Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by Boston Stock Exchange, Inc. To Establish a Northbound Trading Linkage With the Montreal Stock Exchange

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34456; International Series Release No. 693; File No.

SR-BSE-94-01]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by Boston Stock Exchange, Inc. To Establish a Northbound Trading

Linkage With the Montreal Stock Exchange

July 28, 1994.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on February

7, 1994, 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 prepared by the self-regulatory organization.\1\ The

Commission is publishing this notice to solicit comments on the

proposed rule change from interested persons.

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\1\On June 20, 1994, the Exchange submitted to the Commission a

draft of the proposed Linkage Plan for the northbound linkage

(``Draft Linkage Plan''). The Linkage Plan is an agreement between

the BSE and Montreal Stock Exchange which contains arrangements for

the management of the northbound linkage, settlement of trade

disputes, comparison and settlement of trades, and surveillance of

trading activity.

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I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change

The BSE seeks to commence northbound trading pursuant to its

linkage with the Montreal Stock Exchange (``ME'').

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

Securities markets are becoming increasingly international,

reacting to many of the same economic and political events that affect

the rest of the world. The globalization of these markets is driven by

several factors, but advances in automation and telecommunications have

propelled its rapid growth. Factors driving this globalization include

investors' desire to enter foreign markets, the growth of large

institutional funds needing to decrease risk by diversifying

investments in other countries, and regulatory changes that opened

markets to foreign broker-dealer firms and their customers.

Effective international securities markets require efficient and

valuable systems for order routing and execution, information

dissemination, and clearance and settlement. Most major and emerging

markets have automated or plan to automate all or some of these

functions to take advantage of efficiency, competition and market

expansion opportunities.

The Commission in Securities Exchange Act Release No. 25284 stated

that the international securities market should feature efficient

structures for quotation, price and volume dissemination concerning

securities and derivatives markets traded worldwide.\2\ A critical step

in achieving a worldwide securities market information system would be

the creation and maintenance of international linkages between the

automated information systems of the various national securities

markets. Such a link was established between the BSE and the ME in 1984

for orders in U.S. stocks transmitted southbound from Montreal to

Boston. This rule proposal is designed to complete the ``loop'' with

orders in Canadian stocks being routed northbound from Boston to

Montreal.\3\

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\2\See Securities Exchange Act Release No. 26284 (November 14,

1988), 53 FR 46963 (November 21, 1988). The Commission issued its

Policy Statement on Regulation of International Securities Markets

in 1988 to identify areas of regulatory concern presented by the

continued internationalization of the securities markets.

\3\Under the Draft Linkage Plan, see note 1 supra, all

securities listed on the ME, except for options and futures, would

be eligible to be traded through the proposed northbound linkage.

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The proposed rule change seeks to commence northbound trading

pursuant to the trading linkage previously established with the ME.\4\

This would provide an additional means for U.S. customers to place

orders in Canadian stocks with U.S. brokers for execution on the ME.

These orders would be entered into the broker/dealers' order-match

systems which are linked to the BSE's BEACON system. BEACON would

receive and log the details of the order and pass it on to the ME's

automated order-routing and execution system. The order would contain

the terms for the price, if any, stated in Canadian dollars, and an

identifier indicating that its transmission is for the ME. The ME

system would also log the order and direct it to the specialist's

electronic book for action. These orders will be treated as would any

other order sent to the ME floor.

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\4\The Exchange's southbound foreign linkage rule and the

linkage plan with the ME was approved by the Commission in 1989. See

Securities Exchange Act Release No. 27080 (July 31, 1989) (File No.

SR-BSE-89-01).

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Upon execution, the customer report would be sent from the

specialist's book through the ME system to the BEACON system, with both

systems logging in the details of the report, then to the broker/

dealer's order-match system. BEACON will essentially function as a

conduit for the benefit of member firms who today conduct this business

through correspondents. While BEACON will keep detailed records of all

traffic, it will not function as an execution system for Canadian

stocks, nor show quotes in Canadian stocks, and it will not be

advertised as such.

The trades would be cleared pursuant to the BSE member's agreement

with a Canadian correspondent to clear and settle trades at the

Canadian Depository for Securities (``CDS'') on their behalf. BSE

members would give up a valid CDS account at execution and would be

treated like a customer of the Canadian correspondent. This is the

clearing arrangement that U.S. broker/dealers currently utilize in

clearing trades in Canadian stocks.

The ME is an affiliate member of the Intermarket Surveillance Group

(``ISG'') and as such has elected to participate in the ISG

investigative procedures.\5\ This structure will enhance the level of

cooperation between the BSE and ME surveillance departments with regard

to transactions executed through the link, as is currently done today

with southbound orders. Essentially, each northbound trade will be

entered into the ME's electronic book and will therefore be subject to

the ME's on-line stock trading monitoring system (``SECMA''). The ME

currently focuses its trading reviews on insider trading, trading on

non-public market information (``front running''), price manipulation

(Market fraud of various types), short squeeze, short sales down

ticking, normal course issue of bid up ticking, and restrictions on

trading by members involved in a distribution.

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\5\As an affiliate member of ISG, the ME has agreed to abide by

the requirements of the ISG Affiliate Agreement.

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In conducting these types of trading reviews, the ME utilizes price

alerts, volume alerts, exception reports based on high-lows and closing

prices, as well as other technical information analysis and graphics

that are available.

2. Statutory Basis

The basis under the Act for the proposed rule change is Section

6(b)(5) in that the rule is designed to prevent fraudulent and

manipulative acts and practices, to promote just and equitable

principles of trade, to foster cooperation and coordination with

persons engaged in regulating, clearing, settling, processing

information with respect to, and facilitating transactions in

securities, to remove impediments to and perfect the mechanism of a

free and open market, and in general, to protect investors and the

public interest; and is not designed to permit unfair discrimination

between customers, issuers, brokers, or dealers.

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.

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 publication of this notice in the Federal

Register or within such other 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 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. Persons making written submissions

should file copies thereof with the Secretary, Securities and Exchange

Commission, 450 Fifth Street, NW., Washington, DC 20549. 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 at the Commission's

Public Reference Section, 450 Fifth Street, NW., Washington, DC 20549.

Copies of such filing will also be available for inspection and copying

at the principal office of the BSE. All submissions should refer to

File No. SR-BSE-94-01 and should be submitted by August 25, 1994.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-18968 Filed 8-3-94; 8:45 am]

BILLING CODE 8010-01-M