[Federal Register Volume 79, Number 22 (Monday, February 3, 2014)]
[Notices]
[Pages 6244-6246]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-02132]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71416; File No. SR-Phlx-2014-05]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change to Inbound
Routing of Options Orders
January 28, 2014.
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 January 15, 2014, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'')
filed with the Securities and Exchange Commission (``SEC'' or
``Commission'') the proposed rule change as described in Items I, II,
and III, 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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to permit the Exchange to receive inbound
orders in options routed through Nasdaq Execution Services, LLC
(``NES'') from affiliated exchanges, as described in detail below.
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
The purpose of the filing is to permit the receipt of inbound
orders routed from affiliated exchanges in options through NES. The
Exchange filed a proposed rule change to use NES rather than Nasdaq
Options Services LLC (``NOS'') for the outbound routing of options
orders and the Exchange also updated its equities and options rules to
reflect the use of a third party unaffiliated routing broker.\3\
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\3\ See SR-Phlx-2014-04.
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Now, the Exchange proposes to continue to receive orders from its
affiliated exchanges. Specifically, the Exchange proposes to receive
options orders, through NES directly from the options market of NASDAQ
OMX BX, Inc. (``BX'') \4\ as well as from The NASDAQ Options Market
(``NOM''),\5\ under the same terms and conditions as NOS currently
does. BX and NASDAQ have filed to use NES for outbound routing,\6\ as
well as to receive options orders routed from PHLX through NES.\7\
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\4\ Securities Exchange Act Release No. 67956 (June 13, 2013),
78 FR 36810 (June 19, 2013) (SR-Phlx-2013-42).
\5\ Securities Exchange Act Release No. 65399 (September 26,
2011), 76 FR 60955 (September 30, 2011) (SR-Phlx-2011-111). NOM is a
facility of The NASDAQ Stock Market LLC (``NASDAQ'').
\6\ See SR-BX-2014-003 and SR-NASDAQ-2014-007.
\7\ See SR-BX-2014-004 and SR-NASDAQ-2014-008.
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NOS and NES are broker-dealers and members of NASDAQ, PHLX and BX.
Currently, NOS provides all options routing functions for BX Options,
PHLX, and the NOM. BX, NASDAQ, NOM, PHLX and NOS are affiliates.\8\
Accordingly, the affiliate relationship between PHLX and NOS, its
member, raises the issue of an exchange's affiliation with a member of
such exchange. 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.\9\ Similarly,
[[Page 6245]]
under this proposal, the affiliate relationship between PHLX and NES
raises this issue.
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\8\ 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) (order approving NASDAQ OMX's acquisition of PHLX).
\9\ See Securities Exchange Act Release Nos. 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). See also Securities Exchange Act Release No. 58135 (July
10, 2008), 73 FR 40898 (July 16, 2008) (SR-NASDAQ-2008-061)
(Permitting NOS to be affiliated with PHLX).
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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, the
Exchange previously proposed, and the Commission approved, limitations
and conditions on NOS's affiliation with the Exchange.\10\ 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, the Exchange
previously proposed, and the Commission approved,\11\ 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 and NASDAQ, subject to
certain limitations and conditions. The Exchange now proposes to permit
PHLX to accept inbound options orders that NES (rather than NOS) routes
in its capacity as a facility of BX and NASDAQ, subject to the same
limitations that currently apply to PHLX accepting inbound orders from
BX and NOM through NOS, as follows:
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\10\ See Securities Exchange Act Release No. 59995 (May 28,
2009), 74 FR 26750 (June 3, 2009) (SR-Phlx-2009-32).
\11\ See Securities Exchange Act Release No. 67956 (June 13,
2013), 77[sic] FR 36810 (June 19, 2013) (SR-Phlx-2013-42).
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First, the Exchange and FINRA 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 NES's compliance with certain Exchange rules.\13\ Pursuant to
the Regulatory Contract, however, PHLX retains ultimate responsibility
for enforcing its rules with respect to NES.
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\12\ 17 CFR 240.17d-2.
\13\ NES 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 NES for compliance with the
Exchange's trading rules, and will collect and maintain certain related
information.\14\
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\14\ Pursuant to the Regulatory Contract, both FINRA and the
Exchange will collect and maintain all alerts, complaints,
investigations and enforcement actions in which NES (in its capacity
as a facility of BX and Nasdaq routing orders to PHLX) 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.
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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 FINRA is aware) that identify NES as a
participant that has potentially violated Commission or Exchange rules,
and (ii) lists all investigations that identify NES as a participant
that has potentially violated Commission or Exchange rules.
Fourth, the Exchange has in place PHLX Rule 985(c), which
requires The NASDAQ OMX Group, Inc., as the holding company owning both
the Exchange and 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 the Exchange's systems 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 order routing to the Exchange.
By meeting the above conditions, the Exchange will have set up
mechanisms that protect the independence of the Exchange's regulatory
responsibility with respect to NES, as well as demonstrate that NES
cannot use any information advantage it may have because of its
affiliation with the Exchange.
For several weeks, the Exchange has been working with the Financial
Regulatory Authority (``FINRA'') and The Options Clearing Corporation
(``OCC'') to secure the necessary approvals for NES to perform these
functions. The Exchange has now secured those approvals. The Exchange
seeks to complete this process and implement this proposal in January
or February.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act \15\ in general, and furthers the objectives of Section
6(b)(5) of the Act \16\ in particular, in that it is designed to
promote just and equitable principles of trade, 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 the Exchange to
continue to receive inbound orders from an affiliate (NES rather than
NOS), acting in its capacity as a facility of BX and NASDAQ, in a
manner consistent with prior approvals and established protections. The
Exchange believes that these conditions establish mechanisms that
protect the independence of the Exchange's regulatory responsibility
with respect to NES, as well as ensure that NES cannot use any
information it may have because of its affiliation with the Exchange to
its advantage.
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\15\ 15 U.S.C. 78f(b).
\16\ 15 U.S.C. 78f(b)(5).
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(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. Receiving orders through NES
rather than NOS does not raise any issues of intra-market competition
because it involves inbound routing from an affiliated exchange. Nor
does it result in a burden on competition among exchanges, because
there are many competing options exchanges that provide routing
services, including through an affiliate.
(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.
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)(ii) of the Act \17\ and
subparagraph (f)(6) of Rule 19b-4 thereunder.\18\
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\17\ 15 U.S.C. 78s(b)(3)(a)(ii).
\18\ 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.
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At any time within 60 days 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: (i)
Necessary or appropriate in the public interest; (ii) for the
protection
[[Page 6246]]
of investors; or (iii) otherwise in furtherance of the purposes of the
Act. If the Commission takes such action, the Commission shall
institute proceedings to determine whether the proposed rule should be
approved or 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-Phlx-2014-05 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-Phlx-2014-05. 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-Phlx-2014-05 and should be
submitted on or before February 24, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-02132 Filed 1-31-14; 8:45 am]
BILLING CODE 8011-01-P