[Federal Register Volume 75, Number 48 (Friday, March 12, 2010)]
[Notices]
[Pages 11964-11967]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-5319]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-61667; File No. SR-Phlx-2010-36]
Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change To Establish
Procedures To Prevent Informational Advantages Resulting From the
Affiliation Between PHLX and NOS
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, NASDAQ OMX PHLX, Inc. (``Phlx'' or ``Exchange'')
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 Exchange 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
The Exchange proposes a rule change to establish procedures
designed to manage potential informational advantages resulting from
the affiliation between the Exchange and NASDAQ Options Services, LLC
(``NOS''), a registered broker-dealer and a Phlx member.
The text of the proposed rule change is below. Proposed new
language is italicized; proposed deletions are in [brackets].
Rule 985. Affiliation and Ownership Restrictions
(a)-(b) No change.
(c) The NASDAQ OMX Group, Inc., which owns NASDAQ Options Services,
LLC and the Exchange, shall establish and maintain procedures and
internal controls reasonably designed to ensure that NASDAQ Options
Services, LLC does not develop or implement changes to its system on
the basis of non-public information regarding planned changes to the
Exchange's systems, obtained 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
routing to the Exchange.
* * * * *
Rule 1080. Phlx XL and Phlx XL II
(a)-(l) No change.
(m) (i)-(ii) No change.
(iii)(A)-(B) No change.
(C) The Exchange shall establish and maintain procedures and
internal controls reasonably designed to adequately restrict the flow
of confidential and proprietary information between the Exchange and
the Routing Facility, and any other entity, including any affiliate of
the Routing Facility[, and, if the Routing Facility or any of its
affiliates engages in any other business activities other than
providing routing services to the Exchange, between the segment of the
Routing Facility or affiliate that provides the other business
activities and the routing services].
(D) No change.
(iv) 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, 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
a. Background
The Exchange 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.
The Exchange is proposing that NOS be permitted to route certain
orders from The NASDAQ Option Market (``NOM'') to the Exchange without
checking the NOM book prior to routing. NOM is an options market
operated by The NASDAQ Stock Market (the ``NASDAQ Exchange'') and NOS
is the approved outbound routing facility of the NASDAQ Exchange for
NOM. With the exception of Exchange Direct Orders, all routable orders
for options that are trading on NOM check the NOM book prior to
routing. In addition, 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 the
NASDAQ Exchange but rather as a broker-dealer regulated by its
designated examining authority. 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.
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)
[[Page 11965]]
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 the NASDAQ
Exchange, 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 the NASDAQ
Exchange 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 the NASDAQ Exchange, shall be deemed to be the books, records,
premises, officers, directors, agents, and employees of the NASDAQ
Exchange for purposes of and subject to oversight pursuant to the Act,
and the books and records of the routing facility, as a facility of the
NASDAQ Exchange, shall be subject at all times to inspection and
copying by the NASDAQ Exchange and the Commission.
The Commission has approved NOS's affiliation with the Exchange
subject to the conditions that: (1) NOS is a facility of the NASDAQ
Exchange; (2) use of NOS's routing function by NASDAQ Exchange members
is optional \4\ and (3) NOS does not provide routing of orders in
options from NOM to the Exchange or any trading facilities thereof,
unless such orders first attempt to access any liquidity on the NOM
book.\5\
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\4\ Because only NASDAQ Exchange members who are Options
Participants may enter orders into NOM, it also follows that routing
by NOS is available only to NASDAQ Exchange 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 the NASDAQ Exchange for
purposes of participating in options trading on NOM as a ``Nasdaq
Options Order Entry Firm'' or ``Nasdaq Options Market Maker''.
\5\ See Securities Exchange Act Release No. 58179 (July 17,
2008), 73 FR 42874 (July 23, 2008).
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The NASDAQ Exchange has filed a proposed rule change to modify the
last of these conditions to permit NOS to route Exchange Direct Orders
in NOM system securities to the Exchange without checking the NOM book
prior to routing.\6\ 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.\7\ In addition, the
proposed rule change would permit the routing by NOS of orders
(including Exchange Direct Orders) in NOM non-system securities from
NOM to the Exchange.
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\6\ SR-NASDAQ-2010-028.
\7\ See NOM Rule Chapter VI, Section 1(e)(7).
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The principles that govern the routing of orders to an exchange by
an affiliated broker-dealer are well-established. The Exchange 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\ In the orders approving these 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 limitations and conditions proposed in the rule changes were
sufficient to mitigate its concerns.
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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'').
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To appropriately address the concerns raised by the Commission
regarding the potential for conflicts of interest and informational
advantages, the Exchange is proposing certain restrictions and
undertakings. These commitments are consistent with the undertakings
made by: (i) NASDAQ OMX BX (``BX'') in adopting rule changes to permit
NOS, in its operation as a routing facility of NASDAQ Exchange, to
route orders from NOM to the Boston Options Exchange, a facility of BX,
which is an affiliate of the NASDAQ Exchange, and (ii) in the equities
markets, by BX in adopting rule changes to permit NASDAQ Execution
Services, Inc., in its operation as the routing facility of the NASDAQ
Exchange, to route orders from NASDAQ Exchange to BX.\9\
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\9\ See Securities Exchange Act Release Nos. 59154 (December 23,
2008), 73 FR 80468 (December 31, 2008)(SR-BSE-2008-48); 60349 (July
20, 2009), 73 FR 37071 (July 27, 2009)(SR-BX-2009-035).
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In order to manage the concerns raised by the Commission regarding
conflicts of interest in instances where a broker-dealer is affiliated
with an exchange to which it is routing orders, the Exchange notes
that, with respect to orders routed to the Exchange by NOS, NOS is
subject to independent oversight and enforcement by FINRA, an
unaffiliated SRO that is NOS's designated examining authority. In this
capacity, FINRA is responsible for examining NOS with respect to its
books and records and capital obligations and also has the
responsibility for reviewing NOS's compliance with applicable trading
rules. In addition, the Exchange has entered into a regulatory services
agreement with FINRA under which FINRA staff will review NOS's
compliance with the Exchange's rules through FINRA's examination
program. FINRA and the Exchange will also monitor NOS for compliance
with the Exchange's trading rules, subject, of course, to Commission
oversight of the regulatory program of the Exchange and FINRA. The
Exchange will, however, retain ultimate responsibility for enforcing
its rules with respect to NOS except to the extent that they are
covered by an agreement with FINRA pursuant to Rule 17d-2,\10\ in which
case regulatory responsibility will be allocated to FINRA as provided
in Rule 17d-2(d).\11\
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\10\ 17 CFR 240.17d-2.
\11\ The Exchange and FINRA are parties to the Industry Rule
17d-2 Plan for the allocation of regulatory responsibilities
relating to surveillance, investigation, and enforcement of insider
trading rules and the Industry Rule 17d-2 Plan relating to certain
options-related sales practice matters. See Securities Act Release
Nos. 58536 (September 12, 2008), 73 FR 54646 (September 22, 2008)
(File No. 4-566); 57987 (June 18, 2008), 73 FR 36156 (June 25, 2008)
(File No. S7-966) (File No. 4-551). These plans, however, do not
cover any responsibilities relating to NOS.
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Furthermore, in order to minimize the potential for conflicts of
interest, the Exchange and FINRA will collect and maintain all alerts,
complaints, investigations and enforcement actions in which NOS (in
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. FINRA
will then provide a report to the Exchange's Chief Regulatory Officer,
on at least a quarterly basis, which will list all investigations that
identify NOS as a participant that has potentially violated an Exchange
or Commission rule.\12\
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\12\ The Exchange, FINRA and SEC staff may agree going forward
to reduce the number of applicable or relevant surveillances that
form the scope of the agreed upon report.
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In order to address the Commission's concerns about potential for
information advantages that could place an affiliated broker-dealer at
a competitive advantage vis-[agrave]-vis other non-affiliated broker-
[[Page 11966]]
dealers, the Exchange is proposing to adopt Rule 985(c). Rule 985(c)
will require the parent company of both the Exchange and NOS to
implement policies and procedures that are reasonably designed to
prevent NOS from acting on non-public information regarding the
Exchange's systems prior to the time that such information is made
available generally to all market participants of such entity
performing inbound routing functions. These policies and procedures
would include systems development protocols to facilitate an audit of
the efficacy of these policies and procedures.
Specifically, Rule 985(c) shall provide as follows:
The NASDAQ OMX Group, Inc., which owns NASDAQ Options Services,
LLC and the Exchange, shall establish and maintain procedures and
internal controls reasonably designed to ensure that NASDAQ Options
Services, LLC does not develop or implement changes to its system on
the basis of non-public information regarding planned changes to the
Exchange's systems, obtained 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 routing to the Exchange.
In addition, existing rules require: (i) NOS to establish and
maintain procedures and internal controls reasonably designed to
adequately restrict the flow of confidential and proprietary
information between the NASDAQ Exchange and its facilities (including
NOS) and any other entity, and (ii) the Exchange to establish and
maintain procedures and internal controls reasonably designed to
adequately restrict the flow of confidential and proprietary
information between the Exchange and NOS and any other entity,
including any affiliate of NOS.\13\ The Exchange proposes to amend
Exchange Rule 1080(m)(iii)(C) to conform the language to match the
parallel commitments of NOS and NES to establish and maintain
procedures and internal controls to restrict the flow of confidential
and proprietary information.\14\ Furthermore, the Exchange proposes to
delete language in Exchange Rule 1080(m)(iii)(C) that is more
consistent with the use a non-affiliated third party for routing
services since NOS, an affiliated entity, acts as the exclusive order
router of the Exchange. The Exchange believes these measures will
effectively address the concerns identified by the Commission regarding
the potential for informational advantages favoring NOS vis-[agrave]-
vis other Exchange participants.
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\13\ See NOM Rule Chapter VI, Section 11(e); Exchange Rule
1080(m)(iii)(C).
\14\ See NOM Rule Chapter VI, Section 11(e); NASDAQ Rule
4758(b)(8).
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b. Pilot Period
The Exchange proposes that the Commission authorize NOS to route
Exchange Direct Orders and orders in NOM non-system securities inbound
to the Exchange from NOM for a pilot period of 12 months from the
effectiveness date of this rule filing. The Exchange believes that this
pilot period is of sufficient length to permit both the Exchange and
the Commission to assess the impact of the rule change described
herein.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the provisions of Section 6 of the Act,\15\ in general, and with
Section 6(b)(5) of the Act,\16\ 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 would permit inbound routing of orders from NOM to the
Exchange 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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\15\ 15 U.S.C. 78f.
\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
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 \17\ and
Rule 19b-4(f)(6) thereunder.\18\
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\17\ 15 U.S.C. 78s(b)(3)(A).
\18\ 17 CFR 240.19b-4(f)(6).
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A proposed rule change filed under 19b-4(f)(6) normally may not
become operative prior to 30 days after the date of filing.\19\
However, Rule 19b-4(f)(6)(iii) \20\ permits the Commission to designate
a shorter time if such action is consistent with the protection of
investors and the public interest. The Exchange has requested that the
Commission waive the 30-day operative delay. The Commission notes that
the Exchange's proposal is consistent with the rules of other national
securities exchanges and does not raise any new substantive issues.\21\
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.\22\
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\19\ 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. The Exchange has satisfied this requirement.
\20\ Id.
\21\ See Affiliation Orders, supra notes 8 and 9.
\22\ 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:
[[Page 11967]]
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-Phlx-2010-36 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-2010-36. 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 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-2010-36 and should be
submitted on or before April 2, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-5319 Filed 3-11-10; 8:45 am]
BILLING CODE 8011-01-P