[Federal Register: June 29, 2006 (Volume 71, Number 125)]
[Notices]
[Page 37140-37147]
[DOCID:fr29jn06-90]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54034; File No. SR-BSE-2006-22]

Self-Regulatory Organizations; Boston Stock Exchange, Inc.;
Notice of Filing of Proposed Rule Change and Amendment Nos. 1, 2, and 3
Thereto To Implement the Boston Equities Exchange (``BeX'') Trading
System

June 22, 2006.
    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 May 10, 2006, the Boston Stock Exchange, Inc. (``BSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II and III below, which Items have been prepared by the BSE.
BSE filed Amendment No. 1 to the proposed rule change on June 2,
2006.\3\ BSE filed Amendment No. 2 to the proposed rule change on June
9, 2006.\4\ BSE filed Amendment No. 3 to the proposed rule change on
June 15, 2006.\5\ 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. 1 replaces and supersedes the original filing
in its entirety.
    \4\ Amendment No. 2 replaces and supersedes the original filing
and Amendment No. 1 in their entirety.
    \5\ Amendment No. 3 replaces and supersedes the original filing,
Amendment No. 1 and Amendment No. 2 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 is proposing the implementation of the Boston Equities
Exchange (``BeX'') trading system, a fully-automated electronic book
for the display and execution of orders in securities listed otherwise
than on The Nasdaq Stock Market (``Nasdaq'') for which the BSE obtains
unlisted trading privileges (``UTP'') after June 30, 2006.\6\
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    \6\ The rules governing trading in Nasdaq stocks (BSE Rules,
Chapter XXXV) and the rules governing trading in listed securities
assigned to a specialist (BSE Rules, Chapters I, II, III, XV, XVI,
XVII, XIX, and XXXIII) remain unchanged. Separate from this rule
filing, the BSE intends to apply for UTP in all stocks listed
otherwise than on The Nasdaq Stock Market for which we do not yet
have UTP.
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    The text of the proposed rule change is available on the Exchange's
Web site (http://www.bostonstock.com), at the Exchange's Office of the

Secretary, and at the Commission's Public Reference Room.
    The text of the proposed rule change also appears below.\7\
Proposed new language is italicized.
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    \7\ The Commission notes that the rule text submitted by the
Exchange contained several technical errors, which, for the purpose
of this notice, have been corrected. In addition, the reference to
``Market'' orders contained in the last sentence of proposed Chapter
XXXVII, Section 3(f)(ii) should instead be ``At the Close'' orders.
The Exchange has committed to address these errors formally in an
amendment to the proposed rule change following publication of this
notice. Telephone conversation among John Curtain, Assistant Vice
President Corporate Legal and Contracts Attorney, BSE; Jennifer
Colihan, Special Counsel, Division of Market Regulation
(``Division''), Commission; and David Michehl, Special Counsel,
Division, Commission on June 22, 2006.
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RULES OF THE BOSTON STOCK EXCHANGE
Chapter II--Dealings on the Exchange
    Sections 1 through 40. No Change.
    SEC. 41. Minimum Price Variation
    The Minimum Price Variation shall be 0.01. Those securities trading
in fractions shall continue to trade in Minimum Price Variations as
currently approved by the Exchange. Mid-Point Cross Orders may be
executed and reported in increments as small as one-half of the Minimum
Price Variation.
    Sections 42 through 43. No Change.
    Chapter XXXVII--Boston Equities Exchange (``BeX'') Trading System
    The Boston Equities Exchange (``BeX'') trading system is a fully-
automated facility of the Exchange, which allows eligible orders in
eligible securities to electronically match and execute against one
another.
    Section 1. BeX Eligible Securities
    (a) Eligible Securities. All securities eligible for trading on the
Exchange that are listed otherwise than on The Nasdaq Stock Market for
which the BSE obtains unlisted trading privileges (``UTP'') after June
30, 2006 shall be eligible for trading through BeX. Any specialist
request to remove a security from BeX shall be considered by the
appropriate Board Committee.
    Section 2. Eligible Orders
    (a) All orders sent to BeX must be round lot market or limit
orders, specifically designated in the manner specified by the Exchange
for trading in BeX.
    (b) All orders sent to BeX must be for regular way settlement.
    (c) Eligible order types:
    (i) Orders eligible for execution in BeX may be designated as one
of the following existing BSE order types as defined in Chapter I,
Section 3 except that any reference in the existing BSE Rules to the
execution of Orders as soon as ``represented at the specialist's post''
shall for purposes of this Section be understood to mean ``entered in
BeX'':
    (A) At the Opening or At the Opening Only Order.
    (B) Day Order.
    (C) Do Not Increase (DNI).
    (D) Do Not Reduce (DNR).
    (E) Fill or Kill.
    (F) Good `Till Cancel Order.
    (G) Immediate or Cancel.
    (H) Limit, Limited Order or Limited Price Order.
    (I) At the Close.
    (J) Market Order.
    (K) Stop Limit Order.
    (L) Stop Order.
    With the exception of Fill or Kill and Immediate or Cancel Orders,
a customer may append to an Order an instruction that the Order be
cancelled or routed to the market(s) displaying the National Best Bid
or Offer if the Order would trade through the National Best Bid or
Offer if executed on the BeX.
    (ii) Orders eligible for execution in BeX may also be designated as
one of the following additional order types:
    (A) ``Cross'': An order to buy and sell the same security at a
specific price better than the best bid and offer displayed in BeX and
equal to or better than the National Best Bid and Offer. A Cross Order
may represent interest of one or more BSE Members.

    (B) ``Cross with Size'': A Cross Order to buy and sell at least
5,000 shares of the same security with a market value of at least
$100,000.00 (i) at a price equal to or better than the best bid or
offer displayed in BeX and the National Best Bid or Offer (ii) where
the size of the order is larger than the aggregate size of all interest
displayed in BeX at that price; and (iii) where neither side of the
order is for the account of the BSE Member sending the order to BeX.
    (C) ``Good `Till Date (GTD)'': An order to buy or sell that, if not
executed, expires at the end of date specified in the order.
    (D) ``Good `Till Time (GTT)'': An order to buy or sell that, if not
executed, expires at the time specified in the order.
    (E) ``Limit or Close'': A limit order to buy or sell that if not
executed prior to the Market on Close cutoff time of 3:40 p.m.,
pursuant to Chapter II, Section 22, will automatically convert to an At
the Close Order for inclusion in the closing process and if not so
executed, at the close, will be cancelled.
    (F) ``Mid-Point Cross'': A two-sided order with both a buy and sell
component combined that executes at the midpoint of the National Best
Bid or Offer. A Mid-point Cross Order will be rejected when a locked or
crossed market exists in that security at the time the Order is
received. Midpoint Cross Orders may be executed and reported in
increments as small as one-half of the Minimum Price Variation.
    (d) Orders may be entered by a Member on its own behalf, for the
account of another Member (collectively, professional orders) or for
the account of a customer (an agency order). In BeX, however, agency
orders are subject to the same display and execution processes as
professional orders, and agency orders do not receive any priority in
order execution or handling.
    * * * Interpretations and Policies
    .01 The terms ``Best Bid'' and ``Best Offer'' shall mean,
respectively, the highest and lowest priced order to buy and sell an
eligible security in BeX.
    .02 The terms ``National Best Bid'' and ``National Best Offer''
shall mean, respectively, the highest and lowest priced order or quote
to buy and sell a BeX eligible security displayed in the consolidated
quotation system for the security.
    Section 3. Operation of BeX
    (a) Operating Hours. BeX will operate from 7:30 a.m. until 4:30 p.m
during the Exchange's Pre-Opening, Opening, Primary and Post-Primary
Trading Sessions.
    (i) For purposes of this Chapter XXXVII, the primary market for a
security is, unless otherwise designated by the appropriate Board
committee, the listing market for a security; provided, however, that
if a security is traded by the NYSE, then the primary market for such
security is the NYSE, and if a security is not traded by the NYSE and
is traded by the Amex, then the primary market for such security is the
Amex. If a security is solely listed on any other Exchange, then the
primary market for such security is that market. If a security is
traded on both the NYSE and the Amex, whichever of the two is the
listing market is the primary market.
    (b) Pre-Opening. BeX will accept orders each day during the Pre-
Opening. The Pre-Opening in BeX extends from 7:30 a.m. until 9:30 a.m.
During the Pre-Opening, orders are placed on the BeX but will not be
matched and do not generate trade executions. Market participants are
permitted to add, modify or cancel orders. Cross, Cross with Size, and
Mid-point Cross Orders do not participate in the opening and are not
accepted by the BeX trading system during the Pre-Opening.
    (c) Opening. BeX will open for trading each day once the primary
market for a security opens its market on either a displayed quote or
trade.
    Primary Market Opening Procedures (PMOP). Where the opening price
is based on a trade print in the primary market, the BeX opening price
will match the primary market opening price for each individual
security opened. Once the BeX opening price has been determined, all
eligible orders priced equal to or better than the BeX opening price
will be paired for execution at the determined price following
applicable BeX priority rules.
    Where the primary market opening is based on a quote, the BeX will
open as follows:
    (i)(a) Where there are orders in the BeX that cannot be matched,
the BeX will open on a quote;
    (i)(b) Where there are orders in the BeX that can be matched, (such
as a Market Order to Market Order, Limit Order to Market Order, or
Limit Orders that lock or cross) the BeX opening price will be the
Theoretical Opening Price (``TOP''), provided the TOP is at or within
the National Best Bid and Offer;
    (i)(c) Where there are orders in the BeX that can be matched, and
the TOP is not at or within the National Best Bid and Offer, the BeX
opening trade price will be at the National Best Bid or Offer closest
to the TOP so long as Orders can be matched at that price. If Orders
cannot be matched at that price, the BeX will open on a quote.
    (ii) Following the opening execution process in an individual
security, all orders remaining that are executable against the National
Best Bid and Offer will be cancelled or routed in accordance with the
customer's instruction. All other Orders will be booked on the BeX.
    (iii) The TOP.
    (a) The TOP is the price that maximizes the quantity of orders
traded on the BeX at the opening;
    (b) If multiple prices exist under subparagraph (a), above, then
the TOP is the price that minimizes the quantity of orders not traded;
    (c) If multiple prices exist under subparagraph (b), above, then
the price that minimizes any order imbalance is the TOP;
    (d) If multiple prices exist under subparagraph (b) and there is no
order imbalance, the TOP is the price closest to the previous day's
closing price.
    (d) Primary Trading Session. BeX will operate the Primary Trading
Session immediately following the opening for individual securities
where the primary market is either the NYSE or AMEX. During the primary
session, orders are automatically executed as soon as a match can be
found, following applicable BeX priority rules.
    (e) Trading Halts. BeX will halt trading during regulatory trading
halts called by the primary or listing market in a security.
Additionally, BeX will halt its operation during periods of unusual
market conditions pursuant to Chapter II, Section 34A. If trading in an
issue has been halted, BeX will go through its Pre-Opening and Opening
procedures as set forth above.
    (f) Closing. BeX will close as follows:
    (i) Market on Close Period: Beginning at 3:40 p.m. (EST), BeX will
broadcast the imbalance between the At the Close and Limit or Close
Orders on the bid side and the At the Close and Limit or Close Orders
on the sell side.
    (A) During this period At the Close Orders will only be accepted on
the imbalance side.
    (B) During this period At the Close and Limit or Close Orders
cannot be cancelled.
    (ii) BeX will provide a group closing by putting all eligible
orders received by 4:00 p.m. into an ``Authorized Reserve State
(ARS).'' During ARS, BeX will not accept any new orders, cancellations
or modifications. When BeX receives the closing price message from the
primary market, as defined in Section 3(a)(i) above, the BeX trading
system will complete the closing process for each individual security.
During the closing process, all paired At the Close and Limit or Close
Orders are executed at

the primary market closing price. If a Market or Limit or Close Order
is not fully executed at the close, the part not executed will be
cancelled.
    (g) Post-Primary Trading Session (PPS). The BeX PPS will operate
from the time when the primary market disseminates its closing price
until 4:30 p.m. During the BeX PPS only cross orders at a specific
price may be submitted.
    (h) Receipt of Orders. Orders shall be routed to BeX using one of
the following methods:
    (i) Except for the orders described in subparagraph (ii) below, all
orders must be sent to BeX through the Exchange's systems or through
other communication lines approved by the Exchange for the delivery of
orders by its Members.
    (ii) ITS commitments for ITS-eligible securities traded in BeX
shall be sent through the ITS system.
    (i) Ranking and Display of Orders. Except for Cross, Cross with
Size, and Mid-point Cross Orders, which shall be executed as described
in Paragraph (k) below, all orders sent to BeX shall be ranked
according to their price and time of receipt, as follows:
    (i) Limit Orders shall be ranked based on their limit prices and
times of receipt by BeX.
    (ii) All eligible orders shall be immediately and publicly
displayed through the processes set out in the appropriate transaction
reporting plan for each security when they constitute the best bid or
offer in BeX for that security, provided, however, that an order that
would lock or cross another ITS market shall be cancelled rather than
displayed.
    (j) Automated Matching and Execution of Orders. Orders shall
automatically be matched and executed against each other, as follows:
    (i) Except for Cross, Cross with Size, and Mid-point Cross Orders,
which shall be executed as described in Paragraph (k) below, an
incoming order shall be matched against one or more orders in the BeX
in the order of their ranking, following price and time priority for
the full amount of shares available at that price, or for the size of
the incoming order, if smaller. If an incoming Limit Order would trade
through (as defined in the ITS Plan) the National Best Bid or Offer if
executed on the BeX at the time of receipt, it will, at the instruction
of the Member entering the order, either be cancelled or routed to the
market(s) displaying the National Best Bid or Offer. If no instruction
is provided, the order will be returned to Member entering the order.
    (ii) If an incoming Limit Order cannot be matched when it is
received and it is not designated as a type that should be immediately
cancelled the order shall be treated in accordance with Section 3,
Paragraph (i) above.
    (iii) If an incoming Market Order would trade-through (as defined
in the ITS Plan) the National Best Bid or Offer if executed on the BeX
at the time of receipt, it will, at the instruction of the Member
entering the order, either be cancelled or routed to the market(s)
displaying the National Best Bid or Offer.
    (iv) An inbound ITS commitment, if it is priced at or better than
the current Best Bid or Offer in BeX, shall be automatically executed
against the order(s) reflected in the Best Bid or Offer, for the full
amount of shares available at that price, and any remaining portion of
the ITS commitment shall be automatically cancelled.
    (v) Orders shall only be matched at prices that are equal to, or
better than, the National Best Bid or Offer.
    (k) Submission of Cross Orders. Cross, Cross with Size, and Mid-
point Cross Orders shall be automatically executed if they meet the
requirements set out in Section 2(c)(ii)(A), (B) and (F) above. If an
order designated as Cross, Cross with Size, or Mid-point Cross does not
meet such requirements at the time it is received by BeX, it shall be
immediately cancelled.

Section 4. Cancellation of Transactions

    (a) Cancellation of Transactions. A transaction made in
demonstrable error and cancelled by both parties may be unwound,
subject to the approval of the Exchange. Unresolved controversies
relating to transactions that occur in BeX, and which are not addressed
pursuant to the procedures in Section 5, Paragraph (a) below shall be
subject to the arbitration rules of the Exchange set out in Chapter
XXXII of the Rules.

Section 5. Handling of Clearly Erroneous Transactions

    (a) Handling of Clearly Erroneous Transactions. The Exchange will
respond to requests for review of clearly erroneous transactions using
the following procedures:
    (i) The terms of a transaction are ``clearly erroneous'' where
there is an obvious error in any term, such as price, number of shares
or other unit of trading, or identification of the security.
    (ii) Any Member may request a review of an execution received
through BeX when the Member believes that the terms of the transaction
were clearly erroneous when submitted.
    (A) The Member must make a request for review immediately after the
execution and also must provide a written request, by facsimile or by
e-mail, within 15 minutes after the execution.
    (B) The Exchange shall promptly notify the other party to the
transaction of the request for review.
    (C) The Member making a request for review shall provide, within 30
minutes after making the written request for review (or within such
longer period of time specified by Exchange staff), written
documentation relating to the disputed transaction that is reasonably
necessary for use by the Exchange in resolving the matter. The other
party to the transaction shall provide, within 30 minutes after
receiving notice from the Exchange of the request for review (or within
such longer period of time specified by Exchange staff), written
documentation relating to the disputed transaction that is reasonably
necessary for use by the Exchange in resolving the matter. Once a party
has submitted its documentation, and the period for providing the
documentation has ended (or, if earlier, the party has notified the
Exchange that it has no further information), the party may not provide
additional information unless requested to do so by Exchange staff.
Either party to the transaction may request, and the Exchange shall
provide, the written documentation submitted by the other party.
    (D) The Exchange's Chief Regulatory Officer (``CRO'') or another
officer designated by the CRO shall review the transaction and
determine whether it is clearly erroneous. In making that
determination, the CRO or another officer designated by the CRO shall
consider the goals of maintaining a fair and orderly market and the
protection of investors and the public interest.
    (E) If the CRO or another officer designated by the CRO determines
that a transaction is not clearly erroneous, the Exchange shall notify
both parties, in writing, that no action will be taken with respect to
the completed trade. If the CRO or another officer designated by the
CRO determines that a transaction is clearly erroneous, the CRO or
another officer designated by the CRO shall declare the transaction
null and void or modify one or more of the terms of the transaction
with the aim of trying to return the parties to the positions that they
would have been in (or to positions reasonably similar to those
positions) if the error had not occurred. The Exchange shall document
this decision in writing and provide copies of the decision to all
parties.

    (iii) Either party may appeal this determination to a subcommittee
of the Exchange's Regulatory Oversight Committee (``ROC'') by
submitting an appeal to the Exchange's Secretary, by facsimile or in
writing, within 30 minutes after receiving the Exchange's written
decision or, if the Exchange notifies parties of its decision after 4
p.m., by 9:30 a.m. the next trading day. Once an appeal is received,
the Exchange shall notify the counterparty to the trade and both
parties and the Exchange itself will be permitted to submit any
additional supporting written materials up to the time that the
subcommittee considers the appeal. Either party to a disputed trade may
request, and the Exchange shall provide, the written documentation
presented to the subcommittee by the other party or by the Exchange. An
appeal does not operate as a stay on the decision being appealed. After
consideration of any written materials provided by the parties or by
the Exchange, and after any hearings that the subcommittee may hold,
the subcommittee, using the standards set out in this rule, shall
affirm, modify or reverse the original decision. The subcommittee's
decision on a matter shall be the final Exchange action on the matter.
Any decision by the CRO or another officer designated by the CRO under
subparagraph (ii) above or by the ROC subcommittees under this
subparagraph (iii) shall be rendered without prejudice as to the rights
of the parties to the transaction to submit their dispute to
arbitration.
    (iv) If there is any disruption or malfunction in the use or
operation of BeX, or the communications systems associated with BeX,
the CRO or another officer designated by the CRO may declare any
transaction arising out of the use of BeX during the period of the
disruption or malfunction null and void or may modify the terms of
these transactions. In making this decision, the CRO, or any designee,
must find that the transactions were clearly erroneous or that the
actions are necessary for the maintenance of a fair and orderly market
or the protection of investors and the public interest. Absent
extraordinary circumstances, any action by the CRO or other designee
shall be taken within 30 minutes of detection of the erroneous
transaction, but in no event later than 3 p.m. on the trading day
following the date of the trade at issue. The Exchange shall notify
each Member involved in the transaction as soon as practicable
following the decision and any party to the transaction may appeal that
decision by following the procedures set out above in subparagraph
(iii) of this rule.

Section 6. Orders To Be Reduced and Increased on Ex-Date

    (a) When a security is quoted ex-dividend, ex-distribution, ex-
rights or ex-interest, the following kinds of orders shall be reduced
by the value of the payment or rights, and increased in shares in the
case of stock dividends and stock distributions which result in round-
lots, on the day the security sells ex:
    (i) Open buying orders;
    (ii) Open stop orders to sell. (With open stop limit orders to
sell, the limit, as well as the stop price, shall be reduced.) The
following shall not be reduced:
    (i) Open stop orders to buy;
    (ii) Open selling orders.
    (b) Reduction of orders, Odd amounts. When the amount of a cash
dividend is not equivalent to or is not a multiple of the fraction of a
dollar in which bids and offers are made in the particular stock,
orders shall be reduced by the next higher variation.
    (c) Reduction of orders, Proportional procedure. Open buy orders
and open stop orders to sell shall be reduced by the proportional value
of a stock dividend or stock distribution on the day a security sells
ex-dividend or ex-distribution. The new price of the order is
determined by dividing the price of the original order by 100% plus the
percentage value of the stock dividend or stock distribution. For
example, in a stock dividend of 3%, the price of an order would be
divided by 103%.
    The chart below lists, for the more frequent stock distributions,
the percentages by which the prices of open buy orders and open stop
orders to sell shall be divided to determine the new order prices.

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                                                Price of order                                    Price of order
                 Distribution                     divided by              Distribution               divided by
----------------------------------------------------------------------------------------------------------------
5-for-4......................................            125%   2-for-1.........................            200%
4-for-3......................................       133\1/3\%   5-for-2.........................            250%
3-for-2......................................            150%   3-for-1.........................            300%
5-for-3......................................       166\2/3\%   4-for-1.........................            400%
----------------------------------------------------------------------------------------------------------------

    If as a result of this calculation the price is not equivalent to
or is not a multiple of the fraction of a dollar in which bids and
offers are made in the particular security, the price should be rounded
to the next lower variation.
    In reverse splits, all orders (including open sell orders and open
stop orders to buy) should be cancelled.
    (d) Procedure for increase in number of shares. When there is a
stock dividend or stock distribution, open buy orders and open stop
orders to sell shall be increased in shares as follows:
    (i) When there is a stock dividend or stock distribution which
results in one or more full shares for each share held, the number of
shares in open buy orders and open stop orders to sell shall be
increased accordingly.
    EXAMPLES:
    A 3-for-1 stock distribution.
    An order for 100 shares is increased to 300 shares.
    An order for 200 shares is increased to 600 shares.
    An order for 500 shares is increased to 1500 shares.
    (ii) When there is a stock dividend or stock distribution of less
than a one-for-one basis and thus results in fractional shares, open
buy orders and open stop orders to sell shall be increased to the
lowest full round-lot.
    EXAMPLES:
    A 25% stock dividend or a 5-for-4 stock distribution.
    An order for 100 shares remains at 100 shares.
    An order for 300 shares remains at 300 shares.
    An order for 900 shares is increased to 1100 shares.
    An order for 2000 shares is increased to 2500 shares.
    (iii) When there is a stock dividend or stock distribution which
results in fractional shares combined with full shares, the number of
shares in open buy orders and open stop orders to sell shall be
increased to the lowest full round-lot.
    EXAMPLES:
    A 5-for-2 stock distribution.
    An order for 100 shares is increased to 200 shares.
    An order for 200 shares is increased to 500 shares.
    An order for 700 shares is increased to 1700 shares.
    An order for 1200 shares is increased to 3000 shares.

    Section 7. Application of BSE Rules
    (a) The rules and procedures in this Chapter shall apply to trading
conducted in BeX. Unless otherwise defined in this Chapter, terms used
in this Chapter shall have the same meanings given them elsewhere in
the Rules. Except where the context requires otherwise, the provisions
of the bylaws and all other Rules and policies of the Board of
Governors shall continue to be applicable to trading that occurs on the
BeX. If any rule in this Chapter is inconsistent with any other
provision of the Rules, the provisions of this Chapter shall control
and shall be deemed to supplement or amend the inconsistent provision.

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, as
amended, and discussed any comments it received on the proposed rule
change, as amended. 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 has proposed in a separate rule filing, to create a new
electronic trading facility, as that term is defined in section 3(a)(2)
of the Act,\8\ called BeX.\9\ BeX, which is to be developed, owned and
operated by BSX Group, LLC (``BSX''), would be an electronic securities
communications and trading facility intended for the use of BSE Members
and Electronic Access Members and their customers. In this rule filing
relating to the initial phase of the BeX facility, the Exchange
proposes to implement the BeX as a fully-automated electronic book for
the display and execution of orders in securities listed on any
exchange other than issues listed on Nasdaq for which the BSE obtains
unlisted trading privileges after June 30, 2006. All such issues would
not be assigned to a specialist. The rules would be located in Chapter
XXXVII of the Exchange's Rules of the Board of Governors.\10\
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    \8\ Under the Act, the ``term `facility' when used with respect
to an exchange includes its premises, tangible or intangible
property whether on the premises or not, any right to the use of
such premises or property or any service thereof for the purpose of
effecting or reporting a transaction on an exchange (including,
among other things, any system of communication to or from the
exchange, by ticker or otherwise, maintained by or with the consent
of the exchange), and any right of the exchange to the use of any
property or service.'' See 15 U.S.C. 78c(a)(2).
    \9\ On May 5, 2006, the Exchange filed with the Commission a
proposed rule change that establishes BeX and sets forth governance
and membership rules changes pertaining to BeX (SR-BSE-2006-20).
    \10\ See note 6, supra, for a description of the scope of this
proposal.
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    Under the Exchange's current rules there are no provisions for
trading securities that are not assigned to a specialist. Rather than
instituting a ``Cabinet'' rule, which the Exchange considers to be
manually intensive and inefficient, the Exchange proposes to institute
rules governing the BeX as a new fully-automated electronic book that
would display and match eligible orders in these securities, without
the participation of a specialist. For competitive reasons, the
Exchange considers this proposal to be vitally important to its ability
to attract to, and retain order flow by, the BSE.
    Currently, BSE Specialists quote and trade approximately 300
securities. The BSE Floor Broker community routinely receives baskets
of securities that contain orders and cross trades in securities that
are not quoted by BSE Specialists. As such, the orders and cross trades
for securities that are not traded on the BSE must be routed to other
market centers for execution. Thus, the Exchange is not able to retain
order flow that has been directed to the BSE. Moreover, BSE Floor
Brokers are hampered in their ability to attract more sources of order
flow to the Exchange, because a percentage of the order flow they do
attract is eventually routed to other market centers for execution. The
other market centers include those centers that have the capability to
post and execute orders in securities that are not continuously quoted
or traded by any member in a market making capacity, including other
exchanges that have rules governing the same type of electronic book
functionality that the BSE is now seeking to employ.\11\
---------------------------------------------------------------------------

    \11\ See, e.g., Chicago Stock Exchange (``Chx'') Rules, Article
XXA.
---------------------------------------------------------------------------

    As described below, BeX would allow Exchange Members, whether or
not they are on the Exchange's floor, to enter orders into the BeX for
possible execution.
    Eligible securities and eligible orders. Under the proposed rules,
all securities eligible for trading on the Exchange that are not
assigned to a Specialist would be traded in the BeX. Orders sent to BeX
would be required to be specifically designated for handling in BeX.
BeX would accept only round-lot market and limit orders.\12\ No odd-
lot, or mixed lot orders would be accepted.
---------------------------------------------------------------------------

    \12\ Id.
---------------------------------------------------------------------------

    Orders eligible for execution in BeX may be designated as one of
the following existing BSE order types: ``at the close,'' ``at the
opening or at the opening only,'' ``day,'' ``do not increase (DNI),''
``do not reduce (DNR),'' ``fill or kill,'' ``good `till cancel,''
``immediate or cancel,'' ``limit, limited or limited price,''
``market,'' ``stop limit,'' or ``stop'' orders. Orders may also be
designated one of the following new order types: ``cross,'' ``cross
with size,'' ``good `till date (GTD),'' ``good `till time (GTT),''
``limit or close,'' or ``mid-point cross.'' Descriptions of the
eligible new order types are as follows:
    Cross: An order to buy and sell the same security at a specific
price better than the best bid and offer displayed in BeX and equal to
or better than the National Best Bid and Offer. A Cross Order may
represent interest of one or more BSE Members.
    Cross with Size: A Cross Order to buy and sell at least 5,000
shares of the same security with a market value of at least $100,000.00
(i) at a price equal to or better than the best bid or offer displayed
in BeX and the National Best Bid or Offer; (ii) where the size of the
order is larger than the aggregate size of all interest displayed in
BeX at that price; and (iii) where neither side of the order is for the
account of the BSE Member sending the order to BeX. The latter
provision is intended to restrict such orders to agency orders, similar
to the existing BSE, Chx, and American Stock Exchange (``Amex'')
rules.\13\
---------------------------------------------------------------------------

    \13\ BSE Rule Chapter II, Sec. 8 and Chapter XXV, Sec. 6; Amex
Rule Sec. 126.02, and Chx Rule Article XXA, Rule 2(c)(4).
---------------------------------------------------------------------------

    Good `Till Date (GTD): An order to buy or sell that, if not
executed, expires at the end of the date specified in the order.
    Good `Till Time (GTT): An order to buy or sell that, if not
executed, expires at the time specified in the order.
    Limit or Close: A Limit Order to buy or sell that if not executed
prior to the Market on Close cutoff time of 3:40 p.m., pursuant to
Chapter II, Section 22, will automatically convert to an At the Close
Order for inclusion in the closing process, and if not so executed at
the close, will be cancelled.
    Mid-Point Cross: A two-sided order with both a buy and sell
component combined that trades at the midpoint of the National Best Bid
or Offer. A Mid-point Cross Order will be rejected when

a locked or crossed market exists in that security at the time the
Order is received. Mid-point Cross Orders may be executed and reported
in increments as small as one-half of the Minimum Price Variation.
    With the exception of Fill or Kill and Immediate or Cancel Orders,
a customer may append to an Order an instruction that the Order be
cancelled or routed to the market(s) displaying the National Best Bid
or Offer if the Order would trade through the National Best Bid or
Offer if executed on the BeX.
    Compliance with Intermarket Trading System (``ITS'') Plan. To
ensure compliance with the ITS Plan, otherwise eligible orders would be
cancelled or routed away in certain circumstances. Specifically, if an
order in an ITS eligible security crosses or locks the National Best
Bid or Offer at the time that it is received, the order would be
immediately cancelled to ensure compliance with the ITS Plan's rules
relating to locked markets.\14\ Marketable orders that would trade-
though the National Best Bid or Offer would either be cancelled or be
routed to the market(s) showing the National Best Bid or Offer at the
order-entering firm's instructions.\15\
---------------------------------------------------------------------------

    \14\ Similarly, if an order in a listed security locks or
crosses the Best Bid or Offer in BeX at the time it is received, but
not the National Best Bid or Offer, the order would be executed
according to BeX's matching algorithm, and any remaining portion
would be immediately cancelled, if it would lock or cross the
National Best Bid or Offer.
    \15\ See proposed BSE Rule, Chapter XXXVII, Section 3, Paragraph
(j)(i) and (iii).
---------------------------------------------------------------------------

    Operating hours. Under the proposed rules, BeX would operate during
the Exchange's Pre-Opening, Opening, Primary, and Post-Primary Trading
Sessions. Specifically, BeX would accept orders each day during the
Pre-Opening. BeX will open for trading each day for a particular
security once the primary market in that security opens on either a
displayed quote or a trade.\16\ BeX would close at 4:30 p.m.
---------------------------------------------------------------------------

    \16\ The proposed rules define the primary market as the listing
market for a security, unless otherwise designated by the
appropriate Board committee; provided, however, that if a security
is traded by the New York Stock Exchange, Inc. (``NYSE''), then the
primary market for such security would be the NYSE and if a security
is traded by the Amex, then the primary market for such security
would be the Amex. If a security is traded on both the NYSE and the
Amex, whichever of the two is the listing market would be considered
the primary market. See proposed BSE Rule, Chapter XXXVII, Section
3, Paragraph (a)(i).
---------------------------------------------------------------------------

    Pre-Opening. The Pre-Opening in BeX would extend from 7:30 a.m.
until 9:30 a.m., during which orders would be entered on the BeX and
market participants would be able to add, modify or cancel orders.
There would be no matching of orders during the Pre-Opening.
    Opening. BeX will open based upon the opening of the primary market
for a security.\17\ Where the opening price is based on a trade print
in the primary market, the BeX opening price will match the primary
market opening price for each individual security opened. Where the
opening is based on a quote in the primary market, the BeX will open in
one of the following ways: (1) Where there are orders in the BeX that
cannot be matched, the BeX will open on a quote; (2) where there are
orders in the BeX that can be matched, the BeX opening price will be
the Theoretical Opening Price (``TOP''), provided the TOP is at or
within the National Best Bid and Offer; (3) where there are orders in
the BeX that can be matched, and the TOP is not at or within the
National Best Bid and Offer, the BeX opening trade price will be at the
National Best Bid or Offer closest to the TOP so long as Orders can be
matched at that price. If Orders cannot be matched at that price, the
BeX will open on a quote; (4) following the opening execution process
in an individual security all orders remaining that are executable
against the National Best Bid and Offer will be cancelled or routed in
accordance with the customer's instruction. All other Orders will be
booked on the BeX.
---------------------------------------------------------------------------

    \17\ The primary market is defined as either the NYSE, the Amex,
or another exchange solely listing a security (other than the BSE).
Nasdaq securities and BSE solely listed issues (which are assigned
to a specialist) will continue to trade under the BSE's existing
rules, and not on BeX, so this rule proposal does not provide
opening or closing rules for such securities.
---------------------------------------------------------------------------

    Primary Trading Session. Once the opening occurs for individual
securities, BeX will operate the Primary Trading Session. All orders
would automatically be matched following price and time priority as
soon as they are entered in the order book. Incoming orders will be
executed at or within the National Best Bid and Offer.
    Closing. BeX will close in two stages. The first stage is the
``Market on Close Period''. Beginning at 3:40 p.m. (EST), BeX will
broadcast the imbalance between the At the Close and Limit or Close
Orders on the bid side and At the Close and Limit on Close Orders on
the offer side.
    Second, BeX will close based upon the primary market close.\18\ BeX
will provide a group closing by putting all eligible orders in such
securities received by 4 p.m. into an Authorized Reserve State. When
BeX receives the closing price message from the primary market, the BeX
trading engine will complete the closing process for each individual
security.
---------------------------------------------------------------------------

    \18\ Id.
---------------------------------------------------------------------------

    Post-Primary Trading Session. The Post-Primary Trading Session
would operate from the time when the primary market disseminates its
closing price until 4:30. During the Post Primary Trading Session only
Cross Orders may be submitted to BeX.
    Receipt of orders. Orders could be routed to BeX through the
Exchange's systems or through other communications lines approved by
the Exchange for the delivery of orders by Exchange Members.\19\ BeX
would also accept and automatically execute commitments sent by market
centers that participate in ITS.
---------------------------------------------------------------------------

    \19\ See proposed BSE Rule, Chapter XXXVII, Section 3, Paragraph
(h)(i).
---------------------------------------------------------------------------

    Ranking and display of orders. Except for Cross, Cross with Size,
and Mid-point Cross Orders, all orders sent to BeX would be ranked
according to their price and time of receipt and would be displayed to
the public when they constitute the Best Bid or Offer in BeX for a
security.\20\
---------------------------------------------------------------------------

    \20\ See proposed BSE Rule, Chapter XXXVII, Section 3, Paragraph
(i).
---------------------------------------------------------------------------

    Automated matching of orders. In BeX, orders would automatically
match against each other, in price/time priority.\21\ Specifically, an
incoming order would be matched against one or more orders in the BeX,
in the order of their ranking, at the price of each order, for the full
amount of shares available at that price, or for the size of the
incoming order, if smaller. If an incoming order could not be matched
when it is received, and it is not designated as an order that should
be immediately cancelled, the order would be placed in the BeX. For
example:
---------------------------------------------------------------------------

    \21\ The only exception to this price/time priority matching
would occur when certain ``cross with size'' orders are executed. In
those instances, eligible ``cross with size'' transactions--where
there is an order to buy and sell at least 5,000 shares of the same
security with a market value of at least $100,000.00 (A) at a price
equal to or better than both the National Best Bid and Offer and the
Best Bid and Offer displayed in BeX; (B) where the size of the order
is larger than the aggregate size of all interest displayed in BeX
at that price; and (C) where neither side of the order is for the
account of the BSE Member sending the order to BeX--could execute at
the price of orders in BeX, without executing those earlier-received
orders. Because this type of crossing transaction is permitted on
the floor of the Exchange today, the Exchange believes it is
appropriate to include this transaction type in BeX.
---------------------------------------------------------------------------

    Assume that BeX contains the following bids and offers in a
particular security, AAA:

------------------------------------------------------------------------
              Buy                  Price           Price          Sell
------------------------------------------------------------------------
200............................    $47.50   $48.20............       400
1,500..........................     47.00   48.50.............       700

600............................     46.75   49.00.............       100
------------------------------------------------------------------------

--An incoming Limit Order to buy 500 shares at a price of $48.00 would
become the top-of-the-book best bid.
--An incoming Limit Order to buy 500 shares at a price of $48.20 would
match for 400 shares against the top-of-the-book best offer at a price
of $48.20, leaving 100 shares to buy at $48.20.
--Similarly, an incoming Limit Order to buy 500 shares at a price of
$48.50 would match for 400 shares against the top-of-the-book best
offer at a price of $48.20 and would match for 100 shares at a price of
$48.50.
    Inbound ITS commitments, if priced at or better than the current
Best Bid or Offer in BeX, would be automatically executed against the
order(s) reflected in the Best Bid or Offer for the full amount of
shares at that price, and any remaining portion of the ITS commitment
would be automatically cancelled.\22\
---------------------------------------------------------------------------

    \22\ See proposed BSE Rule, Chapter XXXVII, Section 3, Paragraph
(j)(iii).
---------------------------------------------------------------------------

    Cross, Cross with Size and Mid-point Cross Orders would be
automatically executed if they meet the requirements for those types of
orders. If they do not meet applicable requirements, they would be
immediately cancelled.
    No distinction between agency and professional orders. Under the
proposed rules, agency orders (entered on behalf of a customer) and
professional or proprietary orders (entered for the account of a BSE
Member (or other broker-dealer)) would be handled in an identical way
in BeX's matching algorithms.\23\
---------------------------------------------------------------------------

    \23\ See proposed BSE Rule, Chapter XXXVII, Section 2, paragraph
(d). See also Chx Rule, Article XXA, Rule 2, paragraph (d). The
Exchange believes that this handling is appropriate because BeX is a
fully-automated functionality of the Exchange. Orders for BeX would
be submitted directly and electronically to the Exchange. Once
transmitted, an order could be cancelled, but a Member could not
influence the execution of that order in any way. The orders would
enter a line of other orders to be matched against one another based
on an established algorithm. As did the Chx when it proposed its
Ebook rule change, the BSE is seeking an exemption under Rule 11a2-
2(T) for this part of this rule filing.
---------------------------------------------------------------------------

    Cancellations of transactions and handling of clearly erroneous
transactions. Under the proposed rules, Members that make a transaction
in demonstrable error could agree to cancel and unwind the transaction,
subject to the approval of the Exchange.\24\ For purposes of BeX, the
Exchange also proposes to adopt a policy for the handling of clearly
erroneous transactions.\25\ This policy would allow the Exchange's
Chief Regulatory Officer (``CRO'') or another officer designated by the
CRO to (a) review and potentially modify or cancel executions where one
party believes that the terms of the transaction were clearly erroneous
when submitted; and (b) modify or cancel executions that result from a
disruption or malfunction in the use or operation of BeX, or any
communications system associated with the BeX.
---------------------------------------------------------------------------

    \24\ See proposed BSE Rule, Chapter XXXVII, Section 4, Paragraph
(a).
    \25\ See proposed BSE Rule, Chapter XXXVII, Section 5, Paragraph
(a).
---------------------------------------------------------------------------

    The proposed rules set out procedures for each of these reviews,
including specific means for Members to appeal the Exchange's
decisions.\26\
---------------------------------------------------------------------------

    \26\ For example, a Member seeking review of a ``clearly
erroneous'' transaction would be required to notify the Exchange of
the request, by telephone and in writing, promptly after the
execution. After the CRO or another officer designated by the CRO
reviewed the transaction, the Exchange would notify both parties of
the CRO's or designee's decision, in writing. Either party could
appeal the decision to a subcommittee of the Exchange's Regulatory
Oversight Committee (``ROC''), whose decision would be final. In
making their decisions, the CRO, CRO's designee, and the ROC
Subcommittee would consider the goals of maintaining a fair and
orderly market and protecting investors and the public interest. If
it is determined that a transaction was clearly erroneous, the CRO,
CRO designee, or the ROC Subcommittee would try to return the
parties to the positions that they would have been in (or positions
reasonably similar to those positions) if the error had not
occurred. Similarly, in the event of disruption or malfunction that
impacts the operation or use of BeX, the CRO or CRO designee could
act promptly to declare transactions void or to modify transactions.
The Exchange would be required to notify each Member involved in the
transaction as soon as practicable after the CRO or CRO designee
makes any decision. Decisions could be appealed using the procedure
set out for the review of decisions addressing clearly erroneous
transactions.
---------------------------------------------------------------------------

Adjustment of Orders on Ex-Dates
    The Exchange is proposing to adopt the standard process for
adjusting orders on ex-dates.\27\ For example, open buy orders are
reduced by the value of a cash dividend on the ex-dividend date. If the
amount of the cash dividend is not equivalent to or is not a multiple
of the fraction of a dollar in which bids and offers are made in the
stock, open buy orders will be reduced by the next higher variation.
The proposed rule text sets forth charts and examples.
---------------------------------------------------------------------------

    \27\ See proposed BSE Rules, Chapter XXXVII, Section 6. These
proposed rules are based on NYSE Rule 118.
---------------------------------------------------------------------------

Conclusion
    The Exchange represents that it has designed BeX to be a fully-
automated system that would permit eligible orders in eligible
securities to match against one another, without the required
participation of a Specialist. The Exchange believes that this system
functionality would provide all Exchange Members with an efficient way
to trade securities that would protect investors and the public
interest by automatically handling orders in a fair and reasonable
manner.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent
with section 6(b) of the Act,\28\ in general, and furthers the
objectives of section 6(b)(5),\29\ in particular, in that it is
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.
---------------------------------------------------------------------------

    \28\ 15 U.S.C. 78f(b).
    \29\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change, as
amended, 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, as amended.

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 self-regulatory organization consents, the Commission will:
    A. By order approve such proposed rule change, as amended; or
    B. Institute proceedings to determine whether the proposed rule
change, as amended, 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, as amended, 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_ADDRESS>Please include

File Number SR-BSE-2006-22 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-2006-22. 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. 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-2006-22 and should be submitted on or before July
20, 2006.

    For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\30\
---------------------------------------------------------------------------

    \30\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Nancy M. Morris,
Secretary.
[FR Doc. E6-10242 Filed 6-28-06; 8:45 am]

BILLING CODE 8010-01-P