[Federal Register Volume 75, Number 162 (Monday, August 23, 2010)]
[Notices]
[Pages 51861-51863]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-20820]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62736; File No. SR-NASDAQ-2010-100]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing of Proposed Rule Change Regarding Routing to an
Affiliated Exchange
August 17, 2010.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on August 6, 2010, The NASDAQ Stock Market LLC (``NASDAQ'' or the
``Exchange'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the Exchange. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
NASDAQ is proposing a rule change to amend Rule 4751 to modify the
restriction on routing of Directed Orders to a facility of an exchange
that is an affiliate of NASDAQ. The text of the proposed rule change is
available from NASDAQ's Web site at http://nasdaq.cchwallstreet.com, at
NASDAQ's principal office, and at the Commission's Public Reference
Room.
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. The
text of these statements may be examined at the places specified in
Item III below, and is set forth in Sections A, B, and C below.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The NASDAQ OMX Group, Inc. (``NASDAQ OMX''), a Delaware
corporation, owns three U.S. registered securities exchanges--NASDAQ,
NASDAQ OMX PHLX, Inc. (``PHLX'') and NASDAQ OMX BX, Inc. (``BX''). In
addition, NASDAQ OMX currently indirectly owns Nasdaq Execution
Services, LLC (``NES''), a registered broker-dealer and a member of
PHLX. Thus, NES is an affiliate of each of NASDAQ, PHLX and BX.
PHLX has proposed to launch NASDAQ OMX PSX (``PSX'') \3\ as a new
platform for trading NMS stocks (as defined in Rule 600 under
Regulation NMS).\4\ Although PSX will not route to other market
centers, PSX will receive orders routed to it by other market centers,
including NASDAQ. In this respect, PSX will be similar to the NASDAQ
OMX BX Equities System, which does not currently route orders to other
venues.
---------------------------------------------------------------------------
\3\ Securities Exchange Act Release No. 62519 (July 16, 2010),
75 FR 43497 (July 26, 2010) (SR-PHLX-2010-79) (``PSX Proposal'').
\4\ 17 CFR 242.600.
---------------------------------------------------------------------------
NES is the approved outbound routing facility of NASDAQ for cash
equities, providing outbound routing from NASDAQ to other market
centers. NES does not provide inbound routing to NASDAQ. The
acquisition of NES by NASDAQ OMX was approved by the Commission in 2004
and 2005 \5\ and the rules under which NES currently routes orders from
NASDAQ to other market centers were approved initially by the
Commission in 2006 and have been amended on numerous occasions since
then.\6\ Rules 4751 and 4758 establish the conditions under which
NASDAQ is permitted to own and operate NES in its
[[Page 51862]]
capacity as a facility of NASDAQ that routes orders from NASDAQ to
other market centers. The conditions include requirements that: (1) NES
is operated as a facility of NASDAQ; (2) NES will not engage in any
business other than: (i) as an outbound router for NASDAQ and (ii) any
other activities it may engage in as approved by the Commission; (3)
for purposes of Commission Rule 17d-1, the designated examining
authority of NES is a self-regulatory organization unaffiliated with
NASDAQ; (4) use of NES to route orders to other market centers is
optional; \7\ and (5) NASDAQ will not route orders to an affiliated
exchange, such as PHLX, unless they check the NASDAQ book prior to
routing.
---------------------------------------------------------------------------
\5\ See Securities Exchange Act Release Nos. 50311 (September 3,
2004), 69 FR 54818 (September 10, 2004) (Order Granting Application
for a Temporary Conditional Exemption Pursuant To Section 36(a) of
the Exchange Act by the National Association of Securities Dealers,
Inc. Relating to the Acquisition of an ECN by The Nasdaq Stock
Market, Inc.) and 52902 (December 7, 2005), 70 FR 73810 (December
13, 2005) (SR-NASD-2005-128) (Order Approving a Proposed Rule Change
To Establish Rules Governing the Operation of the INET System).
\6\ See Securities Exchange Act Release Nos. 61682 (March 10,
2010), 75 FR 12592 (March 16, 2010) (SR-NASDAQ-2010-030); 61460
(February 1, 2010, 75 FR 6077 (February 5, 2010) (SR-NASDAQ-2010-
018); 60570 (August 26, 2009), 74 FR 45504 (September 2, 2009) (SR-
NASDAQ-2009-079); 60039 (June 3, 2009), 74 FR 27365 (June 9, 2009)
(SR-NASDAQ-2009-050); 59875 (May 6, 2009), 74 FR 22794 (May 14,
2009) (SR-NASDAQ-2009-043); 59807 (April 21, 2009), 74 FR 19251
(April 28, 2009) (SR-NASDAQ-2009-036); 59153 (December 23, 2008), 73
FR 80485 (December 31, 2008) (SR-NASDAQ-2008-098); 58752 (October 8,
2008), 73 FR 61181 (October 15, 2008) (SR-NASDAQ-2008-079); 58135
(July 10, 2008), 73 FR 40898 (July 16, 2008) (SR-NASDAQ-2008-061);
58069 (June 30, 2008), 73 FR 39360 (July 9, 2008) (SR-NASDAQ-2008-
054); 56708 (October 26, 2007), 72 FR 61925 (November 1, 2007) (SR-
NASDAQ-2007-078); 56867 (November 29, 2007), 72 FR 69263 (December
7, 2007) (SR-NASDAQ-2007-065); 55335 (February 23, 2007), 72 FR 9369
(March 1, 2007) (SR-NASDAQ-2007-005); 54613 (October 17, 2006), 71
FR 62325 (October 24, 2006) (SR-NASDAQ 2006-043); 54271 (August 3,
2006), 71 FR 45876 (August 10, 2006) (SR-NASDAQ-2006-027); and 54155
(July 14, 2006), 71 FR 41291 (July 20, 2006) (SR-NASDAQ-2006-001).
\7\ Because only NASDAQ members may enter orders into NASDAQ, it
also follows that routing by NES is available only to NASDAQ
members.
---------------------------------------------------------------------------
The Commission has approved NES's affiliation with PHLX subject to
the conditions that: (1) NES remains a facility of NASDAQ; (2) use of
NES's routing function by NASDAQ members continues to be optional; (3)
NES does not provide routing of orders to PHLX or any trading
facilities thereof, unless such orders first attempt to access any
liquidity on the NASDAQ book; and (4) for purposes of Commission Rule
17d-1, the designated examining authority of NES is a self-regulatory
organization unaffiliated with NASDAQ.\8\
---------------------------------------------------------------------------
\8\ See Securities Exchange Act Release No. 58179 (July 17,
2008), 73 FR 42874 (July 23, 2008) (SR-Phlx-2008-31).
---------------------------------------------------------------------------
NASDAQ is proposing that, upon the resumption of cash equity
trading by PHLX, NES, in its operation as a facility of NASDAQ, be
permitted to route all orders, including Directed Orders, to PSX
without checking the NASDAQ book prior to routing. Directed Orders are
orders that route directly to other exchanges on an immediate-or-cancel
basis without first checking the NASDAQ book for liquidity.\9\ In order
to modify the conditions regarding the operation of NES and allow NES
to route Directed Orders to PSX, NASDAQ is proposing to modify the
restriction in Rule 4751(f)(9) that prohibits the routing of Directed
Orders to a facility of an exchange that is an affiliate of NASDAQ.
Under the proposed rule change, inbound routing of Directed Orders to
the NASDAQ OMX PSX facility of PHLX would be permitted.
---------------------------------------------------------------------------
\9\ Rules 4751 and 4755 provide for routing of ``directed
orders'' to automated market centers other than NASDAQ on an
``immediate-or-cancel'' basis. Such directed orders may be
designated as intermarket sweep orders (``ISOs''), which may be
executed by the receiving venue based on the representation of the
market participant that it has routed to all superior protected
quotations, or not so designated, in which case the orders will
execute only if their execution would not result in a trade-through.
---------------------------------------------------------------------------
The Commission has previously noted concerns about potential
informational advantages and conflicts of interest between an
exchange's self-regulatory obligations and its commercial interest when
the exchange is affiliated with one of its members.\10\ In order to
address the concerns identified by the Commission regarding the
potential for informational advantages favoring NES vis-[agrave]-vis
other non-affiliated members of BX, NASDAQ previously adopted Rule
4758(b)(8) to provide that NES shall establish and maintain procedures
and internal controls reasonably designed to adequately restrict the
flow of confidential and proprietary information between NASDAQ and its
facilities (including NES) and any other entity (including PHLX).\11\
---------------------------------------------------------------------------
\10\ See, e.g., Securities Exchange Act Release Nos. 59153
(December 23, 2008), 73 FR 80485 (December 31, 2008) (SR-NASDAQ-
2008-098) (``BX Order''); 58681 (September 29, 2008), 73 FR 58285
(October 6, 2008) (SR-NYSEArca-2008-90) (``NYSE Arca Order''); 58680
(September 29, 2008), 73 FR 58283 (October 6, 2008) (SR-NYSE-2008-
76) (``NYSE Order''); 58673 (September 29, 2008), 73 FR 57707
(October 3, 2008) (SR-Amex-2008-62) (``NYSE Alternext US Order'').
\11\ BX Order, supra n. 10.
---------------------------------------------------------------------------
In connection with the proposed launch of PSX, PHLX has proposed a
new rule and made certain undertakings intended to manage the flow of
confidential and proprietary information between NES and PHLX and to
minimize potential conflicts of interest.\12\ PHLX's proposed Rule
985(c)(2) will provide:
---------------------------------------------------------------------------
\12\ PSX Proposal, supra n. 3.
The NASDAQ OMX Group, Inc., which owns Nasdaq Execution
Services, LLC and the Exchange, shall establish and maintain
procedures and internal controls reasonably designed to ensure that
Nasdaq Execution Services, LLC does not develop or implement changes
to its system on the basis of non-public information regarding
planned changes to the Exchange's systems, obtained as a result of
its affiliation with the Exchange, until such information is
available generally to similarly situated exchange members in
---------------------------------------------------------------------------
connection with the provision of inbound routing to the Exchange.
Pursuant to the new rule, PHLX has proposed to allow PSX to receive
inbound routed orders for a twelve-month pilot period.
2. Statutory Basis
NASDAQ believes that the proposed rule change is consistent with
the provisions of Section 6 of the Act,\13\ in general, and with
Section 6(b)(5) of the Act,\14\ in particular, in that the proposal 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 a national market system, and,
in general, to protect investors and the public interest. The proposed
rule change would permit inbound routing of Directed Orders and other
orders to PHLX from its affiliate NES while minimizing the potential
for conflicts of interest and informational advantages involved where a
member firm is affiliated with an exchange to which it is routing
orders.
---------------------------------------------------------------------------
\13\ 15 U.S.C. 78f.
\14\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
NASDAQ does not believe that the proposed rule change will impose
any burden on competition that is 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
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) of the Act \15\ and Rule 19b-
4(f)(6) thereunder.\16\
---------------------------------------------------------------------------
\15\ 15 U.S.C. 78s(b)(3)(A).
\16\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
---------------------------------------------------------------------------
At any time within the 60-day period beginning on the date of the
filing of the proposed rule change, the Commission summarily may
temporarily suspend such rule change if it appears to the Commission
that such action is necessary or appropriate in the public interest,
for the protection of investors, or otherwise in furtherance of the
purposes of the Act.
[[Page 51863]]
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to [email protected]. Please include
File Number SR-NASDAQ-2010-100 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-2010-100. 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, 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-2010-100 and should be submitted on or before
September 13, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
---------------------------------------------------------------------------
\17\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-20820 Filed 8-20-10; 8:45 am]
BILLING CODE 8010-01-P