Boston Stock Exchange Rulemaking
Securities and Exchange Commission
(Release No. 34-45791; File No. SR-BSE-2001-08)
April 19, 2002
Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto by the Boston Stock Exchange, Inc. Relating to Competing Specialists and the Execution of Directed Agency Orders
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 December 21, 2001, the Boston Stock Exchange, Inc. ("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 Exchange. On April 19, 2002, the Exchange submitted Amendment No. 1 to the proposed rule change.3 The Commission is publishing this notice to solicit comments on the proposed rule change as amended from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The Exchange proposes to amend certain sections of its rules related to Competing Specialists (as defined in BSE Rules, Chapter XV, Dealer Specialists, Section 18, Procedures for Competing Specialists) and the execution of directed agency orders. The text of the proposed rule change is below. Proposed new language is in italics; proposed deletions are in brackets.
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Procedures for Competing Specialists
...6. The [receiving] specialist/competing specialist is responsible for all orders directed to him/her.
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...9. .... However, [the regular specialist will be responsible for updating quotations; thus all competitors must communicate their markets to the regular specialist and] all specialists must be responsible for their portion of the published bid and/or offer, and the BEACON System will update quotations accordingly.
10. Because there is only one Exchange market in a security subject to competition, all limit orders sent to the Exchange will be maintained by the BEACON System's central limit book and will be executed strictly according to time priority as to receipt of the order in the BEACON System, irrespective of firm order routing procedures. This rule shall not be applicable where the quotation on the book is for the account of a specialist/competing specialist and another specialist/competing specialist has received an order directed to him. In such event, the specialist/competing specialist can elect to execute the order for his own account at the same price as the other specialist/competing specialist's order, or a better price, or to permit the order to be executed against the specialist/competing specialist's quotation.
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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 Exchange 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 Exchange 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
In today's competitive marketplace, customers and market makers have an increasing number of venues for the trading of listed securities. Both customers and market makers are becoming aware of and more selective about where their orders are ultimately executed, particularly in light of the increased disclosure under recently enacted Rule 11Ac1-5 under the Act ("Rule 5").4 This reflects the reality that quoting does not, in and of itself, indicate the best price within a market center, due to price improvement. Rather, it is a combination of several factors which attract orders and comprise order routing decisions, such as historical results, added depth, price improvement and other factors which serve to enhance best execution practices. Accordingly, the Exchange seeks to amend portions of its 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. Under this proposal, it should be noted that all non-directed and Intermarket Trading System ("ITS") orders will continue to be routed according to existing competing specialist rules.
The reasons behind this request are threefold. First, the proposal will enable Exchange specialists to effectively compete with other exchanges and market centers amidst recent changes in the competitive landscape. This is particularly true in light of (a) Nasdaq's proposed rules in their recent Form 1 exchange registration filing, (b) the various order routing scenarios set forth in the Nasdaq SuperMontage environment,5 (c) the Philadelphia Stock Exchange's recently adopted rules in relation to the directing of orders,6 and (d) the current preferencing model in place on the Cincinnati Stock Exchange (see CSE Rule 11.9). Second, the proposed rule amendment will reward specialists who are able to attract orderflow directed to them. Hence, it will increase competition in the marketplace, which carries an inherent benefit to investors. Third, the proposal supports the initiative of Rule 5 as it will improve the ability of order sending firms to better identify and direct orders to those venues that their customers demand as a result of the increased visibility of execution practices under the Rule.
Presently, Chapter XV, Dealer Specialists, Section 18, Procedures for Competing Specialists, Paragraph 10, sets forth that all limit orders sent to the Exchange will be executed strictly according to time priority as to receipt of an order in the Boston Exchange Automated Communication and Order Routing Network ("BEACON") system, irrespective of firm order routing procedures. This would continue to be the case for all customer orders. However, the proposed rule amendment would allow specialists/competing specialists to execute an order that has been directed to him, at the same or better price as the prevailing national best bid and offer ("NBBO"), if the BSE quotation is for the account of another specialist/competing specialist.
Accordingly, the Exchange seeks to amend Chapter XV, Dealer Specialists, Section 18, Procedures for Competing Specialists, Paragraph 10, of its Rules by adding 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 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.7 Furthermore, certain other paragraphs of Chapter XV, Dealer Specialists, Section 18, Procedures for Competing Specialists, will need to be slightly amended in order to remain consistent with paragraph 10. Namely, Paragraph 6 will need to be amended to reflect that all specialist/competing specialists will be responsible for orders directed to him/her. Likewise, Paragraph 9 will need to be amended to reflect certain BEACON system changes which will update quotations more efficiently, removing the burden from the regular specialist.
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. Such order routing has allowed specialists with orderflow to reduce their costs and compete more effectively for public customer business without sacrificing quality of executions. However, the economic value of this practice has diminished considerably with the introduction of a number of Commission led initiatives in recent years, particularly the introduction of decimalization. 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.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent with the provisions of Section 6(b) of the Act,8 in general, and Section 6(b)(5) of the Act,9 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, in general, to protect investors and the public interest, and not be 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 written comments on the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 35 days of the date of publication of this notice in the Federal Register or within such longer 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 Exchange consents, the Commission will:
(A) by order approve such 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, including whether the proposed rule change is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. 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 in the Commission's Public Reference Room. 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-2001-08 and should be submitted by [insert date 21 days from the date of publication].
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.10
Margaret H. McFarland
Action as set forth or recommended herein
For the Division of Market Regulation
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, SEC, dated April 18, 2002 ("Amendment No. 1"). In Amendment No. 1, the BSE removed from the proposed rule change all references to a new defined term, "Professional Agency Order."
4 17 CFR 240.11Ac1-5.
5 See Exchange Act Release No. 43863 (January 19, 2001), 66 FR 8020 (January 26, 2001).
6 See Exchange Act Release No. 45183 (December 21, 2001), 67 FR 118 (January 2, 2002).
7 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).
8 15 U.S.C. 78f(b).
9 15 U.S.C. 78f(b)(5).
10 17 CFR 200.30-3(a)(12).