

[Federal Register: February 12, 2007 (Volume 72, Number 28)]
[Notices]               
[Page 6626-6628]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12fe07-123]                         

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55233; File No. SR-BSE-2006-56]

 
Self-Regulatory Organizations; Boston Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto To 
Add to the Boston Options Exchange a New Functionality Called an 
Automatic Auction Order

February 2, 2007.
    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 December 15, 2006, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been substantially prepared by the BSE. 
On February 1, 2007, BSE filed Amendment No. 1 to the proposed rule 
change.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, BSE granted the Commission an extension 
of the time period specified in Section 19(b)(2) of the Act for 
Commission action.
---------------------------------------------------------------------------

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

    The Exchange proposes to amend the Boston Options Exchange 
(``BOX'') Rules to add a new functionality referred to as an Automatic 
Auction Order (``AAO'') in order to make it easier for non-professional 
customers to participate in a price improvement auction (``Improvement 
Auction''). The text of the proposed rule change is available at BSE, 
the Commission's Public Reference Room, and http://www.bostonstock.com/legal/pending_rule_filings.html
.


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 BSE included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The BSE 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
    BSE seeks to amend the BOX Rules \4\ to add a new order 
functionality called an AAO in order to make it easier for all 
Customers, including non-professional customers, to participate in 
Improvement Auctions (e.g., the PIP). BOX believes that the AAOs will 
increase the number of Improvement Orders that are submitted to an 
Improvement Auction, thereby creating increased competition and overall 
liquidity while also improving execution prices for trades that are 
executed on BOX.
---------------------------------------------------------------------------

    \4\ Capitalized terms not otherwise defined herein shall have 
the meanings prescribed under the BOX Rules.
---------------------------------------------------------------------------

    This AAO functionality automates a process that is currently 
available to the non-professional customer via the Customer PIP Order 
(``CPO''). Currently, however, it is difficult for non-professional 
customers to participate in Improvement Auctions because of the limited 
offering of the CPO by Order Flow Providers (``OFPs''). Only a few OFPs 
have made CPOs available to non-professional customers due, in large 
part, to the constraints that are generally

[[Page 6627]]

associated with the software development an OFP is required to 
undertake in order to handle the processing of the CPO. The AAO 
provides non-professional customers with the ability to trade on the 
BOX Book at standard trading increments and also trade in penny 
increments in an Improvement Auction, should one occur. The AAO, as 
opposed to a standard Limit Order, allows a Customer to participate in 
the Improvement Auction without any further instructions from the 
Customer.
    The AAO allows for increased competition in the Improvement Auction 
and offers greater opportunity for price improvement to occur by 
providing for additional Improvement Orders capable of improving 
prices.

Description of AAO Processing

    An AAO is a Limit Order that is submitted by the OFP on behalf of a 
Customer to the BOX Trading Host in one-cent increments only on a class 
whose minimum trading increment is greater than one cent. The penny 
incremented limit price that is entered by the Customer is referred to 
as the ``AAO Maximum Improvement Price.'' The AAO Maximum Improvement 
Price is the maximum (if the order is to buy) or minimum (if the order 
is to sell) price at which the Customer is willing to trade in any 
Improvement Auctions.

AAO Limit Order

    The Trading Host will round AAOs to the nearest minimum trading 
increment \5\ (up if the order is to sell and down if the order is to 
buy) and place it on the BOX Book (``AAO Limit Order''). The AAO Limit 
Order will be processed as a standard Limit Order as described in 
Chapter 5, Section 14(c)(i) of the BOX Rules and will be traded in 
accordance with Chapter 5, Section 16 of the BOX Rules.
---------------------------------------------------------------------------

    \5\ As delineated in Chapter V, Section 6 of the BOX Rules.
---------------------------------------------------------------------------

AAO Improvement Order

    An AAO will be eligible to participate (subject to Chapter V, 
Section 18 of the BOX Rules) in any Improvement Auctions that may occur 
when the AAO is on the opposite side of the market from the order 
seeking improvement and the AAO Limit Price is equal to the National 
Best Bid or Offer (``NBBO''). When this situation occurs, the BOX 
trading engine will automatically create a new order (the ``AAO 
Improvement Order'') at the end of the auction phase, but prior to any 
trade allocations, with the following terms:
    (1) The quantity of the AAO Improvement Order shall be the lesser 
of the remaining quantity on the BOX Book at the AAO Limit Price or the 
quantity of the order seeking improvement in the auction; and
    (2) The price of the AAO Improvement Order shall be equal to the 
price of the best Improvement Order, Primary Improvement Order or 
unrelated order (on the same side of the market as the AAO).

Trade Processing of AAO

    During an Improvement Auction, if the number of contracts executed 
in the Improvement Auction against the AAO Improvement Order is less 
than the quantity of AAO Limit Order, then, prior to the processing of 
any other orders on the same series on the AAO Limit Order side of the 
market, the quantity of the AAO Limit Order will be decremented on the 
BOX Book by the size of the executed quantity of the AAO Improvement 
Order. Any residual quantity that remains after part of an AAO has 
traded (either on the BOX Book or in the Improvement Auction) will 
continue to be eligible to trade in any subsequent Improvement 
Auctions. In addition, the residual quantity will maintain its priority 
on the BOX Book in accordance with Chapter V, Section 16 of the BOX 
Rules.
    Any AAO Improvement Order created by the BOX Trading Host will be 
assigned the time priority of the related AAO Limit Order. As such, the 
AAO Improvement Order is granted time priority at its relevant price 
level in an Improvement Auction.
    Any modification to the AAO Maximum Improvement Price that causes 
the rounded AAO Limit Price to change or any increase in the quantity 
of the AAO will cause a new time priority to be assigned to the AAO 
Limit Order on the BOX Book. Any changes to the AAO Maximum Improvement 
Price that do not effect the AAO Limit Price will not cause a change to 
the time priority of the original order.
    Additionally, a new AAO received in a particular series that is on 
the opposite side of the market from another AAO, which is already on 
the BOX Book, and is marketable at the AAO Maximum Improvement Price of 
the other booked AAO (e.g., a buy AAO is on the BOX Book with a Limit 
Price bid of $2.00 with an AAO Maximum Improvement Price of $2.03 and a 
new sell AAO is received by the BOX Trading Host with an AAO Maximum 
Improvement Price of $2.02), will be matched at the mid-point of the 
two AAO Maximum Improvement Prices, rounded to the nearest penny 
increment in the favor of the AAO that is already on the BOX Book. The 
quantity of the resulting trade will be for the lesser quantity of the 
two AAOs.
    Finally, AAOs may be entered for any account type except for the 
accounts of BOX Market Makers.
    The following examples demonstrate how an AAO will work. For all 
examples, assume an AAO is entered into the Trading Host to buy 100 
contracts of XYZ at a Maximum Improvement Price of $1.03 (referred to 
in the following examples as the ``Original AAO''). The Original AAO 
will be rounded to $1.00 (i.e., the nearest minimum trading increment 
in accordance with Chapter V, Section 6 of BOX Rules) and the AAO Limit 
Order placed on the BOX Book at $1.00.

    Example 1. For this example, assume the Original AAO is the only 
order resting on the BOX Book at $1.00. An order to sell 70 
contracts at market has commenced an Improvement Auction at $1.01. 
At the end of the auction, the best Improvement Order is an order to 
buy 10 contracts of XYZ at $1.02. The Trading Host creates an AAO 
Improvement Order for 70 contracts at $1.02 with the Original AAO 
Limit Order's time priority which trades against the customer in the 
Improvement Auction. The remaining 30 contracts from the Original 
AAO will remain on the BOX Book at their original time priority.
    Example 2. In this example, everything is the same as Example 1 
except that the market order to sell XYZ is for 100 contracts. The 
full quantity of the Original AAO (i.e., 100 contracts) will be 
executed at $1.02.
    Example 3. For this example, assume there is another AAO buy 
order resting on the BOX Book at $1.00 that has time priority over 
the Original AAO (referred to in this example as the ``2nd AAO''). 
The 2nd AAO is for 50 contracts and its AAO Maximum Improvement 
Price is $1.04. At the end of an Improvement Auction for 90 
contracts to be sold at market, the best Improvement Order is for 10 
contracts at $1.02. Two AAO Improvement Orders are created by the 
BOX Trading Host: one for 100 contracts at $1.02 and one for 50 
contracts at $1.02. All 50 contracts from the 2nd AAO will be 
consummated first at $1.02. The remaining 40 contracts will be 
executed at $1.02 with the Original AAO. The remaining 60 contracts 
from the Original AAO will remain on the BOX Book at their original 
time priority.
    Example 4. For this example assume a second AAO buy order is 
resting on the BOX Book at $1.00 that does not have time priority 
over the Original AAO (referred to in this example as the ``2nd 
AAO''). The 2nd AAO is for 50 contracts with an AAO Maximum 
Improvement Price is $1.04. A market order to sell 75 contracts of 
XYZ is entered into the Trading Host and an Improvement Auction 
commences. During the Improvement Auction an Improvement Order to 
buy XYZ is entered at $1.01. Upon completion of the Improvement 
Auction, the 50 contracts of the 2nd AAO will be fully executed at 
$1.01 and

[[Page 6628]]

the Original AAO will fill the remaining 25 contracts of the market 
order to sell at $1.01. Even though the Original AAO has time 
priority over the 2nd AAO, the 2nd AAO will be filled first because 
it has a higher AAO Maximum Improvement Price ($1.04 vs. $1.03) than 
the Original AAO.
    Example 5. For this example, assume that while the Original AAO 
is resting on the BOX Book, but prior to an Improvement Auction 
commences, another AAO to sell 80 XYZ is entered into the Trading 
Host at $1.01 (referred to in this example and in Example 6 as the 
``2nd AAO''). These two orders will immediately be matched and 
traded at $1.02, the mid-point of the two AAO Maximum Improvement 
Prices. The remaining 20 contracts from the Original AAO will remain 
on the BOX Book with its original time price priority.
    Example 6. For this example, assume everything is the same as in 
Example 5 except the 2nd AAO to sell 80 XYZ is entered into the 
Trading Host at $1.02. The executions will remain the same as in 
Example 5 except the price will be rounded (the midpoint of $1.02 
and $1.03 is $1.025) to the nearest penny increment towards the 
favor of the Original AAO. Since the Original AAO was already on the 
BOX Book, the trade will execute at $1.02. The remaining 20 
contracts from the Original AAO will remain on the BOX Book with its 
original time price priority.

Conclusion

    As shown by the above examples, the AAO causes no detriment to 
customers or the markets as a whole, will increase the number of 
Improvement Orders that will be available to participate in an 
Improvement Auction and thus creates a greater possibility for better 
execution prices on all orders placed on BOX.
2. Statutory Basis
    The proposal is consistent with the requirements of Section 6(b) of 
the Act,\6\ in general, and Section 6(b)(5) of the Act,\7\ in 
particular, in that it makes it easier for non-professional customers 
to participate in Improvement Auctions, it is generally designed to 
promote just and equitable principles of trade, to prevent fraudulent 
and manipulative acts and, in general, to protect investors and the 
public interest.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78f(b).
    \7\ 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 will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange has neither solicited nor received comments on the 
proposed rule change.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which BSE consents, the Commission shall: (a) By order approve such 
proposed rule change, or (b) institute proceedings to determine whether 
the proposed rule change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. 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 No. SR-BSE-2006-56 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-2006-56. 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 BSE. 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-2006-56 and should be submitted on or before March 
5, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
---------------------------------------------------------------------------

    \8\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-2250 Filed 2-9-07; 8:45 am]

BILLING CODE 8010-01-P
