

[Federal Register: September 1, 2006 (Volume 71, Number 170)]
[Notices]               
[Page 52192-52198]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01se06-94]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54365; File No. SR-BSE-2006-22]

 
Self-Regulatory Organizations; Boston Stock Exchange, Inc.; Order 
Granting Approval of Proposed Rule Change and Amendment Nos. 1, 2, and 
3 Thereto and Notice of Filing and Order Granting Accelerated Approval 
to Amendment No. 5 Thereto To Implement the Boston Equities Exchange 
(``BeX'') Trading System

 August 25, 2006.

I. Introduction

    On May 10, 2006, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to implement a new trading system, the Boston 
Equities Exchange (``BeX''). 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 proposed rule change, 
as amended, was published for comment in the Federal Register on June 
29, 2006.\6\ The Commission received no comments regarding the 
proposal, as amended. On August 22, 2006, BSE filed Amendment No. 5 to 
the proposed rule change.\7\ This order

[[Page 52193]]

approves the proposed rule change, as amended, grants accelerated 
approval to Amendment No. 5 to the proposed rule change, and solicits 
comments from interested persons on Amendment No. 5.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced and superseded the original filing 
in its entirety.
    \4\ Amendment No. 2 replaced and superseded the original filing 
and Amendment No. 1 in their entirety.
    \5\ Amendment No. 3 replaced and superseded the original filing, 
Amendment No. 1, and Amendment No. 2 in their entirety.
    \6\ See Securities Exchange Act Release No. 54034 (June 22, 
2006), 71 FR 37140.
    \7\ Amendment No. 4 was filed on July 26, 2006. Amendment No. 4 
was withdrawn on August 22, 2006. Amendment No. 5 was filed on 
August 22, 2006. In Amendment No. 5, the Exchange amended BSE Rules 
Chapter II, Section 41--Minimum Price Variation to state that the 
Exchange shall not display, rank, or accept any bids, offers, or 
orders in a security priced in an increment smaller than $0.01 if 
that bid, offer, or order is priced equal to or greater than $1.00, 
but that the Exchange may execute and report Mid-point Cross Orders 
in increments as small as one-half the Minimum Price Variation for 
the security. In addition, BSE amended the rule text of BSE Rule, 
Chapter XXXVII to clarify that if an At the Close order is not fully 
executed at the close, the part of the order not executed will be 
cancelled; to clarify opening procedures; to indicate more clearly 
when orders would be routed at the instruction of the Member 
entering the order; and to clarify how cross orders would be 
executed in the Post-Primary Trading Session. Further, the Exchange 
corrected several technical errors contained in the rule text.
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II. Description of the Proposed Rule Change

    In a separate filing that is being approved today, BSE proposes to 
establish a new communications and electronic trading facility,\8\ to 
be known as ``BeX.'' \9\ The BeX facility is a fully-automated 
electronic book for the display and execution of orders in securities 
intended for the use of BSE Members, including Electronic Access 
Members, and their customers.
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    \8\ Pursuant to Section 3(a)(2) of 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.'' 
15 U.S.C. 78c(a)(2).
    \9\ BeX is owned and will be operated by BSX Group, LLC 
(``BSX''), of which BSE is currently a majority owner. See 
Securities Exchange Act Release No. 54364 (August 25, 2006) (order 
approving SR-BSE-2006-20), which adopts the proposed governance 
structure of BSX as reflected in its operating agreement, and 
proposed changes to the BSE Constitution with respect to the 
creation of Electronic Access Members and to BSE rules regarding 
transfer of ownership of BSX units.
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    In the instant filing, the Exchange proposes rules to implement the 
initial phase of BeX.\10\ In this initial phase, BeX would be BSE's 
trading facility for any security, other than securities listed on The 
Nasdaq Stock Market (``Nasdaq''),\11\ for which BSE obtains unlisted 
trading privileges (``UTP'') after June 30, 2006. All securities 
displayed and executed on BeX would be securities that are not assigned 
to a BSE specialist. BeX would allow Exchange Members, whether or not 
they are on the Exchange's floor, to enter orders in these securities 
into the BeX facility for possible execution.
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    \10\ The Commission notes that the BSE recently filed a proposed 
rule change setting forth proposed rules to implement the second 
phase of BeX and to comply with the Commission's Regulation NMS 
under the Act, which the Commission has published for comment. See 
Securities Exchange Release Act No. 54291 (August 8, 2006), 71 FR 
47264 (August 16, 2006) (File No. SR-BSE-2006-30)(``BeX Phase II 
Notice'').
    \11\ The BSE rules governing trading in Nasdaq stocks (BSE 
Rules, Chapter XXXV) and the BSE rules governing trading in listed 
securities assigned to a specialist (BSE Rules, Chapters I, II, III, 
XV, XVI, XVII, XIX, and XXXIII) remain unchanged. The Exchange 
advised that it intends to apply for UTP in securities listed 
otherwise than on Nasdaq for which it currently does not trade UTP.
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    The rules governing BeX would be located in Chapter XXXVII of the 
BSE's Rules. The bylaws and all other BSE Rules and policies would 
continue to be applicable to BeX trading except where the context 
requires otherwise.\12\
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    \12\ See proposed BSE Rule, Chapter XXXVII, Section 7.
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    Eligible securities. In the initial phase of BeX, all securities 
eligible for trading on the Exchange that are listed otherwise than on 
Nasdaq for which the BSE has obtained UTP after June 30, 2006 would be 
eligible to be traded in the BeX.\13\ However, any specialist request 
to remove a security from BeX would be considered by the appropriate 
committee of the BSE's Board of Directors (``Board'').\14\
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    \13\ This includes securities that are not listed on Nasdaq and 
securities listed on other exchanges that did not begin trading on 
BSE prior to June 30, 2006.
    \14\ See proposed BSE Rule, Chapter XXXVII, Section 1, Paragraph 
(a).
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    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.\15\ BeX 
would also accept and automatically execute commitments sent by market 
centers that participate in ITS.
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    \15\ See proposed BSE Rule, Chapter XXXVII, Section 3, Paragraph 
(h)(i).
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    Ranking, display, and automated matching of orders. Except for 
Cross, Cross with Size, Mid-point Cross orders and Post Primary Cross 
orders,\16\ 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. Orders 
would automatically match against each other, in price/time priority. 
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.\17\ 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.\18\
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    \16\ See Section on eligible order types for a discussion of 
BeX-eligible cross orders. Cross, Cross with Size, Mid-point Cross 
and Post Primary Cross orders would be executed in accordance with 
BSE Rule, Chapter XXXVII, Section 3, Paragraph (k).
    \17\ See proposed BSE Rule, Chapter XXXVII, Section 3, Paragraph 
(j).
    \18\ See discussion of compliance with the Intermarket Trading 
System (``ITS'') Plan infra.
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    Under the proposed rules, orders could be entered by a BSE Member 
on its own behalf, for the account of another Member (collectively, 
``professional orders'') or for the account of a customer (an ``agency 
order''). However, agency orders would be subject to the same display 
and execution processes as professional orders, and agency orders would 
not receive any priority in order execution or handling.\19\
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    \19\ See proposed BSE Rule, Chapter XXXVII, Section 2, Paragraph 
(d). The Exchange has represented that current BSE Rule, Chapter II, 
Section 11, Trading While Acting as a Broker as to Market Orders, 
would apply to participants' activities on BeX. The rule generally 
provides that a member may not trade ahead of a customer order it is 
representing. Telephone call between Brian Donnelly, Assistant Vice 
President, Regulation and Compliance, BSE, and Jennifer Colihan, 
Special Counsel, and David Michehl, Special Counsel, Division of 
Market Regulation, Commission, on August 8, 2006.
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    Eligible order types. Orders sent to BeX would be required to be 
specifically designated in the manner specified by the Exchange for 
trading in BeX. BeX would accept only round-lot market and limit orders 
for regular-way settlement.\20\
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    \20\ See proposed BSE Rule, Chapter XXXVII, Section 2, Paragraph 
(a)-(b).
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    Orders eligible for execution in BeX could be designated as one of 
the following existing BSE order types: \21\ ``At the Close,'' ``At the 
Opening or At the Opening Only,'' ``Day,'' ``Do Not Increase (DNI),'' 
``Do not Reduce (DNR),'' ``Fill or Kill,'' ``Good `til Cancel,'' 
``Immediate or Cancel,'' ``Limit, Limited or Limited Price,'' 
``Market,'' ``Stop Limit,'' or ``Stop'' orders. Orders could also be 
designated one of the following new order types in BeX: ``Cross,'' 
``Cross with Size,'' ``Good `Till Date (GTD),'' Good ``Till Time 
(GTT),'' ``Limit or Close,'' ``Mid-point Cross'' or ``Post Primary 
Cross.'' Descriptions of the new BeX-eligible order types are as 
follows: \22\
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    \21\ See proposed BSE Rule, Chapter XXXVII, Section 1, Paragraph 
(c)(i).
    \22\ See proposed BSE Rule, Chapter XXXVII, Section 1, Paragraph 
(c)(ii).
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    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 could 
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 at 
a price equal to or better than the best bid or offer displayed in BeX 
and the National Best Bid or Offer, where the size of the order is 
larger than the aggregate size of all interest

[[Page 52194]]

displayed in BeX at that price. Neither side of a Cross with Size order 
may be for the account of the BSE Member sending the order to BeX.\23\
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    \23\ The Commission notes that the in the BeX Phase II Notice, 
supra note 10, BSE has proposed, among other things, to amend the 
Cross with Size provision.
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    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 BSE 
Rule, 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 would be executed at the midpoint of the 
National Best Bid or Offer. A Mid-Point Cross order would be rejected 
when a locked or crossed market exists in the relevant security at the 
time the order is received. Mid-Point Cross orders would be permitted 
to be executed and reported in increments as small as one-half of the 
Minimum Price Variation.\24\
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    \24\ BSE Rules, Chapter II, Section 41 generally sets forth the 
``Minimum Price Variation'' as $.01. See supra note 7 regarding an 
amendment the Exchange has made to this proposal with respect to the 
definition of Minimum Price Variation.
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    Post Primary Cross: A single priced cross order entered during the 
Post Primary Trading Session.
    Cross, Cross with Size, Mid-point Cross, and Post Primary Cross 
orders would be executed automatically if they meet the requirements 
for those types of orders. If they do not meet applicable requirements, 
they would be immediately cancelled.\25\
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    \25\ See proposed BSE Rule, Chapter XXXVII, Section 3, Paragraph 
(k).
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    With the exception of Fill or Kill and Immediate or Cancel orders, 
a customer would be able to append to an order an instruction that the 
order be 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. Absent such an instruction, the order would be 
cancelled.
    Compliance with ITS Plan.\26\ The proposed rules provide that 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 or, at the instruction of the member entering the 
order, routed to the market(s) displaying the National Best Bid or 
Offer to ensure compliance with the ITS Plan's rules relating to locked 
markets.\27\ If an incoming Limit Order would trade through (as defined 
in the ITS Plan) through the National Best Bid or Offer if executed on 
the BeX at the time of receipt, it would be either cancelled or, at the 
instruction of the member entering the order, routed to the market(s) 
showing the National Best Bid or Offer.\28\ If an incoming Market Order 
would trade through the National Best Bid or Offer if executed on the 
BeX at the time of receipt, it would either be cancelled or, at the 
instruction of the member entering the order, routed to the market(s) 
displaying the National Best Bid or Offer.\29\
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    \26\ The Commission notes that in the BeX Phase II Notice, supra 
note 10, the BSE proposed further rule changes, among others, to 
ensure that its rules comply with Rules 610 and 611 of Regulation 
NMS under the Act. The Commission notes that once Regulation NMS has 
been fully implemented, the ITS Plan and its requirements will no 
longer be in effect.
    \27\ See proposed BSE Rule, Chapter XXXVII, Section 3, Paragraph 
(i), subparagraph (ii). Similarly, if an order in a listed security 
locks or crosses the Best Bid or Offer in BeX at the time it is 
received, the order would be executed on BeX according to BeX's 
matching algorithm with any remaining portion either immediately 
cancelled, at the instruction of the member entering the order, 
routed to an away market center(s).
    \28\ See proposed BSE Rule, Chapter XXXVII, Section 3, Paragraph 
(j)(ii).
    \29\ Id. at Paragraph (j)(iii).
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    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.\30\
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    \30\ Id. at Paragraph (j)(iv).
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    Operating hours and trading sessions. BeX would operate from 7:30 
a.m. until 4:30 p.m. during Pre-Opening, Opening, Primary, and Post-
Primary Trading Sessions.\31\ Specifically, the Pre-Opening would 
extend from 7:30 a.m. until 9:30 a.m., during which orders could be 
placed on the BeX but would not be matched and would not generate trade 
executions. Market participants would be able to add, modify or cancel 
orders during this period.
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    \31\ See proposed BSE Rule, Chapter XXXVII, Section 3, 
Paragraphs (a)-(g).
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    The BeX facility would open for trading once the primary market for 
a security opens on either a displayed quote or trade (the 
``Opening'').\32\ Where the Opening is based on a trade print in the 
primary market, it would match the primary market opening price for 
each individual security opened. Once the BeX opening price was 
determined, all eligible orders priced equal to or better than the BeX 
opening price would be paired for execution at that price following 
applicable BeX priority rules.
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    \32\ The proposed rules define the primary market for purposes 
of BeX as the listing market for a security, unless otherwise 
designated by the appropriate BSE 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 not traded by the NYSE and 
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. If a security is solely listed on any other 
exchange, then the primary security for that market would be that 
exchange. See proposed BSE Rule, Chapter XXXVII, Section 3, 
Paragraph (a)(i). Nasdaq securities and BSE-solely listed issues, 
which currently are assigned to a specialist, would continue to 
trade under the BSE's existing rules, and not on BeX.
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    Where the Opening is based on a quote in the primary market, the 
BeX would open in one of the following ways: (1) Where there were 
orders in the BeX that could not be matched, the BeX would open on a 
quote; (2) where there were orders in the BeX that could be matched, 
the BeX opening price would be the Theoretical Opening Price 
(``TOP''),\33\ provided the TOP is at or within the National Best Bid 
and Offer. If the only orders in BeX at the opening are Market Orders, 
the TOP will be the prior day's closing price and the orders would be 
executed at that price. If that price is not within the National Best 
Bid or Offer, the order would be routed, at the instruction of the 
Member entering the order, to the market center(s) displaying the 
National Best Bid or Offer. If the Member has not provided the 
instruction to route, the order will be cancelled; (3) where there were 
orders in the BeX that could be matched, and the TOP is not at or 
within the National Best Bid and Offer, the BeX opening trade price 
would be at the National Best Bid or Offer closest to the TOP as long 
as orders could be matched at that price. If orders could not be 
matched at that price, the BeX would open on a quote.
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    \33\ The TOP would be the price that maximizes the quantity of 
orders traded on the BeX at the opening. If there are multiple 
prices that maximize the quantity of orders traded on the BeX at the 
opening, then the TOP would be the price that minimizes the quantity 
of orders not traded. If there are multiple prices that minimize the 
quantity of orders not traded, then the price that minimizes any 
order imbalance is the TOP. If there are multiple prices that 
minimize the quantity of orders not traded and there is no order 
imbalance, the TOP is the price closest to the previous day's 
closing price. See proposed BSE Rule, Chapter XXXVII, Section 
3(c)(iii).
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    Following the opening execution process in an individual security 
all orders remaining that are executable against the National Best Bid 
and Offer

[[Page 52195]]

would be cancelled, or routed in accordance with the customer's 
instruction. All other orders would be booked on the BeX. Immediately 
following the Opening for individual securities, BeX will commence the 
Primary Trading Session. All orders would be matched automatically 
following price and time priority as soon as they are entered in the 
BeX book. Incoming orders would be executed at or within the National 
Best Bid and Offer.
    BeX would close the Primary Trading Session in the following 
manner: Beginning at 3:40 p.m., BeX would broadcast the imbalance 
between the At-the-Close and Limit-or-Close orders on the bid side, and 
At-the-Close and Limit-or-Close orders on the offer side. During this 
``Market on Close Period,'' At-the-Close and Limit-or-Close orders 
could not be cancelled. At 4 p.m., BeX would put all eligible orders in 
such securities received by 4 p.m. into an Authorized Reserve State. 
When BeX received the closing price message from the primary market, 
the BeX trading engine would complete the closing process for each 
individual security. During this process, all paired At the Close and 
Limit or Close orders would be executed at the primary market closing 
price.
    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 Post Primary Cross orders at a 
specific price could be submitted.
    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.\34\ For purposes of the BeX 
facility, the Exchange also proposes to adopt procedures for review of 
clearly erroneous transactions when such review is requested.\35\ The 
Chief Regulatory Officer (``CRO'') or another officer designated by the 
CRO would review the transaction and potentially modify or cancel 
executions where one party believes that the terms of the transaction 
were clearly erroneous when submitted. The CRO or another officer 
designated by the CRO would also be able to 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.
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    \34\ See proposed BSE Rule, Chapter XXXVII, Section 4, Paragraph 
(a).
    \35\ See proposed BSE Rule, Chapter XXXVII, Section 5, Paragraph 
(a).
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    The proposed rules set out procedures for each of these reviews, 
including specific means for Members to appeal the Exchange's 
decisions.
    Adjustment of orders on ex-dates. The Exchange also proposes to 
adopt a process for adjusting orders in securities quoted ex-dividend, 
ex-distribution, ex-rights, or ex-interest.

III. Discussion

    After careful review of the proposal, the Commission finds that the 
proposed rule change, as amended, which would establish trading rules 
for the BeX facility, is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities exchange.\36\ In particular, the Commission finds that the 
proposed rule change, as amended, is consistent with Section 6(b)(5) of 
the Act,\37\ which requires that the rules of a national securities 
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.
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    \36\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \37\ 15 U.S.C. 78f(b)(5).
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    According to BSE, it currently has no provisions for the trading of 
securities that are not assigned to a specialist. Under the proposed 
rule change, BSE would inaugurate a new, fully-electronic facility for 
the trading of equity securities, which would permit orders in eligible 
securities to match against each other automatically, without the 
participation of a BSE specialist. The Commission finds that the 
proposed rules governing the BeX facility are designed to perfect the 
mechanism of a free and open market by providing for the automatic 
handling of orders in BeX-eligible securities in a fair and reasonable 
manner. In the Commission's view, this new automatic execution facility 
should help provide investors with a more efficient mechanism by which 
to immediately access and trade securities on the Exchange.\38\
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    \38\ The Commission notes that the Exchange recently filed a 
proposed rule change, that, among other things, would add 
enhancements to the BeX facility to ensure the Exchange's compliance 
with Regulation NMS under the Act, and to qualify as an ``automated 
trading center'' under that regulation. While the Commission 
believes that the instant proposed rule change, as amended, is 
consistent with the requirements of the Act, the Commission is not 
making a determination in this Order that the Exchange's automatic 
execution capabilities would satisfy the ``automated trading 
center'' definition in Rule 600(b)(4) of Regulation NMS.
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    Various facets of the proposed rule change are discussed below.

1. Eligible Securities

    Under the proposed rule change, securities eligible for trading on 
BeX would include all securities eligible for trading on the Exchange 
that are not listed on the Nasdaq for which the BSE obtains UTP after 
June 30, 2006. Although, under the proposal, a specialist could request 
to remove a security from BeX, the Commission notes that a security 
would not be eligible for trading on BeX if that same security is 
traded by a BSE specialist. The Commission further notes that, since 
filing the instant proposal, the Exchange has filed a proposed rule 
change that is intended to eliminate, as of January 1, 2007, specialist 
participation in any transactions on the BSE.\39\ The Commission 
believes that the Exchange's retention on a short-term basis of its 
existing specialist system for securities that have traded pursuant to 
UTP on the BSE prior to June 1, 2006, at the same time BeX is 
introduced for other securities, is a reasonable approach by which the 
Exchange can phase-in its fully-automated trading system.
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    \39\ See BeX Phase II Notice, supra note10.
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2. Receipt, Ranking, Display, and Automated Matching 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.\40\ BeX would also accept and 
automatically execute commitments sent by market centers that 
participate in ITS.
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    \40\ See proposed BSE Rule, Chapter XXXVII, Section 3, Paragraph 
(h)(i).
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    Under the proposed rule change, all orders sent to BeX (excluding 
the order types discussed below) 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. No 
distinction is made to this priority with regard to agency orders and 
professional or proprietary orders. The Commission believes that the 
use of price/time priority in the ranking, display, and matching of 
orders, and the equal treatment of agency and professional orders, is 
consistent with the Act. The Commission notes that it previously has

[[Page 52196]]

approved similar rules for other exchanges.\41\
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    \41\ See, e.g., Securities Exchange Act Release No. 52094 (July 
21, 2005), 70 FR 43913 (July 29, 2005) (Order approving the 
electronic book for the Chicago Stock Exchange, Inc.).
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3. Eligible Order Types

    In addition to accepting specific order types set forth in BSE's 
existing rules, the Exchange proposes to add several new order types 
for use exclusively on BeX. These order types include Cross, Cross with 
Size, Good `Till Date, Good `Till Time, Limit or Close, Mid-Point 
Cross, and Post Primary Cross orders types. The Commission believes 
that these new order types are appropriate in the context of the BeX 
facility. In addition, they should help provide market participants 
with greater flexibility in fulfilling their trading objectives.
    With respect to the Cross, Cross with Size, and Mid-point Cross 
orders that would be implemented in BeX, the Commission notes that 
similar order types have been approved for electronic trading systems 
at other exchanges.\42\ The Commission notes that the proposed rule 
regarding Cross with Size, in consonance with the criteria for larger-
sized crosses contained in the existing BSE rules, would require this 
order type to be for at least 5,000 shares and larger than the 
aggregate size of all interest displayed in BeX at the price of the 
cross. It would further require that neither side of the order be for 
the account of the BSE member sending the order to the Exchange. The 
Exchange has added another condition for BeX, stipulating that the 
order must have a market value of at least $100,000.\43\
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    \42\ See Chicago Stock Exchange Rules Chapter XXA, Rule 2(c)(3)-
(4); NYSE Arca Rule 7.31(y).
    \43\ The Commission notes that the BSE has proposed to amend the 
Cross with Size provision as part of the second phase of BeX. See 
BeX Phase II Notice.
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4. Compliance With Intermarket Trading System Plan

    The Commission believes that the proposed rule change includes 
provisions serving to ensure that the BeX complies with the ITS Plan 
and thereby promote the fair and orderly operation of the national 
market system.\44\ In this regard, the Commission notes that the rules 
provide that if an order in an ITS-eligible security crosses or locks 
the NBBO at the time that it is received, the order would be cancelled 
or, at the instruction of the member entering the order, routed to the 
market center(s) displaying the National Best Bid or Offer.
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    \44\ See also supra note 26.
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    If an incoming Limit Order or Market Order in an ITS-eligible 
security would trade through (as defined in the ITS Plan) the NBBO if 
executed on the BeX at the time of receipt, it would either be 
cancelled, or routed to the market(s) displaying the NBBO if it 
contains such instruction from the Exchange member entering the order. 
Inbound ITS commitments, if priced at or better than the current best 
bid or offer in BeX (``BBO''), would be automatically executed against 
the order(s) reflected in the BBO for the full amount of shares at that 
price, and any remaining portion of the ITS commitment would be 
automatically cancelled.

5. Trading Sessions and Opening and Closing Procedures

    The BeX will open its Primary Session for trading each day, and 
begin processing orders that have been submitted during the 7:30 to 
9:30 a.m. Pre-Opening Session, once the primary market for the relevant 
security opens. When the primary market opens on a trade print, the 
opening price on BeX will match the price of that transaction. When the 
primary market opens on a displayed quote, and there are no orders in 
BeX that can be matched, BeX also will open on a quote. When there are 
orders that can be matched, the opening price will be either the TOP, 
or--when the TOP is inferior to the National Best Bid or National Best 
Offer--at the closer of the National Best Bid or National Best Offer to 
the TOP, if there are orders on the BeX that can be matched at that 
price. Otherwise, BeX will open on a quote. Following the opening in an 
individual security--where there were orders that were matched--any 
remaining orders that could be executed at the NBBO are either 
canceled, or routed in accordance with the customer's instructions. 
Remaining orders that could set a new NBBO would be displayed. All 
other orders would be placed on the BeX book.
    To close the Primary Trading Session, at 3:40 p.m., BeX would 
broadcast the imbalance between the orders on the bid and ask side, 
respectively, that have been designated to be executed at the closing 
price (i.e., At-the-Close and any Limit-or-Close orders that have not 
been executed by this time, and have therefore been converted to At the 
Close orders). At 4 p.m., BeX would put all eligible orders in such 
securities received by 4:00 p.m. into an Authorized Reserve State. When 
BeX receives the closing price message from the primary market, BeX 
would complete the closing process for each individual security by 
pairing these orders and executing them at the primary market closing 
price. From this time until 4:30 p.m., the BeX will operate a Post-
Primary Trading Session during which only Post Primary cross orders 
could be submitted. The Commission believes that the proposed BeX 
opening and closing procedures are reasonable and consistent with the 
Act.

6. Cancellations, Clearly Erroneous Transactions, and Adjustment of 
Orders

    The Exchange's proposal would allow participants making a 
demonstrable error to agree to cancel and unwind the transaction, 
subject to the Exchange's approval. The proposed rule change also sets 
forth formal procedures regarding the Exchange's review of clearly 
erroneous transactions, and the specific means for market participants 
to appeal decisions made by Exchange officials. The Commission believes 
that these proposed rules are consistent with the Act and should 
provide for a fair, transparent, and reasonable process in which BeX 
participants can correct erroneous transactions. The Commission notes 
that it has approved similar rules at other exchanges.\45\
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    \45\ See, e.g., CHX Rules, Article XXA, Rules 5 and 7; NYSE Arca 
Rule 7.10.
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    The proposal also sets forth the rules governing how and when it 
would adjust certain orders to buy or sell a security when a security 
is quoted ex-dividend, ex-distribution, or ex-interest. These 
procedures should help ensure that such orders will continue to be 
handled according to the sellers' or buyers' original intentions and to 
preserve the ability of these orders to obtain the best price 
available. These proposed rules, too, are substantially similar to 
rules of another exchange that were previously approved by the 
Commission.\46\
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    \46\ See NYSE Rule 118.
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7. Application of ``Effect v. Execute'' Exemption From Section 11(a) of 
the Act

    Section 11(a) of the Act \47\ prohibits a member of a national 
securities exchange from effecting transactions on that exchange for 
its own account, the account of an associated person, or an account 
over which it or its associated person exercises discretion 
(collectively, ``covered accounts'') unless an exception applies. Rule 
11a2-2(T) \48\ under the Act, known as the ``effect versus execute'' 
rule, provides exchange members with an exemption from the Section 
11(a) prohibition. Rule 11a2-2(T) permits an exchange member, subject 
to certain conditions, to effect

[[Page 52197]]

transactions for covered accounts by arranging for an unaffiliated 
member to execute the transactions on the exchange. To comply with Rule 
11a2-2(T)'s conditions, a member (i) must transmit the order from off 
the exchange floor; (ii) may not participate in the execution of the 
transaction once it has been transmitted to the member performing the 
execution; (iii) may not be affiliated with the executing member; and 
(iv) with respect to an account over which the member has investment 
discretion, neither the member nor its associated person may retain any 
compensation in the connection with effecting the transaction except as 
provided in the Rule.
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    \47\ 15 U.S.C. 78k(a).
    \48\ 17 CFR 240.11a2-2(T).
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    In letters to the Commission,\49\ the Exchange represented that 
transactions effected in the BeX trading system meet the requirements 
of Rule 11a2-2(T). Based on these representations, the Commission finds 
that the BeX trading system satisfies the four conditions of Rule 11a2-
2(T).
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    \49\ See Letter from Letter from William C. Meehan, General 
Counsel, BSE, to Kelly M. Riley, Assistant Director, Division of 
Market Regulation, Commission, dated June 2, 2006; see also Letter 
from William C. Meehan, General Counsel, BSE, to Kelly M. Riley, 
Assistant Director, Division, Commission, dated August 8, 2006.
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    First, orders would be sent, by electronic means, to the physically 
separate trading platform of BeX. In the context of other automated 
trading systems, the Commission has found that the off-floor 
transmission requirement is met if a covered account order is 
transmitted from a remote location directly to an exchange's floor by 
electronic means.\50\ The Exchange stated in its letter that it 
proposes that its members, whether they are located on the Exchange's 
physical trading floor or off of the floor, be able to use automated 
means to transmit orders for their own account into the BeX trading 
system. The Commission has stated that the off-floor transmission 
requirement may be met when an order is sent from one trading floor of 
an exchange to another, separate trading floor of the same 
exchange.\51\ On the basis of the Exchange's representations, the 
Commission believes that orders sent, by electronic means, from the 
Exchange's physical trading floor may be considered to be sent from 
``off-floor'' for purposes of the BeX trading system. Specifically, the 
Commission believes that because the securities traded on the BeX 
trading system are not traded on the Exchange's physical floor, the BeX 
trading system is essentially a different, separate ``trading floor.'' 
The Commission notes that Exchange floor members will not have a time/
place advantage with regard to the securities traded in the BeX trading 
system. Specifically, orders transmitted from the Exchange's trading 
floor will not be processed any more quickly by the BeX trading system 
than those orders received from off the physical floor. In addition, 
floor members will see information about orders that are at the top of 
the BeX trading system only after that information has been sent to the 
securities information processor for dissemination to the public. Thus, 
based on these facts, the Commission believes the off-floor 
transmission requirement is satisfied in this case.
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    \50\ See, e.g., Securities Exchange Act Release Nos. 49066 
(January 13, 2004), 69 FR 2773 (January 20, 2004) (order approving 
the Boston Options Exchange as an options trading facility of the 
Boston Stock Exchange); 29237 (May 24, 1991), 56 FR 24853 (May 31, 
1991) (regarding New York Stock Exchange's (``NYSE'') Off-Hours 
Trading Facility); 15533 (January 29, 1979), 44 FR 6084 (January 31, 
1979) (regarding the American Stock Exchange (``Amex'') Post 
Execution Reporting System, the Amex Switching System, the 
Intermarket Trading System, the Multiple Dealer Trading Facility of 
the Cincinnati Stock Exchange, the Pacific Exchange's (``PCX'') 
Communications and Execution System, and the Philadelphia Stock 
Exchange's (``Phlx'') Automated Communications and Execution System 
(``1979 Release'')); and 14563 (March 14, 1978), 43 FR 11542 (March 
17, 1978) (regarding the NYSE's Designated Order Turnaround System). 
See also Letter from Paula R. Jensen, Deputy Chief Counsel, 
Division, Commission, to Angelo Evangelou, Senior Attorney, Chicago 
Board Options Exchange (``CBOE''), dated March 31, 2003 (regarding 
CBOE's CBOEdirect system (``CBOEdirect Letter'')); Letter from Paula 
R. Jenson, Deputy Chief Counsel, Division, Commission, to Jeffrey P. 
Burns, Assistant General Counsel, Amex, dated July 9, 2002 
(regarding Amex's Auto-Ex system for options); Letter from Paula R. 
Jenson, Deputy Chief Counsel, Division, Commission, to Richard S. 
Rudolph, Counsel, Phlx, dated April 15, 2002 (regarding Phlx's AUTOM 
System and its automatic execution feature AUTO-X); Letter from 
Paula R. Jensen, Deputy Chief Counsel, Division, Commission, to 
Kathryn L. Beck, Senior Vice President, Special Counsel and 
Antitrust Compliance Officer, PCX, dated October 25, 2001 (regarding 
Archipelago Exchange (``ArcaEx'') (``ArcaEx Letter'')); Letter from 
Brandon Becker, Director, Division, Commission, to George T. Simon, 
Foley & Lardner, dated November 30, 1994 (regarding Chicago Match 
(``Chicago Match Letter'')).
    \51\  See Letter from Richard A. Steinwurtzel, Attorney, Office 
of Chief Counsel, Division, Commission, to Philip J. Lo Bue, Senior 
Vice President, PCX, dated December 22, 1978); see also Securities 
Exchange Act Release No. 52094 (July 21, 2005), 70 FR 43913 (July 
29, 2005) (order approving the Chicago Stock Exchange, Inc. Ebook).
---------------------------------------------------------------------------

    Second, the rule requires that the member not participate in the 
execution of its order. The Exchange represented that its members 
relinquish control of orders after they are submitted to BeX and noted 
that the members do not receive any special or unique trading 
advantages in BeX.\52\ Third, although Rule 11a2-2(T) contemplates 
having an order executed by an exchange member who is unaffiliated with 
the member initiating the order, the Commission recognizes that the 
requirement may be satisfied when automated exchange facilities are 
used.\53\ Finally, the BSE represents that members that rely on Rule 
11a2-2(T) for a managed account transaction must comply with the 
limitations on compensation set forth in the rule.
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    \52\ See Securities Exchange Act Release No. 44983 (October 25, 
2001), 66 FR 55225 (November 1, 2001) (Order approving ArcaEx as the 
equities trading facility of PCX Equities Inc.); 1979 Release, supra 
note 50. See also CBOEdirect Letter, supra note 50; Letter from 
Larry E. Bergmann, Senior Associate Director, Division, Commission, 
to Edith Hallahan, Associate General Counsel, Phlx, dated March 24, 
1999 (regarding Phlx's VWAP Trading System); Letter from Catherine 
McGuire, Chief Counsel, Division, Commission, to David E. Rosedahl, 
PCX, dated November 30, 1998 (regarding Optimark); and Chicago Match 
Letter, supra note 50.
    \53\ In considering the operation of automated execution systems 
operated by an exchange, the Commission noted that while there is no 
independent executing exchange member, the execution of an order is 
automatic once it has been transmitted into the systems. Because the 
design of these systems ensures that members do not possess any 
special or unique trading advantages in handling their orders after 
transmitting them to the exchange, the Commission has stated that 
executions obtained through these systems satisfy the independent 
execution requirement of Rule 11a2-2(T). See 1979 Release, supra 
note 50.
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Accelerated Approval of Amendment No. 5

    The Commission finds good cause for approving Amendment No. 5 to 
the proposed rule change prior to the thirtieth day after publishing 
notice of Amendment No. 5 in the Federal Register pursuant to Section 
19(b)(2) of the Act.\54\
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    \54\ 15 U.S.C. 78s(b)(2). Pursuant to Section 19(b)(2) of the 
Act, the Commission may not approve any proposed rule change, or 
amendment thereto, prior to the thirtieth day after the date of 
publication of the notice thereof, unless the Commission finds good 
cause for so doing.
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    In Amendment No. 5, the BSE amended Chapter II, Section 41--Minimum 
Price Variation to state that the Exchange shall not display, rank, or 
accept any bids, offers, or orders in a security priced in an increment 
smaller than $0.01 if that bid, offer, or order is priced equal to or 
greater than $1.00, but that the Exchange may execute and report Mid-
point Cross Orders in increments as small as one-half the Minimum Price 
Variation for the security. In addition, BSE amended the rules text of 
BSE Rule, Chapter XXXVII to clarify that if an At the Close order is 
not fully executed at the close, the part of the order not executed 
will be cancelled; to clarify opening procedures; to indicate more 
clearly when orders would be routed at the instruction of the member 
entering the order, to the market center(s) displaying the National 
Best Bid or Offer; and to

[[Page 52198]]

clarify how cross orders would be executed in the Post-Primary Trading 
Session. The Exchange also corrected several technical errors contained 
in the rule text.
    The Commission believes that these clarifying and technical changes 
to the proposed rule change improve the proposal and raise no new or 
novel issues of regulatory concern, and therefore should not delay its 
implementation. Accordingly, the Commission finds good cause to 
accelerate approval of Amendment No. 5, pursuant to Section 19(b)(2) of 
the Act.\55\
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    \55\ 15 U.S.C. 78s(b)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 5, including whether Amendment No. 5 
is consistent with the Act. Comments may be submitted by any of the 
following methods:

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 
Amendment No. 5 of File Number SR-BSE-2006-22 and should be submitted 
on or before September 22, 2006.

V. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, is consistent with the Act and the rules and 
regulations thereunder applicable to a national securities exchange, 
and, in particular, with Section 6(b)(5) of the Act.\56\
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    \56\ 15 U.S.C. 78f(b)(5).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\57\ that the proposed rule change (SR-BSE-2006-22), as amended, 
and Amendment No. 3 thereto, is approved and Amendment No. 5 is 
approved on an accelerated basis.
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    \57\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\58\
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    \58\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-14564 Filed 8-31-06; 8:45 am]

BILLING CODE 8010-01-P
