[Federal Register Volume 59, Number 247 (Tuesday, December 27, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31673]
[[Page Unknown]]
[Federal Register: December 27, 1994]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35116; International Series Release No. 762; File No.
SR-BSE-94-01]
Self-Regulatory Organizations; Boston Stock Exchange, Inc; Order
Granting Approval to Proposed Rule Change and Notice of Filing and
Order Granting Accelerated Approval to Amendment No. 1 to Proposed Rule
Change Relating to the Boston-Montreal Linkage
December 19, 1994.
I. Introduction
On February 7, 1994, the Boston Stock Exchange, Inc. (``BSE'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to establish a northbound trading
linkage with the Montreal Exchange (``ME''). On November 7, 1994, the
BSE submitted amendment no. 1 to the rule filing.\3\
---------------------------------------------------------------------------
\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1993).
\3\See letter from Karen A. Aluise, Assistant Vice President,
BSE, to Holly Smith, Associate Director, SEC, dated November 1,
1994.
---------------------------------------------------------------------------
The proposed rule change was published for comment in Securities
Exchange Act Release No. 34456 (July 28, 1994), 59 FR 39802 (August 4,
1994). No comments were received on the proposal.
II. Background
In 1984, the Commission approved the first phase of a southbound
linkage between the BSE and the ME for the routing of orders for the
purchase and sale of securities listed on the BSE.\4\ The initial phase
of the linkage permitted ME members to direct to the BSE marketable
limit orders in approximately forty U.S.-listed Canadian national
stocks available for trading on the Intermarket Trading System
(``ITS''). In 1985, phase two of the linkage was approved permitting
the BSE to expand the list of securities eligible to be traded on the
linkage to include most ITS securities traded on the BSE.\5\
---------------------------------------------------------------------------
\4\See Securities Exchange Act Release No. 21449 (November 1,
1984), 49 FR 44575.
\5\See Securities Exchange Act Release No. 21925 (April 8,
1985), 50 FR 14480.
---------------------------------------------------------------------------
In 1989, the Commission approved a Linkage Plan that allowed the
BSE to connect the southbound linkage with the BSE's automated
communications order-routing network (``BEACON'') system.\6\ The
Commission also approved at that time a generic linkage rule that
allows the Exchange to establish trading linkages, provided that the
BSE submits a Linkage Plan for each new proposed linkage to the
Commission for its approval.\7\
---------------------------------------------------------------------------
\6\See Securities Exchange Act Release No. 27080 (July 31,
1989).
\7\See supra note 6. Under the Linkage Rule, the Exchange is
required to file with the Commission a Linkage Plan that contains
the details of each proposed new linkage pursuant to Section 19(b)
of the Act, 15 U.S.C. Sec. 78s(b).
---------------------------------------------------------------------------
III. Description of the Proposal
The proposed rule change establishes a trading linkage for the
transmission of orders in certain Canadian securities from the BSE to
the ME (``northbound linkage''). The linkage will be administered
pursuant to the Linkage Plan agreement between the BSE and ME. The
Linkage Plan contains provisions relating to management of the linkage,
resolution of trade disputes, comparison and settlement of trades, and
surveillance of transactions.\8\
---------------------------------------------------------------------------
\8\The Exchange has filed with the Commission a trade execution
monitoring program for the surveillance of orders directed to the ME
from the BSE's BEACON system.
---------------------------------------------------------------------------
As a result of the northbound linkage, BSE members will be able to
route orders for dually traded Canadian securities\9\ directly to the
ME for execution. The broker-dealers may enter orders for Canadian
securities into their in-house electronic systems, which are linked to
the BSE's BEACON system. BEACON receives and records the details of
each order\10\ before routing them directly to the ME's automated
order-routing and execution system.\11\ The ME system then logs each
order and directs it to the ME specialist's electronic book.\12\
---------------------------------------------------------------------------
\9\To be eligible for trading over the northbound linkage,
securities must be registered with the Commission pursuant to
Section 12(b) of the Act, 15 U.S.C. Sec. 78l(b). Each eligible
Canadian security will either be listed on the BSE or traded on the
BSE pursuant to unlisted trading privileges under Section 12(f) of
the Act, 15 U.S.C. Sec. 78l(f).
\10\The order will contain the terms for the price, if any,
stated in Canadian dollars, and an identifier indicating that its
transmission is for the ME.
\11\The BSE specialists assigned to the eligible Canadian
securities are not given an opportunity to interact with orders
routed directly to the ME.
\12\The northbound orders routed through the BSE linkage to the
ME will be handled by the ME according to the same rules and
policies as orders sent to the ME floor from Canadian broker-
dealers.
---------------------------------------------------------------------------
Upon the execution of a U.S. customer's order on the ME, a customer
report is sent from the ME specialist's book through the ME system to
the BEACON system, with both systems logging in the details of the
report. BEACON then sends the report to the U.S. broker-dealer's in-
house system. The trades are cleared in Canada pursuant to the BSE
member's agreement with a Canadian correspondent to clear and settle
trades at the Canadian Depository for Securities (``CDS'') on its
behalf.\13\
---------------------------------------------------------------------------
\13\BSE members will give up a valid CDS account at execution
and will be treated like a customer of the Canadian correspondent.
This is the clearing arrangement that U.S. broker-dealers currently
utilize in clearing trades in Canadian stocks.
---------------------------------------------------------------------------
IV. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, with the requirements of Section 6(b).\14\ In particular,
the Commission believes the proposal is consistent with Section
6(b)(5), which requires that the rules of an exchange be designed to
promote just and equitable principles of trade, to prevent fraudulent
and manipulative acts, and, in general, to protect investors and the
public interest.
---------------------------------------------------------------------------
\14\15 U.S.C. 78f(b).
---------------------------------------------------------------------------
The Commission generally views agreements between the United States
and foreign securities exchanges as positive developments that reflect
and contribute to the increasing internationalization of the world's
securities markets.\15\ Linkages, in particular, facilitate the flow of
capital and financial services across borders. Currently, when a BSE
member has customer orders for Canadian securities to be traded on the
ME, it must make arrangements with a Canadian broker-dealer (ME member)
to place the orders on the ME for execution. The linkage proposed by
the BSE will establish an order routing mechanism for the transmission
of orders from BSE members to the ME involving Canadian securities
traded on the ME and also registered under Section 12(b) of the Act. As
a result, the linkage should improve the efficient handling of such
orders routed by BSE members on behalf of their customers to the ME.
---------------------------------------------------------------------------
\15\In addition to the BSE linkages with the ME, the Commission
has previously approved a linkage between the Toronto Stock Exchange
and the American Stock Exchange, see Securities Exchange Act Release
No. 21441 (October 31, 1984), 49 FR 44575 (November 7, 1984), and a
linkage between the Toronto Stock Exchange and the Midwest Stock
Exchange (now the Chicago Stock Exchange), see Securities Exchange
Act Release No. 23075 (March 28, 1986), 51 FR 11854 (April 7, 1986).
Neither of these linkages with the Toronto Stock Exchange is
currently in operation.
---------------------------------------------------------------------------
The Commission notes that the northbound linkage is not intended to
create a single market or to ``link'' the BSE and ME marketmaking
functions for dually listed securities.\16\ Although the northbound
trading linkage uses the BSE's BEACON system to communicate orders to
the ME, trading between the ME and BSE specialists will not be
coordinated, nor will a BSE specialist be allowed to interact with U.S.
customer orders entered by broker-dealers into the northbound linkage
for routing to the ME. Nevertheless, agency duties will require BSE
members to route orders to the market that will provide the best
execution.\17\ Accordingly, customers should not be disadvantaged by a
BSE member's decision to route their orders to a particular market.\18\
---------------------------------------------------------------------------
\16\For example, as with trading in any security dually listed
on a U.S. exchange and a foreign exchange, the BSE and ME
specialists' books will not be consolidated, and there is no time or
price priority in relation to orders placed on the other exchange.
\17\A broker-dealer must seek to obtain the best execution for
customer orders. Best execution generally means that a broker-dealer
must obtain the most favorable terms available under the
circumstances for a customer's transaction. A broker-dealer's duty
to seek to obtain the best execution of customer orders derives from
the common law agency duty of loyalty, which obligates an agent to
act exclusively in the principal's best interest. This common law
agency principle has been incorporated into case law and Commission
decisions under the federal securities laws. See Division of Market
Regulation, SEC, Market 2000: An Examination of Current Equity
Market Developments (January 1994), at Study V.
\18\The Commission expects the BSE to remind its members of
their best execution obligation in entering orders through the
northbound linkage.
---------------------------------------------------------------------------
The Commission has reviewed the Linkage Plan for the northbound
linkage between the BSE and ME to ensure that it will provide U.S.
investors with protection against fraudulent and manipulative acts. The
Commission believes that a surveillance sharing agreement between
markets proposing to develop linkages for order routing purposes is an
essential element to any Linkage Plan. Such agreements ensure the
quality of information necessary to detect or deter potential
manipulation and other trading abuses. In this regard, the BSE is a
member and the ME is an affiliate members of the Intermarket
Surveillance Group (``ISG''), which provides for the exchange of
necessary surveillance information. ISG coordinates surveillance and
investigative information sharing arrangements in the stock and options
markets.\19\ The Commission believes that this structure should enhance
the level of cooperation between the BSE and ME surveillance
departments with regard to transactions executed through the northbound
linkage.
---------------------------------------------------------------------------
\19\ISG was formed in July 1983. See Intermarket Surveillance
Group Agreement, July 14, 1983. The most recent amendment to the ISG
Agreement, which incorporates the original agreement and all
amendments made thereafter, was signed by ISG members in January
1990. See Second Amendment to the Intermarket Surveillance Group
Agreement, January 29, 1990.
---------------------------------------------------------------------------
In addition, the Commission notes that each northbound trade will
be entered into the ME's electronic book, and will therefore be subject
to the ME's on-line stock trading monitoring system (``SECMA'').\20\
Furthermore, the BSE and ME have developed a trade execution monitoring
program for the surveillance of orders directed to the ME from the
BSE's BEACON system. These surveillance procedures should also help to
detect as well as deter any potential manipulation.
---------------------------------------------------------------------------
\20\The ME currently focuses its trading reviews on insider
trading, trading on non-public market information (``front
running''), price manipulation (market fraud of various types, short
squeeze, short sales down ticking, normal course issue of bid up
ticking, and restrictions on trading by members involved in a
distribution. In conducting these types of trading reviews, the ME
utilizes price alerts, volume alerts, exception reports based on
high-lows and closing prices, as well as other technical information
analysis and graphics that are available.
---------------------------------------------------------------------------
In summary, the Commission believes that the BSE has set forth a
reasonable proposal. In particular, by limiting the northbound linkage
to securities that are traded on the BSE and registered under Section
12(b) of the Act, the linkage will provide customers with access to
executions on the ME, while ensuring that such customers continue to
receive the protection of the federal securities laws and the rules
thereunder.
The Commission finds good cause for approving Amendment No. 1 to
the rule change prior to the thirtieth day after publication of notice
of filing thereof. Amendment No. 1 restricts the securities that may be
traded through the northbound linkage to securities that are registered
under Section 12(b) of the Act\21\ and therefore limits the scope of
the rule change as originally proposed. The broader proposed rule
change was published in the Federal Register for the full statutory
period and no comments were received.\22\
---------------------------------------------------------------------------
\21\See supra note 3.
\22\See Securities Exchange Act Release No. 34456 (July 28,
1994), 59 FR 39802 (August 4, 1994).
---------------------------------------------------------------------------
V. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning amendment No. 1. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW., Washington,
DC 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 Section, 450 Fifth Street,
NW., Washington, DC 20549. Copies of such filing will also be available
for inspection and copying at the principal office of the BSE. All
submssions should refer to File No. SR-BSE-94-01 and should be
submitted by January 17, 1995.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\23\ that the proposed rule change (SR-BSE-94-01) is approved.
---------------------------------------------------------------------------
\23\15 U.S.C. 78s(b)(2) (1988).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\24\
---------------------------------------------------------------------------
\24\17CFR 200.30-3(a)(12) (1993).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-31673 Filed 12-23-94; 8:45 am]
BILLING CODE 8010-01-M
