

[Federal Register: January 3, 2008 (Volume 73, Number 2)]
[Notices]               
[Page 524-526]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03ja08-59]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57037; File No. SR-BSE-2007-53]

 
Self-Regulatory Organizations; Boston Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to the Opening of the Market of the Boston Options Exchange

December 21, 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 20, 2007, 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 
Exchange. The Exchange filed the proposed rule change pursuant to 
section 19(b)(3)(A)(iii) \3\ of the Act and Rule 19b-4(f)(5) 
thereunder,\4\ which renders the proposal 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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    \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)(5).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to delay the opening of trading in the event 
of unusual trading activity in a particular series or instrument. The 
text of the proposed rule change is available on the Exchange's Web 
site at http://www.bostonstock.com, at the Exchange's principal office, 

and at the Commission's Public Reference Room.

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 substantially 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 proposes to amend the BOX Rules \5\ to delay the opening of 
trading in the event of unusual trading activity in a particular series 
or instrument on the Boston Options Exchange, (``BOX''). BOX believes 
that delaying the opening of trading in the event of unusual

[[Page 525]]

trading activity will help to ensure a fair and orderly market opening.
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    \5\ Capitalized terms not otherwise defined herein shall have 
the meanings prescribed under the BOX Rules.
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Delayed Series Opening
    The Exchange will delay the opening of an options series if a 
Market Maker's quote crosses the Theoretical Opening Price (``TOP'') 
\6\ by more than a certain percentage and certain amount of the TOP, as 
determined on a periodic, series-by-series basis by the Market 
Regulation Center (``MRC''). Such a delayed series opening will be 
announced to all BOX Participants via the Trading Host and the Market 
Operations Center (``MOC'') will contact the Market Maker whose quotes 
caused the delayed opening to verify the accuracy of his or her quotes. 
Once the Market Maker confirms or amends his or her quotes, the MRC 
will open the series for trading.
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    \6\ The Theoretical Opening Price ``is that price at which the 
Opening Match would occur at the current time, if that time were the 
opening, according to the Opening Match procedures [described in 
Chapter V, Section 9(e) of the BOX Rules].'' See BOX Rules, Chapter 
V, Section 9(b).
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Delayed Class Opening
    The Exchange will delay the opening of an options class if the sum 
of the volume for all of the series within a class exceeds a certain 
amount of series or a certain amount of contracts, as determined on a 
periodic, class-by-class basis by the MRC. Such a delayed class opening 
will be announced to all BOX Participants via the Trading Host. MRC 
will investigate the cause of the high volume or amount in the class 
and once resolved, will open the class for trading.
Discussion
    By implementing a mechanism whereby the opening of a particular 
series or instrument may be delayed under certain enumerated 
circumstances, all BOX Market Makers will be protected equally from the 
unreasonable risk of multiple, nearly simultaneous executions caused by 
communication failures or systemic errors. Like auto-quote systems used 
on other options exchanges, the primary method for Market Makers to 
update their quotes on BOX is to post and update quotes on multiple 
series of options at the same time through the use of ``bulk quotes.'' 
\7\ Generally, these quotes are based on the Market Maker's proprietary 
pricing models that rely on various factors, including the price of the 
underlying security and that security's market volatility. As these 
variables change, a Market Maker's pricing model and automated quote 
system will continuously enter bulk quotes for most or all of the 
series in the class.
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    \7\ A ``bulk quote'' message is a single message from a Market 
Maker that simultaneously updates all of the Market Maker's quotes 
in multiple series in a class at the same time.
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    In most instances, a Market Maker sends a message to BOX to update 
or refresh his or her quote on at least one of the series in his or her 
assigned class after each execution by the Market Maker in that options 
series or any movement in the underlying security's price. If, however, 
a Market Maker's pricing model and automated quote update system 
malfunction, the Market Maker's bulk quote update could inadvertently 
execute across all of the series in the assigned class.
    This can be especially problematic if a Market Maker experiences a 
technical breakdown in either the Market Maker's communication link 
with BOX or the Market Maker's automated trading and quotation system 
during the Opening Match. Trading on BOX opens by ``processing the 
series of a class in a random order, starting promptly after the 
opening for trading of the underlying security in the primary market.'' 
\8\ If a Market Maker is experiencing technical difficulties it can be 
executed against numerous times nearly simultaneously as BOX's Opening 
Match opens each options series within a class. This occurrence can 
create huge unintended principal positions for the Market Maker and 
expose the Market Maker to unnecessary market risk.
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    \8\ See BOX Rules, Chapter V, Section 9(e)(i).
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    Firm risk management procedures dictate that Market Makers must 
take into account the possibility of such errors and the corresponding 
risk to the Market Maker and the firm. As a result, the BSE believes 
that Market Makers widen their quotes, quote less aggressively, and 
limit their quote size in order to avoid such unintended executions and 
the attendant risks and costs, all to the detriment of customers and 
other market participants. The mechanism outlined in this proposal is 
designed to promote Market Maker confidence that these risks have been 
alleviated or eliminated and in turn bolster their ability to quote 
more effectively on the BOX Market. Thus, Market Maker quote widths 
should narrow, quotes should be entered more aggressively, and quote 
size should increase, all resulting in increased liquidity on the 
opening of the BOX Market.
    The proposed rule change is intended to detect situations where 
price and volume seem to suggest that unusual market conditions exist. 
By implementing a mechanism whereby the opening of a series or 
instrument may be delayed in the event of unusual trading activity, 
unintentional and erroneous trades may be prevented from occurring. 
Unintentional and erroneous trades do not properly reflect the true 
nature of the market and subject Market Makers to unreasonable market 
risk, multiple executions and clearing fees, with no real economic 
justification behind the trades. The Exchange believes the proposed 
rule change will assist in reducing these inefficiencies and risks by 
preventing a BOX Market Maker from erroneously and automatically 
trading multiple times during the Opening Match.
    The MOC is best suited to contact a Market Maker in the event that 
the proposed mechanism is triggered at the individual series level. If 
and when needed, the MOC would expeditiously contact the Market Maker 
responsible for the unusual quotes to determine if they were accurate 
and intentional or were in fact erroneous. This quick response by the 
MOC serves two purposes. First, if the Market Maker involved informs 
the MOC that the quotes in question were intentionally and accurately 
entered, then the MOC will quickly relay this information to the MRC 
and remove this particular barrier preventing the series from opening. 
Second, if the MOC's contact with the Market Maker confirms that the 
quotes or orders were indeed erroneously sent to BOX and thus 
unreliable, the Market Maker will be able to promptly amend its quotes, 
whereby the MOC will notify the MRC that the issue has been resolved 
and the series will again be ready to open.
    The proposed mechanism also accounts for unusual activity on the 
opening of the BOX Market in an entire instrument as a whole. Certain 
conditions on the opening of the BOX Market may not trigger the 
parameters set at the individual series level. However, where a Market 
Maker has nonetheless entered unintended erroneous quotes on BOX, 
particularly excessive trading over normal levels could still cause 
significant inefficiencies and expose the Market Maker to unintended 
risk. This excessive volume could occur either in the number of series 
or the number of contracts that would trade in that instrument on the 
open. Again, providing a system whereby the MRC will have the ability 
to suspend the opening of an instrument at the class level will protect 
Market Makers from exposure to the risk and negative results that would 
otherwise accompany trading on these erroneous quotes.

[[Page 526]]

    The MRC is able to evaluate historical data from the opening of the 
BOX Market. Statistical analysis of this data shows the number of 
contracts and number of series that typically trade in each instrument 
on the opening of the BOX Market. Using this data, the MRC will set 
finite upper volume levels, ``y'' and ``z'', for both the number of 
series and number of contracts that will be able to trade on the open. 
These levels will be assigned on an individual basis for each 
instrument that is listed and traded on the BOX Market.
    The MRC will periodically evaluate the parameters to be used in 
determining the applicable percentages, amounts and volumes as 
discussed above. These parameters will be coded into the Trading Host 
and will be applied to all Market Maker quotes on an equal basis. 
Periodic review will enable the proposed mechanism to function as 
intended by allowing for adjustment of these parameters, when 
appropriate. The MRC will also review these parameters if and when the 
series and class opening delays are triggered. This will allow the MRC 
to determine whether the quotes in question, in the interests of both 
the Market Maker and BOX, should be flagged and prevent the series or 
instrument from opening for trading. Thus, the combination of periodic 
and event specific review of the parameters will allow for optimal 
threshold settings and the function of the mechanism as designed.
    The Exchange also is proposing to delete current subparagraph g(i), 
which provides that the BOX Trading Host will not open a series if the 
opening price is not within an acceptable range as determined by the 
MRC and will be announced to all BOX Participants via the Trading 
Host.\9\ The Exchange believes that proposed subparagraph g(ii) is an 
improvement to the current subparagraph g(i). The proposed (g)ii 
contains parameters which will be hard coded into the system. The 
Exchange believes these new parameters more effectively and efficiently 
addresses situations where the opening should be delayed than the 
current g(i) which relies on a variety of factors. These new parameters 
were determined after reviewing trading activity over time. As such, 
the new g(ii) will better assist in opening the market in a fair and 
orderly manner.
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    \9\ In making this determination the MRC will consider, among 
other factors, all prices that exceed a variance greater than either 
$.50 or 20% to the previous day's closing price.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act,\10\ in general, and furthers the 
objectives of section 6(b)(5) of the Act,\11\ in particular, in that it 
is designed to promote just and equitable principles of trade, to 
prevent fraudulent and manipulative acts, 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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    \10\ 15 U.S.C. 78f(b).
    \11\ 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 would 
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

    No written comments were either solicited or received.

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

    Because the proposed rule change effects a change in an existing 
order-entry or trading system that: (i) Does not significantly affect 
the protection of investors or the public interest; (ii) does not 
impose any significant burden on competition; and (iii) does not have 
the effect of limiting the access to or availability of the system, the 
proposed rule change has become effective pursuant to section 
19(b)(3)(A) of the Act \12\ and subparagraph (f)(5) of Rule 19b-4 
thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(5).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such 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 the 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 Number SR-BSE-2007-53 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-2007-53. 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 NYSE. 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-2007-53 and 
should be submitted on or before January 24, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E7-25568 Filed 1-2-08; 8:45 am]

BILLING CODE 8011-01-P
