Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment No. 1 by the Boston Stock Exchange, Inc. Relating to its Specialist Performance Evaluation Program

[Federal Register Volume 63, Number 238 (Friday, December 11, 1998)]
[Notices]
[Pages 68490-68493]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32963]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40746; File No. SR-BSE-98-7]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 by the Boston Stock Exchange, Inc. Relating
to its Specialist Performance Evaluation Program

December 3, 1998.
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 October 8, 1998, the Boston Stock Exchange, Inc. (``BSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change. The Exchange submitted
Amendment No. 1 to its proposal on November 13, 1998.\3\ The proposed
rule change, as amended, is described in Items I, II, and III below,
which Items have been prepared by the Exchange. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ In Amendment No. 1, the Exchange seeks permanent approval of
the Specialist Performance Evaluation Program and deletes its
request for accelerated approval and retroactive implementation of
the proposed rule change. See Rule 19b-4 filing, SR-BSE-98-07 (Am.
1), dated November 6, 1998 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change

The Exchange proposes to amend the depth measure calculations in
its Specialist Performance Evaluation Program pilot program (``SPEP'')
and to seek permanent approval of the program at the expiration of the
pilot on December 31, 1998.\4\ The text of the proposed rule change is
as follows: new text is italicized and deleted text is bracketed.
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\4\ Id.
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Chapter XV

Specialists

Specialist Performance Evaluation Program

* * * * *
Sec. 17(c)(iii) Exceptions. Where Specialists have threshold scores
in each measure at the following levels (subject to change pursuant to
Commission approval), they will be deemed to have adequately performed:

Overall Evaluation Score--at or above weighted score of [5.00]
7.00
Turnaround Time--below 21.0 seconds (5 points)(5%)
Holding Orders Without Action--below 21.0% (5 points)(5%)
Price Improvement in <8th Markets--at or above 2.0% (5
points)(20%)
Price Improvement in 8th Markets--at or above 15.0% (5
points)(15%)
Price Improvement in>8th Markets--at or above 25.0% (5
points)(15%)
Combined Depth (10 points) (40%)
(a) Depth--at or above 75.0% [(5 points)(20%)]
(b) Added Depth--at or above 1.0% [(5 points)(20%)]
* * * * *

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

1. Purpose
The Exchange seeks to amend its SPEP pilot by modifying the two
depth measure calculations and the overall program score. All other
aspects of the pilot program will remain the same. In addition, the
Exchange is requesting permanent approval of the program, which has
been in effect since 1992 \5\ with periodic modification over the
years.\6\ The Exchange believes that the SPEP is an effective tool for
measuring specialist performance if continuously monitored and modified
to meet the changing needs of the industry and the types of business
sent to the Exchange, as well as changes in technology. The current
pilot program will expire on December 31, 1998.
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\5\ The Commission initially approved the SPEP in Securities
Exchange Act Release No. 22993 (March 10, 1986), 51 FR 8298 (March
14, 1986). The BSE was permitted to incorporate objective measures
of specialist performance into its pilot program in Securities
Exchange Act Release No. 31890 (Feb. 19, 1993), 58 FR 11647 (Feb.
26, 1993), at which point the initial pilot program ceased to exist
as a separate program.
\6\ See Amendment No. 1, supra note 3.
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The Exchange has two depth measure calculations, which are Depth
and Added Depth. The Depth measure (which measures the percentage of
shares exceeding the displayed NBBO size that are executed at or better
than the displayed NBBO price, for those orders that at the time of
receipt exceed the displayed NBBO size) is currently weighted at 20% of
the overall total score with a minimum threshold of 75%, i.e., no
points for any executions below 75% of the NBBO size.\7\ The

[[Page 68491]]

Added Depth measure (which measures the relative percentage of overall
BSE depth attributable to each specialist at the displayed NBBO price
and in excess of the displayed NBBO size at the time the order is
received) is currently weighted at 20% of the overall total score with
a minimum threshold of 1%, i.e., no points for contributions less than
1% to the added depth of all BSE specialists.\8\
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\7\ For example, assume the NBBO size is 500 shares displayed
and the BSE specialist receives an order for 1200 shares. If the
specialist executes 600 shares at the NBBO price, the specialist
would receive credit for 600 shares out of 1200 shares, or 50%. See
Securities Exchange Act Release No. 39730 (March 6, 1998); 63 FR
12847 (March 16, 1998) (``March 1998 Order''). Points are allocated
based on the specialist's raw score. In this example, the specialist
would not receive any points for the Depth measure, because the
specialist's Depth percentage is below 75%. The points for each
measure are weighted to obtain an overall weighted score for all the
measures.
\8\ For example, assume the NBBO size is 500 shares displayed
and the BSE specialist receives an order for 1200 shares, and that
the specialist executes 600 shares at the displayed NBBO price. The
number of shares over the NBBO size the specialist executed is
calculated by subtracting 500 from 600. The specialist has 100
shares of ``added depth.'' Then calculate the added depth for each
qualifying order for each specialist, add the added depth for each
specialist for each qualifying order, and total the added depth for
all specialists combined. Next compare each specialist's added depth
to the overall added depth for the floor to arrive at the percentage
for each specialist relative to the other specialists. For example,
100 added depth for Specialist A / 10,000 added depth for all
specialists = 10% added depth for specialists A. See March 1998
Order, supra note 7. Points are allocated based on the specialist's
raw score. In this example, the specialist would receive points for
the Added Depth measure, because the specialist's Added Depth
percentage is equal to or greater than 1%. After points have been
assigned for each measure under the SPEP, the points for each
measure are assigned a weight to obtain an overall weighted score
for all the measures.
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After reviewing two quarters of performance statistics, the
Exchange has determined that four firms on the floor cannot meet the 1%
Added Depth threshold, even if they were to achieve a Depth measure of
100%, because their volume of business is de minimus in comparison to
some of the larger firms. However, the Exchange believes that the
combination of the Added Depth and Depth measures balances out the
performance results: where small firms tend to score extremely high
relative to the larger firms on the Depth measure, firms with a
significant amount of business tend to score higher relative to the
smaller firms on the Added Depth measure.
Rather than eliminate the Added Depth measure in its entirety, the
Exchange is proposing to combine the range points of the two depth
measures and weight the overall combined score at 40%, as opposed to
the current calculation which separately weights the range points of
each measure at 20% each. This will result in the inclusion of both
measures in the performance program, but will eliminate the requirement
that a specialist appear before the Market Performance Committee for
failure of a single measure that is mathematically impossible for that
specialist to attain a passing score on. Under the proposed change, a
specialist who failed the Added Depth category, but performed at some
level above the range covered by the minimum threshold of 75%-79.9% for
the Depth measure would end up over the minimum threshold for the
combined score.
The current range point scales and weighted scores for each of the
depth measures are as follows:

----------------------------------------------------------------------------------------------------------------
Depth Added Depth
----------------------------------------------------------------------------------------------------------------
Weighted Weighted
Percentage of orders Points score (20%) Percentage of orders Points score (20%)
----------------------------------------------------------------------------------------------------------------
<75.0............................... 0 0 <1.0.................. 0 0
75.0-79.9........................... 5 1 1.0-1.9............... 5 1
80.0-84.9........................... 10 2 2.0-3.9............... 10 2
85.0-89.9........................... 15 3 4.0-5.9............... 15 3
>=90.0.............................. 20 4 >=6.0................. 20 4
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The proposed range point scales for each of the depth measures and
the combined weighted score are as follows:

----------------------------------------------------------------------------------------------------------------
Depth Added Depth Combined depth
----------------------------------------------------------------------------------------------------------------
Total Weighted
Percentage of orders Points Percentage of orders Points points score (40%)
----------------------------------------------------------------------------------------------------------------
<75.0............................... 0 <1.0.................. 0 0 0
75.0-79.9........................... 5 1.0-1.9............... 5 5 2
80.0-84.9........................... 10 2.0-3.9............... 10 10 4
85.0-89.9........................... 15 4.0-5.9............... 15 15 6
>=90.0.............................. 20 >=6.0................. 20 20 8
25 10
30 12
35 14
40 16
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The following results occur under the current and proposed depth
measure calculations for (1) a specialist who scores 82% on the Depth
measure and 0.7% on the Added Depth measure and (2) a specialist who
scores 76% on the Depth measure and 4% on the Added Depth measure:

------------------------------------------------------------------------
Specialist (1) Specialist (2)
------------------------------------------------------------------------
Current Calculation
------------------------------------------------------------------------
Depth 82% (10 pts)........................ Depth 76% (5 pts).
Added Depth 0.7% (0 pts).................. Added Depth 4% (15 pts).
Weighted Scores total 2................... Weighted Scores total 4.
------------------------------------------------------------------------
Proposed Calculation
------------------------------------------------------------------------
Depth 82% (10 pts)........................ Depth 76% (5 pts).

[[Page 68492]]

Added Depth 0.7% (0 pts).................. Added Depth 4% (15 pts).
Combined Depth (10 pts)................... Combined Depth (20 pts).
Weighted Score totals 4................... Weighted Score totals 8.
------------------------------------------------------------------------

In addition, the minimum threshold level for the Overall Program
weighted score, which is currently set at ``at or above 5.00'', is
being changed to compensate for the change in the depth calculations
and will be set at ``at or above 7.00.''
Under the pilot, assuming that a specialist performed at the
minimum threshold level for each measure, the breakdown of weighted
points would be as follows:

------------------------------------------------------------------------
Weight Weighted
Measure percent Points points
------------------------------------------------------------------------
Turnaround Time.................. 5 5 0.25
Holding Orders Without Action.... 5 5 0.25
Price Improvement (<\1/8\)....... 20 5 1.00
Price Improvement (\1/8\)........ 15 5 0.75
Price Improvement (>\1/8\)....... 15 5 0.75
Depth............................ 20 5 1.00
Added Depth...................... 20 5 1.00
------------
Overall Weighted Score..... ........... ........... 5.00
------------------------------------------------------------------------

Under the proposed rule change, assuming that a specialist
performed at the minimum threshold level for each measure, the
breakdown of weighted points would be as follows:

------------------------------------------------------------------------
Weight Weighted
Measure percent Points points
------------------------------------------------------------------------
Turnaround Time.................. 5 5 0.25
Holding Orders Without Action.... 5 5 0.25
Price Improvement (<\1/8\)....... 20 5 1.00
Price Improvement (\1/8\)........ 15 5 0.75
Price Improvement (>\1/8\)....... 15 5 0.75
Depth and Added Depth............ 40 10 4.00
------------
Overall Weighted Score..... ........... ........... 7.00
------------------------------------------------------------------------

2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b)(5) of the Act.\9\ Specifically, the Exchange believes
that the proposal is 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, in general, to protect investors and the public
interest; and is not designed to permit unfair discrimination between
customers, issuers, brokers or dealers.
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\9\ 15 U.S.C. 78f(b)(5).
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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
with respect to 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 self-regulatory organization 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, 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 in the
Commission's Public Reference Room in Washington, D.C.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
number SR-BSE-98-7 and should be submitted by January 4, 1999.

[[Page 68493]]

For the Commission, by the Division of Market Regulations,
pursuant to delegated.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-32963 Filed 12-10-98; 8:45 am]
BILLING CODE 8010-01-M

Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment No. 1 by the Boston Stock Exchange, Inc. Relating to its Specialist Performance Evaluation Program

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