

[Federal Register: August 8, 2007 (Volume 72, Number 152)]
[Notices]               
[Page 44596-44599]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08au07-115]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56185; File No. SR-BSE-2007-39]

 
Self-Regulatory Organizations; Boston Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Clarify How the BOX Trading Host Systematically Filters All Orders 
Against the National Best Bid and Offer

August 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 July 30, 2007, the Boston Stock Exchange, Inc. (``Exchange'' or 
``BSE'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been substantially prepared by the Exchange. 
The Exchange has designated the proposed rule change as a non-
controversial rule change pursuant to section 19(b)(3)(A)(iii) of the 
Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ which renders the proposed 
rule change effective upon filing with the Commission. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
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    \30\ 17 CFR 200.30-3(a)(12).
    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend the rules of the Boston Options 
Exchange (``BOX'') to clarify how the BOX Trading Host systematically 
filters all orders against the National Best Bid and Offer (``NBBO'') 
to ensure that a trade-through to the detriment of the inbound order 
does not occur, and that the customer's interests are protected by 
making sure that any execution of its order on BOX is at a price at 
least as good as the best price available on any of the other options 
exchanges. The proposed rule filing also seeks to clarify how BOX 
currently processes such orders when the NBBO is either locked or 
crossed. The text of the proposed rule change is set forth below; new 
text is in italics and deleted text is in brackets.

RULES OF THE BOSTON OPTIONS EXCHANGE FACILITY

Chapter V
Sec. 16 Execution and Price/Time Priority
    (a)--No change.
    (b) Filtering of BOX In-Bound Orders [to Prevent Trade-Throughs].
    i. With the exception of Improvement Orders and Primary Improvement 
Orders submitted during a PIP (which are processed in accordance with 
section 18 of this Chapter V) and Directed Orders (which are processed 
in accordance with section 5, subsections b and c, of Chapter VI) 
[A]all inbound orders to BOX (whether on behalf of Customers, non-BOX 
Participant broker-dealer proprietary accounts or market makers at 
other exchanges) as well as inbound Principal (``P'') and Principal as 
Agent (``P/A'') (see Chapter XII, ``Intermarket Linkage Rules'', 
herein) orders received via InterMarket Linkage will be filtered by the 
Trading Host prior to entry on the BOX Book to ensure that these orders 
will not [execute at price outside the current NBBO (``trade-
throughs'').]:
    1) in the case of a sell order, execute at a price below the NBBO 
bid price

-or-

    2) in the case of a buy order, execute at a price above the NBBO 
offer price.
    All of the filtering rules described in this section are 
independent of whether the NBBO is locked or crossed or not, except 
where the BOX best price on the same side of the market as the inbound 
order has crossed, or is crossed by, the opposite side NBBO, the order 
will be routed, if eligible, or rejected immediately.
    ii.-iv.--No change.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

[[Page 44597]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to amend the BOX Rules 
to describe how the BOX Trading Host systematically filters all orders 
against the NBBO to ensure that a trade-through to the detriment of the 
inbound order does not occur. The proposal also describes how 
customers' interests are protected by making sure that any execution of 
his order on BOX is at a price at least as good as the best price 
available on any of the other options exchanges.
    BOX's responsibility to the inbound customer or broker-dealer order 
is to ensure that its execution is at the best price available across 
all markets at that moment. Presently, BOX processes trades 
irrespective of whether the NBBO is locked, crossed, or ``normal.'' As 
a result of this practice, there is the potential to cause a trade-
through. The purpose of this rule filing is to amend the BOX rules to 
recognize that only the price on the side of the NBBO opposite to the 
inbound order needs to be taken into account when filtering inbound 
orders, regardless of whether the NBBO is locked, crossed, or 
``normal,'' and regardless of whether BOX is presently part of the NBBO 
on the opposite side from the order. The Exchange has obtained 
exemptive relief for any trade-throughs that occur as a result of this 
practice.\5\
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    \5\ See letter from Elizabeth K. King, Associate Director, 
Division of Market Regulation, Commission, to John Katovich, Chief 
Legal Officer, Exchange, dated July 30, 2007. See also letter from 
John Katovich, Chief Legal Officer, Exchange, to Nancy M. Morris, 
Secretary, Commission, dated July 30, 2007.
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    The following examples illustrate BOX's proposed processing of NBBO 
filtering:
    Example 1:

------------------------------------------------------------------------
                                          Bid                Offer
------------------------------------------------------------------------
NBBO............................   2.00..............  2.10
      BOX Trading Host receives an order to sell 10 ``at market.''
               Inbound sell order executed at 2.00 on BOX.
------------------------------------------------------------------------

    Example 2:
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    \6\ Exposure time will be set according to the NBBO Exposure 
time period as referenced in the BOX Rules. See BOX Rules, Chapter 
V, Section 16(b)(iii).

------------------------------------------------------------------------
                                          Bid                Offer
------------------------------------------------------------------------
NBBO............................  2.00...............  2.10
      BOX Trading Host receives an order to sell 20 ``at market.''
Inbound sell order executed for 10 at 2.00 on BOX. The remaining ten are
 exposed \6\ internally at 2.00 and, if not executed, will be routed to
    the exchange disseminating the best price or rejected to sender.
------------------------------------------------------------------------

    Example 3:

------------------------------------------------------------------------
                                          Bid                Offer
------------------------------------------------------------------------
NBBO............................  2.05...............  2.10
      BOX Trading Host receives an order to sell 10 ``at market.''
    Inbound sell order exposed internally at 2.05 on BOX; and if not
executed, will be routed to the exchange disseminating the best price or
                           rejected to sender.
------------------------------------------------------------------------

    Example 4:

------------------------------------------------------------------------
                                          Bid                Offer
------------------------------------------------------------------------
NBBO............................  2.00...............  2.00
      BOX Trading Host receives an order to sell 10 ``at market.''
   Inbound sell order executed at 2.00 on BOX since this is best price
                   available nationally for a seller.
------------------------------------------------------------------------

    Example 5:

------------------------------------------------------------------------
                                          Bid                Offer
------------------------------------------------------------------------
NBBO............................  2.05...............  2.05
      BOX Trading Host receives an order to sell 10 ``at market.''
    Inbound sell order exposed internally at 2.05 on BOX; and if not
executed, will be routed to the exchange disseminating the best price or
                           rejected to sender.
------------------------------------------------------------------------

    Example 6:

------------------------------------------------------------------------
                                          Bid                Offer
------------------------------------------------------------------------
NBBO............................  2.00...............  1.95
      BOX Trading Host receives an order to sell 10 ``at market.''
   Inbound sell order executed at 2.00 on BOX since this is best price
                   available nationally for a seller.
------------------------------------------------------------------------

    Example 7:

------------------------------------------------------------------------
                                          Bid                Offer
------------------------------------------------------------------------
NBBO............................  2.00...............  1.95
      BOX Trading Host receives an order to sell 20 ``at market.''
  Inbound sell order executed for 10 at 2.00 on BOX since this is best
  price available nationally for a seller. The remaining 10 are exposed
 internally at 2.00, and if not executed, will be routed to the exchange
           disseminating the best price or rejected to sender.
------------------------------------------------------------------------

    Example 8:

------------------------------------------------------------------------
                                          Bid                Offer
------------------------------------------------------------------------
NBBO............................  2.05...............  1.95
      BOX Trading Host receives an order to sell 10 ``at market.''
 Inbound sell order exposed internally at 2.05 on BOX; if not executed,
 will be routed to the exchange disseminating the best price or rejected
                               to sender.
------------------------------------------------------------------------

    In the following example (Example 9), the BOX best price on the 
same side of the market as the inbound order is crossed by the opposite 
side NBBO. In this particular case, it is impractical to expose the 
inbound executable order at the opposite NBBO as in the previous 
examples since BOX is already showing a better offer (of 2.10 versus 
the NBBO exposure price of 2.15) with which nobody has traded.
    In this unique circumstance (where the same side BBO on BOX is 
crossed by the opposite side NBBO), BOX will immediately route the 
order to the exchange disseminating the best price, if possible, or 
reject the order back to the sender.
    Example 9:

------------------------------------------------------------------------
                                          Bid                Offer
------------------------------------------------------------------------
NBBO............................  2.15...............  2.05
      BOX Trading Host receives an order to sell 10 ``at market.''
 Inbound sell order routed immediately to the exchange disseminating the
             best price at 2.15 or rejected back to sender.
------------------------------------------------------------------------

    As illustrated by the above examples, the BOX NBBO filtering 
process ensures that a sell order is never executed on BOX at a price 
inferior to the best bid available at the other options exchanges; 
similarly, any order to buy an option would not be executed on BOX at 
price worse than the best offer available elsewhere at that moment. BOX 
believes that in the case of a crossed NBBO, it is in the inbound 
customer order's interest to execute at the best price on the opposite 
side of the NBBO on BOX, where possible, as this is much quicker than 
routing to an away exchange.
    In connection with proposed rule change, the Exchange has 
respectfully

[[Page 44598]]

requested an exemption, pursuant to Rule 608(e) of Regulation NMS, from 
the requirement of Rule 608(c) of Regulation NMS that the Exchange 
comply with and enforce compliance by its members with the requirements 
of Section 8(c) of the Plan for the Purpose of Creating and Operating 
an Intermarket Options Linkage (``the Plan'') in the limited 
circumstance where a trade-through occurs due to an execution when the 
NBBO is crossed by the disseminated market of another options exchange, 
or BOX's disseminated market crosses the NBBO, and BOX's price \7\ on 
the opposite side of the market for the incoming order establishes, or 
is equal to, the NBBO. To the same extent and subject to the same 
limitations, the Exchange has requested exemptive relief from the 
requirement in Rule 608(c) of Regulation NMS that the Exchange comply 
with section 4(b) of the Plan by enforcing compliance by its members 
with the provisions of section 8(c) of the Plan. The Commission has 
granted the requested exemption.\8\
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    \7\ BOX's price could be either BOX's disseminated price or it 
could be a Participant response to the exposure of the incoming 
order pursuant to Chapter V, Section 16(b) of BOX Rules. Therefore, 
an incoming order during a crossed market must execute at a price 
equal to the NBBO on the opposite side of the incoming order.
    \8\ See supra note 5.
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2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
requirements of Section 6(b) of the Act \9\ in general, and Section 
6(b)(5) of the Act \10\ in particular, in that it is designed to 
promote just and equitable principles of trade, to perfect the 
mechanism of a free and open market and the national market system, and 
to protect investors and the public interest by clarifying how the BOX 
Trading Host systematically filters all orders against the NBBO to 
ensure that a trade-through to the detriment of the inbound order does 
not occur.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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

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

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

    The Exchange has designated the proposed rule change as one that: 
(1) Does not significantly affect the protection of investors or the 
public interest; (2) does not impose any significant burden on 
competition; and (3) does not become operative for 30 days from the 
date of filing, or such shorter time as the Commission may designate if 
consistent with the protection of investors and the public interest. 
Therefore, the foregoing rule change has become effective pursuant to 
section 19(b)(3)(A) of the Act \11\ and subparagraph (f)(6) of Rule 
19b-4 thereunder.\12\ The Exchange has asked the Commission to waive 
the operative delay to permit the proposed rule change to become 
operative prior to the 30th day after filing so that the Exchange can 
clarify the conditions under which BOX provides automatic executions 
during times of crossed markets, thus allowing the maximum potential 
number of orders to be handled electronically on the Exchange.
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change at least five 
business before doing so.
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    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public 
interest.\13\ Waiving the delay will allow the Exchange's 
clarifications of the operation of the BOX Trading Host's filtering of 
orders against the NBBO to become operative immediately. Waiving the 
delay will also allow the proposal to become operative simultaneously 
with the trade-through exemption granted to the Exchange as of July 30, 
2007,\14\ the date the proposed rule change was filed. Therefore, the 
Commission designates the proposal operative upon filing.
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    \13\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \14\ See supra note 5.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate the rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

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-2007-39 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-BSE-2007-39. 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, 100 F Street, NE., Washington, DC 
20549, on official business days between the hours of 10 a.m. and 3 
p.m. 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-2007-39 and should be submitted on 
or before August 29, 2007.


[[Page 44599]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-15434 Filed 8-7-07; 8:45 am]

BILLING CODE 8010-01-P
