[Federal Register Volume 78, Number 118 (Wednesday, June 19, 2013)]
[Notices]
[Pages 36810-36812]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-14534]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67956; File No. SR-Phlx-2013-42]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order
Approving a Proposed Rule Change for the Permanent Approval of a Pilot
Program to Permit the Exchange to Accept Inbound Options Orders Routed
by Nasdaq Options Services LLC from NASDAQ OMX BX, Inc.
June 13, 2013.
I. Introduction
On April 23, 2013, NASDAQ OMX PHLX LLC (``Exchange'' or ``PHLX'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change
requesting permanent approval of the Exchange's pilot program that
permits the Exchange to accept inbound orders routed by NASDAQ Options
[[Page 36811]]
Services LLC (``NOS'') from NASDAQ OMX BX, Inc. (``BX''). The proposed
rule change was published for comment in the Federal Register on May 8,
2013.\3\ The Commission received no comment letters regarding the
proposed rule change. This order approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 69498 (May 2, 2013),
78 FR 26826 (``Notice'').
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II. Background
PHLX Rule 985(b) prohibits the Exchange or any entity with which it
is affiliated from, directly or indirectly, acquiring or maintaining an
ownership interest in, or engaging in a business venture with, an
Exchange member or an affiliate of an Exchange member in the absence of
an effective filing under Section 19(b) of the Act.\4\ NOS is a
registered broker-dealer that is a member of the Exchange, and
currently provides to members of BX optional routing services to other
markets.\5\ NOS is owned by NASDAQ OMX Group, Inc. (``NASDAQ OMX''),
which also owns three registered securities exchanges--the Exchange,
BX, and the NASDAQ Stock Market LLC (``NASDAQ'').\6\ Thus, NOS is an
affiliate of these exchanges.\7\ Absent an effective filing, PHLX Rule
985(b) would prohibit NOS from being a member of the Exchange. The
Commission initially approved NOS's affiliation with PHLX in connection
with NASDAQ OMX's acquisition of PHLX,\8\ and NOS currently performs
certain limited activities for the Exchange.\9\
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\4\ 15 U.S.C. 78s(b). PHLX Rule 985 also prohibits a PHLX member
from being or becoming an affiliate of PHLX, or an affiliate of an
entity affiliated with PHLX, in the absence of an effective filing
under Section 19(b). See PHLX Rule 985(b)(1)(B).
\5\ NOS operates as a facility of BX that provides outbound
routing from BX to other market centers, subject to certain
conditions. See BX Options Rules, Chapter VI, Sec. 11 (Order
Routing). See also Securities Exchange Act Release No. 67256 (June
26, 2012), 77 FR 39277 (July 2, 2012) (SR-BX-2012-030).
\6\ See Securities Exchange Act Release Nos. 58324 (August 7,
2008), 73 FR 46936 (August 12, 2008) (SR-BSE-2008-02; SR-BSE-2008-
23; SR-BSE-2008-25; SR-BSECC-2008-01) (order approving NASDAQ OMX's
acquisition of BX); and 58179 (July 17, 2008), 73 FR 42874 (July 23,
2008) (SR-Phlx-2008-31) (order approving NASDAQ OMX's acquisition of
PHLX) (``PHLX Acquisition Order'').
\7\ See id. See also Notice, supra 78 FR at 26827.
\8\ See PHLX Acquisition Order, 73 FR at 42887.
\9\ See, e.g., Phlx Rule 1080(m) (Away Markets and Order
Routing). See also Securities Exchange Act Release No. 59995 (May
28, 2009), 74 FR 26750 (June 3, 2009) (SR-Phlx-2009-32).
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On May 15, 2012, PHLX filed a proposed rule change for the Exchange
to accept inbound orders routed from BX on a pilot basis subject to
certain limitations and conditions.\10\ On April 23, 2013, the Exchange
filed the instant proposal to allow the Exchange to accept such orders
routed inbound by NOS from BX on a permanent basis subject to certain
limitations and conditions.\11\
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\10\ See Securities Exchange Act Release No. 67026 (May 18,
2012), 77 FR 31053 (May 24, 2012) (SR-Phlx-2012-68) (notice of
proposed rule change to allow the Exchange to accept inbound orders
from BX on a one-year pilot basis).
\11\ See Notice, 78 FR at 26826.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\12\ Specifically, the Commission finds that the proposed rule
change is consistent with Section 6(b)(1) of the Act,\13\ which
requires, among other things, that a national securities exchange be so
organized and have the capacity to carry out the purposes of the Act,
and to comply and enforce compliance by its members and persons
associated with its members, with the provisions of the Act, the rules
and regulation thereunder, and the rules of the Exchange. Further, the
Commission finds that the proposed rule change is consistent with
Section 6(b)(5) of the Act,\14\ which requires, among other things,
that the rules of a national securities exchange be 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, and 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. Section 6(b)(5) also
requires that the rules of an exchange not be designed to permit unfair
discrimination among customers, issuers, brokers, or dealers.
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\12\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition and
capital formation. 15 U.S.C. 78c(f).
\13\ 15 U.S.C. 78f(b)(1).
\14\ 15 U.S.C. 78f(b)(5).
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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, the Exchange
previously implemented limitations and conditions to NOS's affiliation
with the Exchange to permit the Exchange to accept inbound orders that
NOS routes in its capacity as a facility of BX on a pilot basis.\15\
The Exchange has proposed to permit PHLX to accept inbound orders that
NOS routes in its capacity as a facility of BX on a permanent basis,
subject to the same limitations and conditions of this pilot: \16\
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\15\ See Securities Exchange Act Release No. 67294 (June 28,
2012), 77 FR 39771 (July 5, 2012) (SR-Phlx-2012-68).
\16\ See Notice, 78 FR at 26827.
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First, the Exchange 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'').\17\ Pursuant to the Regulatory Contract and the 17d-2
Agreement, FINRA will be allocated regulatory responsibilities to
review NOS's compliance with certain PHLX rules.\18\ Pursuant to the
Regulatory Contract, however, the Exchange retains ultimate
responsibility for enforcing its rules with respect to NOS.
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\17\ 17 CFR 240.17d-2.
\18\ NOS is also subject to independent oversight by FINRA, its
designated examining authority, for compliance with financial
responsibility requirements.
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Second, FINRA will monitor NOS for compliance with PHLX's
trading rules, and will collect and maintain certain related
information.\19\
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\19\ Pursuant to the Regulatory Contract, both FINRA and the
Exchange 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 the Exchange) is identified as
a participant that has potentially violated applicable Commission or
Exchange rules. The Exchange 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. See Notice, 78 FR at 26827 n.12.
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Third, FINRA will provide a report to the Exchange'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 has potentially violated Commission
or Exchange rules, and (ii) lists all investigations that identify NOS
as a participant that has potentially violated Commission or PHLX
rules.
Fourth, the Exchange has in place PHLX Rule 985, which
requires NASDAQ OMX, as the holding company owning both the Exchange
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 the Exchange's systems as a
[[Page 36812]]
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 order routing to the Exchange.
The Exchange stated that it has met all the above-listed
conditions. By meeting such conditions, the Exchange believes that it
has set up mechanisms that protect the independence of the Exchange's
regulatory responsibility with respect to NOS, and has demonstrated
that NOS cannot use any information advantage it may have because of
its affiliation with the Exchange.\20\
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\20\ See Notice, 78 FR at 26827.
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In the past, the Commission has expressed concern that the
affiliation of an exchange with one of its members raises potential
conflicts of interest, and the potential for unfair competitive
advantage.\21\ Although the Commission continues to be concerned about
potential unfair competition 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, for the reasons
discussed below, the Commission believes that it is consistent with the
Act to permit NOS, in its capacity as a facility of BX, to route orders
inbound to the Exchange on a permanent basis instead of a pilot basis,
subject to the limitations and conditions described above.\22\
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\21\ See, e.g., Securities Exchange Act Release Nos. 54170 (July
18, 2006), 71 FR 42149 (July 25, 2006) (SR-NASDAQ-2006-006) (order
approving NASDAQ's proposal to adopt NASDAQ Rule 2140, restricting
affiliations between NASDAQ and its members); 53382 (February 27,
2006), 71 FR 11251 (March 6, 2006) (SR-NYSE-2005-77) (order
approving the combination of the New York Stock Exchange, Inc. and
Archipelago Holdings, Inc.); 58673 (September 29, 2008), 73 FR 57707
(October 3, 2008) (SR-Amex-2008-62 and SR-NYSE-2008-60) (order
approving the combination of NYSE Euronext and the American Stock
Exchange LLC); 59135 (December 22, 2008), 73 FR 79954 (December 30,
2008) (SR-ISE-2009-85) (order approving the purchase by ISE Holdings
of an ownership interest in Direct Edge Holdings LLC); 59281
(January 22, 2009), 74 FR 5014 (January 28, 2009) (SR-NYSE-2008-120)
(order approving a joint venture between NYSE and BIDS Holdings
L.P.); 58375 (August 18, 2008), 73 FR 49498 (August 21, 2008) (File
No. 10-182) (order granting the exchange registration of BATS
Exchange, Inc.); 61698 (March 12, 2010), 75 FR 13151 (March 18,
2010) (File Nos. 10-194 and 10-196) (order granting the exchange
registration of EDGX Exchange, Inc. and EDGA Exchange, Inc.); and
62716 (August 13, 2010), 75 FR 51295 (August 19, 2010) (File No. 10-
198) (order granting the exchange registration of BATS-Y Exchange,
Inc.).
\22\ The Commission notes that these limitations and conditions
are consistent with those previously approved by the Commission for
other exchanges. See, e.g., Securities Exchange Act Release Nos.
69233 (March 25, 2013), 78 FR 19352 (March 29, 2013) (SR-NASDAQ-
2013-028); 69232 (March 25, 2013), 78 FR 19342 (March 29, 2013) (SR-
BX-2013-013); 69229 (March 25, 2013), 78 FR 19337 (March 29, 2013)
(SR-Phlx-2013-15); 67256 (June 26, 2012) 77 FR 39277 (July 2, 2012)
(SR-BX-2012-030); and 64090 (March 17, 2011), 76 FR 16462 (March 23,
2011) (SR-BX-2011-007).
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The Exchange has proposed four ongoing conditions applicable to
NOS's routing activities, which are enumerated above. The Commission
believes that these conditions will mitigate its concerns about
potential conflicts of interest and unfair competitive advantage. In
particular, the Commission believes that FINRA's oversight of NOS,\23\
combined with FINRA's monitoring of NOS's compliance with the
Exchange's rules and quarterly reporting to the Exchange, will help to
protect the independence of the Exchange's regulatory responsibilities
with respect to NOS. The Commission also believes that the Exchange's
Rule 985(b) is designed to ensure that NOS cannot use any information
advantage it may have because of its affiliation with the Exchange.
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\23\ This oversight will be accomplished through the 17d-2
Agreement between FINRA and the Exchange and the Regulatory
Contract. See Notice, 78 FR at 26827 n.10 and accompanying text.
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\24\ that the proposed rule change (SR-Phlx-2013-42) be, and hereby
is, approved.
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\24\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets, pursuant
to delegated authority.\25\
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\25\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-14534 Filed 6-18-13; 8:45 am]
BILLING CODE 8011-01-P