CSFB Next Fund, Inc.
Interactive Brokers Group, LLC
LabMorgan Corporation
Salomon Brothers Holding Company, Inc.
UBS (USA) Inc.

February 6, 2003

Mr. Jonathan G. Katz
Secretary
Securities and Exchange Commission
450 5th St., NW
Washington, DC 20549

Re: SR-BSE-2002-15, Boston Stock Exchange, Inc. Filing to Establish Trading Rules for the Boston Options Exchange Facility

Dear Mr. Katz:

CSFB Next Fund, Inc. ("Credit Suisse"), Interactive Brokers Group, LLC ("Interactive"), LabMorgan Corporation ("J.P. Morgan"), Salomon Brothers Holding Company, Inc. ("Salomon") and UBS (USA) Inc. ("UBS"), collectively the Boston Options Exchange, LLC shareholders ("BOX Shareholders") appreciate the opportunity to submit comments on File No. SR-BSE-2002-15. The Boston Stock Exchange, Inc. ("BSE" or "Exchange"), in conjunction with the Bourse de Montreal ("ME") and BOX Shareholders, proposes to create a new electronic options trading facility of the BSE, called the Boston Options Exchange ("BOX"). The BOX Shareholders believe that the creation of this new options exchange, with its innovative market model, will provide an alternative to the existing market models that will be simpler, faster, fairer, more open and less costly for participants.

BOX Model

The BSE proposes to establish a new automated trading facility for standardized equity options listed on the Exchange for qualified participant firms. This facility will provide a pure electronic auction market to its participants without the need for a trading floor. The BOX model anticipates an options market where orders from all types of market participants will interact directly with each other on a price/time priority basis. BOX would offer a price/time priority based limit order book where any public customer order may be represented and where broker-dealer market participants could submit orders or take liquidity. The BOX model also proposes to provide a limited facility for order flow providers to interact with their own order flow but only at prices better than the best bid or offer on the market and a viable opportunity for market makers to participate and compete for those orders quickly and anonymously. Through the use of technology, BOX will offer what the Commission and industry have been seeking, a market structure that is more open and allows for better execution, with true competitive participation.

BOX Advantages

We believe that the BOX market model will offer significant advantages for participants and their customers. As the rule filing indicates, these benefits include:

  1. Fully automated market - Trading is fully automated which provides the economies of straight through processing to the brokerage and trading community and ensures extremely rapid response times. Given this technology, BOX is expected to offer the lowest execution costs.

  2. No cost barriers to entry - No equity investment is required to participate in BOX. Market makers pay a monthly minimum activity fee. Order flow providers pay no annual access fee as trading is done on a "pay as you go" basis.

  3. Open market structure - With a transparent order book, orders will be handled on a strict price/time priority without a specialist controlling the price. All orders are live and available to all participants with no limitations on the ability of professional or broker/dealer orders to access the order book. All prices on the BOX book are firm for all participants including broker/dealers, customers and away market makers. Such firm quote obligations in our rules will restrict market makers from improperly moving quotes or failing to execute orders at posted prices, a problem experienced in some market centers today.

  4. Price improvement auctions - BOX includes a unique electronic mini-auction that will attract - and subject to price competition - orders that would otherwise simply be printed elsewhere at the NBBO. The price improvement auction is entirely automated, of brief duration and guarantees that the client's interest takes precedence over all other orders during the process.

  5. Open and equal access - There will be multiple market makers in each issue, encouraging free and open competition. There are no designated specialists or subjective allocation procedures. Any qualified participant may be a market maker in any option class. Qualified participants are generally firms already subject to a U.S. equity market self-regulatory organization. Competing market makers are responsible for ensuring basic liquidity, and their competing with each other will encourage finer pricing and tighter spreads to the ultimate advantage of the investor.

  6. Exchange regulatory expertise - The BSE, one of the nation's oldest securities exchanges and self-regulatory organizations, will establish a surveillance program for the fully electronic trading facility. Full automation will provide the Exchange a powerful tool in the form of a complete, electronic audit trail in which to surveil the market for fraud or any unfair trading practices. In addition, the Exchange has repeatedly demonstrated its ability to attract quality management and regulatory staff necessary to manage orderly markets and will provide the support, funding and technology necessary to adequately surveil the BOX market.

  7. Proven trading platform - Although this is a new market, BOX will use a customized version of NSC, Montreal Exchange's ("ME") trading engine. The NSC platform, developed by ATOS-Euronext, is one of the most widely used trading systems in the world, operating at more than fifteen exchanges.

Industry Response

Although our rules have only recently been published, the industry response to the BOX model has been significant. We have sponsored road shows in Chicago and New York that have been attended by hundreds of interested parties. We have already received twenty applications from firms that want to participate in BOX at the launch. Over ten IT and Independent Software Vendors ("ISVs") are developing software and front-end systems to establish connectivity for participant firms. Reaction from both interested parties and competition alike has been intense, a true sign that the BOX market model is the future of the options industry.

Recommendation

In light of the foregoing, the BOX shareholders strongly encourage the Commission to approve the BOX rules as filed. Our analysis of the BOX model and what it will offer the market and its participants has led us, the equity shareholders, to invest in a market that we believe is necessary for the future of the options industry. Our firm backgrounds and interests are diverse, including both order flow providers and market makers, but we have joined together with the BSE and ME as partners in this effort because we believe that BOX offers what no other current options market can ... low costs of entry and execution, an open market structure and competition, the ability to give the end customer a price better than the NBBO ... all in a secure, regulated and fully automated trading environment.

Thank you for the opportunity to comment on this filing.

Sincerely,

Simon D. Yates
Managing Director
Equity Derivatives Trading
Credit Suisse First Boston
Thomas P. Peterffy
Chairman and CEO
Interactive Brokers LLC
Juan-Carlos Pinilla
Managing Director
J.P. Morgan Securities Inc.
David M. Weisberger
Managing Director
Salomon Smith Barney, Inc.
Daniel B. Coleman
Managing Director
Head of Equities, U.S. Trading
UBS (USA) Inc.
 

cc. Annette Nazareth
Robert Colby
Elizabeth King
Deborah Flynn
John Roeser

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