[Federal Register Volume 75, Number 161 (Friday, August 20, 2010)]
[Notices]
[Pages 51509-51512]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-20658]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62724; File No. SR-NASDAQ-2010-099]
Self-Regulatory Organizations; Notice of Filing of a Proposed
Rule Change by the NASDAQ Stock Market LLC To Adopt a Definition of
Professional and Require That All Professional Orders Be Appropriately
Marked
August 16, 2010.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given
that on August 6, 2010, The NASDAQ Stock Market LLC (``NASDAQ'') filed
with the Securities and Exchange Commission (``SEC'' or ``Commission'')
the proposed rule change as described in Items I and II below, which
Items have been prepared by NASDAQ. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
NASDAQ is filing with the Securities and Exchange Commission
(``SEC'' or ``Commission'') a proposal for the NASDAQ Options Market
(``NOM'' or ``Exchange'') to amend Chapter I, Section 1 (Definitions)
to adopt a definition of ``Professional'' on the Exchange and require
that all Professional orders be appropriately marked by Exchange
Participants.
The text of the proposed rule change is available from NASDAQ's Web
site at http://nasdaq.cchwallstreet.com/Filings/, at NASDAQ's principal
office, and at the Commission's Public Reference Room.
[[Page 51510]]
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, NASDAQ 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. NASDAQ 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 purpose of this proposal is to amend Chapter I, Section 1
(Definitions) to adopt a definition of ``Professional'' on the Exchange
and require that all Professional orders be appropriately marked.
This filing is similar to the recent filings of PHLX NASDAQ OMX,
Inc. (``Phlx''), the International Securities Exchange, LLC (``ISE''),
and Chicago Board Options Exchange, Incorporated, (``CBOE''), which
dealt with establishing a new definition of ``professional'' as a
person or entity that places a certain high volume of orders in listed
options per day on average during a calendar month in his or her own
beneficial account.\3\
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\3\ See Securities Exchange Act Release Nos. 61802 (March 30,
2010), 75 FR 17193 (April 5, 2010) (SR-Phlx-2010-05) (approval
order); 61198 (December 17, 2009), 74 FR 68880 (December 29, 2009)
(SR-CBOE-2009-078) (approval order); and 59287 (January 23, 2009),
74 FR 5694 (January 30, 2009) (SR-ISE-2006-26) (approval order). A
filing by NYSE Amex LLC (``NYSE Amex'') proposing a similar
professional designation was based on the Phlx, ISE, and CBOE
proposals. See Securities Exchange Act Release No. 61818 (March 31,
2010), 75 FR 17457 (April 6, 2010) (SR-NYSEAmex-2010-18) (approval
order). Phlx, ISE, CBOE, and NYSE Amex are known in this filing as
the ``Professional Rule Exchanges.''
The cited filings discuss, among other things, the need for a
professional designation to be applied by members of the respective
exchanges because the systems of such exchanges differentiate for
execution or processing purposes based on order origin. NOM does not
similarly differentiate among orders based on their origin.
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Background
A member of NOM is known as a Participant or Options Participant
(``Participant'').\4\ This is a firm or organization that is registered
with the Exchange pursuant to Chapter II for purposes of participating
in options trading on NOM as a Nasdaq Options Order Entry Firm or
Nasdaq Options Market Maker.\5\ Options traded by Participants (which
may include trades on behalf of Public Customers) \6\ on NOM, a wholly
electronic exchange, are electronically executable and routable. The
NOM System \7\ and rules provide for the ranking, display, and
execution of all orders in price/time priority without regard to the
status of the person or entity entering an order.\8\ The Exchange notes
that NOM has, in contrast to certain other options markets, a ``flat''
system that does not differentiate for execution or processing purposes
among orders on the basis of who or what entity enters an order on the
Exchange.\9\
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\4\ See Chapter I, Section 1(a)(40). Some NOM Participants are
also members of other options exchanges such as, for example, ISE,
CBOE, or Phlx.
\5\ Nasdaq Options Order Entry Firm or Order Entry Firm or OEF
is defined in Chapter I, Section 1(a)(25) as: those Options
Participants representing as agent Customer Orders on NOM and those
non-Market Maker Participants conducting proprietary trading. Nasdaq
Options Market Maker or Options Market Maker is defined in Chapter
I, Section 1(a)(26) as: an Options Participant registered with the
Exchange for the purpose of making markets in options contracts
traded on the Exchange and that is vested with the rights and
responsibilities specified in Chapter VII of these Rules.
\6\ Public Customer is defined in Chapter I, Section 1(a)(48)
as: a person that is not a broker or dealer in securities.
\7\ System is defined in Chapter IV, Section 1(a) as: the
automated system for order execution and trade reporting owned and
operated by The Nasdaq Options Market LLC.
\8\ See Securities Exchange Act Release No. 57478 (March 12,
2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-
NASDAQ-2007-080) (approval order). See also Chapter VI, Section 10,
which discusses the price/time execution algorithm for System orders
and states, in relevant part, that the System will execute trading
interest at the best price in the System before executing trading
interest at the next best price, and that the System will execute
displayed orders before non-displayed orders at the same price.
\9\ In contrast to NOM, hybrid options exchanges such as, for
example, Phlx and CBOE blend auction and electronic market
structures that differentiate certain order priority and execution
functions based upon, among other things, the origin of the order
(e.g., whether the order was a customer, market maker, broker or
dealer, firm, or other type of order); these exchanges also charge
different fees based on order origin. NOM does, like other
exchanges, differentiate fees based on order origin. For example,
fees for removing liquidity in SPY options are different for
customers than they are for market makers and firms. This filing
does not propose any changes in respect of the NOM fee structure.
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NASDAQ Options Services LLC (``NOS''), a member of the
Exchange,\10\ is the Exchange's exclusive order router for all orders
that come through the Exchange.\11\ NOS performs routing functions with
respect to System Securities and Non-System Securities.\12\ The
Exchange's general routing procedures are set forth in Chapter VI,
Section 11 (Order Routing), which states in subsection (c) that, among
other things, once routed by the System, an order becomes subject to
the rules and procedures of the destination market.\13\ NOS also
performs order routing services on behalf of Phlx.\14\
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\10\ NOS is also a member of other options exchanges such as,
for example, ISE and Phlx.
\11\ See Securities Exchange Act Release No. 57478 (March 12,
2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-
NASDAQ-2007-080) (approval order). See also Chapter VI, Section
11(e), which states, in relevant part: NOM shall route orders in
options via Nasdaq Options Services LLC, a broker-dealer that is a
member of an unaffiliated SRO which is the designated examining
authority for the broker-dealer. Nasdaq Options Services LLC serves
as the Routing Facility of NOM. The sole function of the Routing
Facility will be to route orders in options listed and open for
trading on NOM to away markets pursuant to NOM rules solely on
behalf of NOM. The Routing Facility is subject to regulation as a
facility of Nasdaq, including the requirement to file proposed rule
changes under Section 19 of the Act.
\12\ Chapter VI, Section 1(b) states: ``System Securities''
shall mean all options that are currently trading on NOM pursuant to
Chapter IV (Securities Traded on NOM) above. All other options shall
be ``Non-System Securities.''
\13\ Chapter VI, Section 11(c) states: Priority of Routed
Orders. Orders sent by the System to other markets do not retain
time priority with respect to other orders in the System and the
System shall continue to execute other orders while routed orders
are away at another market center. Once routed by the System, an
order becomes subject to the rules and procedures of the destination
market including, but not limited to, order cancellation. If a
routed order is subsequently returned, in whole or in part, that
order, or its remainder, shall receive a new time stamp reflecting
the time of its return to the System.
\14\ NOS routes certain orders in options listed and open for
trading on the Phlx electronic order, trading and execution system
(known as XL II) to away market centers. See Phlx Rule
1080(m)(iii)(A) and Securities Exchange Act Release No. 59995 (May
28, 2009), 74 FR 26750 (June 3, 2009) (SR-Phlx-2009-32) (approval
order).
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The exchanges that do the great majority of all U.S. options
trading, namely the Professional Rule Exchanges CBOE, ISE, NYSE AMEX,
and Phlx, already have rules that are similar to the Professional
designation rule proposed by the Exchange (a professional is a person
or entity that places 390 or more orders in listed options per day on
average during a calendar month in his or her own beneficial account).
These Professional Rule Exchanges make differentiations based on
whether an order is marked professional or otherwise. Some Exchange
Participants are, as noted, also members of Professional Rule Exchanges
such as CBOE, ISE, or Phlx. As members of these exchanges, such
Exchange Participants are subject to the professional designation rules
of the Professional Rule Exchanges. Similarly, NOS is a member of
several Professional Rule Exchanges. Exchange rules indicate that
orders routed by NOS become subject to the rules and
[[Page 51511]]
procedures of the destination markets (away exchanges).\15\
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\15\ Once routed by the System, an order becomes subject to the
rules and procedures of the destination market including, but not
limited to, order cancellation. See Chapter VI, Section 11(c).
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The Exchange believes that disparate rules in respect of
Professional order designation, and lack of uniform application of such
rules, do not promote the best regulation and may, in fact, encourage
regulatory arbitrage.\16\ The Exchange believes that it is therefore
prudent and necessary to have a Professional designation rule as is
commonplace in the industry, particularly where NOS (like Exchange
Participants) is a member of several exchanges that have rules
requiring professional order designations.
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\16\ The Exchange believes that the risk of regulatory arbitrage
is heightened where not all exchanges have Professional designation
rules; and there is a lack of uniformity regarding Professional Rule
Exchanges marking orders as Professional when routing such orders
away.
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The Proposal
The Exchange proposes new Chapter I, Section 1(a)(48) to state that
the term ``Professional'' means any person or entity that (i) is not a
broker or dealer in securities, and (ii) places more than 390 orders in
listed options per day on average during a calendar month for its own
beneficial account(s). A Participant or a Public Customer may, without
limitation, be a Professional. Moreover, in order to properly represent
orders entered on the Exchange according to the new definition, a
Participant will be required to appropriately mark all Professional
orders.\17\ To comply with this requirement, Participants will be
required to review their Public Customers' activity on at least a
quarterly basis to determine whether orders that are not for the
account of a broker-dealer should be represented as Professional
orders.\18\ The Exchange will issue a notice to Participants via OTA or
ORA outlining the procedures for the implementation of the proposal.
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\17\ The Exchange intends to require Participants to indentify
Professional orders submitted electronically by identifying them in
the customer type field, and will notify Participants via an Options
Trader Alert (``OTA'') or Options Regulatory Alert (``ORA'')
regarding this requirement.
\18\ Participants will be required to conduct a quarterly review
and make any appropriate changes to the way in which they are
representing orders within five business days after the end of each
calendar quarter. While Participants will only be required to review
their accounts on a quarterly basis, if during a quarter the
Exchange identifies a customer for which orders are being
represented as other than Professional orders but that has averaged
more than 390 orders per day during a month, the Exchange will
notify the Participant and the Participant will be required to
change the manner in which it is representing the customer's orders
within five business days. This is similar to the process of other
options exchanges that have adopted a professional designation. See,
e.g., Securities Exchange Act Release No. 61802 (March 30, 2010), 75
FR 17193 (April 5, 2010) (SR-Phlx-2010-05) (approval order).
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The Professional definition proposed by NOM is similar to the
Professional designation that has been adopted by Phlx, ISE, CBOE, and
NYSE Amex.\19\ As noted, the Professional definition will not impact
the Exchange's price/time order entry (priority) system.\20\ Instead,
the Exchange's proposal will ensure that Exchange Participants mark
their Professional orders properly, that is, similarly in terms of
professional order identification regardless of whether the order is
placed on NOM or some other Professional Order Exchange. Moreover, with
the proposed Professional designation in place, the Exchange will be
able to accept orders that are marked professional.\21\
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\19\ See supra note 3.
\20\ For example, unlike the Phlx proposal (which, among other
things, discusses that Professional orders on Phlx will be treated
in the same manner as off-floor brokers in terms of certain priority
rules), the Exchange's proposal does not address or impact any
priority relationship for Professional as opposed to other NOM
orders.
\21\ Currently, NOM only accepts orders that are marked as
customer, firm, market maker, or away market maker orders.
Professional orders that may not now be accepted by NOM must be sent
to other Exchanges. While the Exchange does not intend to
differentiate among Professional and other orders for priority
purposes, it may, in the future, feel that it is appropriate to
differentiate its routing or other fees in respect of Professional
as opposed to other orders; and if so, the Exchange intends to file
an appropriate fee-related rule filing(s). The Exchange does not
address its fee structure in the present filing.
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The designation of Professional or Professional order would not
result in any different treatment of such orders for purposes of NOM
rules concerning away market protection. That is, all non broker or
dealer orders, including those that meet the definition of Professional
orders, would continue to be treated equally for purposes of Exchange
away market protection rules.\22\
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\22\ See, e.g., Chapter VI, Section 11 and Chapter XII.
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The Exchange believes that identifying Professional accounts based
upon the average number of orders entered in qualified accounts is an
appropriately objective approach that will reasonably distinguish such
persons and entities from retail investors or market participants. The
Exchange proposes the threshold of 390 orders per day on average over a
calendar month, because it believes that this number far exceeds the
number of orders that are entered by retail investors in a single
day.\23\ Moreover, the 390 orders per day threshold proposed by NOM
directly corresponds to the daily order volume recognized by Phlx and
other options exchanges that have, as previously discussed, established
professional order designations.\24\ In addition, basing the standard
on the number of orders that are entered in listed options for a
qualified account(s) assures that professional account holders cannot
inappropriately avoid the purpose of the rule by spreading their
trading activity over multiple exchanges, and using an average number
over a calendar month will prevent gaming of the 390 order
threshold.\25\
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\23\ 390 orders is equal to the total number of orders that a
person would place in a day if that person entered one order every
minute from market open to market close. Many of the largest retail-
oriented electronic brokers offer lower commission rates to
customers they define as ``active traders.'' Publicly available
information from the websites of Charles Schwab, Fidelity, TD
Ameritrade and OptionsXpress all define ``active trader'' as someone
who executes only a few options trades per month. The highest
required trading activity to qualify as an active trader among these
four firms was 35 trades per quarter. See Securities Exchange Act
Release No. 57254 at note 11 (which also notes that a study of one
of the largest retail-oriented options brokerage firms indicated
that on a typical trading day, options orders were entered with
respect to 5,922 different customer accounts. There was only one
order entered with respect to 3,765 of the 5,922 different customer
accounts on this day, and there were only 17 customer accounts with
respect to which more than ten orders were entered. The highest
number of orders entered with respect to any one account over the
course of an entire week was 27).
\24\ The similarity of the Exchange's proposed Professional
order definition to that of other options exchanges is important
from the regulatory perspective, that is from a desire to promote a
national market system that minimizes regulatory arbitrage.
\25\ The Exchange intends to notify Participants via OTA or ORA
that this proposal will be implemented on the first trading day of
the month after the approval or effectiveness of this proposal.
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2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \26\ in general, and furthers the objectives of Section
6(b)(5) of the Act \27\ in particular, in that it 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 facilitating transactions in
securities, and to remove impediments to and perfect the mechanisms of
a free and open market and a national market system, by defining
Professional and indicating that all Professional orders shall be
appropriately marked by Participants.
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\26\ 15 U.S.C. 78f(b).
\27\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
NASDAQ does not believe that the proposed rule change will result
in any burden on competition that is not
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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
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate 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 or disapprove 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 Exchange 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 protected]. Please include
File Number SR-NASDAQ-2010-099 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2010-099. 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 Web site
viewing and printing 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 the 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-
NASDAQ-2010-099 and should be submitted on or before September 10,
2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\28\
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\28\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-20658 Filed 8-19-10; 8:45 am]
BILLING CODE 8010-01-P