1786 Federal Register / Vol. 72, No. 9 / Tuesday, January 16, 2007 / Notices 

6 17 CFR 200.30–3(a)(12). 

1 5 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3Capitalized terms not otherwise defined herein 

shall have the meanings prescribed under the BOX 

Rules. 

4See paragraph (a) of Section 18 of Chapter V of 

the BOX Rules. 

5Pursuant to Paragraph (e)(iii) of Section 18 of 

Chapter V of the BOX Rules. 

6Pursuant to Paragraph (b) of Section 16 of 

Chapter V of the BOX Rules (‘‘Filter Rule’’). 

Pursuant to the Filter Rule, a Limit Order that has 

a Buy (Sell) limit price equal to or better than the 

National Best Offer (Bid), and the Best BOX Offer 

(Bid) is not equal to the National Best Offer (Bid), 

the Limit Order is ‘‘exposed’’ for three seconds to 

seek potential BOX orders that can match the 

National Best Offer (Bid) before the order is routed 

to an away market that is equal to the National Best 

Offer (Bid). 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.6

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E7–384 Filed 1–12–07; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–55050; File No. SR–BSE–

2006–03] 

Self-Regulatory Organizations; Boston 

Stock Exchange, Inc.; Notice of Filing 

of Proposed Rule Change and 

Amendment No. 1 Thereto, Relating to 

the Treatment of Limit Orders That Are 

Submitted to the Boston Options 

Exchange During a Price Improvement 

Period 

January 5, 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 

8, 2006, the Boston Stock Exchange, Inc. 

(‘‘BSE’’ or ‘‘Exchange’’) filed with the 

Securities and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change. On January 4, 2007, the BSE 

filed Amendment No. 1 to the proposed 

rule change. The proposed rule change 

is described in Items I, II, and III below, 

which Items have been prepared 

substantially by the Exchange. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change, as amended, from interested 

persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

As described in more detail herein, 

the Exchange proposes to modify the 

Boston Options Exchange (‘‘BOX’’) 

Rules to clarify the treatment of Limit 

Orders that are submitted to the BOX 

during a Price Improvement Period 

(‘‘PIP’’).3 In addition, this proposal 

clarifies that certain Improvement 

Orders (as explained below) are not 

accepted by the BOX Trading Host. The 

text of the proposed rule change is 

available at the Exchange, 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 

self-regulatory organization 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 self-regulatory organization 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 

The purpose of the proposed rule 

change is to clarify the treatment of 

Limit Orders that are submitted to the 

BOX during a PIP. In addition, this 

proposal clarifies that certain 

Improvement Orders (as explained 

below) are not accepted by the BOX 

Trading Host. 

I. Background and Introduction 

In general, the BOX PIP is a threesecond auction starting at a price better 

than the current National Best Bid and 

Offer (‘‘NBBO’’), during which BOX 

Participants compete to participate in 

the execution of the Customer Order 

submitted to the PIP (the ‘‘PIP Order’’) 

by submitting specially designated 

orders called Improvement Orders in 

one penny increments that are only 

accepted in a PIP auction. A Limit 

Order, in the same series as the PIP 

Order, that is submitted to BOX during 

a PIP auction is considered an 

‘‘unrelated order’’ pursuant to the BOX 

PIP Rules,4 and under certain 

circumstances, may prematurely 

terminate the PIP or may immediately 

execute against the PIP Order. When the 

PIP is prematurely terminated, the PIP 

Order is matched against the best 

prevailing orders on BOX (whether 

Improvement Orders or unrelated orders 

received by BOX during the PIP).5 Then 

the Limit Order is filtered from trading 

through the NBBO and executed 

accordingly.6

Competing Principles Underlying the 

Treatment of Unrelated Orders in a PIP 

The BOX trading system operates 

under four main principles when 

handling the interaction of an unrelated 

Limit Order with the PIP process. 

Specifically, the BOX system: 

1. Allows the PIP to continue for as 

long as possible. The BSE believes that 

in most cases this will maximize the 

price improvement potential to the PIP 

Order. 

2. Maintains the relative price/time 

priority of all orders on the system, 

including Improvement Orders. 

3. Will not allow Improvement Orders 

to lock or cross the BOX Book. 

4. Never ‘‘holds-up’’ the processing of 

any order and seeks to execute an order 

as quickly as practicable in order to 

mitigate the risk of adverse market 

movements. 

On the few occasions when these four 

principles intersect or are in conflict, 

BSE has sought to maintain a reasonable 

balance between the interests of all 

orders while offering each order the best 

available price, without violating any 

BOX Rules or the securities laws. 

Therefore, the first principle, allowing 

the PIP to continue for as long as 

possible, will apply until it conflicts 

with any of the other three (3) 

principles. 

Consideration of the size of orders or 

the potential execution volume at any 

PIP price level is not one of these main 

principles of the BOX system. The BOX 

system does not consider the number of 

contracts that may be executed at the 

best PIP improvement price when 

determining priority or when the PIP 

should terminate. Having at least one 

contract available at the best 

improvement price is all that is 

required. 

II. Same Side Limit Orders—Premature 

Termination Events 

The submission to BOX of a Limit 

Order that is on the same side of the 

market as the PIP Order will 

prematurely terminate the PIP, allowing 

the PIP Order to be immediately 

executed against the best prevailing 

orders on BOX (whether Improvement 

Orders or unrelated orders received by 

BOX during the PIP), if at the time the 

Limit Order is submitted to BOX: 

i. The Buy (Sell) Limit Order price is 

equal to or higher (lower) than the 

National Best Offer (Bid) and either: 


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7See proposed paragraph (i) of Section 18 of 

Chapter V of the BOX Rules. 

8A Limit Order is marketable when the Buy (Sell) 

Limit Order price is equal to or higher (lower) than 

the National Best Offer (Bid). 

9See proposed paragraph (i)(i)(a) of Section 18 of 

Chapter V of the BOX Rules. 10The Trading Host will not accept Improvement 

Orders equal to or lower than $2.00 because the 

BOX system will not allow Improvement Orders to 

lock or cross the Best Bid or Offer on the BOX Book. 

See proposed Supplementary Material .03 to 

Section 18 of Chapter V of the BOX Rules and 

discussion below. 

11See proposed paragraph (i)(i)(b) of Section 18 

of Chapter V of the BOX Rules. 

(a) The BOX Best Offer (Bid) is equal 

to the National Best Offer (Bid); or 

(b) The BOX Best Offer (Bid) is higher 

(lower) than the National Best Offer 

(Bid) and the price of the best 

Improvement Order is equal to or lower 

(higher) than the National Best Offer 

(Bid); or 

ii. The Buy (Sell) Limit Order price is 

lower (higher) than the National Best 

Offer (Bid) and its limit price equals or 

crosses the price of the best 

Improvement Order.7

In short, a same side Limit Order will 

terminate the PIP if the Limit Order 

matches the best BOX price (i.e., the 

BOX BBO or the best Improvement 

Order) provided the best BOX price is 

better than or equal to the NBBO (i.e., 

the Limit Order is marketable)8 or if the 

Limit Order is non-marketable and its 

limit price is superior to the best 

Improvement Order. Therefore, the first 

factor to consider when determining 

whether the PIP will prematurely 

terminate is whether the Limit Order is 

marketable upon receipt by BOX. 

A. If the Limit Order Is Marketable 

The rule contemplates two different 

marketable Limit Order scenarios. 

1. Scenario One 

At the time of the submission of the 

Limit Order, the Buy (Sell) Limit Order 

price is equal to or higher (lower) than 

the National Best Offer (Bid) and the 

BOX Best Offer (Bid) is equal to the 

National Best Offer (Bid).9 The 

following example illustrates this 

scenario. 

Example A—

TABLE A 

NBBO BOX BBO PIP order Best IO price Limit order 

price Limit order size Early termination 

PIP order 

execution 

2.00–2.10 2.00–2.10 Buy 20k 2.07 Buy at 2.10 20 YES 2.07 

As shown in Table A, assume the 

NBBO and the BOX BBO in the relevant 

series are $2.00 bid—$2.10 offer and the 

PIP Order is a buy order for 20 

contracts. The PIP starts at $2.09 (one 

penny better than the National Best 

Offer). During the PIP auction, 

Improvement Orders are submitted to 

the PIP until the price of the best 

Improvement Order is $2.07 for 20 

contracts. Then a Limit Order to buy 20 

contracts at a limit price of $2.10 is 

submitted to BOX. In this example, 

since the Buy Limit Order price of $2.10 

is equal to the National Best Offer also 

at $2.10 and the BOX Best Offer of $2.10 

is equal to the National Best Offer at 

$2.10, then the PIP will immediately 

terminate. Upon termination, the PIP 

Order will execute in full against the 

best Improvement Order at $2.07 and 

any remaining Improvement Orders will 

be immediately cancelled. The Buy 

Limit Order will then execute against 

the BOX Offer at $2.10. The result 

would be the same regardless of the 

Limit Order size or if the best 

Improvement Order was anywhere 

between $2.09 through $2.01.10

BSE wants to maximize the price to 

the PIP Order while also minimizing 

any potential market risk to the Limit 

Order by having BOX execute the Limit 

Order as soon as a matching order is 

available at the National Best Offer 

(Bid). In order to avoid a delay of the 

Limit Order execution against the 

matching BOX Offer, which Offer might 

otherwise be cancelled, BSE has chosen 

to strike a balance among the competing 

principles and give the PIP Order the 

price improvement that is immediately 

available to the PIP Order by 

prematurely terminating the PIP 

auction. In this Example A, if a PIP is 

not underway the Limit Order could 

execute against the BOX Offer at $2.10. 

However, in this situation in which a 

PIP is underway, allowing the PIP to 

continue and immediately executing the 

Limit Order at $2.10 against the BOX 

Offer would violate BOX price priority 

rules. This is because the best 

Improvement Order at $2.07 is at a 

lower (i.e., better) price than the limit 

price of $2.10. On BOX, even though 

Improvement Orders may only execute 

against PIP Orders, price priority rules 

still apply, and no order can be 

executed at a price inferior to the best 

price available to another order. 

2. Scenario Two 

At the time of the submission of the 

Limit Order, the Buy (Sell) Limit Order 

price is equal to or higher (lower) than 

the National Best Offer (Bid), the BOX 

Best Offer (Bid) is higher (lower) than 

the National Best Offer (Bid), and the 

price of the best Improvement Order is 

equal to or lower (higher) than the 

National Best Offer (Bid).11 The 

following is an example of this market 

scenario. 

Example B—

TABLE B 

NBBO BOX BBO PIP order Best IO price Limit order 

price Limit order size Early termination 

PIP order 

execution 

2.00–2.05 2.00–2.10 Buy 20k 2.05 Buy at 2.05 20 YES 2.05 

If we take Example A above and make 

the following changes in the market 

scenario: the NBBO improves to $2.00 

bid—$2.05 offer after the PIP begins, the 

best Improvement Order is for 20 

contracts at $2.05, and a Limit Order 

with a limit price to buy at $2.05 is 

submitted to BOX, the PIP would also 

terminate prematurely. In this Example 

B, since the Buy Limit Order price of 

$2.05 is still equal to the National Best 

Offer also at $2.05 (i.e., marketable), the 

BOX Best Offer ($2.10) is higher than 

the National Best Offer ($2.05) and the 

price of the best Improvement Order 

($2.05) is equal to the National Best 

Offer at $2.05, the market conditions 

meet the requirements of the rule and 


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12Section 16(b) of Chapter V of the BOX Rules. 

13See proposed Supplementary Material .03 to 

Section 18 of Chapter V of the BOX Rules and 

discussion below. 

14See proposed Supplementary Material .03 to 

Section 18 of Chapter V of the BOX Rules and 

discussion below. 

15See proposed paragraph (i)(ii) of Section 18 of 

Chapter V of the BOX Rules. 

16Section 16(a) of Chapter V of the BOX Rules. 

17See proposed Supplementary Material .03 to 

Section 18 of Chapter V of the BOX Rules and 

discussion below. 

the PIP will immediately terminate. The 

PIP Order will execute in full against 

the best Improvement Order at $2.05 

and any remaining Improvement Orders 

will be immediately cancelled. Because 

the Limit Order matches the National 

Best Offer at $2.05 the Limit Order 

would be exposed internally on BOX at 

$2.05 pursuant to the Filter Rule.12

As in Scenario One, BSE wants to 

maximize the price to the PIP Order 

while also limiting the market risk to 

the Limit Order, by having BOX give the 

Limit Order the opportunity to execute 

as soon as practicable at the National 

Best Offer (Bid). In this case, because 

the BOX Offer at $2.10 is inferior to the 

National Best Offer at $2.05, the Limit 

Order would ordinarily (i.e., absent a 

PIP auction underway) be exposed at 

$2.05 pursuant to the Filter Rule. 

However, if the BOX trading system 

were to continue the PIP, no further 

price improvement would be possible 

when the best Improvement Order is 

$2.05. The Trading Host could not 

accept Improvement Orders equal to or 

lower than the $2.05 Limit Order price 

as long as the Limit Order is being 

exposed because the Limit Order would 

have priority and the BOX system will 

not allow Improvement Orders to lock 

or cross the opposite side BOX Best Bid 

of $2.05.13

Alternatively, if BOX were to hold the 

unrelated Limit Order until the end of 

the PIP auction this could cause the 

Limit Order to lose an opportunity to 

trade. Rather, BSE has chosen to strike 

a balance among the competing 

principles by giving the PIP Order the 

then-available price improvement and 

prematurely terminating the PIP. 

If the best Improvement Order was 

only at $2.07 in Example B, the best 

Improvement Order price would be 

higher than the National Best Offer price 

of $2.05, and the PIP would continue 

because it does not create a situation 

that violates BOX price/time priority 

rules. The Limit Order would be 

exposed internally on BOX at $2.05. 

Although the PIP continues, the Trading 

Host would not accept Improvement 

Orders equal to or lower than the $2.05 

Limit Order price because it will not 

allow Improvement Orders to lock or 

cross the opposite side order exposed on 

the BOX Book.14

B. If the Limit Order Is Non-Marketable 

The PIP auction will also prematurely 

terminate early when at the time of the 

submission, the Buy (Sell) Limit Order 

price is lower (higher) than the National 

Best Offer (Bid) (i.e., non-marketable) 

and the price of the Limit Order equals 

or crosses the price of the best 

Improvement Order.15 The following is 

an example of this market scenario. 

Example C—

TABLE C 

NBBO BOX BBO PIP order Best IO price Limit order 

price Limit order size Early termination 

PIP order 

execution 

2.00–2.10 2.00–2.10 Buy 20k 2.05 Buy/Sell at 2.05 20 YES 2.05 

As shown in Table C, assume the 

NBBO and the BOX BBO are $2.00 bid—

$2.10 offer and the PIP Order is a buy 

order for 20 contracts. The PIP starts at 

$2.09 (one penny better than the 

National Best Offer). During the PIP 

auction, Improvement Orders are 

submitted to the PIP until the price of 

the best Improvement Order is $2.05 for 

20 contracts. Then a Limit Order to buy 

20 contracts at a limit price of $2.05 is 

submitted to BOX. In this Example C, 

since the Buy Limit Order price of $2.05 

is lower than the National Best Offer at 

$2.10 and the limit price equals or 

crosses the price of the best 

Improvement Order (i.e., $2.05), then 

the PIP will immediately terminate. The 

PIP Order will execute in full against 

the best Improvement Order at $2.05 

and any remaining Improvement Orders 

will be immediately cancelled. The Buy 

Limit Order will then be placed on the 

BOX Book at $2.05. 

As in the other scenarios, BSE wants 

to maximize the price to the PIP Order 

and also limit the market risk to the 

Limit Order, by having BOX display the 

Limit Order and giving the Limit Order 

the opportunity to execute as soon as 

practicable. In this case, because the 

Buy Limit Order at $2.05 is better than 

the current BOX Best Bid at $2.00, the 

Limit Order must be displayed at $2.05 

pursuant to the Display Rule.16

However, if the BOX trading system 

were to continue the PIP, it could create 

a situation very similar to the one 

explained in Scenario 2 and Example B 

above. Specifically, no further price 

improvement would be possible when 

the best Improvement Order is $2.05. 

The Trading Host could not accept 

Improvement Orders equal to or lower 

than the $2.05 Limit Order price as long 

as the Limit Order is being displayed 

because the Limit Order would have 

priority and the BOX system will not 

allow Improvement Orders to lock or 

cross the opposite side BOX Best Bid of 

$2.05.17

For clarification purposes only, the 

following is a similar scenario in which 

the PIP would not prematurely 

terminate. 

Example D—

TABLE D 

NBBO BOX BBO PIP order Best IO price Limit order 

price Limit order size Early termination 

PIP order 

execution 

2.00–2.10 2.00–2.10 Buy 20k 2.07 Buy at 2.05 20 NO 2.07 or 2.06 

Assume we take Example C above and 

make the following changes in the 

market scenario: Improvement Orders 

are submitted to the PIP until the price 

of the best Improvement Order is $2.07 

for 20 contracts. Upon receipt of the Buy 

Limit Order, there wouldn’t be an order 

on BOX that the Limit Order could 

execute against and the Limit Order 


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18The BOX Trading Host is programmed to 

continue to accept Improvement Orders at $2.06 or 

higher and will not accept Improvement Orders at 

$2.05 or lower unless the Limit Order is cancelled, 

in which case the Trading Host will begin to accept 

them again. 

19For an opposite side Limit Order, it is 

marketable when the Sell (Buy) Limit Order price 

is equal to or lower than the National Best Bid 

(Offer). 

20The remainder of the Limit Order, if any, is 

filtered from trading through the NBBO pursuant to 

the Filter Rule and executed accordingly. The 

remainder of the PIP Order, if any, continues in the 

PIP process. 

21The Limit Order could be cancelled before the 

end of the PIP, in which case the Limit Order would 

not be available to execute with the PIP Order. 

would then be placed on the BOX Book 

at $2.05 and displayed as the BOX Best 

Bid. Because the Improvement Order at 

$2.07 is higher than the $2.05 Limit 

Order price, the PIP will continue. BOX 

will not accept Improvement Orders 

lower than $2.06 18 because this would 

lock or cross the BOX Best Bid (the 

Limit Order at $2.05). 

III. Opposite Side Limit OrderImmediate Execution 

The submission to BOX of a Limit 

Order on the opposite side of a PIP 

Order will immediately execute against 

a PIP Order when the Sell (Buy) Limit 

Order price is equal to or crosses the 

National Best Bid (Offer) and; 

i. The BOX Best Bid (Offer) is equal 

to the National Best Bid (Offer); or 

ii. The BOX Best Bid (Offer) is lower 

(higher) than the National Best Bid 

(Offer) and neither the best 

Improvement Order nor BOX Best Offer 

(Bid) is equal to or crosses the National 

Best Bid (Offer). 

In short, the opposite side Limit Order 

will immediately execute against a PIP 

Order when the Limit Order could 

match the BOX Best Bid (Offer) and/or 

the National Best Bid (Offer) and the 

Limit Order is superior to the best 

Improvement Order. Whether the 

opposite side Limit Order is 

marketable 19 or not upon receipt by 

BOX is the first factor to consider when 

determining whether the Limit Order 

will immediately execute against the 

PIP Order. If the Limit Order is 

marketable and the best Improvement 

Order is not equal to or lower (higher) 

than the National Best Bid (Offer), then 

the Limit Order immediately executes 

against the PIP Order up to the lesser of 

(a) the size of the PIP Order, or (b) the 

size of the Limit Order.20 The execution 

price of the PIP Order against the Limit 

Order in this case will be determined by 

whether the BOX Best Bid (Offer) is 

equal to the National Best Bid (Offer) or 

it is lower (higher) than the National 

Best Bid (Offer) at the time of execution. 

Where the Limit Order is for at least the 

full size of the PIP Order, the PIP is 

prematurely terminated with the 

cancellation of all the Improvement 

Orders. 

A. If the BOX BBO Equals the NBBO 

If the BOX Best Bid (Offer) is equal to 

the National Best Bid (Offer) at the time 

of the execution, then the execution 

price will be one penny better than the 

National Best Bid (Offer). 

Example E—

TABLE E 

NBBO BOX BBO PIP order Best IO price Limit order 

price Limit order size 

Execute 

against PIP 

order 

PIP order 

execution 

2.00–2.10 2.00–2.10 Buy 20k 2.07 Sell at 2.00 20 YES 2.01 

As shown in Table E, assume the 

NBBO and the BOX BBO in the relevant 

series is $2.00 bid—$2.10 offer and the 

PIP Order is a buy order for 20 

contracts. The PIP starts at $2.09 (one 

penny better than the National Best 

Offer). During the PIP interval, 

Improvement Orders are submitted to 

the PIP until the price of the best 

Improvement Order is $2.07. Then, 

assume a Limit Order to sell 20 

contracts with a limit price of $2.00 is 

submitted to BOX. Because the Sell 

Limit Order price is equal to the 

National Best Bid at $2.00 (i.e., 

marketable) and the BOX Best Bid of 

$2.00 is equal to the National Best Bid, 

the Limit Order will be immediately 

executed in full against the PIP Order at 

$2.01, one penny better than the 

National Best Bid. Since the Limit Order 

is the same size as the PIP Order, the PIP 

terminates as well in this example. Any 

Improvement Orders will be 

immediately cancelled. 

BSE wants to maximize the price to 

the PIP Order and also limit the market 

risk to the Limit Order, by having BOX 

give the Limit Order the opportunity to 

execute as soon as a matching order is 

available. In this case the PIP Order is 

immediately available to execute against 

the Limit Order at $2.01, which 

provides price improvement to both the 

PIP Order and the Limit Order. 

‘‘Holding’’ the Limit Order until the PIP 

has run its full course might cause the 

Limit Order to miss the $2.00 BOX Best 

Bid which could be cancelled or 

modified during the lapse. Also, the PIP 

Order could have missed the 

opportunity to receive an execution at 

$2.01. In contrast, allowing the PIP to 

continue without immediately 

executing the Limit Order against the 

PIP Order would cause a violation of 

BOX priority rules. First, in this 

example, executing the Limit Order 

against the PIP Order at the National 

Best Bid of $2.00 would violate the time 

priority of the $2.00 order on the BOX 

Book that is the BOX Best Bid price. 

Additionally, if the Limit Order did not 

immediately execute against the PIP 

Order, the Limit Order would have been 

executed at $2.00 with the BOX Best 

Bid, which would be a priority violation 

of the PIP Order, which can trade at 

$2.01. In order to not violate priority 

rules and also to not hold up the Limit 

Order from executing against a matching 

order, BSE has chosen to strike a 

balance among the competing principles 

and give the PIP Order as well as the 

Limit Order the price improvement that 

is immediately available. 

In contrast, the PIP would continue if 

the Limit Order in Example E had a 

limit price of $2.05 instead of $2.00, 

making it non-marketable, in which case 

the Limit Order would be placed on the 

BOX Book and displayed. Meanwhile, 

BOX gives the PIP Order the 

opportunity for further improvement. 

Since the Limit Order price of $2.05 is 

better than the best Improvement Order 

at $2.07, the Limit Order might be 

available to execute against the PIP 

Order at the end of the PIP process.21

Example F—


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TABLE F 

NBBO BOX BBO PIP order Best IO price Limit order price Limit order size 

Execute 

against PIP 

order 

PIP 

order 

execution 

2.00–2.10 2.00–2.10 Buy 20k 2.07 Sell at 2.00 30 YES 2.01 

If we take Example E above and make 

the following changes in the market 

scenario: A Limit Order to sell 30 

contracts with a limit price of $2.00 is 

submitted to BOX, the Limit Order 

would be partially executed against the 

PIP Order at $2.01 and the remainder of 

the Limit Order (10 contracts) would be 

filtered from trading through the NBBO 

pursuant to the Filter Rule and execute 

with the size of BOX Bid at $2.00. 

However, if in this Example F the Limit 

Order was a Limit Order to sell 10 

contracts, the Limit Order would be 

executed in full against the PIP Order at 

$2.01, and the remainder of the PIP 

Order would continue in the PIP 

process. 

B. The BOX BBO Does Not Equal the 

NBBO 

When the BOX Best Bid (Offer) is 

lower (higher) than the National Best 

Bid (Offer) and neither the best 

Improvement Order nor BOX Best Offer 

(Bid) is equal to or crosses the National 

Best Bid (Offer), the PIP Order will 

execute against the Limit Order and the 

execution price will be the National 

Best Bid (Offer). 

Example G —

TABLE G 

NBBO BOX BBO PIP order Best IO price Limit order 

price Limit order size 

Execute 

against PIP 

order 

PIP order 

execution 

2.05–2.10 2.00–2.10 Buy 20k 2.07 Sell at 2.00 15 YES 2.05 

As shown in Table G, assume the 

NBBO in the relevant series is $2.05 bid 

and $2.10 offer and the BBO is at $2.00 

bid ¥$2.10 offer, the PIP Order is a buy 

order for 20 contracts, and the best 

Improvement Order is $2.07. Then an 

opposite side unrelated Limit Order to 

sell 15 contracts at $2.00 is received. 

Because the Sell Limit Order price is 

lower than or equal to the National Best 

Bid at $2.05 (i.e., marketable), the BOX 

Best Bid of $2.00 is lower than the 

National Best Bid at $2.05, and the best 

Improvement Order at $2.07 does not 

equal or cross the National Best Bid at 

$2.05, the Sell Limit Order will be 

immediately executed in full against the 

PIP Order at the National Best Bid of 

$2.05. The PIP will proceed to duration 

for 5 contracts, which may or may not 

receive additional Improvement Orders 

lower than the $2.07 price (perhaps to 

the best possible price for the PIP Order 

of $2.01). 

BSE wants to maximize the price to 

the PIP Order while limiting the market 

risk to the Limit Order, by having BOX 

give the Limit Order the opportunity to 

execute as soon as a matching order is 

available. In this case it is the PIP Order 

that is immediately available at the 

price of $2.05, which provides price 

improvement to both the PIP Order and 

the Limit Order. This situation occurs 

because the BOX Best Bid of $2.00 is 

lower than the National Best Bid of 

$2.05, so pursuant to the Filter Rule, the 

BOX system will seek to have the Limit 

Order executed at the National Best Bid 

price of $2.05. Since this price is lower 

than the BOX Best Offer ($2.10), and 

also lower than the best Improvement 

Order ($2.07), the Limit Order is also 

the best price available for the PIP 

Order. Therefore, in order to maximize 

the price improvement to the PIP Order 

the unrelated opposite side Limit Order 

will immediately execute against the 

PIP Order ensuring the PIP Order a 

$2.05 price for 15 contracts. 

The benefit of this policy can also be 

shown by contrasting it with the 

possible outcomes if BOX allowed the 

PIP to continue without immediately 

executing the Limit Order against the 

PIP Order. In this situation, if the Limit 

Order does not execute against the PIP 

Order, then the Limit Order would be 

exposed on the BOX Book at $2.05 to 

seek a buy order at $2.05. However, the 

Limit Order could be cancelled prior to 

the receipt of a response, in which case 

the PIP Order would end up trading 

with the Improvement Order at an 

inferior price ($2.07) to the Limit Order 

price ($2.05). Alternatively, allowing the 

Limit Order to be exposed on the BOX 

Book at $2.05 could result in the 

submission of a responsive buy order, 

which would stop the PIP at that point 

because the buy order is a same side 

unrelated order. Therefore, it is more 

reasonable to avoid this unnecessary, 

and potentially detrimental, delay and 

instead follow Example G by 

immediately executing the PIP Order 

and the Limit Order at $2.05 upon 

receipt of the Limit Order. 

C. Addition Example—Opposite Side 

Limit Order 

In order to further clarify the 

operation of the rule for opposite side 

Limit Orders, consider the following 

example where the Limit Order does not 

immediately execute against the PIP 

Order. 

Example H—


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22This occurs even if the aggregate quantity of the 

best Improvement Orders at $2.05 or lower do not 

equal the full size of the PIP Order (i.e., the system 

does not check to determine that the combined 

quantity of all the Improvement Orders at $2.05 or 

lower is for the full size quantity of the PIP Order). 

See Example I. 

23Pursuant to Paragraph (e)(iii) of Section 18 of 

Chapter V of the BOX Rules. 

TABLE H 

NBBO BOX BBO PIP 

order Best IO price Limit order price Limit order size 

Execute 

against PIP 

order 

PIP order 

execution 

2.05–2.10 2.00–2.10 Buy 20k 2.05 Sell at 2.00 15 NO 2.05 

Take Example G above and make the 

following changes in the market 

scenario: The price of the best 

Improvement Order is $2.05. The Limit 

Order will not immediately execute 

against the PIP Order at $2.05 because 

the PIP Order is already likely to receive 

at least a partial execution at $2.05 with 

the best Improvement Order.22

Therefore, the PIP continues in order to 

seek further price improvement with the 

unrelated Limit Order being exposed as 

a sell at $2.05 in accordance with the 

Filter Rule. 

IV. Matching Unrelated Orders 

In order to further clarify the 

operation of the rule for unrelated Limit 

Orders as discussed above, consider the 

following example where the first 

unrelated Limit Order does not 

terminate the PIP and a second 

unrelated order that could match the 

first is received by BOX. 

Example I—

TABLE I 

NBBO BOX BBO PIP order Best IO 

price IO size #1 Limit order price 

#1 Limit 

order size 

#2 Limit 

order price 

#2 Limit 

order size 

PIP order 

execution 

2.05–2.10 2.00–2.10 Buy 20k 2.05 5 Sell at 2.00 20 Buy at 2.05 20 2.05 

Take Example H above and make the 

following changes in the market 

scenario: The size of the best 

Improvement Order at $2.05 is only 5 

contracts; a ‘‘same side’’ unrelated order 

is also received (Limit Order #2). As in 

Example H, the ‘‘opposite side’’ Limit 

Order #1 will not immediately execute 

against the PIP Order at $2.05 because 

the PIP Order is already likely to receive 

at least a partial execution at $2.05 with 

the best Improvement Order (in this 

case 5 contracts). Therefore, the PIP 

continues in order to seek further price 

improvement with the unrelated Limit 

Order #1 being exposed as a sell at $2.05 

in accordance with the Filter Rule. 

However, if a buy order for $2.05 is 

received in response to the exposure of 

the sell Limit Order #1, this Limit Order 

#2 would also be considered an 

unrelated same side Limit Order. As in 

Example C, since the buy Limit Order 

price of $2.05 is lower than the National 

Best Offer at $2.10 and the limit price 

equals the price of the best 

Improvement Order ($2.05), then the 

PIP will immediately terminate. As 

stated above, when the PIP is 

prematurely terminated, the PIP Order 

is matched against the best prevailing 

orders on BOX (whether Improvement 

Orders or unrelated orders received by 

BOX during the PIP).23 Therefore, in 

this Example I the PIP Order will 

execute in full—5 contracts against the 

best Improvement Order at $2.05 and 

the remaining 15 contracts against the 

exposed opposite side unrelated Limit 

Order #1 at $2.05 because the Limit 

Order was next in time priority. Since 

the two unrelated orders match, the 

remaining size of Limit Order #1 will 

then execute 5 contracts against Limit 

Order #2 at $2.05. The remaining 15 

contracts of Limit Order #2 will then be 

placed on the BOX Book and displayed 

at $2.05. 

Additional Matching Unrelated Order 

Examples 

Example J—

TABLE J 

NBBO BOX BBO PIP order Best IO price Limit order 

price Limit order size 

Execute against 

second limit 

order 

PIP order 

execution 

2.00–2.10 2.00–2.10 Buy 20k 2.07 Sell at 2.05 20 NO 2.05 

As shown in Table J, assume the 

NBBO and the BOX BBO in the relevant 

series is $2.00 bid—$2.10 offer and the 

PIP Order is a buy order for 20 

contracts. The PIP starts at $2.09 (one 

penny better than the National Best 

Offer). During the PIP interval, 

Improvement Orders are submitted to 

the PIP until the price of the best 

Improvement Order is $2.07. Then, 

assume a Limit Order to sell 20 

contracts (i.e., opposite side of the 

market from the PIP Order) with a limit 

price of $2.05 is submitted to BOX. The 

PIP would continue because the Sell 

Limit Order price is higher than the 

National Best Bid, making it nonmarketable, in which case the Limit 

Order would be placed on the BOX 

Book and displayed as the new BOX 

Best Offer (and new National Best Offer) 

at $2.05. Meanwhile, BOX gives the PIP 

Order the opportunity for further 

improvement. Since the Limit Order 

price of $2.05 is better than the best 

Improvement Order at $2.07, the Limit 

Order might be available to execute 

against the PIP Order at the end of the 

PIP process. Then a Limit Order to buy 

20 contracts (i.e. on the same side of the 


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24 15 U.S.C. 78f(b). 

25 15 U.S.C. 78f(b)(5). 

market as the PIP Order), with a limit 

price of $2.05 is submitted to BOX. 

Since the buy Limit Order price of $2.05 

is equal to the new National Best Offer, 

then the PIP immediately terminates. 

The Sell Limit Order would be executed 

with the PIP Order in full at $2.05. The 

Buy Limit Order would be placed on the 

BOX Book and displayed as the BOX 

Best Bid at $2.05. 

Example K—

TABLE K 

NBBO BOX BBO PIP order Best IO price Limit order 

price Limit order size 

Execute against 

second limit 

order 

PIP order 

execution 

2.00–2.10 2.00–2.10 Buy 20k 2.04 Sell at 2.05 20 YES 2.05 

As shown in Table K, assume the 

NBBO and the BOX BBO in the relevant 

series is $2.00 bid—$2.10 offer and the 

PIP Order is a buy order for 20 

contracts. The PIP starts at $2.09 (one 

penny better than the National Best 

Offer). The only difference from 

Example J is that during the PIP interval 

Improvement Orders are submitted to 

the PIP until the price of the best 

Improvement Order is $2.04. Then, 

assume a Limit Order to sell 20 

contracts (i.e., opposite side of the 

market from the PIP Order) with a limit 

price of $2.05 is submitted to BOX. The 

PIP would continue because the Sell 

Limit Order price is higher than the 

National Best Bid, making it nonmarketable, in which case the Limit 

Order would be placed on the BOX 

Book and displayed as the new BOX 

Best Offer (and new National Best Offer) 

at $2.05. Meanwhile, BOX gives the PIP 

Order the opportunity for further 

improvement. Since the Limit Order 

price of $2.05 is worse than the best 

Improvement Order at $2.04, the Limit 

Order would not execute against the PIP 

Order at the end of the PIP process. 

Then a Limit Order to buy 20 contracts 

(i.e. on the same side of the market as 

the PIP Order), with a limit price of 

$2.05 is submitted to BOX. Since the 

buy Limit Order price of $2.05 is equal 

to the new National Best Offer, then the 

PIP immediately terminates. The best 

Improvement Order would be executed 

with the PIP Order in full at $2.04. The 

Sell Limit Order would then execute 

with the Buy Limit Order in full at 

$2.05. 

V. Improvement Order Clarification 

The BOX Trading Host does not 

accept Improvement Orders that lock or 

cross the BOX Book on the same side of 

the market as the PIP Order. To accept 

such Improvement Orders would violate 

the price priority of the resting orders 

on the BOX Book. 

VI. Reports 

BSE is currently obligated to provide 

certain reports to the Commission that 

provide data about BOX-Top and 

Market Orders that terminate the PIP 

prematurely, as well as BOX-Top and 

Market Orders that immediately execute 

against a PIP Order. BSE represents that 

it will provide the same information for 

Limit Orders that terminate the PIP 

prematurely or immediately execute 

against a PIP Order. 

2. Statutory Basis 

The Exchange believes that the 

proposal is consistent with the 

requirements of Section 6(b) of the 

Act,24 in general, and Section 6(b)(5) of 

the Act,25 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 by clarifying the 

treatment of Limit Orders that are 

submitted to the BOX during a PIP and 

that certain Improvement Orders are not 

accepted by the BOX Trading Host. 

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 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 the Exchange consents, 

the Commission will: 

(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 rulecomments@sec.gov. Please include File 

Number SR–BSE–2006–03 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–2006–03. 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 


sroberts on PROD1PC70 with NOTICES
Federal Register / Vol. 72, No. 9 / Tuesday, January 16, 2007 / Notices 1793 

26 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2The Commission has modified the text of the 

summaries prepared by DTC. 

3 15 U.S.C. 78q–1. 

4 15 U.S.C. 78s(b)(3)(A)(iii). 

5 17 CFR 240.19b–4(f)(4). 

6For purposes of calculating the 60-day period 

within which the Commission may summarily 

abrogate the proposed rule change under Section 

19(b)(3)(C) of the Act, the Commission considers 

the period to commence on January 5, 2007, the 

date on which the last amendment to the proposed 

rule change was filed with the Commission. 15 

U.S.C. 78s(b)(3)(C). 

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 File 

Number SR–BSE–2006–03 and should 

be submitted on or before February 6, 

2007. 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.26

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E7–406 Filed 1–12–07; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–55058; File No. SR–DTC–

2006–17] 

Self-Regulatory Organizations; The 

Depository Trust Company; Notice of 

Filing and Immediate Effectiveness of 

Proposed Rule Change Adding the 

Security Holder Report Service to the 

Security Position Report Service 

January 8, 2007. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’),1 notice is hereby given that on 

November 17, 2006, The Depository 

Trust Company (‘‘DTC’’) filed with the 

Securities and Exchange Commission 

(‘‘Commission’’) and on January 5, 2007, 

amended the proposed rule change 

described in Items I, II, and III below, 

which items have been prepared 

primarily by DTC. The Commission is 

publishing this notice to solicit 

comments on the proposed rule change 

from interested parties. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The purpose of the proposed rule 

change is to add a new service, the 

Security Holder Report (‘‘SHR’’) service, 

to DTC’s Security Position Report 

(‘‘SPR’’) service. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, 

DTC 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. DTC has prepared 

summaries, set forth in sections (A), (B), 

and (C) below, of the most significant 

aspects of these statements.2

(A) Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

SPRs are reports prepared by DTC that 

show for each issuer whose securities 

are eligible for DTC’s book entry 

services the identity of each DTC 

participant having that issuer’s 

securities credited to its participant 

account and the quantity of that issuer’s 

securities that the DTC participant has 

credited to its participant account as of 

a selected date. Most securities are 

registered with the issuer’s transfer 

agent in the name of DTC’s nominee, 

Cede & Co. Issuers rely on DTC to 

provide them with SPR information. 

DTC also provides SPR information to 

trustees and authorized third party 

agents. These entities typically need 

SPR information provided by DTC in 

order to properly conduct proxy, record 

date, and voting rights related functions. 

Some authorized users of the SPR 

service also perform regulatory 

reporting functions for which they 

require the participants’ identities but 

do not need the corresponding quantity 

of securities credited to each 

participant. Currently, such users are 

required to order from DTC an SPR, 

which costs $120 per CUSIP. In order to 

mitigate user expenses, DTC is 

proposing to offer the SHR service as 

part of its SPR service. The SHR will 

allow authorized users to obtain reports 

with only participant identity. SHRs 

will result in lower production costs to 

DTC and in greater protection of 

participant information and will allow a 

lower fee to be charged than that for 

standard SPRs. The SHR fees are: 

(i) $55.00 per CUSIP for the first 500 

CUSIPS and 

(ii) $6.00 per CUSIP for requests of 

501 or more CUSIPS. 

The proposed rule change is 

consistent with the requirements of 

Section 17A of the Act 3 and the rules 

and regulations thereunder applicable to 

DTC because it will foster cooperation 

and coordination with persons engaged 

in the clearance and settlement of 

securities transactions and, in general, 

protects investors and the public 

interest. 

(B) Self-Regulatory Organization’s 

Statement on Burden on Competition 

DTC does not believe that the 

proposed rule change will have any 

impact on or impose any burden on 

competition. 

(C) Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

No written comments relating to the 

proposed rule change have been 

solicited or received. DTC will notify 

the Commission of any written 

comments received by DTC. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

The foregoing rule change has become 

effective upon filing pursuant to Section 

19(b)(3)(A)(iii) of the Act 4 and Rule 

19b–4(f)(4) 5 thereunder because the 

proposed rule change effects a change in 

an existing service of DTC that (i) does 

not adversely affect the safeguarding of 

securities or funds in the custody or 

control of DTC or for which it is 

responsible and (ii) does not 

significantly affect the respective rights 

or obligations of DTC or persons using 

the service. At any time within sixty 

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 furtherance of the 

purposes of the Act.6

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 rulecomments@sec.gov. Please include File 


sroberts on PROD1PC70 with NOTICES