CSFB Next Fund, Inc.
Interactive Brokers Group, LLC
Salomon Brothers Holding Company, Inc.
UBS (USA) Inc.
February 6, 2003
Mr. Jonathan G. Katz
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.
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.
We believe that the BOX market model will offer significant advantages for participants
and their customers. As the rule filing indicates, these benefits include:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
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.
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
Thank you for the opportunity to comment on this filing.
|Simon D. Yates
Equity Derivatives Trading
Credit Suisse First Boston
|Thomas P. Peterffy
Chairman and CEO
Interactive Brokers LLC
J.P. Morgan Securities Inc.
|David M. Weisberger
Salomon Smith Barney, Inc.
| Daniel B. Coleman
Head of Equities, U.S. Trading
UBS (USA) Inc.
cc. Annette Nazareth