Document ID: SEC-2008-0329-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Boston Stock Exchange, Inc.
Posted Date: 2008-03-03T05:00Z

[Federal Register: March 3, 2008 (Volume 73, Number 42)]
[Notices]               
[Page 11452-11454]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03mr08-101]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57383; File No. SR-BSE-2008-05]

 
Self-Regulatory Organizations; Boston Stock Exchange, Inc.; 
Notice of Filing of a Proposed Rule Change, as Modified by Amendment 
No. 5, To Amend the Rules of the Boston Options Exchange Related to 
Obvious Error Procedures

February 26, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\

[[Page 11453]]

notice is hereby given that on January 29, 2008, 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. On February 21, 2008, the 
Exchange filed Amendment No. 1 to the proposal. On February 22, 2008, 
the Exchange submitted Amendment Nos. 2, 3, and 4, and withdrew 
Amendment Nos. 1, 2, and 3 to the proposal. On February 26, 2008, the 
exchange withdrew Amendment No. 4 and submitted Amendment No. 5 to the 
proposal.\3\ The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 5 replaces and supersedes the original filing 
and all previous amendments in their entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes amending the Boston Options Exchange 
(``BOX'') Rules related to Obvious Error procedures. The text of the 
proposed rule change is available at the Exchange, the Commission's 
Public Reference Room, and http://www.bostonstock.com.

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

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

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

1. Purpose
    The BSE seeks to amend the BOX Rules \4\ to modify the process for 
determining whether to ``adjust or bust'' certain trades on the BOX 
market. The Exchange believes that modifying this process will help to 
better ensure a fair and orderly market.
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    \4\ Capitalized terms not otherwise defined herein shall have 
the meanings prescribed under the BOX Rules.
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    Currently, BOX has an established process whereby, in the event 
that a suspected Obvious Error has occurred during trading on the BOX 
market, a request for review may be made by one or both of the parties 
involved. This request for review notifies the Market Regulation Center 
(``MRC'') of the existence of a suspected erroneous transaction and 
initiates a review process. If the MRC determines that the transaction 
does in fact represent an Obvious Error, the transaction is either 
adjusted or busted. Depending on the parties involved in the 
transaction, the adjustments are either set according to pre-determined 
increments or by mutual agreement between the parties.
    The Exchange states that, currently, the MRC, as defined in the BOX 
Rules \5\ as the ``Exchange's facilities for surveilling and regulating 
the conduct of business for options on BOX,'' is involved in these 
Obvious Error requests and determinations. This amendment to the BOX 
Rules will substitute the BOX Market Operations Center (``MOC'') \6\ 
for the MRC as the entity that first receives these Obvious Error 
requests. The MOC is already the primary contact for Options 
Participants when communicating with the BOX market regarding trading 
matters. Under this proposal, the MOC, as the primary contact, will 
promptly notify the MRC when an Obvious Error request is received, 
since the MRC will continue to be the body that makes adjust or bust 
decisions.
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    \5\ See Section 1 of Chapter I of the BOX Rules.
    \6\ This proposal will also add the MOC to the definitions 
section of the BOX Rules. See, Section 1 of Chapter I of the BOX 
Rules. The remainder of the changes to the definition section fall 
into two categories. The first is switching the current Sections 31 
and 32 so that they are in alphabetical order. The second is, after 
inserting the MOC as a definition, renumbering the remaining 
definitions.
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    Additionally, the current BOX Obvious Error rules refer to 
transactions involving Market Makers ``on BOX.'' The proposed amendment 
to the BOX Rules will remove the language ``on BOX.'' This proposed 
change would provide an additional avenue of relief for non-BOX market 
makers, resulting in the Obvious Error Rules applying not only to BOX 
Market Makers, but also to market makers on other exchanges whose 
orders are designated with a market maker account type in the BOX 
Trading Host. Currently, according to Section 20(d)(ii)(1) of Chapter V 
of the BOX Rules, only BOX Market Makers involved in an erroneous 
transaction with another BOX Market Maker may avail themselves to the 
pre-determined obvious error Theoretical Price plus or minus adjustment 
levels. This amendment, if approved, would maintain and expand the 
choices available to a non-BOX market maker involved in an erroneous 
transaction. Just as a BOX Market Maker, a non-BOX market maker would 
have the choice of agreeing with the counter party to bust the 
transaction, agreeing to adjust to an agreed upon price for the 
transaction, or now having the transaction adjusted to the pre-
determined levels.
    This amendment to the BOX Rules will also establish an additional 
course of action if it is determined that an Obvious Error has 
occurred. The current BOX Rules allow for an adjustment in the 
transaction price where both parties to the transaction are market 
makers. Alternatively, the BOX Rules call for a bust of the transaction 
if at least one party to the transaction is a market maker on BOX, 
unless both parties agree to an adjustment price and notify the MRC. 
The proposed amendment to the Obvious Error Rule will render this 
particular scenario applicable only when ``neither'' party to the 
transaction is a market maker. Under the scenario where neither of the 
parties involved in the obviously erroneous transaction is a market 
maker, a bust of the transaction is believed to be the proper course of 
action, absent an agreement to an adjusted price for the transaction.
    The additional course of action, as proposed, will now be available 
to the MRC when one party to the transaction is not a market maker and 
the other party is a market maker. The Exchange believes that affording 
a non-market maker party the opportunity to choose between busting the 
transaction or adjusting it according to the pre-determined increments, 
as set forth in the Obvious Error Rule, will better protect the non-
market maker party in the event of obviously erroneous transactions. 
The establishment of this option is intended to protect against 
scenarios where a non-market making party, perhaps a Public Customer, 
enters into a transaction with a market maker. Under the current rules, 
if this transaction is determined to be an Obvious Error, the trade 
will be busted unless the parties agree to an adjustment price. If the 
Public Customer does not want the trade busted but, nonetheless, cannot 
agree to an adjusted price with the market maker, then the trade will 
still be busted. The Exchange believes that this could expose the 
Public Customer to unintended positions and risk, perhaps in the 
equities markets, where this particular options transaction was 
intended to hedge against. The Exchange believes that, by providing 
access to the pre-established Obvious Error adjustment increments,

[[Page 11454]]

some of this risk should be alleviated or eliminated for the non-market 
maker party by allowing the transaction to be adjusted rather than 
busted.
    The Exchange believes that the availability of the pre-determined 
adjustment increments should provide non-market maker parties with 
added assurances that, in the case of an obviously erroneous 
transaction and at their election, the transaction will be adjusted 
rather than automatical busted, as provided in the current Rule. While 
this should provide an added protective feature for non-market makers, 
it should not expose market makers to any additional risk or decrease 
the protections that they are already afforded in the BOX Rules. A 
market maker's transaction already has these pre-determined adjustment 
increments applied to their trades with other market makers. Thus, this 
proposal would merely extend the application of the pre-determined 
adjustment increments to another party that a market maker could trade 
with via the BOX Trading Host.
2. Statutory Basis
    The Exchange believes that the proposed amendment to the BOX Rules 
would result in greater flexibility in determining the outcome of 
erroneous transactions within the BOX Trading Host. Accordingly, the 
Exchange believes that the proposed rule change is consistent with 
Section 6(b) of the Act,\7\ in general, and furthers the objectives of 
Section 6(b)(5) of the Act,\8\ in particular, in that it is designed to 
promote just and equitable principles of trade, remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system, and, in general, protect investors and the public 
interest.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition 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 solicited or received by the Exchange with 
respect to 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 the 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 rule-comments@sec.gov. Please include 
File Number SR-BSE-2008-05 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-2008-05. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/
sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-BSE-2008-05 and should be 
submitted on or before March 24, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-3959 Filed 2-29-08; 8:45 am]

BILLING CODE 8011-01-P