[Federal Register Volume 72, Number 10 (Wednesday, January 17, 2007)]
[Notices]
[Pages 2047-2048]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-526]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55073 File No. SR-BSE-2006-48]


Self-Regulatory Organizations; Boston Stock Exchange, Inc.; Order 
Granting Approval to Proposed Rule Change To Implement a Quote 
Mitigation Plan

January 9, 2007.

I. Introduction

    On November 15, 2006, the Boston Stock Exchange, Inc. (``BSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend the Boston Options Exchange (``BOX'') 
Rules to add a Quote Mitigation Plan. The proposed rule change was 
published for comment in the Federal Register on November 27, 2006.\3\ 
The Commission received one comment letter on the proposed rule 
change.\4\ This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 54779 (November 17, 
2006), 71 FR 68655.
    \4\ See letter to Nancy Morris, Secretary, Commission, from 
Christopher Nagy, Chair, SIFMA Options Committee (``SIFMA''), dated 
December 20, 2006. SIFMA supports BSE's quote mitigation proposal 
discussed herein and recommends its implementation on an industry-
wide basis. Specifically, SIFMA believes that the adoption of an 
industry-wide, uniform ``holdback timer'' proposal, like the 
strategy approved by this order, would provide the most effective 
means of quote mitigation. SIFMA expressed concern that a lack of 
uniformity among quote mitigation strategies implemented by the 
various options exchanges may impose a burden on member firms and 
result in confusion among market participants. Additional concerns 
raised in SIFMA's December 20, 2006 comment letter relating to other 
proposed rule changes filed by the options exchanges will be more 
fully addressed in any subsequent releases issued by the Commission.
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II. Description of the Proposal

    The purpose of the proposed rule change is to mitigate quote 
traffic and address quote capacity issues by, under certain 
circumstances, ``bundling'' quotes so that options data is submitted to 
the Options Price Reporting Authority (``OPRA'') over short intervals 
rather than on a continuous basis. Specifically, BOX proposes to 
mitigate quotes in the following manner:
    <bullet> BOX proposes to ``let the market decide'' which 
instruments would be considered to be ``less interesting'' by basing 
this determination on the open interest in contracts at the Options 
Clearing Corporation for each instrument. Those series with lower open 
interest are likely to be of less interest to options traders and 
investors. The precise threshold of open interest which will determine 
whether the broadcast of a series is subject to mitigation or not will 
vary according to the degree BOX is meeting its stated goals of 
reducing overall traffic. BOX anticipates that this threshold could be 
as high as 300 to 400 contracts, but that it will be no lower than 50 
contracts. BOX does not propose to apply mitigation to instruments 
which have been listed for fewer than ten trading sessions, regardless 
of the open interest.
    <bullet> BOX would ``bundle'' at intervals of up to 1,000 
milliseconds (and no less than 200 milliseconds) any changes to its 
broadcast for those instruments which have fallen below the threshold 
in the previous point.
    <bullet> BOX would use variable rates of ``bundling'' delays for 
the three different types of broadcast updates: changes in price, 
increases in quantity without a change in price, and decreases in 
quantity without a change in price. Under this proposal, changes in 
prices may be subject to less delay than changes to quantity at same 
price. For example, BOX may apply a ``bundling interval'' of 400 
milliseconds to updates regarding a price change while using a figure 
of 1,000 milliseconds for updates concerning only a change in quantity 
at the same price. The appropriate mix will be determined by the 
relative success BOX is meeting in its overall goals of traffic 
reduction.
    The Exchange does not propose to apply the above-described bundling 
to message traffic relating to price improvement auctions or NBBO 
exposure mechanisms, nor to trade reporting messages. Furthermore, no 
bundling of quotes is proposed for inbound orders and quotes which are 
sent to BOX by users. Instead,

[[Page 2048]]

messaging will be bundled only for outbound updates.
    The Exchange believes this proposal is an optimal trade-off between 
costs and benefits and that it is fully compliant with its firm quote 
obligations. BOX has indicated that its target reduction in outbound 
peak traffic is 15% to 20% of what the traffic would have been had no 
mitigation been applied. Box has also represented that the reduction in 
overall traffic, as opposed to peaks, will be lower, but still 
significant, with a target of 8% to 10%.

III. Discussion

    After careful review of the proposal and consideration of the 
comment letter, the Commission finds that the proposed rule change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange.\5\ 
In particular, the Commission finds that the proposal is consistent 
with Section 6(b)(5) of the Act,\6\ which requires, among other things, 
that the rules of an exchange be designed to promote just and equitable 
principles of trade, 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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    \5\ In approving this proposed rule change the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \6\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the Exchange's proposal to ``bundle'' 
quotes should reduce the volume of options quote traffic disseminated 
to OPRA and help to address capacity concerns on the Exchange. Because 
the contemplated delays in data transmission are very brief, the 
Commission does not believe that ``bundling'' quotes will adversely 
affect market transparency or negatively affect market participants or 
investors. Furthermore, the Commission believes that BOX's quote 
mitigation proposal is designed to provide the Exchange with a 
mechanism, that should reduce overall peak market data traffic with a 
relatively small impact on the quality of information available to 
options market users.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\7\ that the proposed rule change (SR-BSE-2006-48), be, and hereby 
is approved.
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    \7\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-526 Filed 1-16-07; 8:45 am]
BILLING CODE 8011-01-P