

[Federal Register: September 30, 2005 (Volume 70, Number 189)]
[Notices]               
[Page 57339-57340]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30se05-159]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52501; File No. SR-BSE-2005-30]

 
Self-Regulatory Organizations; Boston Stock Exchange, Inc.; Order 
Approving a Proposed Rule Change and Amendment No. 2 Thereto Relating 
to the Removal of Unreliable Quotes From the Exchange's Determination 
of the National Best Bid or Offer

September 23, 2005.

I. Introduction

    On July 27, 2005, the Boston Stock Exchange, Inc. (``BSE''), filed 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change pursuant to Section 19(b)(1) of the Securities Exchange Act 
of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ to adopt a rule 
relating to the removal of unreliable quotes from the determination of 
the national best bid or offer (``NBBO''). The BSE filed Amendment No. 
1 to the proposed rule change on August 5, 2005 and withdrew Amendment 
No. 1 on August 12, 2005. The BSE filed Amendment No. 2 to the proposed 
rule change on August 12, 2005.\3\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 2 added clarifying language and corrected 
typographical and technical errors.
---------------------------------------------------------------------------

    The proposed rule change, as amended, was published for comment in 
the Federal Register on August 24, 2005.\4\ The Commission received one 
comment letter on the proposal.\5\ This order approves the proposed 
rule change, as amended.
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 52296 (August 18, 
2005), 70 FR 49689.
    \5\ See letter from Matthew Hinerfeld, Managing Director and 
Deputy General Counsel, Citadel Investment Group, L.L.C., on behalf 
of Citadel Derivatives Group LLC, to Jonathan G. Katz, Secretary, 
Commission, dated August 26, 2005 (``Citadel Letter'').
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    Pursuant to obligations to avoid trade-throughs under the Plan for 
the Purpose of Creating and Operating an Intermarket Option Linkage 
(``Linkage Plan''),\6\ the Boston Options Exchange (``BOX''), in 
general, filters certain orders to either trade on BOX, if the best BOX 
price is at the NBBO or, if the best BOX price is not at the NBBO, to 
access the best price for such orders through the intermarket option 
linkage (``Linkage'').\7\
---------------------------------------------------------------------------

    \6\ On July 28, 2000, the Commission approved a national market 
system plan for the purpose of creating and operating an intermarket 
option linkage proposed by the American Stock Exchange LLC, the 
Chicago Board Options Exchange, Incorporated, and the International 
Securities Exchange, Inc. See Securities Exchange Act Release No. 
43086 (July 28, 2000), 65 FR 48023 (August 4, 2000). Subsequently, 
upon separate requests by the Philadelphia Stock Exchange, Inc., the 
Pacific Exchange, Inc., and the BSE, the Commission issued orders to 
permit these exchanges to participate in the Linkage Plan. See 
Securities Exchange Act Release Nos. 43573 (November 16, 2000), 65 
FR 70851 (November 28, 2000); 43574 (November 16, 2000), 65 FR 70850 
(November 28, 2000); and 49198 (February 5, 2004), 69 FR 7029 
(February 12, 2004).
    \7\ See subsection (i) of Section 1 of Chapter XII of the BOX 
Rules.
---------------------------------------------------------------------------

    The BSE is proposing to add subsection (e) of Section 3 of Chapter 
XII of the BOX Rules to add provisions for declaring an away market's 
quotes in a particular class of options unreliable and to thereby 
exclude such quotes from BOX's NBBO determination when an away market: 
(i) Is disconnected from Linkage; (ii) disseminates non-firm quotes; or 
(iii) has other confirmed quoting problems. The BSE proposes to exclude 
unreliable quotes from BOX's NBBO determination, thereby including in 
BOX's NBBO determination only quotes that are reliable and accessible 
to investors. The BSE seeks only to exclude an away market's unreliable 
quotes in a particular option class from BOX's NBBO determination for 
the time that such quotes remain unreliable.

III. Comment Summary

    As noted above, the Commission received one comment letter on the 
proposal.\8\ The commenter supported the proposal and recommended that 
the Commission approve it. However, the commenter suggested that the 
BSE modify its proposal to allow the BOX to determine that an away 
market is disconnected from Linkage without having to get confirmation 
from the away market that the away market is disconnected. The 
commenter cited ``the need for immediate action'' as the basis for 
suggesting that the BSE amend its proposal to allow the BOX to make its 
determination that a market is disconnected from Linkage without first 
obtaining confirmation from the away market.\9\
---------------------------------------------------------------------------

    \8\ See supra note 5.
    \9\ The Citadel Letter also addressed File No. SR-Amex-2005-066, 
a proposal to allow the American Stock Exchange LLC (``Amex'') to 
exclude an away market's quotes from the Amex's determination of the 
NBBO when such away market is disconnected from Linkage. The 
commenter strongly supported Amex's proposal. In addition, the 
commenter urged the Commission to address issues related to non-firm 
quotes that are outside the scope of these proposed rule changes.
---------------------------------------------------------------------------

IV. Discussion

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of Section 6 of the Act 
\10\ and the rules and regulations thereunder applicable to a national 
securities exchange.\11\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Act,\12\ 
which requires, among other things, that the rules of an exchange be 
designed to promote just and equitable principles of trade, 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. The Commission believes that it is appropriate for BOX 
to remove an away market's disseminated quotes from BOX's determination 
of the NBBO when such quotes are unreliable. The Commission further 
believes that the proposed rule change establishes reasonable 
procedures to determine the unreliability of an away market's quotes 
and to notify promptly the affected away market, and establishes an 
appropriate standard for determining when to resume inclusion of the

[[Page 57340]]

affected away market's quotes in BOX's NBBO.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78f.
    \11\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \12\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission has considered the comments made in the Citadel 
Letter. The Commission recognizes that the provision in the proposed 
rule change requiring BOX to contact an away market to confirm that its 
quotes are unreliable (except in circumstances in which the BOX Market 
Operations Center received a message from OPRA, the OLA Administrator, 
or the relevant away market) differs slightly from the rules adopted by 
the other options exchanges. Nonetheless, the Commission believes that 
the proposed provision is consistent with the Act.

V. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, is consistent with the requirements of the Act 
and the rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-BSE-2005-30) as amended, is 
approved.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jonathan G. Katz,
Secretary.
 [FR Doc. E5-5328 Filed 9-29-05; 8:45 am]

BILLING CODE 8010-01-P
