[Federal Register Volume 77, Number 101 (Thursday, May 24, 2012)]
[Notices]
[Pages 31057-31059]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-12620]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67027; File No. SR-NASDAQ-2012-061]
Self-Regulatory Organizations; the NASDAQ Stock Market LLC;
Notice of Filing of Proposed Rule Change for the NASDAQ Options Market
To Accept Inbound Orders From NASDAQ OMX BX's New Options Market
May 18, 2012.
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 May 15, 2012, The NASDAQ Stock Market LLC (``Exchange'' or
``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 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 filing with the Commission a proposal for the NASDAQ
Options Market (``NOM'') to accept inbound orders routed by NASDAQ
Options Services LLC (``NOS'') from NASDAQ OMX BX's new options market
(with the attendant obligations and conditions), as described further
below, on a one year pilot basis.
The text of the proposed rule change is available 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, the Exchange 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. The Exchange 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
In conjunction with a proposal by NASDAQ OMX BX (``BX'') to
establish a new options market and provide outbound routing services to
all markets using its affiliated routing broker, NOS,\3\ NASDAQ
proposes that NOS be permitted to route orders from BX to NASDAQ on a
one year pilot basis.
---------------------------------------------------------------------------
\3\ See SR-BX-2012-030.
---------------------------------------------------------------------------
NOS is a broker-dealer and member of NASDAQ, BX and NASDAQ OMX PHLX
(``PHLX''). NOS provides all routing functions for NASDAQ \4\ and
[[Page 31058]]
PHLX,\5\ and BX has proposed that NOS do so for BX as well.\6\ NASDAQ,
PHLX, BX and NOS are affiliates. Accordingly, the affiliate
relationship between NASDAQ and NOS, its member, raises the issue of an
exchange's affiliation with a member of such exchange.\7\ Specifically,
in connection with prior filings, the Commission has expressed concern
that the affiliation of an exchange with one of its members raises the
potential for unfair competitive advantage and potential conflicts of
interest between an exchange's self-regulatory obligations and its
commercial interests.\8\
---------------------------------------------------------------------------
\4\ See NOM Rules Chapter VI, Section 11(e). See also Securities
Exchange Act Release No. 57478 (March 12, 2008), 73 FR 14521 (March
18, 2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-080).
\5\ See Securities Exchange Act Release No. 59995 (May 28,
2009), 74 FR 26750 (June 3, 2009) (SR-Phlx-2009-32).
\6\ See SR-BX-2012-030.
\7\ Absent an effective filing, Exchange Rule 2160(b) would
prohibit NOS from being a member of the Exchange.
\8\ See e.g., Securities Exchange Act Release No. 59153
(December 23, 2008), 73 FR 80485 (December 31, 2008) (SR-NASDAQ-
2008-098); and 62736 (August 17, 2010), 75 FR 51861 (August 23,
2010) (SR-NASDAQ-2010-100).
---------------------------------------------------------------------------
Recognizing that the Commission has previously expressed concern
regarding the potential for conflicts of interest in instances where a
member firm is affiliated with an exchange of which it is a member,
NASDAQ previously proposed, and the Commission approved, limitations
and conditions on NOS's affiliation with NASDAQ.\9\ In addition, NASDAQ
is permitted to accept inbound orders that NOS routes in its capacity
as a facility of PHLX, subject to certain limitations and
conditions.\10\
---------------------------------------------------------------------------
\9\ 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).
\10\ See Securities Exchange Act Release No. 59948 (May 20,
2009), 74 FR 25784 (May 29, 2009) (SR-NASDAQ-2009-047).
---------------------------------------------------------------------------
Also recognizing that the Commission has expressed concern
regarding the potential for conflicts of interest in instances where a
member firm is affiliated with an exchange to which it is routing
orders, many exchanges have filed with the Commission the conditions
and limitations under which they can accept inbound orders from an
affiliated exchange using an affiliated router.\11\ At this time,
NASDAQ proposes to accept inbound options orders that NOS will route in
its capacity as a facility of BX, subject to the following limitations
and conditions:
---------------------------------------------------------------------------
\11\ See e.g., Securities Exchange Act Release No. 65399
(September 26, 2011), 76 FR 60955 (September 20, 2011) (SR-Phlx-
2011-111).
---------------------------------------------------------------------------
First, NASDAQ and the Financial Industry Regulatory
Authority (``FINRA'') will maintain a Regulatory Contract, as well as
an agreement pursuant to Rule 17d-2 under the Act (``17d-2
Agreement'').\12\ Pursuant to the Regulatory Contract and the 17d-2
Agreement, FINRA will be allocated regulatory responsibilities to
review NOS's compliance with certain NASDAQ rules.\13\ Pursuant to the
Regulatory Contract, however, NASDAQ retains ultimate responsibility
for enforcing its rules with respect to NOS.
---------------------------------------------------------------------------
\12\ 17 CFR 240.17d-2.
\13\ NOS is also subject to independent oversight by FINRA, its
designated examining authority, for compliance with financial
responsibility requirements.
---------------------------------------------------------------------------
Second, FINRA will monitor NOS for compliance with
NASDAQ's trading rules, and will collect and maintain certain related
information.\14\
---------------------------------------------------------------------------
\14\ Pursuant to the Regulatory Contract, both FINRA and NASDAQ
will collect and maintain all alerts, complaints, investigations and
enforcement actions in which NOS (in its capacity as a facility of
BX routing orders to NASDAQ) is identified as a participant that has
potentially violated applicable Commission or Exchange rules. NASDAQ
and FINRA will retain these records in an easily accessible manner
in order to facilitate any potential review conducted by the
Commission's Office of Compliance Inspections and Examinations.
---------------------------------------------------------------------------
Third, FINRA will provide a report to NASDAQ's chief
regulatory officer (``CRO''), on a quarterly basis, that: (i)
Quantifies all alerts (of which the Exchange or FINRA is aware) that
identify NOS as a participant that have potentially violated Commission
or Exchange rules, and (ii) lists all investigations that identify NOS
as a participant that has potentially violated Commission or Exchange
rules.
Fourth, NASDAQ is amending NASDAQ Rule 2160 \15\ to
require NASDAQ OMX, as the holding company owning both NASDAQ and NOS,
to establish and maintain procedures and internal controls reasonably
designed to ensure that NOS does not develop or implement changes to
its system, based on non-public information obtained regarding planned
changes to NASDAQ's systems as a result of its affiliation with NASDAQ,
until such information is available generally to similarly situated
Exchange members, in connection with the provision of inbound order
routing to NASDAQ. Currently, Rule 2160 applies to NES; NASDAQ proposes
to add NOS to this rule.
---------------------------------------------------------------------------
\15\ Currently, NASDAQ Rule 2160 requires NASDAQ OMX, as the
holding company owning both NASDAQ and NASDAQ Execution Services,
LLC (``NES''), to establish and maintain procedures and internal
controls reasonably designed to ensure that NES does not develop or
implement changes to its system, based on non-public information
obtained regarding planned changes to NASDAQ's systems as a result
of its affiliation with NASDAQ, until such information is available
generally to similarly situated Exchange members, in connection with
the provision of inbound order routing to NASDAQ.
---------------------------------------------------------------------------
Fifth, NASDAQ proposes that the routing of orders from NOS
to NASDAQ, in NOS's capacity as a facility of BX be authorized for a
pilot period of one year.
NASDAQ believes that the above-listed conditions protect the
independence of NASDAQ's regulatory responsibility with respect to NOS,
and that these mitigate the aforementioned concerns about potential
conflicts of interest and unfair competitive advantage.
2. Statutory Basis
NASDAQ believes that the proposed rule change is consistent with
the provisions of Section 6 of the Act,\16\ in general, and with
Section 6(b)(5) of the Act,\17\ 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, because the
proposed rule change will allow NASDAQ to receive inbound routes of
orders from NOS, acting in its capacity as a facility of BX, in a
manner consistent with prior approvals and established protections.
NASDAQ believes that the proposed conditions establish mechanisms that
protect the independence of NASDAQ's regulatory responsibility with
respect to NOS, as well as ensure that NOS cannot use any information
it may have because of its affiliation with NASDAQ to its advantage.
---------------------------------------------------------------------------
\16\ 15 U.S.C. 78f.
\17\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition 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
No written comments were either solicited or received.
[[Page 31059]]
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 (i) as the Commission may
designate up to 90 days of such date 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 such 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 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 email to [email protected]. Please include
File Number SR-NASDAQ-2012-061 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-2012-061. This
file number should be included on the subject line if email 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
10:00 a.m. and 3:00 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-2012-061 and should
be submitted on or before June 14, 2012.
---------------------------------------------------------------------------
\18\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority. \18\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-12620 Filed 5-23-12; 8:45 am]
BILLING CODE 8011-01-P