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BOX Seeks SRO Status with Pending SEC Filing

Wants control over its own destiny because Nasdaq owns its regulator, the Boston Stock Exchange

Rather than allow a competitor to regulate its electronic options market, the Boston Options Exchange (BOX) is filing to become a national securities exchange to gain the status of a self-regulatory organization (SRO).

“At the moment, BOX is a facility of an SRO. We’re not legally speaking, an exchange, which puts us in the peculiar of being regulated by a competitor, which has an options market, ” commented Will Easley, vice chairman at BOX in an interview yesterday. “The choices were to find a different SRO to be our regulator or to go ahead to set up an SRO ourselves,” explained Easley.

The Nasdaq Stock Market acquired the BOX’s regulator, Boston Stock Exchange (BSE), in August of 2008. Nasdaq now operates two competing options exchanges — the Philadelphia Stock Exchange’s options market known as Nasdaq OMX PHLX and the Nasdaq Options Market or NOM.

Yesterday, the BOX, said it’s opening an office in Washington, D.C., to work closely with the SEC, and that it hired Wayne Pestone, former counsel at Bingham McCutchen LLP (Bingham) as its chief legal officer. At Bingham, Pestone, who previously worked at the SEC, has provided counsel to exchanges regarding market regulation, surveillance and compliance for both equity and options trading. He also represented the BOX since its beginnings in 2002, when the all-electronic derivatives exchange was formed as an alternative to the existing market models.

As chief legal officer, Pestone’s primary responsibilities are supervision of BOX’s day-to-day legal and compliance obligations, and as liaison with BOX’s primary regulator, the BSE. Pestone and his group will take over the functions currently performed by the BSE Staff. He is also working with the SEC on seeking SRO approval, which entails filing the S-1 documentation. Approval is targeted for the fourth quarter of 2009.

Pestone is also going to hire his own legal team. In terms of headcount costs, BOX is currently paying 12 people at the BSE to perform regulatory functions. The overall headcount won’t change,” said Easley. One of the benefits of becoming its own regulator is that it will simplify the number of relationships that BOX has. For instance, if someone rings up the BOX staff today with a regulatory, question, it has to refer the caller to an outside organization. BOX will also save a little money in that BSE has some profit margins built into its regulatory fees, noted Easley.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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