Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by Boston Stock Exchange, Inc. Requesting Permanent Approval of Its Competing Specialist Initiative

[Federal Register Volume 60, Number 39 (Tuesday, February 28, 1995)]
[Notices]
[Pages 10882-10884]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-4857]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35404; File No. SR-BSE-95-02]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by Boston Stock Exchange, Inc. Requesting Permanent Approval of 
Its Competing Specialist Initiative

February 22, 1995.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on February 
6, 1995, 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 self-regulatory organization. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The BSE seeks permanent approval of its Competing Specialist 
Initiative. Specifically, the rules proposed for adoption are: 
Additions are italicized and deletions are [bracketed].
Chapter XV--Specialists
* * * * * [[Page 10883]] 
    Sec. 17.
* * * * *

Procedures for Competing Specialists

    Sec. 18. Any specialist can apply to the Exchange to function as a 
competing specialist pursuant to these procedures:
     1. Applications to compete must be directed to the Market 
Performance Committee in writing and must list in order of preference 
the stock(s) in which the applicant intends to compete. The Market 
Performance Committee will use the following guidelines in reviewing an 
application:
    •  overall performance evaluation results of the applicant
    •  financial capability
    •  adequacy of manpower on the floor
    •  objection by the regular specialist in a stock, with or 
without cause
     2. Any objection\1\ by the regular specialist to permit 
competition in one or more of such specialist's stocks must be in 
writing and filed with the Exchange within 48 hours\2\ of notice\3\ of 
the competing specialist's application. The objection will be 
considered by the Market Performance Committee in reviewing the 
application, and its decision may be appealed to the Executive 
Committee.

    \1\Only the regular specialist can object to competition in his/
her stocks.
    \2\Unless the regular specialist is unavailable, in which case 
within 48 hours of becoming available.
    \3\Once an application is received by the Exchange, a written 
notification will be issued to the regular specialist(s) in whose 
stocks competition is being sought.
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     3. All applicants must be registered with the Exchange as 
specialists and must meet the current minimum requirements for 
specialists set forth in Chapter XV, the minimum capital and equity 
requirements as set forth in Chapters VIII and XXII of the Rules of the 
Exchange, and conform to all other performance requirements and 
standards set forth in the Rules of the Exchange. A competing 
specialist will be subject to all of the rules and policies applicable 
to a regular specialist.
     4. All applicant organizations, existing or newly created, must 
satisfy the Market Performance Committee that they have sufficient 
manpower to fulfill the functions of a specialist as set forth in 
Chapter XV in all of the stocks in which the applicant will be 
registered either as a regular or a competing specialist.
     5. The regular specialist will receive all orderflow not 
specifically directed to a competitor.
     6. The receiving specialist is responsible for all orders directed 
to him/her.
     7. In any competitive situation, if either the regular specialist 
to whom a stock was originally assigned or the specialist organization 
which subsequently received approval to compete with the regular 
specialist desires to terminate the competition by requesting that it 
be relieved of the stock that is the subject of competition, it should 
so notify the Market Performance Committee at least 3 business days 
prior to the desired effective date of such withdrawal. When the 
regular specialist requests to be relieved of a stock, the stock shall 
be posted for reallocation by the Stock Allocation Committee. In the 
interim, if the Market Performance Committee is satisfied that the 
competing specialist can continue to maintain a fair and orderly market 
in such stock, the competing specialist shall serve as the regular 
specialist until the stock has been reallocated.\4\ Where there is more 
than one competing specialist in the stock, Exchange staff shall place 
the stock with a caretaker until reallocation.

    \4\Once the stock has been reallocated to a regular specialist, 
that specialist shall not be permitted to object to competition in 
such stock.
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     8. Any competing specialist who withdraws his/her registration in 
a stock will be barred from applying to compete in that same stock for 
a period of ninety (90) days following the effective date of 
withdrawal.
     9. Notwithstanding the existence of competing specialist 
situations, there is only one Exchange market in a security subject to 
competition. Due to the ease of communications on the Floor via the 
Stentofon System, it will not be necessary to locate competing 
specialists adjacent to each other. However, the regular specialist 
will be responsible for updating quotations; thus all competitors must 
communicate their markets to the regular specialist and be responsible 
for their portion of the published bid and/or offer. Also, competitors 
must cooperate with the regular specialist regarding openings and 
reopenings to ensure that they are unitary.
    10. Limit orders entrusted to each competing specialist are to be 
represented and executed strictly according to time priority as to 
receipt of the order in the BEACON System.
    11. Competing specialists must keep each other informed and 
communicate to inquiring Floor brokers the full size of any executable 
``all-or-none'' orders in their possession since all-or-none orders 
cannot be represented in the published quote. The competing specialists 
are expected to represent such orders on a ``best efforts'' basis to 
ensure the execution of the entire order at a single price or prices, 
or not at all.
    12. The registration of any competing specialist may be suspended 
or terminated by the Market Performance Committee upon a determination 
of any substantial or continued failure by such competing specialist to 
engage in dealings in accordance with the Constitution and Rules of the 
Exchange.
    13. Competing Specialists shall be allowed to execute their 
customer orderflow which is related to index arbitrage only on plus or 
zero plus ticks when the Dow Jones Industrial Average (``DJIA'') 
declines by fifty points or more from the previous day's closing value. 
Such requirement shall remain in effect for the remainder of the 
trading day once it has been activated, except that the requirement 
shall no longer apply where the DJIA moves back to a value which is 
twenty-five points or less from the previous day's closing value. 
``Index arbitrage'' is defined as an arbitrage trading strategy 
involving the purchase or sale of a group of stocks in conjunction with 
the purchase or sale, or intended purchase or sale, of one or more 
cash-settled options or futures contracts on index stock groups or 
options on any such futures contracts, in an attempt to profit from the 
price difference between the group of stocks and the derivative index 
products.
The Specialist's Book
    Sec. 6. The Specialist's book is the book, file or record in which 
all orders entrusted to the Specialist in a particular issue must be 
kept. It shall be closed at all times and the information therein 
contained shall not be divulged or permitted to come to the knowledge 
of anyone except the Specialist or relief Specialist for that book, or 
to the Board of Governors, a committee of the Exchange, or the Chairman 
or Officer designated by him, except that a Specialist may disclose 
information contained in his/her book [;]:
    (i) for the purpose of demonstrating the methods of trading to 
visitors to the Floor; [or]
    (ii) to other market centers in order to facilitate the operation 
of ITS or any other Application of the System provided, in either case, 
that at the same time he makes the information disclosed available to 
all members [.]; or
    (iii) to competing specialists in his/her stocks on a summary basis 
as provided for in the ``Procedures for Competing Specialists''.

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 self-regulatory organization 
included [[Page 10884]] 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 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 seek permanent 
approval of the Exchange's Competing Specialist Initiative (``CSI'') 
pilot program which is scheduled to expire on May 18, 1995. CSI permits 
competing specialists on the floor of the Exchange in the form of one 
regular specialist and one or more competing specialists. Orders are 
directed to either specialist based on each customer's independent 
decision, but all orders in a stock are executed in accordance with 
strict time priority. Once all limit orders at a price level are 
depleted, each specialist is responsible for the market orders directed 
to them.
    The regular specialist is responsible for updating quotations and 
coordinating openings and reopenings to ensure they are unitary. All 
ITS activity must be cleared through the regular specialist. To all 
other markets in the National Market System, there is only one Boston 
market. Trading halts are coordinated through the regular specialist 
and apply to all competitors in a stock.
    In addition, all competitors will be evaluated on competing stocks 
in the Exchange's Specialist Performance Evaluation Program.
2. Statutory Basis
    The BSE believes that the statutory basis for this proposal is 
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 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

    Comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the 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 self-regulatory organization consents, the Commission will:
    (A) By order approve the 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. 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 BSE. All 
submissions should refer to File No. SR-BSE-95-02 and should be 
submitted by March 21, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-4857 Filed 2-27-95; 8:45 am]
BILLING CODE 8010-01-M