper from Indiana University that
studied the short term effects of preferencing on market quality and
found any such effects to be minimal). These letters are available
at the Commission in File No. SR-BSE-95-02.
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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 NW., 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 NW.,
Washington, D.C. 20549. 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-95-14 and should be
submitted by October 27, 1995.
V. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
A. Description
The BSE normally assigns one specialist to each stock traded on the
Exchange floor (the ``regular'' specialist). The competing specialist
program allows the Exchange to approve additional specialists for a
particular stock (``Competing Specialists''), who compete with each
other and the regular specialist on the trading floor of the
Exchange.\7\ The competing specialist pilot currently limits the number
of specialists that can compete in a stock to three--one regular
specialist and up to two Competing Specialists. The pilot also limits
each Competing Specialist to a maximum of 10 stocks unless the Market
Performance Committee approves an increase of up to 20 stocks per
applicant firm. The BSE proposes to expand these limitations to allow
up to four Competing Specialists that may compete in up to 100 stocks
each.
\7\ The Commission notes that the Competing Specialists must
conduct their activity on the floor of the Exchange. There are no
existing Exchange rules that allow specialists to operate off the
floor of the Exchange. Such a change in operations would require
Commission approval.
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Under the pilot program, Competing Specialists have the same
affirmative and negative market making obligations as regular
specialists.\8\ The regular specialist, however, remains responsible
for (1) updating all quotations,\9\ (2) coordinating all openings and
reopenings to ensure that they are unitary, (3) inputing quotations on
the Intermarket Trading System (``ITS'') to reflect the best BSE quote
among all the specialists,\10\ and (4) coordinating trading halts.
\8\ Among the obligations imposed upon specialists by the
Exchange, and by the Act and rules thereunder, is the maintenance of
fair and orderly markets. See, e.g., 17 CFR 240.11b-1; BSE Rules,
Ch. XV, Section 2.
\9\ The BSE needs to implement system upgrades that will allow
the Competing Specialists to enter their own quotes into BEACON. The
system will coordinate the aggregation and dissemination of
quotations, but the regular specialist will continue to coordinate
openings, reopenings, and trading halts. See infra text accompanying
note 28.
\10\ See id. Regardless of the number of specialists competing
in a stock, the BSE displays only one consolidated quotation (the
best quote among all the specialists) to other markets in the
National Market System at all times.
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Under the competing specialist program, the Exchange's rules
governing the auction market principles of priority, parity, and
precedence remain unchanged for quotes at the ITS/BBO.\11\ Specialists
quoting at the ITS/BBO have priority over specialists not quoting at
the ITS/BBO. Under the rules, if two or more specialists are quoting at
the ITS/BBO, the earliest bid/offer at that price has time priority and
will be filled first up to its specified size. If the specialists are
on both price and time parity at the ITS/BBO, all bids/offers equal to
or greater than the size of the contra-side order are on parity and
entitled to precedence over smaller orders.
\11\ See BSE Rules, Ch. II. Section 6.
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When none of the specialists are quoting at the ITS/BBO, the
competing specialist program permits orders to be directed to a
particular specialist for execution (i.e., there is no priority between
quotes outside of the ITS/BBO).\12\ If a particular specialist is not
[[Page 52442]]
specified, the order is directed to the regular specialist unless the
routing firm is affiliated with a Competing Specialist.\13\ In that
case, the order is routed automatically to that member firm's
affiliated specialist, thereby preventing member firms affiliated with
a specialist from routing non-profitable orders through the BSE's
automated order routing system (``BEACON'') to another specialist when
market conditions are unfavorable.
\12\ For example, assume that the ITS/BBO is 20 bid to 20\1/8\
offered, and specialist A is bidding 19\3/4\ while specialist B is
bidding 19\1/2\. A market order to sell may be directed to
specialist B for execution even through specialist A has a better
bid because neither specialist is bidding at the ITS/BBO. Under the
competing specialist program, specialist B would execute the order
at 20 (the ITS best bid) or better. If specialist A had been bidding
20 (the ITS best bid), specialist A would have had priority to
execute the order even though it was directed to specialist B.
\13\ As noted above, however, if the Competing Specialist is
quoting the ITS/BBO and clearly has established priority on the BSE
floor, then the Competing Specialist will fill the order despite the
default routing to the regular specialist.
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All limit orders in BEACON are represented and executed strictly
according to time priority, irrespective of firm routing
procedures.\14\ BEACON (which handles approximately 95% of all order
flow on the BSE) automatically executes incoming orders against any
contra-side orders on the limit order book. Prior to automatic
execution, however, all market and marketable limit orders are exposed
to the designated specialist for 15 seconds for possible price
improvement.\15\ Only where there is no contra-side order on the limit
order book (and no other specialist has a priority quote at the ITS/
BBO) is the incoming order routed to the designated specialist for
execution.
\14\ The BSE is proposing to codify this policy in Chapter XV,
Section 18, of the BSE Rules.
\15\ See BSE Rules, Ch. II, Sec. 6.
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The BSE represents that it is in the process of developing
additional enhancements to BEACON to assist the efficiency of the
competing specialist program. First, at the outset of the pilot only
the regular specialist was sent quote alerts \16\ and trade alerts \17\
in a given security. The BSE represents that BEACON has been modified
so that such alerts are currently sent to the Competing Specialist.\18\
Additionally, BEACON recently was enhanced to alert the regular
specialist to trade-throughs of the BSE market.\19\ The Exchange
anticipates providing this alert to Competing Specialists as well.\20\
In addition, the regular specialist currently must coordinate pre-
openings with Competing Specialist verbally. The BSE expects to
implement shortly improvements to BEACON that enable each specialist to
directly enter pre-opening trading interest into BEACON.\21\
\16\ Quote alerts are messages sent by BEACON to a BSE
specialist when a quote from among the ITS participants occurs at or
through the price at which there is a limit order on the BSE book.
\17\ Trade alerts are messages sent by BEACON to the BSE
specialist when a trade occurs among the ITS participants at the
price of an outstanding limit order on the specialist's book.
\18\ Conversation between George Mann, General Counsel and
Senior Vice President, BSE, and N. Amy Bilbija, Attorney,
Commission, on June 23, 1995.
\19\ A ``trade-through'' of the BSE market occurs whenever
another ITS Participant initiates the purchase of a security at a
price that is higher than the price at which the security is being
offered (or initiates the sale at a price lower than the price at
which the security is being bid) at the time of purchase (or sale)
on the BSE.
\20\ See BSE January Report, infra note 25.
\21\ See id.
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In addition, Competing Specialists currently do not have the
capability to enter their own quotes into BEACON, but rather must
communicate them orally to the regular specialist who then enters the
quote into BEACON on the Competing Specialist's behalf. In order to
encourage competitive quoting by all specialists making markets in a
security, the BSE has been working to modify BEACON so that the system
will accept quotes from Competing Specialists. Because there currently
is only one quote entered into the system by the regular specialist,
BEACON presently routes orders as directed without systematically
determining whether another specialist may have a priority quote at the
ITS/BBO. Once the system is enhanced so that BEACON accepts quotes from
each specialist directly, the BSE will also reprogram BEACON to route
incoming orders to the specialist with priority on the Exchange at the
ITS/BBO, or, if no such priority has been established, to the
designated specialist.\22\
\22\ See infra note 38.
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B. Discussion
The Commission finds that the BSE's proposal to extend its
competing specialist pilot program, as amended, to March 29, 1996, is
consistent with the requirements 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 Section 6(b)(5) of the Act,\23\ which requires that the
rules of an exchange be designed to promote just and equitable
principles of trade, prevent fraudulent and manipulative acts, 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.
\23\ 15 U.S.C. 78f(b)(5) (1988).
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In its original pilot approval order, the Commission expressed
concerns regarding what impact the competing specialist program might
have on the BSE market. To this end, the Commission requested that the
BSE submit quarterly data reports and a report analyzing such data.\24\
The BSE has filed these interim reports with the Commission.\25\
\24\ See Securities Exchange Act Release No. 34078, supra note
5.
\25\ See Competing Specialist Initiative January 1995 Report,
submitted to the Commission on February 13, 1995 (``BSE January
Report''); and letter from Karen Aluise, Assistant Vice President,
BSE, to N. Amy Bilbija, Attorney, SEC, dated April 28, 1995 (``BSE
April Report''). These reports are available in the public file for
SR-BSE-95-02.
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The data submitted by the BSE indicates that the volume of orders
directed to the BSE in the stocks with multiple specialists increased
steadily during the pilot. In addition, the depth of the limit order
book for the stocks increased, indicating that firms are sending both
market and limit orders to their affiliated specialists.
Finally, while the BSE has provided evidence that the competing
specialist program has increased order flow to the Exchange, the data
regarding quote competition between specialists in a particular
security is mixed. The data shows an increase in the volume of the
BSE's incoming ITS commitments for the securities traded pursuant to
the competing specialist program. The data also indicates, however,
that there is a lack of interaction by the regular specialist with
incoming orders directed to a competing specialist. Specifically,
directed orders are almost always executed by the designated
specialist. Under the program's rules, if the specialists were quoting
at the ITS/BBO, they would at times have priority over the designated
specialist and intercept some of the directed order flow. While this
data is inconclusive, the Commission believes that certain system
enhancements may facilitate quote competition on the BSE.\26\
\26\ See infra note 28.
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In addition, an extension of the pilot will enable the BSE to
provide additional data for a more thorough analysis of the effects of
multiple specialists on the BSE market and the national market system.
Accordingly, during the extension of the pilot, the Commission requests
that the BSE continue to submit the quarterly reports described in the
pilot approval order.\27\ The Commission also requests that the BSE
include in future reports data identifying the percentage of BSE quotes
that either match or better the ITS/BBO. This data should isolate
stocks in which there are multiple specialists and be compared to
statistics for stocks with only one specialist.\28\
\27\ See Securities Exchange Act Release No. 34078, supra note
5.
\28\ As discussed above, see supra text accompanying note 9, the
BSE needs to adopt enhancements to BEACON to permit Competing
Specialists to enter their own quotes into the system and to enable
orders to be automatically routed to the specialist with priority
under the rules. During the pilot extension, the Commission expects
the BSE to continue developing these system enhancements, and
expects progress to be made toward implementation of direct quote
entry capability and systematic routing of orders.
[[Page 52443]]
More importantly, the Commission is interested in exploring whether
broader market structure initiatives can address the commenters'
concerns regarding order interaction and the effects of referencing on
the NMS in general, and on order execution quality in particular. In
this regard, the Commission recently proposed rules that attempt to
address, among other things, the order interaction and best execution
issues presented by referencing of order flow.\29\ Extension of the BSE
pilot will allow the Commission an opportunity to study the
implications of these proposals for the BSE's competing specialist
pilot.
\29\ See Securities Exchange Act Release No. 36310 (September
29, 1995).
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The Commission finds good cause for approving the proposed rule
change, as amended, prior to the thirtieth day after the date of
publication of notice of filing thereof in the Federal Register. The
Commission believes that accelerated approval of the proposal to extend
the pilot is appropriate in order to avoid an unnecessary interruption
to the pilot while the Commission conducts its market structure
rulemaking and continues to collect data. Moreover, the Commission
received only minimal comment on the BSE proposal to adopt the pilot on
a permanent basis, making it unlikely that additional comment would be
submitted regarding the extension. The Commission also believes that
accelerated approval of the clarifying language to the limit or order
execution rule is appropriate. The rule, which merely clarifies the
existing practice, was previously published for public comment for the
full statutory period \30\ and no comments were receive on the
proposal.
\30\ See supra note 4.
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Finally, the Commission believes that accelerated approval of the
proposed expansion of the program to four Competing Specialists that
may compete in up to 100 securities is appropriate. Expansion of the
program will provide the Commission with additional data upon which to
decide whether the program should be permanently approved. In addition,
the Commission published the BSE's request for permanent approval,
which contained no destructions on the number of specialist or the
number of stocks in which they could compete, for the full statutory
period.\31\ Only one comment letter that criticized the proposal was
received.\32\ The Commission will consider that comment when deciding
either to approve the BSE's request to make the competing specialist
program. permanent.
\31\ See Securities Exchange Act Release No. 35404 (February 22,
1995), 60 FR 10882 (February 28, 1995).
\32\ See Gavin Letter, supra note 6.
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VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2),\33\ that the
proposed rule change to extend the BSE's competing specialist program
as amended, through March 29, 1996, is hereby approved on an
accelerated basis.
\33\ 15 U.S.C. 78s(b)(2) (1988)
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By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 95-24910 Filed 10-5-95; 8:45 am]
BILLING CODE 8010-01-M
