[Federal Register Volume 61, Number 82 (Friday, April 26, 1996)]
[Notices]
[Pages 18634-18636]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-10317]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37134; File No. SR-BSE-96-03]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the Boston
Stock Exchange, Incorporated Relating to Stopping Stock in Minimum
Variation Markets
April 22, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. Sec. 78s(b)(1), notice is hereby given that on
April 19, 1996, the Boston Stock Exchange, Incorporated (``BSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') 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 and grant
accelerated approval.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange seeks permanent approval of its rule, as proposed be
to amended, regarding stopping stock in minimum variation markets.\1\
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\1\ The Commission initially approved the BSE's proposal to
codify procedures for stopping stock and to establish a separate
pilot program for stopping stock in minimum variation markets in
Securities Exchange Act Release No. 35068 (Dec. 8, 1994), 59 FR
64717 (Dec. 15, 1994) (File No. SR-BSE-94-09) (``1994 Pilot Approval
Order''). The Commission subsequently extended the pilot program in
Securities Exchange Act Release Nos. 35474 (Mar. 10, 1995), 60 FR
14471 (Mar. 17, 1995) (File No. SR-BSE-95-03) (``March 1995 Pilot
Approval Order''); 36004 (July 21, 1995), 60 FR 38872 (July 28,
1995) (``July 1995 Pilot Approval Order''). This pilot program
expires after April 21, 1996. In this filing, the Exchange proposes
a modified version of its pilot program for stopping stock in
minimum variation markets.
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II. Self-Regulatory Organization's Statement of the Propose 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 eliminate those
provisions of the current pilot program regarding the execution of
stopped orders in minimum variation markets that provide for the
execution of stopped orders ahead of same priced limits with priority
through the execution of 500 shares on the book. The Exchange seeks
permanent approval of all other aspects of the rule regarding stopping
stock in minimum variation markets.
The proposed rule will require the execution of stopped orders in
minimum variation markets (a) after a transaction takes place on the
primary market at the stopped price or higher in the case of a buy
order (lower in the case of a sell order) or (b) at an improved price
after the applicable Exchange share volume at that improved price has
been exhausted. In no event will a stopped order be
[[Page 18635]]
executed at a price inferior to the stop price. The Exchange states
that, as in the case of greater than minimum variation markets, the
proposed rule will continue to benefit customers because they might
receive a better price than the stop price, yet it also protects prior-
entered same-price limit orders on the book.
2. Statutory Basis
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 inappropriate 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 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-96-03 and should be
submitted by May 17, 1996.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
After careful consideration, the Commission has determined to
approve permanently the proposed rule change. For the reasons discussed
below, 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 Section 6(b)(5) \2\ and Section 11(b) \3\ of the Act.
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\2\ 15 U.S.C. Sec. 78f.
\3\ 15 U.S.C. Sec. 78k.
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Historically, the Commission has had mixed reactions about the
practice of stopping stock. The 1963 Report of the Special Study of the
Securities Markets found that unexecuted customer limit orders on the
specialist's book might be bypassed by the stopped orders.\4\ The
Commission, nevertheless, has allowed the practice of stopping stock in
markets where the spread is at least twice the minimum variation
because the possible harm to orders on the book is offset by the
reduced spread that results and the possibility of price improvement.
Although the procedures for stopping stock in minimum variation markets
do not reduce the spread between the quotes, the Commission has
allowed, on a pilot basis, the practice on the Exchange in limited
circumstances.\5\
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\4\ See SEC, Report of the Special Study of Securities Markets
of the Securities and Exchange Commission, H.R. Doc. No. 95, 88th
Cong., 1st Sess., Pt. 2 (1963).
When stock is stopped, limit book orders on the opposite side of
the market do not receive an immediate execution. Consequently, if
the stopped order then receives an improved price, limit orders at
the stop price are bypassed and, if the market turns away from that
limit, may never be executed.
\5\ Recently, the Commission permanently approved other
exchanges' programs for stopping stock in minimum variation markets,
which did not raise the concerns that the BSE's pilot program raised
with respect to limit orders on the same side of the market as the
stopped orders. In this filing, the BSE amends its program to
alleviate such concerns. See Securities Exchange Act Release Nos.
36399 (Oct. 20, 1995), 60 FR 54900 (Oct. 26, 1995) (permanently
approving New York Stock Exchange's pilot program for stopping stock
in minimum variation markets); 36400 (Oct. 20, 1995), 60 FR 54886
(Oct. 26, 1995) (permanently approving American Stock Exchange's
pilot program for stopping stock in minimum variation markets);
36401 (Oct. 20, 1995), 60 FR 54893 (Oct. 26, 1995) (permanently
approving Chicago Stock Exchange's pilot program for stopping stock
in minimum variation markets).
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The Exchange now proposes procedures for stopping stock in minimum
variation markets that have been modified from its pilot program. The
BSE's pilot program allowed BSE specialists to elect to fill a stopped
order at a better price before the limit order interest on the Exchange
was exhausted provided that the specialists adhered to certain
procedures. \6\ In approving this portion of the BSE's pilot program,
the Commission noted its serious concerns that limit orders on the same
side of the market as the stopped orders may be bypassed when such
stopped orders are execute at an improved price. \7\ The stopping stock
program currently being proposed, however, would only allow specialists
to execute stopped stock when volume equal to all the pre-existing
limit orders ahead of the stopped order prints in the primary market.
Specifically, the specialist would be required to execute stopped
market orders in minimum variation markets either (1) at the stopped
price after a transaction takes place on the primary market at the bid
price or lower for a sell order (or the offering price or higher for a
buy order) on the primary market or (2) at an improved price after the
displayed BSE share volume has been exhausted.
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\6\ The BSE's pilot had a unique provision regarding the
execution of stopped orders at an improved price before pre-existing
limit order interest at the price is exhausted.
\7\ As a result, in the orders approving the BSE's pilot
procedures, the Commission asked the Exchange to study the effects
of stopping stock in minimum variation markets. In the July 1995
Pilot Approval Order, the Commission requested that the BSE
calculate data based on twenty stocks chosen by the Commission
during three different days showing (1) how many orders and shares
were stopped in each stock, (2) the average number of limit orders
and the average number of shares on the book ahead of the stopped
stock, (3) how many orders and shares received price improvement,
and (4) how many orders and shares were on the limit order book at
the time each order was stopped and the number of such limit orders
and shares that were not executed by the end of the trading day.
After submitting the data to the Commission, the Exchange proposed
to amend its procedures for stopping stock in minimum variation to
disallow specialists from filling stopped stock at the better price
before the pre-existing limit orders ahead of the stopped order.
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The Commission believes that the Exchange's proposed procedures for
stopping stock in minimum variation markets are consistent with the Act
in that they will assist specialists in providing an opportunity for
primary market price protection to the customer whose order is stopped,
without requiring that specialists execute all pre-existing bids or
offers when such executions otherwise would not be required under
Exchange rules. Moreover, the Exchange's currently proposed procedures
for stopping stock in minimum variation markets eliminate the potential
for bypassing prior-entered limit orders on the specialist's book on
the same side of the market as the
[[Page 18636]]
stopped orders. The BSE's program, as currently proposed, would be
substantially similar to the program already in place in the Chicago
Stock Exchange, Incorporated (``CHX'').\8\
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\8\ In permanently approving the CHX's pilot program for
stopping stock in minimum variation markets, the Commission noted
that unintended consequences may arise from the interplay between a
regional exchange's price protection rules and its procedures for
stopping stock. In this regard, the Commission believed that the
benefits of stopping stock in minimum variation markets sufficiently
offset the possible harm to the limit orders on the book. For
similar reasons, the Commission is approving the BSE program, as
proposed to be amended, on a permanent basis. See Securities
Exchange Act Release No. 36401 (Oct. 20, 1995), 60 FR 54893 (Oct.
26, 1995).
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For the above reasons, the Commission believes that the BSE
proposal is consistent with Section 6(b)(5) of the Act. Moreover, the
Commission also believes that the proposal is consistent with the Rule
11b-1(a)(2)(ii) of the Act.\9\ Rule 11b-1(a)(2)(ii) requires that a
specialist engage in a course of dealings for his own account that
assist in the maintenance, so far as practicable, of a fair and orderly
market. The Commission believes that the proposal is consistent with
the objectives of this Rule because the implementation of the proposal
should help the specialist to provide an opportunity for price
improvement to the customer whose stop order is granted, without
placing a burden on specialists by requiring that specialists execute
other pre-existing bids or offers when such executions would not be
otherwise required under Exchange rules.
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\9\ 17 CFR 240.11b-1(a)(2)(ii).
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The Commission also believes that the proposal is consistent with
the prohibition in Section 11(b) against providing discretion to a
specialist in the handling of an order.\10\ Section 11(b) was designed,
in part, to address potential conflicts of interest that may arise as a
result of the specialist's dual role as agent and principal in
executing stock transactions. In particular, Congress intended to
prevent specialists from unduly influencing market trends through their
knowledge of market interest from the specialist's book and their
handling of discretionary agency orders.\11\ The Commission has stated
that, pursuant to Section 11(b), all orders other than market or limit
orders are discretionary and therefore cannot be accepted by
specialists.\12\
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\10\ Section 11(b) permits a specialist to accept only market or
limit orders.
\11\ See H. Rep. No. 1383, 73d Cong. 2d Sess. 22, S. Rep. 792,
73d Cong. 2d Sess. 18 (1934).
\12\ See Special Study, supra note 4.
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The Commission believes that it is appropriate to treat stopped
orders as equivalent to limit orders. A limit order is an order to buy
or sell a stated amount of security at a specified price, or better if
obtainable. The Commission believes that stopped orders are equivalent
to limit orders, in this instance, because the orders would be
automatically elected after a transaction takes place on the primary
market at the stopped price. The Commission, therefore, believes that
the requirements imposed on the specialist for granting stops in
minimum variation markets provide sufficiently stringent guidelines to
ensure that the specialist will implement the proposed rule change in a
manner consistent with his market making duties and Section 11(b).\13\
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\13\ Moreover, stopped orders as ``limit orders'' would not
bypass pre-existing limit orders on the same side of the market.
Under the BSE's new procedures being approved herein, specialists
may not execute a stopped order before the limit order interest on
the Exchange (at the same price as the stopped order) is exhausted.
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In permanently approving the Exchange's proposal, the Commission
expects the Exchange to continue monitoring the practice of stopping
stock in minimum variation markets and to take appropriate action in
the event BSE identifies any instances of specialist non-compliance
with the program's procedures.
Finally, the Commission finds good cause for approving the proposed
rule change prior to the thirtieth day after the date of publication of
notice of filing thereof. Accelerating the approval of the proposal
would allow the BSE specialists to continue stopping stock in minimum
variation markets although they will no longer be able to execute
stopped stock ahead of prior-entered same priced limit orders.
Moreover, the BSE's program, as currently proposed, is substantially
similar to the CHX's procedures, which were published in the Federal
Register for the full comment period and were approved by the
Commission on October 20, 1995.\14\
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\14\ See supra note 7.
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\15\ that the proposed rule change (SR-BSE-96-03) is approved.
\15\ 15 U.S.C. Sec. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-10317 Filed 4-25-96; 8:45 am]
BILLING CODE 8010-01-M
