[Federal Register Volume 73, Number 2 (Thursday, January 3, 2008)]
[Notices]
[Pages 524-526]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-25568]
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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 [email protected]. 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