02-14434. Self-Regulatory Organizations; Boston Stock Exchange, Inc.; Order Approving Proposed Rule Change and Amendment No. 1 Thereto Relating to Competing Specialists and the Execution of Directed Agency Orders

May 30, 2002.

I. Introduction

On December 21, 2001, the Boston Stock Exchange, Inc. (“BSE” or “Exchange”) filed with the Securities and Exchange Commission (“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 related to competing specialists and the execution of directed agency orders. On April 19, 2002, the Exchange submitted Amendment No. 1 to the proposed rule change.^[3] The proposed rule change, together with Amendment No. 1, was published for comment in the Federal Register on April 26, 2002.^[4] No comments were received on the proposal. This order approves the proposed rule change, including Amendment No. 1.

II. Description of the Proposal

The Exchange proposes to amend certain sections of its rules related to Competing Specialist Initiative Rules (see BSE Rules, Chapter XV, Dealer Specialists, Section 18, Procedures for Competing Specialists) to allow, under certain conditions, for the altering of priority of specialist/competing specialist principal quotations when orders are directed by a customer to another specialist/competing specialist.^[5] Specifically, the Exchange seeks to add an exception for orders directed to a specialist/competing specialist. The exception will allow the specialist/competing specialist who receives such an order to elect to execute the order for his own account at the same national best bid and offer (“NBBO”) price or better than the quotation on the book, if the quotation on the book is for the account of another specialist/competing specialist, or to permit the directed order to execute against the prevailing specialist/competing specialist's quotation.^[6]

Furthermore, the Exchange proposes to amend certain other paragraphs of Chapter XV, Dealer Specialists, Section 18, Procedures for Competing Specialists, in order to remain consistent. Namely, the Exchange proposes to amend Paragraph 6 to reflect that all specialist/competing specialists will be responsible for orders directed to him/her. Likewise, the exchange seeks to amend Paragraph 9 to reflect certain Boston Exchange Automated Communication and Order Routing Network (“BEACON”) system changes, which will update quotations more efficiently, removing the burden from the regular specialist.

III. Discussion

The Commission finds that the proposed rule change is consistent with the provisions of section 6(b) of the Act,^[7] in general, and section 6(b)(5) of the Act,^[8] in particular, which requires, among other things, that the rules of an exchange be designed 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 not be designed to permit unfair discrimination between customers, issuers, brokers or dealers.

In today's BEACON system, an agency order is automatically routed to the specialist quote in accordance with price/time priority amongst competing specialists if such quote is at the NBBO. This will continue to be the case for all customer orders. However, this rule will now allow the specialist/competing specialist who receives such an order to elect to execute the order for his own account at the NBBO price or better than the quotation on the book, if the quotation is for the account of another specialist/competing specialist, or to permit the directed order to execute against the prevailing specialist/competing specialist's quotation.

Implementation of the proposed rule will enable the order to be routed to the designated specialist and will enable competing specialists to exercise greater control over more of their firm's orderflow and provide price improvement opportunities to their customers over existing specialist proprietary quotations. All ITS transactions and non-directed orders will continue to be routed according to price/time priority, and available for price improvement by exposure to the specialists/competing specialists.

IV. Conclusion

It is therefore ordered, pursuant to section 19(b)(2) of the Act,^[9] that the proposed rule change (SR-BSE-2001-08), as amended, is hereby approved.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.^[10]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  17 CFR 240.19b-4.

3.  See letter from John A. Boese, Assistant Vice President, Legal and Regulatory, BSE, to Belinda Blaine, Associate Director, Division of Market Regulation, Commission, dated April 18, 2002 (“Amendment No. 1”).

4.  See Securities Exchange Act Release No. 45791 (April 19, 2002), 67 FR 20852.

5.  Under this proposal, all non-directed and Intermarket Trading System (“ITS”) orders will continue to be routed according to existing competing specialist rules.

6.  Where an agency order resides on the book of a specialist/competing specialist and a specialist/competing specialist then receives an executable order routed to him/her, the subsequent agency orders may be price improved by the specialist/competing specialist receiving such order, or permitted to match the resident agency order at the limit price (without price improvement).

7.  15 U.S.C. 78f(b).

8.  15 U.S.C. 78f(b)(5).

9.  Id.

10.  17 CFR 200.30-2(a)(12).