[Federal Register Volume 75, Number 49 (Monday, March 15, 2010)]
[Notices]
[Pages 12323-12325]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-5530]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-61668; File No. SR-NASDAQ-2010-028]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Modify Routing of Orders From NASDAQ Options Market to an Affiliated
Exchange
March 5, 2010.
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 February 26, 2010, The NASDAQ Stock Market LLC (``Nasdaq'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by Nasdaq. Nasdaq has designated the proposed rule
change as constituting a non-controversial rule change under Rule 19b-
4(f)(6) under the Act,\3\ which renders the proposal effective upon
filing with the Commission. 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.
\3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Nasdaq proposes to amend Chapter VI, Sections 1(e)(7) and 11(b) of
the Rules of the NASDAQ Options Market (``NOM'') to modify the
restriction on routing of certain orders to an exchange that is an
affiliate of NOM.
The text of the proposed rule change is below. Proposed new
language is italicized; proposed deletions are in [brackets].
Options Rules
Chapter VI Trading System
* * * * *
Sec. 1 Definitions
The following definitions apply to Chapter VI for the trading of
options listed on NOM.
(a)-(d) No change.
(e) The term ``Order Type'' shall mean the unique processing
prescribed for designated orders that are eligible for entry into the
System, and shall include:
(1)-(6) No change.
(7) ``Exchange Direct Orders'' are orders that are directed to an
exchange other than NOM as directed by the entering party without
checking the NOM book. If unexecuted, the order (or unexecuted portion
thereof) shall be returned to the entering party. This order type may
only be used for orders with time-in-force parameters of IOC.
Exchange Direct[ed] Orders may not be directed to a facility of an
exchange that is an affiliate of Nasdaq other than the Boston Options
Exchange or NASDAQ OMX PHLX.
(8) No change.
(f)-(h) No change.
Sec. 11 Order Routing
(a) No change.
(b) For Non-System securities, the order routing process shall be
available to Participants from 9:30 a.m. Eastern Time until market
close and shall route orders based on the participant's instructions.
Notwithstanding the foregoing, the order routing process will not be
available to route Non-System Securities to a facility of an exchange
that is an affiliate of Nasdaq other than the Boston Options Exchange
or NASDAQ OMX PHLX.
(c)-(e) No change.
* * * * *
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
a. Background
NASDAQ OMX PHLX, Inc. (``PHLX'') is a wholly-owned subsidiary of
The NASDAQ OMX Group, Inc. (``NASDAQ OMX''), a Delaware corporation.
NASDAQ OMX also indirectly owns NASDAQ Options Services, LLC (``NOS''
or the ``Routing Facility''), a registered broker-dealer and a PHLX
member. Thus, NOS is deemed an affiliate of PHLX.
b. Affiliation and Order Routing
Nasdaq is proposing that NOS be permitted to route Exchange Direct
Orders in System Securities \4\ to PHLX without checking the NOM book
prior to routing. Exchange Direct Orders are orders that route directly
to other options markets on an immediate-or cancel basis without first
checking the NOM book for liquidity.\5\ In addition, the proposed rule
change would permit the routing by NOS of orders (including Exchange
Direct Orders) in Non-System Securities from NOM to PHLX.
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\4\ Pursuant to Chapter VI, Section 1(b), ``System Securities''
are all options that are currently trading on NOM pursuant to
Chapter IV of the NOM rules. All other options are ``Non-System
Securities.''
\5\ See Chapter VI, Section 1(e)(7) of the NOM Rules.
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NOS is the approved outbound routing facility of Nasdaq for NOM.
Under NOM Rule Chapter VI, Section 11: (1) NOM routes orders in options
via NOS, which serves as the sole ``Routing Facility'' of NOM; (2) the
sole function of the Routing Facility is to route orders in options to
away markets pursuant to NOM rules, solely on behalf of NOM; (3) NOS is
a member of an unaffiliated self-regulatory organization, which is the
designated examining authority for the broker-dealer; (4) 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; (5) NOM must 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 the Routing Facility), and any other entity; and
(6) the books, records, premises, officers, directors, agents, and
employees of the Routing Facility, as a facility of Nasdaq, shall be
deemed to be the books, records, premises, officers, directors, agents,
and employees of Nasdaq for
[[Page 12324]]
purposes of and subject to oversight pursuant to the Act, and the books
and records of the Routing Facility, as a facility of Nasdaq, shall be
subject at all times to inspection and copying by Nasdaq and the
Commission.
The Commission has approved NOS's affiliation with PHLX subject to
the conditions that: (1) NOS remains a facility of Nasdaq; (2) use of
NOS's routing function by Nasdaq members continues to be optional \6\
and (3) NOS does not provide routing of orders in options from NOM to
PHLX or any trading facilities thereof, unless such orders first
attempt to access any liquidity on the NOM book.\7\
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\6\ Because only Nasdaq members who are Options Participants may
enter orders into NOM, it also follows that routing by NOS is
available only to Nasdaq members who are Options Participants.
Pursuant to Chapter I, Section 1(a)(40) of the NOM Rules, the term
``Options Participant'' means a firm, or organization that is
registered with Nasdaq for purposes of participating in options
trading on NOM as a ``Nasdaq Options Order Entry Firm'' or ``Nasdaq
Options Market Maker''.
\7\ See Securities Exchange Act Release No. 58179 (July 17,
2008), 73 FR 42874 (July 23, 2008).
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Currently, Chapter VI, Section 1(e)(7) of the NOM rules prohibits
the routing of Exchange Direct Orders to a facility of an exchange that
is an affiliate of Nasdaq, with the exception of Exchange Direct Orders
routed to the Boston Options Exchange (``BOX''), a facility of BX,
which is an affiliate of Nasdaq. In order to modify the conditions
noted above regarding the operation of NOS and allow NOS to route
Exchange Direct Orders directly to PHLX, Nasdaq is proposing to amend
Chapter VI, Section 1(e)(7) of the NOM Rules to expand the exception
for routing to affiliates to permit routing by NOS to PHLX. Under the
proposed rule change, an Options Participant could enter an order into
NOM designated as an ``Exchange Direct Order'' with instructions to
route that order directly to PHLX without first checking the NOM book.
In addition, Nasdaq is proposing to amend Chapter VI, Section 11(b)
of the NOM Rules to permit the routing of orders in Non-System
Securities via NOS from NOM to PHLX. As a result, orders in Non-System
Securities that are routed to away markets under normal procedures
could be routed to PHLX, as well as those that are entered as Exchange
Direct Orders with instructions to route directly to PHLX.
Nasdaq and other exchanges previously have adopted rules that
permit exchanges to accept routing of inbound orders from affiliates,
subject to certain limitations and conditions intended to address the
Commission's concerns regarding affiliation.\8\ Specifically, the
proposed rule change to Chapter VI, Section 1(e)(7) is consistent with:
(i) Nasdaq adopting rule changes to permit NOS, in its operation as a
routing facility for NOM, to route orders from NOM to BOX, a facility
of BX, which is an affiliate of Nasdaq, and (ii) in the equities
markets, by Nasdaq in adopting rule changes to permit NASDAQ Execution
Services, Inc., in its operation as the routing facility of Nasdaq, to
route orders from Nasdaq to BX.\9\
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\8\ See Securities Exchange Act Release Nos. 60354 (July 21,
2009), 74 FR 37074 (July 27, 2009)(SR-NASDAQ-2009-065); 60349 (July
20, 2009), 74 FR 37071 (July 27, 2009)(SR-BX-2009-035); 59153
(December 23, 2008), 73 FR 80485 (December 31, 2008)(SR-NASDAQ-2008-
098); 59154 (December 23, 2008), 73 FR 80468 (December 31, 2008)(SR-
BSE-2008-48); 59010 (November 24, 2008), 73 FR 73373 (December 2,
2008) (SR-NYSEArca-2008-130); 58681 (September 29, 2008), 73 FR
58285 (October 6, 2008)(SR-NYSEArca-2008-90); 58680 (September 29,
2008), 73 FR 58283 (October 6, 2008)(SR-NYSE-2008-76); 58673
(September 29, 2008), 73 FR 57707 (October 3, 2008)(SR-Amex-2008-62)
(collectively, the ``Affiliation Orders'').
\9\ See Securities Exchange Act Release Nos. 60354 (July 21,
2009), 74 FR 37074 (July 27, 2009)(SR-NASDAQ-2009-065); 59153
(December 23, 2008), 73 FR 80485 (December 31, 2008)(SR-NASDAQ-2008-
098).
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In the orders approving the above-mentioned rule changes, the
Commission noted its 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, but determined that the proposed limitations
and conditions were sufficient to mitigate its concerns.
With respect to concerns identified by the Commission regarding the
potential for informational advantages favoring NOS vis-[agrave]-vis
other non-affiliated PHLX members, these concerns are addressed by: (i)
Existing NOM Rule Chapter VI, Section 11(e) which requires NOS to
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
NOS) and any other entity and (ii) existing PHLX Rule 1080(m)(iii)(C)
which requires PHLX to establish and maintain procedures and internal
controls reasonably designed to adequately restrict the flow of
confidential and proprietary information between PHLX and NOS and any
other entity, including any affiliate of NOS.
In addition, PHLX is proposing a rule change and certain
undertakings intended to manage the flow of confidential and
proprietary information between NOS and PHLX and to minimize potential
conflicts of interest.\10\
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\10\ See SR-Phlx-2010-036.
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2. Statutory Basis
Nasdaq believes that the proposed rule change is consistent with
the provisions of Section 6 of the Act,\11\ in general, and with
Section 6(b)(5) of the Act,\12\ 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 changes would permit routing of Exchange Direct Orders from NOM to
PHLX through NOS while minimizing the potential for conflicts of
interest and informational advantages involved where a broker-dealer is
affiliated with an exchange facility to which it is routing orders.
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\11\ 15 U.S.C. 78f.
\12\ 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 necessary or appropriate in
furtherance of the purposes of the Act, as amended.
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 proposed rule change: (i) Does not significantly affect
the protection of investors or the public interest; (ii) does not
impose any significant burden on competition; and (iii) does not become
operative for 30 days after the date of the filing, or such shorter
time as the Commission may designate if consistent with the protection
of investors and the public interest, the proposed rule change has
become effective pursuant to Section 19(b)(3)(A) of the Act \13\ and
Rule 19b-4(f)(6) thereunder.\14\
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\13\ 15 U.S.C. 78s(b)(3)(A).
\14\ 17 CFR 240.19b-4(f)(6).
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[[Page 12325]]
A proposed rule change filed under 19b-4(f)(6) normally may not
become operative prior to 30 days after the date of filing.\15\
However, Rule 19b-4(f)(6)(iii) \16\ permits the Commission to designate
a shorter time if such action is consistent with the protection of
investors and the public interest. Nasdaq has requested that the
Commission waive the 30-day operative delay. The Commission notes that
Nasdaq's proposal is consistent with its rules regarding order routing
to BOX \17\ and the rules of other national securities exchanges and
does not raise any new substantive issues.\18\ For these reasons, the
Commission believes that waiving the 30-day operative delay is
consistent with the protection of investors and the public interest,
and designates the proposed rule change to be operative upon filing
with the Commission.\19\
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\15\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-
4(f)(6)(iii) requires that a self-regulatory organization submit to
the Commission written notice of its intent to file the proposed
rule change, along with a brief description and text of 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. Nasdaq has satisfied this requirement.
\16\ Id.
\17\ See supra note 9.
\18\ See Affiliation Orders, supra note 8.
\19\ For the purposes only of waiving the 30-day operative
delay, the Commission has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission may summarily abrogate 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.
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-2010-028 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-2010-028. 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 Nasdaq. 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-2010-028 and should
be submitted on or before April 5, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-5530 Filed 3-12-10; 8:45 am]
BILLING CODE 8011-01-P