

[Federal Register: June 29, 2006 (Volume 71, Number 125)]
[Notices]               
[Page 37140-37147]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29jn06-90]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54034; File No. SR-BSE-2006-22]

 
Self-Regulatory Organizations; Boston Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change and Amendment Nos. 1, 2, and 3 
Thereto To Implement the Boston Equities Exchange (``BeX'') Trading 
System

June 22, 2006.
    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 May 10, 2006, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II and III below, which Items have been prepared by the BSE. 
BSE filed Amendment No. 1 to the proposed rule change on June 2, 
2006.\3\ BSE filed Amendment No. 2 to the proposed rule change on June 
9, 2006.\4\ BSE filed Amendment No. 3 to the proposed rule change on 
June 15, 2006.\5\ The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaces and supersedes the original filing 
in its entirety.
    \4\ Amendment No. 2 replaces and supersedes the original filing 
and Amendment No. 1 in their entirety.
    \5\ Amendment No. 3 replaces and supersedes the original filing, 
Amendment No. 1 and Amendment No. 2 in their entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing the implementation of the Boston Equities 
Exchange (``BeX'') trading system, a fully-automated electronic book 
for the display and execution of orders in securities listed otherwise 
than on The Nasdaq Stock Market (``Nasdaq'') for which the BSE obtains 
unlisted trading privileges (``UTP'') after June 30, 2006.\6\
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    \6\ The rules governing trading in Nasdaq stocks (BSE Rules, 
Chapter XXXV) and the rules governing trading in listed securities 
assigned to a specialist (BSE Rules, Chapters I, II, III, XV, XVI, 
XVII, XIX, and XXXIII) remain unchanged. Separate from this rule 
filing, the BSE intends to apply for UTP in all stocks listed 
otherwise than on The Nasdaq Stock Market for which we do not yet 
have UTP.
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    The text of the proposed rule change is available on the Exchange's 
Web site (http://www.bostonstock.com), at the Exchange's Office of the 

Secretary, and at the Commission's Public Reference Room.
    The text of the proposed rule change also appears below.\7\ 
Proposed new language is italicized.
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    \7\ The Commission notes that the rule text submitted by the 
Exchange contained several technical errors, which, for the purpose 
of this notice, have been corrected. In addition, the reference to 
``Market'' orders contained in the last sentence of proposed Chapter 
XXXVII, Section 3(f)(ii) should instead be ``At the Close'' orders. 
The Exchange has committed to address these errors formally in an 
amendment to the proposed rule change following publication of this 
notice. Telephone conversation among John Curtain, Assistant Vice 
President Corporate Legal and Contracts Attorney, BSE; Jennifer 
Colihan, Special Counsel, Division of Market Regulation 
(``Division''), Commission; and David Michehl, Special Counsel, 
Division, Commission on June 22, 2006.
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RULES OF THE BOSTON STOCK EXCHANGE
Chapter II--Dealings on the Exchange
    Sections 1 through 40. No Change.
    SEC. 41. Minimum Price Variation
    The Minimum Price Variation shall be 0.01. Those securities trading 
in fractions shall continue to trade in Minimum Price Variations as 
currently approved by the Exchange. Mid-Point Cross Orders may be 
executed and reported in increments as small as one-half of the Minimum 
Price Variation.
    Sections 42 through 43. No Change.
    Chapter XXXVII--Boston Equities Exchange (``BeX'') Trading System
    The Boston Equities Exchange (``BeX'') trading system is a fully-
automated facility of the Exchange, which allows eligible orders in 
eligible securities to electronically match and execute against one 
another.
    Section 1. BeX Eligible Securities
    (a) Eligible Securities. All securities eligible for trading on the 
Exchange that are listed otherwise than on The Nasdaq Stock Market for 
which the BSE obtains unlisted trading privileges (``UTP'') after June 
30, 2006 shall be eligible for trading through BeX. Any specialist 
request to remove a security from BeX shall be considered by the 
appropriate Board Committee.
    Section 2. Eligible Orders
    (a) All orders sent to BeX must be round lot market or limit 
orders, specifically designated in the manner specified by the Exchange 
for trading in BeX.
    (b) All orders sent to BeX must be for regular way settlement.
    (c) Eligible order types:
    (i) Orders eligible for execution in BeX may be designated as one 
of the following existing BSE order types as defined in Chapter I, 
Section 3 except that any reference in the existing BSE Rules to the 
execution of Orders as soon as ``represented at the specialist's post'' 
shall for purposes of this Section be understood to mean ``entered in 
BeX'':
    (A) At the Opening or At the Opening Only Order.
    (B) Day Order.
    (C) Do Not Increase (DNI).
    (D) Do Not Reduce (DNR).
    (E) Fill or Kill.
    (F) Good `Till Cancel Order.
    (G) Immediate or Cancel.
    (H) Limit, Limited Order or Limited Price Order.
    (I) At the Close.
    (J) Market Order.
    (K) Stop Limit Order.
    (L) Stop Order.
    With the exception of Fill or Kill and Immediate or Cancel Orders, 
a customer may append to an Order an instruction that the Order be 
cancelled or routed to the market(s) displaying the National Best Bid 
or Offer if the Order would trade through the National Best Bid or 
Offer if executed on the BeX.
    (ii) Orders eligible for execution in BeX may also be designated as 
one of the following additional order types:
    (A) ``Cross'': An order to buy and sell the same security at a 
specific price better than the best bid and offer displayed in BeX and 
equal to or better than the National Best Bid and Offer. A Cross Order 
may represent interest of one or more BSE Members.

[[Page 37141]]

    (B) ``Cross with Size'': A Cross Order to buy and sell at least 
5,000 shares of the same security with a market value of at least 
$100,000.00 (i) at a price equal to or better than the best bid or 
offer displayed in BeX and the National Best Bid or Offer (ii) where 
the size of the order is larger than the aggregate size of all interest 
displayed in BeX at that price; and (iii) where neither side of the 
order is for the account of the BSE Member sending the order to BeX.
    (C) ``Good `Till Date (GTD)'': An order to buy or sell that, if not 
executed, expires at the end of date specified in the order.
    (D) ``Good `Till Time (GTT)'': An order to buy or sell that, if not 
executed, expires at the time specified in the order.
    (E) ``Limit or Close'': A limit order to buy or sell that if not 
executed prior to the Market on Close cutoff time of 3:40 p.m., 
pursuant to Chapter II, Section 22, will automatically convert to an At 
the Close Order for inclusion in the closing process and if not so 
executed, at the close, will be cancelled.
    (F) ``Mid-Point Cross'': A two-sided order with both a buy and sell 
component combined that executes at the midpoint of the National Best 
Bid or Offer. A Mid-point Cross Order will be rejected when a locked or 
crossed market exists in that security at the time the Order is 
received. Midpoint Cross Orders may be executed and reported in 
increments as small as one-half of the Minimum Price Variation.
    (d) Orders may be entered by a Member on its own behalf, for the 
account of another Member (collectively, professional orders) or for 
the account of a customer (an agency order). In BeX, however, agency 
orders are subject to the same display and execution processes as 
professional orders, and agency orders do not receive any priority in 
order execution or handling.
    * * * Interpretations and Policies
    .01 The terms ``Best Bid'' and ``Best Offer'' shall mean, 
respectively, the highest and lowest priced order to buy and sell an 
eligible security in BeX.
    .02 The terms ``National Best Bid'' and ``National Best Offer'' 
shall mean, respectively, the highest and lowest priced order or quote 
to buy and sell a BeX eligible security displayed in the consolidated 
quotation system for the security.
    Section 3. Operation of BeX
    (a) Operating Hours. BeX will operate from 7:30 a.m. until 4:30 p.m 
during the Exchange's Pre-Opening, Opening, Primary and Post-Primary 
Trading Sessions.
    (i) For purposes of this Chapter XXXVII, the primary market for a 
security is, unless otherwise designated by the appropriate Board 
committee, the listing market for a security; provided, however, that 
if a security is traded by the NYSE, then the primary market for such 
security is the NYSE, and if a security is not traded by the NYSE and 
is traded by the Amex, then the primary market for such security is the 
Amex. If a security is solely listed on any other Exchange, then the 
primary market for such security is that market. If a security is 
traded on both the NYSE and the Amex, whichever of the two is the 
listing market is the primary market.
    (b) Pre-Opening. BeX will accept orders each day during the Pre-
Opening. The Pre-Opening in BeX extends from 7:30 a.m. until 9:30 a.m. 
During the Pre-Opening, orders are placed on the BeX but will not be 
matched and do not generate trade executions. Market participants are 
permitted to add, modify or cancel orders. Cross, Cross with Size, and 
Mid-point Cross Orders do not participate in the opening and are not 
accepted by the BeX trading system during the Pre-Opening.
    (c) Opening. BeX will open for trading each day once the primary 
market for a security opens its market on either a displayed quote or 
trade.
    Primary Market Opening Procedures (PMOP). Where the opening price 
is based on a trade print in the primary market, the BeX opening price 
will match the primary market opening price for each individual 
security opened. Once the BeX opening price has been determined, all 
eligible orders priced equal to or better than the BeX opening price 
will be paired for execution at the determined price following 
applicable BeX priority rules.
    Where the primary market opening is based on a quote, the BeX will 
open as follows:
    (i)(a) Where there are orders in the BeX that cannot be matched, 
the BeX will open on a quote;
    (i)(b) Where there are orders in the BeX that can be matched, (such 
as a Market Order to Market Order, Limit Order to Market Order, or 
Limit Orders that lock or cross) the BeX opening price will be the 
Theoretical Opening Price (``TOP''), provided the TOP is at or within 
the National Best Bid and Offer;
    (i)(c) Where there are orders in the BeX that can be matched, and 
the TOP is not at or within the National Best Bid and Offer, the BeX 
opening trade price will be at the National Best Bid or Offer closest 
to the TOP so long as Orders can be matched at that price. If Orders 
cannot be matched at that price, the BeX will open on a quote.
    (ii) Following the opening execution process in an individual 
security, all orders remaining that are executable against the National 
Best Bid and Offer will be cancelled or routed in accordance with the 
customer's instruction. All other Orders will be booked on the BeX.
    (iii) The TOP.
    (a) The TOP is the price that maximizes the quantity of orders 
traded on the BeX at the opening;
    (b) If multiple prices exist under subparagraph (a), above, then 
the TOP is the price that minimizes the quantity of orders not traded;
    (c) If multiple prices exist under subparagraph (b), above, then 
the price that minimizes any order imbalance is the TOP;
    (d) If multiple prices exist under subparagraph (b) and there is no 
order imbalance, the TOP is the price closest to the previous day's 
closing price.
    (d) Primary Trading Session. BeX will operate the Primary Trading 
Session immediately following the opening for individual securities 
where the primary market is either the NYSE or AMEX. During the primary 
session, orders are automatically executed as soon as a match can be 
found, following applicable BeX priority rules.
    (e) Trading Halts. BeX will halt trading during regulatory trading 
halts called by the primary or listing market in a security. 
Additionally, BeX will halt its operation during periods of unusual 
market conditions pursuant to Chapter II, Section 34A. If trading in an 
issue has been halted, BeX will go through its Pre-Opening and Opening 
procedures as set forth above.
    (f) Closing. BeX will close as follows:
    (i) Market on Close Period: Beginning at 3:40 p.m. (EST), BeX will 
broadcast the imbalance between the At the Close and Limit or Close 
Orders on the bid side and the At the Close and Limit or Close Orders 
on the sell side.
    (A) During this period At the Close Orders will only be accepted on 
the imbalance side.
    (B) During this period At the Close and Limit or Close Orders 
cannot be cancelled.
    (ii) BeX will provide a group closing by putting all eligible 
orders received by 4:00 p.m. into an ``Authorized Reserve State 
(ARS).'' During ARS, BeX will not accept any new orders, cancellations 
or modifications. When BeX receives the closing price message from the 
primary market, as defined in Section 3(a)(i) above, the BeX trading 
system will complete the closing process for each individual security. 
During the closing process, all paired At the Close and Limit or Close 
Orders are executed at

[[Page 37142]]

the primary market closing price. If a Market or Limit or Close Order 
is not fully executed at the close, the part not executed will be 
cancelled.
    (g) Post-Primary Trading Session (PPS). The BeX PPS will operate 
from the time when the primary market disseminates its closing price 
until 4:30 p.m. During the BeX PPS only cross orders at a specific 
price may be submitted.
    (h) Receipt of Orders. Orders shall be routed to BeX using one of 
the following methods:
    (i) Except for the orders described in subparagraph (ii) below, all 
orders must be sent to BeX through the Exchange's systems or through 
other communication lines approved by the Exchange for the delivery of 
orders by its Members.
    (ii) ITS commitments for ITS-eligible securities traded in BeX 
shall be sent through the ITS system.
    (i) Ranking and Display of Orders. Except for Cross, Cross with 
Size, and Mid-point Cross Orders, which shall be executed as described 
in Paragraph (k) below, all orders sent to BeX shall be ranked 
according to their price and time of receipt, as follows:
    (i) Limit Orders shall be ranked based on their limit prices and 
times of receipt by BeX.
    (ii) All eligible orders shall be immediately and publicly 
displayed through the processes set out in the appropriate transaction 
reporting plan for each security when they constitute the best bid or 
offer in BeX for that security, provided, however, that an order that 
would lock or cross another ITS market shall be cancelled rather than 
displayed.
    (j) Automated Matching and Execution of Orders. Orders shall 
automatically be matched and executed against each other, as follows:
    (i) Except for Cross, Cross with Size, and Mid-point Cross Orders, 
which shall be executed as described in Paragraph (k) below, an 
incoming order shall be matched against one or more orders in the BeX 
in the order of their ranking, following price and time priority for 
the full amount of shares available at that price, or for the size of 
the incoming order, if smaller. If an incoming Limit Order would trade 
through (as defined in the ITS Plan) the National Best Bid or Offer if 
executed on the BeX at the time of receipt, it will, at the instruction 
of the Member entering the order, either be cancelled or routed to the 
market(s) displaying the National Best Bid or Offer. If no instruction 
is provided, the order will be returned to Member entering the order.
    (ii) If an incoming Limit Order cannot be matched when it is 
received and it is not designated as a type that should be immediately 
cancelled the order shall be treated in accordance with Section 3, 
Paragraph (i) above.
    (iii) If an incoming Market Order would trade-through (as defined 
in the ITS Plan) the National Best Bid or Offer if executed on the BeX 
at the time of receipt, it will, at the instruction of the Member 
entering the order, either be cancelled or routed to the market(s) 
displaying the National Best Bid or Offer.
    (iv) An inbound ITS commitment, if it is priced at or better than 
the current Best Bid or Offer in BeX, shall be automatically executed 
against the order(s) reflected in the Best Bid or Offer, for the full 
amount of shares available at that price, and any remaining portion of 
the ITS commitment shall be automatically cancelled.
    (v) Orders shall only be matched at prices that are equal to, or 
better than, the National Best Bid or Offer.
    (k) Submission of Cross Orders. Cross, Cross with Size, and Mid-
point Cross Orders shall be automatically executed if they meet the 
requirements set out in Section 2(c)(ii)(A), (B) and (F) above. If an 
order designated as Cross, Cross with Size, or Mid-point Cross does not 
meet such requirements at the time it is received by BeX, it shall be 
immediately cancelled.

Section 4. Cancellation of Transactions

    (a) Cancellation of Transactions. A transaction made in 
demonstrable error and cancelled by both parties may be unwound, 
subject to the approval of the Exchange. Unresolved controversies 
relating to transactions that occur in BeX, and which are not addressed 
pursuant to the procedures in Section 5, Paragraph (a) below shall be 
subject to the arbitration rules of the Exchange set out in Chapter 
XXXII of the Rules.

Section 5. Handling of Clearly Erroneous Transactions

    (a) Handling of Clearly Erroneous Transactions. The Exchange will 
respond to requests for review of clearly erroneous transactions using 
the following procedures:
    (i) The terms of a transaction are ``clearly erroneous'' where 
there is an obvious error in any term, such as price, number of shares 
or other unit of trading, or identification of the security.
    (ii) Any Member may request a review of an execution received 
through BeX when the Member believes that the terms of the transaction 
were clearly erroneous when submitted.
    (A) The Member must make a request for review immediately after the 
execution and also must provide a written request, by facsimile or by 
e-mail, within 15 minutes after the execution.
    (B) The Exchange shall promptly notify the other party to the 
transaction of the request for review.
    (C) The Member making a request for review shall provide, within 30 
minutes after making the written request for review (or within such 
longer period of time specified by Exchange staff), written 
documentation relating to the disputed transaction that is reasonably 
necessary for use by the Exchange in resolving the matter. The other 
party to the transaction shall provide, within 30 minutes after 
receiving notice from the Exchange of the request for review (or within 
such longer period of time specified by Exchange staff), written 
documentation relating to the disputed transaction that is reasonably 
necessary for use by the Exchange in resolving the matter. Once a party 
has submitted its documentation, and the period for providing the 
documentation has ended (or, if earlier, the party has notified the 
Exchange that it has no further information), the party may not provide 
additional information unless requested to do so by Exchange staff. 
Either party to the transaction may request, and the Exchange shall 
provide, the written documentation submitted by the other party.
    (D) The Exchange's Chief Regulatory Officer (``CRO'') or another 
officer designated by the CRO shall review the transaction and 
determine whether it is clearly erroneous. In making that 
determination, the CRO or another officer designated by the CRO shall 
consider the goals of maintaining a fair and orderly market and the 
protection of investors and the public interest.
    (E) If the CRO or another officer designated by the CRO determines 
that a transaction is not clearly erroneous, the Exchange shall notify 
both parties, in writing, that no action will be taken with respect to 
the completed trade. If the CRO or another officer designated by the 
CRO determines that a transaction is clearly erroneous, the CRO or 
another officer designated by the CRO shall declare the transaction 
null and void or modify one or more of the terms of the transaction 
with the aim of trying to return the parties to the positions that they 
would have been in (or to positions reasonably similar to those 
positions) if the error had not occurred. The Exchange shall document 
this decision in writing and provide copies of the decision to all 
parties.

[[Page 37143]]

    (iii) Either party may appeal this determination to a subcommittee 
of the Exchange's Regulatory Oversight Committee (``ROC'') by 
submitting an appeal to the Exchange's Secretary, by facsimile or in 
writing, within 30 minutes after receiving the Exchange's written 
decision or, if the Exchange notifies parties of its decision after 4 
p.m., by 9:30 a.m. the next trading day. Once an appeal is received, 
the Exchange shall notify the counterparty to the trade and both 
parties and the Exchange itself will be permitted to submit any 
additional supporting written materials up to the time that the 
subcommittee considers the appeal. Either party to a disputed trade may 
request, and the Exchange shall provide, the written documentation 
presented to the subcommittee by the other party or by the Exchange. An 
appeal does not operate as a stay on the decision being appealed. After 
consideration of any written materials provided by the parties or by 
the Exchange, and after any hearings that the subcommittee may hold, 
the subcommittee, using the standards set out in this rule, shall 
affirm, modify or reverse the original decision. The subcommittee's 
decision on a matter shall be the final Exchange action on the matter. 
Any decision by the CRO or another officer designated by the CRO under 
subparagraph (ii) above or by the ROC subcommittees under this 
subparagraph (iii) shall be rendered without prejudice as to the rights 
of the parties to the transaction to submit their dispute to 
arbitration.
    (iv) If there is any disruption or malfunction in the use or 
operation of BeX, or the communications systems associated with BeX, 
the CRO or another officer designated by the CRO may declare any 
transaction arising out of the use of BeX during the period of the 
disruption or malfunction null and void or may modify the terms of 
these transactions. In making this decision, the CRO, or any designee, 
must find that the transactions were clearly erroneous or that the 
actions are necessary for the maintenance of a fair and orderly market 
or the protection of investors and the public interest. Absent 
extraordinary circumstances, any action by the CRO or other designee 
shall be taken within 30 minutes of detection of the erroneous 
transaction, but in no event later than 3 p.m. on the trading day 
following the date of the trade at issue. The Exchange shall notify 
each Member involved in the transaction as soon as practicable 
following the decision and any party to the transaction may appeal that 
decision by following the procedures set out above in subparagraph 
(iii) of this rule.

Section 6. Orders To Be Reduced and Increased on Ex-Date

    (a) When a security is quoted ex-dividend, ex-distribution, ex-
rights or ex-interest, the following kinds of orders shall be reduced 
by the value of the payment or rights, and increased in shares in the 
case of stock dividends and stock distributions which result in round-
lots, on the day the security sells ex:
    (i) Open buying orders;
    (ii) Open stop orders to sell. (With open stop limit orders to 
sell, the limit, as well as the stop price, shall be reduced.) The 
following shall not be reduced:
    (i) Open stop orders to buy;
    (ii) Open selling orders.
    (b) Reduction of orders, Odd amounts. When the amount of a cash 
dividend is not equivalent to or is not a multiple of the fraction of a 
dollar in which bids and offers are made in the particular stock, 
orders shall be reduced by the next higher variation.
    (c) Reduction of orders, Proportional procedure. Open buy orders 
and open stop orders to sell shall be reduced by the proportional value 
of a stock dividend or stock distribution on the day a security sells 
ex-dividend or ex-distribution. The new price of the order is 
determined by dividing the price of the original order by 100% plus the 
percentage value of the stock dividend or stock distribution. For 
example, in a stock dividend of 3%, the price of an order would be 
divided by 103%.
    The chart below lists, for the more frequent stock distributions, 
the percentages by which the prices of open buy orders and open stop 
orders to sell shall be divided to determine the new order prices.

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                                                Price of order                                    Price of order
                 Distribution                     divided by              Distribution               divided by
----------------------------------------------------------------------------------------------------------------
5-for-4......................................            125%   2-for-1.........................            200%
4-for-3......................................       133\1/3\%   5-for-2.........................            250%
3-for-2......................................            150%   3-for-1.........................            300%
5-for-3......................................       166\2/3\%   4-for-1.........................            400%
----------------------------------------------------------------------------------------------------------------

    If as a result of this calculation the price is not equivalent to 
or is not a multiple of the fraction of a dollar in which bids and 
offers are made in the particular security, the price should be rounded 
to the next lower variation.
    In reverse splits, all orders (including open sell orders and open 
stop orders to buy) should be cancelled.
    (d) Procedure for increase in number of shares. When there is a 
stock dividend or stock distribution, open buy orders and open stop 
orders to sell shall be increased in shares as follows:
    (i) When there is a stock dividend or stock distribution which 
results in one or more full shares for each share held, the number of 
shares in open buy orders and open stop orders to sell shall be 
increased accordingly.
    EXAMPLES:
    A 3-for-1 stock distribution.
    An order for 100 shares is increased to 300 shares.
    An order for 200 shares is increased to 600 shares.
    An order for 500 shares is increased to 1500 shares.
    (ii) When there is a stock dividend or stock distribution of less 
than a one-for-one basis and thus results in fractional shares, open 
buy orders and open stop orders to sell shall be increased to the 
lowest full round-lot.
    EXAMPLES:
    A 25% stock dividend or a 5-for-4 stock distribution.
    An order for 100 shares remains at 100 shares.
    An order for 300 shares remains at 300 shares.
    An order for 900 shares is increased to 1100 shares.
    An order for 2000 shares is increased to 2500 shares.
    (iii) When there is a stock dividend or stock distribution which 
results in fractional shares combined with full shares, the number of 
shares in open buy orders and open stop orders to sell shall be 
increased to the lowest full round-lot.
    EXAMPLES:
    A 5-for-2 stock distribution.
    An order for 100 shares is increased to 200 shares.
    An order for 200 shares is increased to 500 shares.
    An order for 700 shares is increased to 1700 shares.
    An order for 1200 shares is increased to 3000 shares.

[[Page 37144]]

    Section 7. Application of BSE Rules
    (a) The rules and procedures in this Chapter shall apply to trading 
conducted in BeX. Unless otherwise defined in this Chapter, terms used 
in this Chapter shall have the same meanings given them elsewhere in 
the Rules. Except where the context requires otherwise, the provisions 
of the bylaws and all other Rules and policies of the Board of 
Governors shall continue to be applicable to trading that occurs on the 
BeX. If any rule in this Chapter is inconsistent with any other 
provision of the Rules, the provisions of this Chapter shall control 
and shall be deemed to supplement or amend the inconsistent provision.

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, as 
amended, and discussed any comments it received on the proposed rule 
change, as amended. 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 BSE has proposed in a separate rule filing, to create a new 
electronic trading facility, as that term is defined in section 3(a)(2) 
of the Act,\8\ called BeX.\9\ BeX, which is to be developed, owned and 
operated by BSX Group, LLC (``BSX''), would be an electronic securities 
communications and trading facility intended for the use of BSE Members 
and Electronic Access Members and their customers. In this rule filing 
relating to the initial phase of the BeX facility, the Exchange 
proposes to implement the BeX as a fully-automated electronic book for 
the display and execution of orders in securities listed on any 
exchange other than issues listed on Nasdaq for which the BSE obtains 
unlisted trading privileges after June 30, 2006. All such issues would 
not be assigned to a specialist. The rules would be located in Chapter 
XXXVII of the Exchange's Rules of the Board of Governors.\10\
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    \8\ Under the Act, the ``term `facility' when used with respect 
to an exchange includes its premises, tangible or intangible 
property whether on the premises or not, any right to the use of 
such premises or property or any service thereof for the purpose of 
effecting or reporting a transaction on an exchange (including, 
among other things, any system of communication to or from the 
exchange, by ticker or otherwise, maintained by or with the consent 
of the exchange), and any right of the exchange to the use of any 
property or service.'' See 15 U.S.C. 78c(a)(2).
    \9\ On May 5, 2006, the Exchange filed with the Commission a 
proposed rule change that establishes BeX and sets forth governance 
and membership rules changes pertaining to BeX (SR-BSE-2006-20).
    \10\ See note 6, supra, for a description of the scope of this 
proposal.
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    Under the Exchange's current rules there are no provisions for 
trading securities that are not assigned to a specialist. Rather than 
instituting a ``Cabinet'' rule, which the Exchange considers to be 
manually intensive and inefficient, the Exchange proposes to institute 
rules governing the BeX as a new fully-automated electronic book that 
would display and match eligible orders in these securities, without 
the participation of a specialist. For competitive reasons, the 
Exchange considers this proposal to be vitally important to its ability 
to attract to, and retain order flow by, the BSE.
    Currently, BSE Specialists quote and trade approximately 300 
securities. The BSE Floor Broker community routinely receives baskets 
of securities that contain orders and cross trades in securities that 
are not quoted by BSE Specialists. As such, the orders and cross trades 
for securities that are not traded on the BSE must be routed to other 
market centers for execution. Thus, the Exchange is not able to retain 
order flow that has been directed to the BSE. Moreover, BSE Floor 
Brokers are hampered in their ability to attract more sources of order 
flow to the Exchange, because a percentage of the order flow they do 
attract is eventually routed to other market centers for execution. The 
other market centers include those centers that have the capability to 
post and execute orders in securities that are not continuously quoted 
or traded by any member in a market making capacity, including other 
exchanges that have rules governing the same type of electronic book 
functionality that the BSE is now seeking to employ.\11\
---------------------------------------------------------------------------

    \11\ See, e.g., Chicago Stock Exchange (``Chx'') Rules, Article 
XXA.
---------------------------------------------------------------------------

    As described below, BeX would allow Exchange Members, whether or 
not they are on the Exchange's floor, to enter orders into the BeX for 
possible execution.
    Eligible securities and eligible orders. Under the proposed rules, 
all securities eligible for trading on the Exchange that are not 
assigned to a Specialist would be traded in the BeX. Orders sent to BeX 
would be required to be specifically designated for handling in BeX. 
BeX would accept only round-lot market and limit orders.\12\ No odd-
lot, or mixed lot orders would be accepted.
---------------------------------------------------------------------------

    \12\ Id.
---------------------------------------------------------------------------

    Orders eligible for execution in BeX may be designated as one of 
the following existing BSE order types: ``at the close,'' ``at the 
opening or at the opening only,'' ``day,'' ``do not increase (DNI),'' 
``do not reduce (DNR),'' ``fill or kill,'' ``good `till cancel,'' 
``immediate or cancel,'' ``limit, limited or limited price,'' 
``market,'' ``stop limit,'' or ``stop'' orders. Orders may also be 
designated one of the following new order types: ``cross,'' ``cross 
with size,'' ``good `till date (GTD),'' ``good `till time (GTT),'' 
``limit or close,'' or ``mid-point cross.'' Descriptions of the 
eligible new order types are as follows:
    Cross: An order to buy and sell the same security at a specific 
price better than the best bid and offer displayed in BeX and equal to 
or better than the National Best Bid and Offer. A Cross Order may 
represent interest of one or more BSE Members.
    Cross with Size: A Cross Order to buy and sell at least 5,000 
shares of the same security with a market value of at least $100,000.00 
(i) at a price equal to or better than the best bid or offer displayed 
in BeX and the National Best Bid or Offer; (ii) where the size of the 
order is larger than the aggregate size of all interest displayed in 
BeX at that price; and (iii) where neither side of the order is for the 
account of the BSE Member sending the order to BeX. The latter 
provision is intended to restrict such orders to agency orders, similar 
to the existing BSE, Chx, and American Stock Exchange (``Amex'') 
rules.\13\
---------------------------------------------------------------------------

    \13\ BSE Rule Chapter II, Sec. 8 and Chapter XXV, Sec. 6; Amex 
Rule Sec. 126.02, and Chx Rule Article XXA, Rule 2(c)(4).
---------------------------------------------------------------------------

    Good `Till Date (GTD): An order to buy or sell that, if not 
executed, expires at the end of the date specified in the order.
    Good `Till Time (GTT): An order to buy or sell that, if not 
executed, expires at the time specified in the order.
    Limit or Close: A Limit Order to buy or sell that if not executed 
prior to the Market on Close cutoff time of 3:40 p.m., pursuant to 
Chapter II, Section 22, will automatically convert to an At the Close 
Order for inclusion in the closing process, and if not so executed at 
the close, will be cancelled.
    Mid-Point Cross: A two-sided order with both a buy and sell 
component combined that trades at the midpoint of the National Best Bid 
or Offer. A Mid-point Cross Order will be rejected when

[[Page 37145]]

a locked or crossed market exists in that security at the time the 
Order is received. Mid-point Cross Orders may be executed and reported 
in increments as small as one-half of the Minimum Price Variation.
    With the exception of Fill or Kill and Immediate or Cancel Orders, 
a customer may append to an Order an instruction that the Order be 
cancelled or routed to the market(s) displaying the National Best Bid 
or Offer if the Order would trade through the National Best Bid or 
Offer if executed on the BeX.
    Compliance with Intermarket Trading System (``ITS'') Plan. To 
ensure compliance with the ITS Plan, otherwise eligible orders would be 
cancelled or routed away in certain circumstances. Specifically, if an 
order in an ITS eligible security crosses or locks the National Best 
Bid or Offer at the time that it is received, the order would be 
immediately cancelled to ensure compliance with the ITS Plan's rules 
relating to locked markets.\14\ Marketable orders that would trade-
though the National Best Bid or Offer would either be cancelled or be 
routed to the market(s) showing the National Best Bid or Offer at the 
order-entering firm's instructions.\15\
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    \14\ Similarly, if an order in a listed security locks or 
crosses the Best Bid or Offer in BeX at the time it is received, but 
not the National Best Bid or Offer, the order would be executed 
according to BeX's matching algorithm, and any remaining portion 
would be immediately cancelled, if it would lock or cross the 
National Best Bid or Offer.
    \15\ See proposed BSE Rule, Chapter XXXVII, Section 3, Paragraph 
(j)(i) and (iii).
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    Operating hours. Under the proposed rules, BeX would operate during 
the Exchange's Pre-Opening, Opening, Primary, and Post-Primary Trading 
Sessions. Specifically, BeX would accept orders each day during the 
Pre-Opening. BeX will open for trading each day for a particular 
security once the primary market in that security opens on either a 
displayed quote or a trade.\16\ BeX would close at 4:30 p.m.
---------------------------------------------------------------------------

    \16\ The proposed rules define the primary market as the listing 
market for a security, unless otherwise designated by the 
appropriate Board committee; provided, however, that if a security 
is traded by the New York Stock Exchange, Inc. (``NYSE''), then the 
primary market for such security would be the NYSE and if a security 
is traded by the Amex, then the primary market for such security 
would be the Amex. If a security is traded on both the NYSE and the 
Amex, whichever of the two is the listing market would be considered 
the primary market. See proposed BSE Rule, Chapter XXXVII, Section 
3, Paragraph (a)(i).
---------------------------------------------------------------------------

    Pre-Opening. The Pre-Opening in BeX would extend from 7:30 a.m. 
until 9:30 a.m., during which orders would be entered on the BeX and 
market participants would be able to add, modify or cancel orders. 
There would be no matching of orders during the Pre-Opening.
    Opening. BeX will open based upon the opening of the primary market 
for a security.\17\ Where the opening price is based on a trade print 
in the primary market, the BeX opening price will match the primary 
market opening price for each individual security opened. Where the 
opening is based on a quote in the primary market, the BeX will open in 
one of the following ways: (1) Where there are orders in the BeX that 
cannot be matched, the BeX will open on a quote; (2) where there are 
orders in the BeX that can be matched, the BeX opening price will be 
the Theoretical Opening Price (``TOP''), provided the TOP is at or 
within the National Best Bid and Offer; (3) where there are orders in 
the BeX that can be matched, and the TOP is not at or within the 
National Best Bid and Offer, the BeX opening trade price will be at the 
National Best Bid or Offer closest to the TOP so long as Orders can be 
matched at that price. If Orders cannot be matched at that price, the 
BeX will open on a quote; (4) following the opening execution process 
in an individual security all orders remaining that are executable 
against the National Best Bid and Offer will be cancelled or routed in 
accordance with the customer's instruction. All other Orders will be 
booked on the BeX.
---------------------------------------------------------------------------

    \17\ The primary market is defined as either the NYSE, the Amex, 
or another exchange solely listing a security (other than the BSE). 
Nasdaq securities and BSE solely listed issues (which are assigned 
to a specialist) will continue to trade under the BSE's existing 
rules, and not on BeX, so this rule proposal does not provide 
opening or closing rules for such securities.
---------------------------------------------------------------------------

    Primary Trading Session. Once the opening occurs for individual 
securities, BeX will operate the Primary Trading Session. All orders 
would automatically be matched following price and time priority as 
soon as they are entered in the order book. Incoming orders will be 
executed at or within the National Best Bid and Offer.
    Closing. BeX will close in two stages. The first stage is the 
``Market on Close Period''. Beginning at 3:40 p.m. (EST), BeX will 
broadcast the imbalance between the At the Close and Limit or Close 
Orders on the bid side and At the Close and Limit on Close Orders on 
the offer side.
    Second, BeX will close based upon the primary market close.\18\ BeX 
will provide a group closing by putting all eligible orders in such 
securities received by 4 p.m. into an Authorized Reserve State. When 
BeX receives the closing price message from the primary market, the BeX 
trading engine will complete the closing process for each individual 
security.
---------------------------------------------------------------------------

    \18\ Id.
---------------------------------------------------------------------------

    Post-Primary Trading Session. The Post-Primary Trading Session 
would operate from the time when the primary market disseminates its 
closing price until 4:30. During the Post Primary Trading Session only 
Cross Orders may be submitted to BeX.
    Receipt of orders. Orders could be routed to BeX through the 
Exchange's systems or through other communications lines approved by 
the Exchange for the delivery of orders by Exchange Members.\19\ BeX 
would also accept and automatically execute commitments sent by market 
centers that participate in ITS.
---------------------------------------------------------------------------

    \19\ See proposed BSE Rule, Chapter XXXVII, Section 3, Paragraph 
(h)(i).
---------------------------------------------------------------------------

    Ranking and display of orders. Except for Cross, Cross with Size, 
and Mid-point Cross Orders, all orders sent to BeX would be ranked 
according to their price and time of receipt and would be displayed to 
the public when they constitute the Best Bid or Offer in BeX for a 
security.\20\
---------------------------------------------------------------------------

    \20\ See proposed BSE Rule, Chapter XXXVII, Section 3, Paragraph 
(i).
---------------------------------------------------------------------------

    Automated matching of orders. In BeX, orders would automatically 
match against each other, in price/time priority.\21\ Specifically, an 
incoming order would be matched against one or more orders in the BeX, 
in the order of their ranking, at the price of each order, for the full 
amount of shares available at that price, or for the size of the 
incoming order, if smaller. If an incoming order could not be matched 
when it is received, and it is not designated as an order that should 
be immediately cancelled, the order would be placed in the BeX. For 
example:
---------------------------------------------------------------------------

    \21\ The only exception to this price/time priority matching 
would occur when certain ``cross with size'' orders are executed. In 
those instances, eligible ``cross with size'' transactions--where 
there is an order to buy and sell at least 5,000 shares of the same 
security with a market value of at least $100,000.00 (A) at a price 
equal to or better than both the National Best Bid and Offer and the 
Best Bid and Offer displayed in BeX; (B) where the size of the order 
is larger than the aggregate size of all interest displayed in BeX 
at that price; and (C) where neither side of the order is for the 
account of the BSE Member sending the order to BeX--could execute at 
the price of orders in BeX, without executing those earlier-received 
orders. Because this type of crossing transaction is permitted on 
the floor of the Exchange today, the Exchange believes it is 
appropriate to include this transaction type in BeX.
---------------------------------------------------------------------------

    Assume that BeX contains the following bids and offers in a 
particular security, AAA:

------------------------------------------------------------------------
              Buy                  Price           Price          Sell
------------------------------------------------------------------------
200............................    $47.50   $48.20............       400
1,500..........................     47.00   48.50.............       700

[[Page 37146]]


600............................     46.75   49.00.............       100
------------------------------------------------------------------------

--An incoming Limit Order to buy 500 shares at a price of $48.00 would 
become the top-of-the-book best bid.
--An incoming Limit Order to buy 500 shares at a price of $48.20 would 
match for 400 shares against the top-of-the-book best offer at a price 
of $48.20, leaving 100 shares to buy at $48.20.
--Similarly, an incoming Limit Order to buy 500 shares at a price of 
$48.50 would match for 400 shares against the top-of-the-book best 
offer at a price of $48.20 and would match for 100 shares at a price of 
$48.50.
    Inbound ITS commitments, if priced at or better than the current 
Best Bid or Offer in BeX, would be automatically executed against the 
order(s) reflected in the Best Bid or Offer for the full amount of 
shares at that price, and any remaining portion of the ITS commitment 
would be automatically cancelled.\22\
---------------------------------------------------------------------------

    \22\ See proposed BSE Rule, Chapter XXXVII, Section 3, Paragraph 
(j)(iii).
---------------------------------------------------------------------------

    Cross, Cross with Size and Mid-point Cross Orders would be 
automatically executed if they meet the requirements for those types of 
orders. If they do not meet applicable requirements, they would be 
immediately cancelled.
    No distinction between agency and professional orders. Under the 
proposed rules, agency orders (entered on behalf of a customer) and 
professional or proprietary orders (entered for the account of a BSE 
Member (or other broker-dealer)) would be handled in an identical way 
in BeX's matching algorithms.\23\
---------------------------------------------------------------------------

    \23\ See proposed BSE Rule, Chapter XXXVII, Section 2, paragraph 
(d). See also Chx Rule, Article XXA, Rule 2, paragraph (d). The 
Exchange believes that this handling is appropriate because BeX is a 
fully-automated functionality of the Exchange. Orders for BeX would 
be submitted directly and electronically to the Exchange. Once 
transmitted, an order could be cancelled, but a Member could not 
influence the execution of that order in any way. The orders would 
enter a line of other orders to be matched against one another based 
on an established algorithm. As did the Chx when it proposed its 
Ebook rule change, the BSE is seeking an exemption under Rule 11a2-
2(T) for this part of this rule filing.
---------------------------------------------------------------------------

    Cancellations of transactions and handling of clearly erroneous 
transactions. Under the proposed rules, Members that make a transaction 
in demonstrable error could agree to cancel and unwind the transaction, 
subject to the approval of the Exchange.\24\ For purposes of BeX, the 
Exchange also proposes to adopt a policy for the handling of clearly 
erroneous transactions.\25\ This policy would allow the Exchange's 
Chief Regulatory Officer (``CRO'') or another officer designated by the 
CRO to (a) review and potentially modify or cancel executions where one 
party believes that the terms of the transaction were clearly erroneous 
when submitted; and (b) modify or cancel executions that result from a 
disruption or malfunction in the use or operation of BeX, or any 
communications system associated with the BeX.
---------------------------------------------------------------------------

    \24\ See proposed BSE Rule, Chapter XXXVII, Section 4, Paragraph 
(a).
    \25\ See proposed BSE Rule, Chapter XXXVII, Section 5, Paragraph 
(a).
---------------------------------------------------------------------------

    The proposed rules set out procedures for each of these reviews, 
including specific means for Members to appeal the Exchange's 
decisions.\26\
---------------------------------------------------------------------------

    \26\ For example, a Member seeking review of a ``clearly 
erroneous'' transaction would be required to notify the Exchange of 
the request, by telephone and in writing, promptly after the 
execution. After the CRO or another officer designated by the CRO 
reviewed the transaction, the Exchange would notify both parties of 
the CRO's or designee's decision, in writing. Either party could 
appeal the decision to a subcommittee of the Exchange's Regulatory 
Oversight Committee (``ROC''), whose decision would be final. In 
making their decisions, the CRO, CRO's designee, and the ROC 
Subcommittee would consider the goals of maintaining a fair and 
orderly market and protecting investors and the public interest. If 
it is determined that a transaction was clearly erroneous, the CRO, 
CRO designee, or the ROC Subcommittee would try to return the 
parties to the positions that they would have been in (or positions 
reasonably similar to those positions) if the error had not 
occurred. Similarly, in the event of disruption or malfunction that 
impacts the operation or use of BeX, the CRO or CRO designee could 
act promptly to declare transactions void or to modify transactions. 
The Exchange would be required to notify each Member involved in the 
transaction as soon as practicable after the CRO or CRO designee 
makes any decision. Decisions could be appealed using the procedure 
set out for the review of decisions addressing clearly erroneous 
transactions.
---------------------------------------------------------------------------

Adjustment of Orders on Ex-Dates
    The Exchange is proposing to adopt the standard process for 
adjusting orders on ex-dates.\27\ For example, open buy orders are 
reduced by the value of a cash dividend on the ex-dividend date. If the 
amount of the cash dividend is not equivalent to or is not a multiple 
of the fraction of a dollar in which bids and offers are made in the 
stock, open buy orders will be reduced by the next higher variation. 
The proposed rule text sets forth charts and examples.
---------------------------------------------------------------------------

    \27\ See proposed BSE Rules, Chapter XXXVII, Section 6. These 
proposed rules are based on NYSE Rule 118.
---------------------------------------------------------------------------

Conclusion
    The Exchange represents that it has designed BeX to be a fully-
automated system that would permit eligible orders in eligible 
securities to match against one another, without the required 
participation of a Specialist. The Exchange believes that this system 
functionality would provide all Exchange Members with an efficient way 
to trade securities that would protect investors and the public 
interest by automatically handling orders in a fair and reasonable 
manner.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act,\28\ in general, and furthers the 
objectives of section 6(b)(5),\29\ in particular, in that it is 
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.
---------------------------------------------------------------------------

    \28\ 15 U.S.C. 78f(b).
    \29\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change, as 
amended, will impose any burden on competition 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 comments on the 
proposed rule change, as amended.

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, as amended; or
    B. Institute proceedings to determine whether the proposed rule 
change, as amended, 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, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

[[Page 37147]]

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-BSE-2006-22 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-BSE-2006-22. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). 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. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the Exchange. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-BSE-2006-22 and should be submitted on or before July 
20, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\30\
---------------------------------------------------------------------------

    \30\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Nancy M. Morris,
Secretary.
[FR Doc. E6-10242 Filed 6-28-06; 8:45 am]

BILLING CODE 8010-01-P
