[Federal Register Volume 73, Number 137 (Wednesday, July 16, 2008)]
[Notices]
[Pages 40898-40902]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-16233]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-58135; File No. SR-NASDAQ-2008-061]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
Regarding Routing to Affiliated Exchanges
July 10, 2008.
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 July 9, 2008, 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
substantially prepared by NASDAQ. NASDAQ has designated the proposed
rule change as constituting a 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 the
Substance of the Proposed Rule Change
NASDAQ proposes to modify NASDAQ Rule 4751 and Chapter VI, Section
11 of the Rules of the NASDAQ Options Market (``NOM'') to limit the
routing of certain orders to exchanges affiliated with NASDAQ. NASDAQ
proposes to implement the rule change at the time of the closings of
proposed acquisitions of the Philadelphia Stock Exchange, Inc.
(``PHLX'') and Boston Stock Exchange, Incorporated (``BSE'').
The text of the proposed rule change is below. Proposed new
language is italicized.\4\
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\4\ Changes are marked to the rule text that appears in the
electronic Nasdaq Manual found at http://nasdaq.complinet.com.
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[[Page 40899]]
NASDAQ Rules
Equity Rules
* * * * *
4751. Definitions
* * * * *
(a)-(e) No change.
(f) 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)-(8) No change.
(9) ``Directed Orders'' are orders that are directed to an exchange
other than Nasdaq as directed by the entering party without checking
the Nasdaq book. If unexecuted, the order (or unexecuted portion
thereof) shall be returned to the entering party. This option may only
be used for orders with time-in-force parameters of IOC.
Directed Orders may be designated as intermarket sweep orders by
the entering party to execute against the full displayed size of any
protected bid or offer (as defined in Rule 600(b) of Regulation NMS
under the Act). A broker-dealer that designates an order as an
intermarket sweep order has the responsibility of complying with Rules
610 and 611 of Regulation NMS.
Directed Orders may not be directed to a facility of an exchange
that is an affiliate of Nasdaq.
(g)-(i) No change.
* * * * *
Options Rules
* * * * *
Chapter VI Trading System
* * * * *
Sec. 11 Order Routing
(a) For 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 as follows. Participants can designate
orders as either available for routing or not available for routing.
Orders designated as not available for routing shall follow the book
processing rules set forth in Section 10 above. Orders designated as
available for routing will first check the System for available
contracts for execution. After checking the System for available
contracts, orders are sent to other available market centers for
potential execution, per entering firm's instructions. When checking
the book, the System will seek to execute at the price at which it
would send the order to a destination market center. If contracts
remain un-executed after routing, they are posted on the book. Once on
the book, should the order subsequently be locked or crossed by another
market center, the System will not route the order to the locking or
crossing market center. With the exception of the Minimum Quantity
order type, all time-in-force parameters and order types may be used in
conjunction with this routing option.
(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.
(c)-(d) No change.
(e) 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.
Nasdaq Options Services LLC also routes orders in options that are
not listed and actually trading on NOM. When routing orders in options
that are not listed and open for trading on NOM, Nasdaq Options
Services is not a facility of NOM and is not regulated as a facility of
Nasdaq but as a broker-dealer regulated by its designated examining
authority.
Use of Nasdaq Options Services LLC to route orders to other market
centers is optional. Parties that do not desire to use Nasdaq Options
Services LLC must designate orders as not available for routing.
NOM shall establish and maintain procedures and internal controls
reasonably designed to adequately restrict the flow of confidential and
proprietary information between the Exchange and its facilities
(including the Routing Facility), and any other entity.
The books, records, premises, officers, directors, agents, and
employees of the Routing Facility, as a facility of the Exchange, shall
be deemed to be the books, records, premises, officers, directors,
agents, and employees of the Exchange for purposes of and subject to
oversight pursuant to the Exchange Act. The books and records of the
Routing Facility, as a facility of the Exchange, shall be subject at
all times to inspection and copying by the Exchange and the Commission.
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
On October 2, 2007, The Nasdaq Stock Market, Inc. (which was
recently renamed The NASDAQ OMX Group, Inc. (``NASDAQ OMX'')) announced
that it had entered into an agreement with BSE pursuant to which NASDAQ
OMX will acquire all of the outstanding membership interests in BSE,
and BSE will be merged with and into Yellow Merger Corporation, a
Delaware corporation and wholly owned subsidiary of NASDAQ OMX, with
BSE surviving the merger (the ``BSE Merger''). As a result of the BSE
Merger, BSE will become a Delaware stock corporation, with 100% of its
outstanding stock owned by NASDAQ OMX.
On November 7, 2007, The Nasdaq Stock Market, Inc. announced that
it had entered into an agreement with PHLX pursuant to which NASDAQ OMX
will acquire all of the outstanding capital stock of PHLX, and PHLX
will be merged with and into Pinnacle Merger Corp., a Delaware
corporation and wholly owned subsidiary of NASDAQ OMX, with PHLX
surviving the merger (the ``PHLX Merger,'' and together with the BSE
Merger, the ``Mergers''). NASDAQ OMX will operate BSE and PHLX as
wholly owned subsidiaries, with rules, membership rosters, and listings
that are separate and distinct from the rules, membership rosters, and
listings of NASDAQ.
Nasdaq Execution Services, LLC (``NES'') and NASDAQ Options
Services, LLC (``NOS''), which are both subsidiaries of NASDAQ, are
registered broker-dealers and members of BSE and PHLX. In their filings
related to the
[[Page 40900]]
Mergers, both BSE and PHLX proposed to adopt rules requiring Commission
approval of any affiliations between themselves and their members.\5\
As a result of the Mergers, NES and NOS will become affiliates of BSE
and PHLX. Accordingly, in their filings, both BSE and PHLX requested
Commission approval of such affiliations, subject to the following
conditions:
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\5\ Securities Exchange Act Release No. 57757 (May 1, 2008), 73
FR 26159 (May 8, 2008) (SR-BSE-2008-23) (``BSE Governance Proposal
Notice''); Securities Exchange Act Release No. 57703 (April 23,
2008), 73 FR 23293 (April 29, 2008) (SR-PHLX-2008-31) (``PHLX
Acquisition Proposal Notice'').
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With respect to NES: NES remains a facility of NASDAQ; use
of NES's routing function by NASDAQ members continues to be optional;
and NES does not provide routing of directed orders to BSE, PHLX or any
trading facilities thereof, unless such orders first attempt to access
any liquidity on the NASDAQ book.
With respect to NOS: NOS remains a facility of NASDAQ; use
of NOS's Routing Facility function by NASDAQ members continues to be
optional; and NOS does not provide routing of orders in options that
are not listed and open for trading on the NASDAQ Option Market
(``NOM'') to BSE, PHLX, or any trading facilities thereof.
In this filing, NASDAQ is proposing modifications to its rules to fully
implement these conditions.
The acquisition of the entities that are now NES and NOS by The
Nasdaq Stock Market, Inc. (now NASDAQ OMX) was approved by the
Commission in 2004 and 2005.\6\ The rules under which NES currently
routes orders to other market centers were approved by the Commission
in 2006 and were subsequently amended on several occasions.\7\
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\6\ 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).
\7\ See Securities Exchange Act Release Nos. 56867 (November 29,
2007), 72 FR 69263 (December 7, 2007) (SR-NASDAQ-2007-065); 56708
(October 26, 2007), 72 FR 61925 (November 1, 2007) (SR-NASDAQ-2007-
078); 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).
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Notably, NASDAQ Rule 4758(a) describes various order routing
strategies that a NASDAQ market participant may employ. All of the
routing strategies that allow routing to BSE or PHLX stipulate that
routing occurs ``after checking the System [i.e., the NASDAQ book] for
available shares.'' \8\ NASDAQ Rule 4758(b) further describes the
parameters for operation of NES as follows: (1) All routing of equities
by NASDAQ is performed by NES, which, in turn, routes orders to other
market centers as directed by the NASDAQ; (2) NES will not engage in
any business other than: (a) As a outbound router for NASDAQ and (b)
any other activities it may engage in as approved by the Commission;
(3) NES will operate as a facility, as defined in Section 3(a)(2) of
the Act, of NASDAQ; (4) for purposes of Rule 17d-1 under the Act, the
designated examining authority of NES will be a self-regulatory
organization unaffiliated with NASDAQ or any of its affiliates; (5)
NASDAQ shall be responsible for filing with the Commission rule changes
related to the operation of, and fees for services provided by, NES,
and NES shall be subject to exchange non-discrimination requirements;
(6) the books, records, premises, officers, agents, directors and
employees of NES, as a facility of NASDAQ, shall be deemed to be the
books, records, premises, officers, agents, directors and employees of
NASDAQ for purposes of, and subject to oversight pursuant to, the Act,
and the books and records of NES, as a facility of the NASDAQ, shall be
subject at all times to inspection and copying by the Commission; and
(7) use of NES is optional.
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\8\ The ``DOT'' routing strategy allows market participants to
instruct whether or not a particular order should check the book
prior to routing, but is available for routing solely to the New
York Stock Exchange and the American Stock Exchange.
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In addition to the order routing strategies described in Rule 4758,
Rules 4751 and 4755 provide for routing of ``directed orders'' to
automated market centers other than NASDAQ on an ``immediate-or-
cancel'' basis.\9\ Such directed orders may be designated as
intermarket sweep orders (``ISOs''),\10\ 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. Under existing rules,
directed orders are the only types of orders that could be routed by
NES to BSE or PHLX without checking the NASDAQ book prior to routing.
As described above, Rule 4758 already establishes all the restrictions
stipulated in the BSE Filing and the PHLX Filing with respect to
NASDAQ's order routing strategies. In order to implement the
restrictions with respect to ``Directed Orders,'' as defined in NASDAQ
Rule 4751, NASDAQ is amending that rule to provide that Directed Orders
may not be directed to a facility of an exchange that is an affiliate
of NASDAQ.
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\9\ Separately, Rule 4758 provides for routing of orders with a
time-in-force other than immediate-or-cancel, but only to the New
York Stock Exchange or the American Stock Exchange.
\10\ Rule 600(b)(30) under Regulation NMS recognizes the
regulatory purpose of an ISO and defines it as follows:
``Intermarket sweep order'' means a limit order for an NMS stock
that meets the following requirements: (i) When routed to a trading
center, the limit order is identified as an intermarket sweep order;
and (ii) Simultaneously with the routing of the limit order
identified as an intermarket sweep order, one or more additional
limit orders, as necessary, are routed to execute against the full
displayed size of any protected bid, in the case of a limit order to
sell, or the full displayed size of any protected offer, in the case
of a limit order to buy, for the NMS stock with a price that is
superior to the limit price of the limit order identified as an
intermarket sweep order. These additional routed orders also must be
marked as intermarket sweep orders.''
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NOS serves as the outbound router for the NOM, which commenced
operations on March 31, 2008. 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 listed and open for trading on
NOM to away markets pursuant to NOM rules, solely on behalf of NOM; (3)
NOS is a member of an unaffiliated SRO 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 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.
Unlike NES, NOS does not have a ``directed order'' for options that
are trading on NOM; rather, all routable orders for options that are
trading on
[[Page 40901]]
NOM check the NOM book prior to routing. However, NOS also routes
orders in options that are not trading on NOM (referred to in the NOM
Rules as ``Non-System Securities''). When routing orders in options
that are not listed and open for trading on NOM, NOS is not regulated
as a facility of NASDAQ but rather as a broker-dealer regulated by its
designated examining authority. However, as provided by Chapter IV,
Section 5 of the NOM Rules, all orders routed by NOS under these
circumstances are routed to away markets that are at the best price,
and solely on an immediate-or-cancel basis.
NASDAQ is amending Chapter VI, Section 11 of the NOM Rules to
provide that NOM's order routing process will not be available to route
Non-System Securities to a facility of an exchange that is an affiliate
of NASDAQ. In addition, although Chapter VI, Section 11 currently
states that NOM participants can designate orders as either available
for routing or not available for routing, NASDAQ is further amending
this rule to explicitly state that use of NOS to route orders to other
market centers is optional, and that parties that do not desire to use
NOS must designate orders as not available for routing.
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 change will provide that routing from NASDAQ to BSE or PHLX
through NES and NOS will occur solely in circumstances where routed
orders access liquidity available on the NASDAQ book prior to routing.
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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.
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 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 subparagraph (f)(6) of Rule 19b-4 thereunder.\14\ As required
under Rule 19b-4(f)(6)(iii),\15\ NASDAQ provided the Commission with
written notice of its intent to file the proposed rule change, along
with a brief description and text of the proposed rule change, prior to
the date of filing of the proposed rule change.
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\13\ 15 U.S.C. 78s(b)(3)(A).
\14\ 17 CFR 240.19b-4(f)(6).
\15\ 17 CFR 240.19b-4(f)(6)(iii).
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A proposed rule change filed under Rule 19b-4(f)(6) normally may
not become operative for 30 days after the date of filing. However,
Rule 19b-4(f)(6)(iii) 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 because the proposed rule change will implement
changes designed to provide that routing from NASDAQ to BSE or PHLX
through NES and NOS will occur solely in circumstances where routed
orders access liquidity available on the NASDAQ book prior to routing,
which limits are designed to lessen potential conflicts of interest
that may be associated with routing to affiliated exchanges. The
acquisitions of PHLX and BSE are expected to close imminently, and
therefore waiving the 30-day preoperative period would allow NASDAQ to
implement these changes at the time of such closings.
The Commission believes that waiving the 30-day operative delay is
consistent with the protection of investors and the public interest.
The Commission notes that the proposed rule change will limit the
routing of orders from NASDAQ to PHLX and BSE,\16\ which will be
affiliates of NASDAQ following the Mergers, by NES and NOS, which are
members of NES and NOS and affiliates of NASDAQ and will be affiliates
of PHLX and BSE following the Mergers, to the routing of orders that
first attempt to access liquidity on the NASDAQ book. The Commission
has in the past expressed its concern about the potential for unfair
competition and conflicts of interest between an exchange's self-
regulatory obligations and its commercial interests that could exist if
an exchange were to otherwise become affiliated with one of its
members, as well as the potential for unfair competitive advantage that
the affiliated member could have by virtue of informational or
operational advantages, or the ability to receive preferential
treatment.\17\ As noted above, NASDAQ represents that the proposed
restrictions are designed to lessen potential conflicts of interest
that may be associated with routing to affiliated exchanges. The
Commission also notes that public comment was previously solicited with
respect to the proposed restrictions in the context of rule proposals
filed by PHLX and BSE relating to the Mergers.\18\ No comments were
received on those filings. Further, the Commission notes that NASDAQ
represents that it will only implement the proposed rule change at the
time of the closings of the proposed acquisitions of PHLX and BSE,
respectively. For these reasons, the Commission designates that the
proposed rule change become operative immediately.\19\
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\16\ The Commission notes that BSE's equities market is not
currently operational. See BSE Governance Proposal Notice, supra
note 5, 73 FR at 26166.
\17\ See Securities Exchange Act Release No. 53382 (February 27,
2006), 71 FR 11251 (March 6, 2006) (SR-NYSE-2005-77) (order
approving the New York Stock Exchange, Inc.'s merger with
Archipelago Holdings, Inc.). See also Securities Exchange Act
Release No. 54170 (July 18, 2006), 71 FR 42149 (July 25, 2006)
(order approving NASDAQ's proposal to adopt NASDAQ Rule 2140,
restricting affiliations between NASDAQ and its members).
\18\ See BSE Governance Proposal Notice and PHLX Acquisition
Proposal Notice, supra note 5.
\19\ For 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,
[[Page 40902]]
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 rule-comments@sec.gov. Please include
File Number SR-NASDAQ-2008-061 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2008-061. 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 inspection
and copying in the Commission's Public Reference Room on official
business days between the hours of 10 a.m. and 3 p.m. Copies of such
filing also will be available for inspection and copying at the
principal office of the 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-2008-061 and should be submitted on or before
August 6, 2008.
For the Commission, by the Division of Trading & Markets,
pursuant to delegated authority.\20\
Florence E. Harmon,
Acting Secretary.
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\20\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E8-16233 Filed 7-15-08; 8:45 am]
BILLING CODE 8010-01-P