
[Federal Register: November 20, 2008 (Volume 73, Number 225)]
[Notices]               
[Page 70400-70402]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20no08-108]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58953; File No. SR-NSX-2008-20]

 
Self-Regulatory Organizations; National Stock Exchange, Inc.; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend NSX Rule 11.23(a) Which Defines the Phrase ``Riskless Principal 
Transaction''

November 14, 2008.
    Pursuant to section 19(b)(3)(A) of the Securities Exchange Act of 
1934 (the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on November 13, 2008, National Stock Exchange, Inc. 
(``NSX[supreg]'' or the ``Exchange'') filed with the Securities and 
Exchange Commission (``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 
comment 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 amend NSX Rule 11.23(a), which defines the 
phrase ``riskless principal transaction,'' to make clear that the 
definition includes transactions where an ETP Holder receives orders 
that may be executed in whole or in part in other market venues. As 
explained in further detail below, this amendment will clarify the 
scope of the exception to NSX's Customer Priority rule contained in 
Rule 12.6(d), and will more closely align NSX's rules with those used 
by other self-regulatory organizations (``SROs'').

[[Page 70401]]

    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nsx.com, at the principal office of the 
Exchange, 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 parts of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    NSX Rule 12.6 prohibits an ETP Holder from placing an order for its 
own account (or an account in which it or one of its associated persons 
is interested) while it holds an unexecuted, marketable customer order 
for the same security, unless an exception applies. Specifically, Rule 
12.6 provides:
    (a) No ETP Holder shall (i) personally buy or initiate the purchase 
of any security traded on the Exchange for its own account or for any 
account in which it or any associated person of the ETP Holder is 
directly or indirectly interested while such an ETP Holder holds or has 
knowledge that any person associated with it holds an unexecuted market 
order to buy such security in the unit of trading for a customer, or 
(ii) sell or initiate the sale of any such security for any such 
account while it personally holds or has knowledge that any person 
associated with it holds an unexecuted market order to sell such 
security in the unit of trading for a customer.
    (b) No ETP Holder shall (i) buy or initiate the purchase of any 
such security for any account in which it or any associated person of 
the ETP Holder is directly or indirectly interested at or below the 
price at which it personally holds or has knowledge that any person 
associated with it holds an unexecuted limited price order to buy such 
security in the unit of trading for a customer or (ii) sell or initiate 
the sale of any such security for any such account at or above the 
price at which it personally holds or has knowledge that any person 
associated with it holds an unexecuted limited price order to sell such 
security in the unit of trading for a customer.
    Rule 12.6(d) provides an exception to provisions (a) and (b) where 
``an ETP Holder engages in trading activity to facilitate the 
execution, on a riskless principal basis, of another order from its 
customer * * * provided that the requirements of Rule 11.23 are 
satisfied * * * .'' (emphasis added.) Thus, to meet the exception in 
Rule 12.6(d), an ETP Holder also must comply with Rule 11.23. In turn, 
Rule 11.23(a) defines the phrase ``riskless principal transaction'' to 
mean:

    Two offsetting principal transaction legs in which an ETP 
Holder, (i) after having received an order to buy a security that it 
holds for execution on the Exchange, purchases the security as 
principal at the same price, exclusive of markups, markdowns, 
commissions and other fees, to satisfy all or a portion of the order 
to buy or (ii) after having received an order to sell a security 
that it holds for execution on the Exchange, sells the security as 
principal at the same price, exclusive of markups, markdowns, 
commissions and other fees, to satisfy all or a portion of the order 
to sell.

(emphasis added.)

    Therefore, if an ETP Holder receives an order to buy or sell a 
security, but does not hold that order for execution on the Exchange, 
any resulting transaction might not meet the definition of a riskless 
principal transaction in Rule 11.23(a). For the same reason, such a 
transaction also might not meet the exception in Rule 12.6(d).
    In addition, it is unclear whether an order submitted to a ETP 
Holder without a designated marketplace for execution could be ``[held] 
for execution on the Exchange,'' particularly where the ETP Holder 
executes the first leg of what generally would be considered a riskless 
principal transaction on a market other than the Exchange and completes 
the transaction with its customer on the Exchange. Because the customer 
has not designated where the order should be executed, and because the 
first leg of the order was in fact executed off the Exchange, such an 
order might not be viewed as being ``[held] for execution on the 
Exchange.'' Accordingly, the transaction might not be a ``riskless 
principal transaction'' within the meaning of Rule 11.23(a) and, 
therefore, might not satisfy the exception contained in Rule 12.6(d), 
even if the transaction was done to facilitate a customer order.
    NSX proposes to remove the requirement that an order be ``[held] 
for execution on the Exchange'' from the definition of a ``riskless 
principal transaction'' in Rule 11.23(a) to permit the type of 
transaction described above to qualify as a ``riskless principal 
transaction'' and, where the other requirements are met, to meet the 
exception in Rule 12.6(d). The exception in Rule 12.6(d) is designed to 
allow ETP Holders to place proprietary trades ahead of customer orders 
only where such proprietary trades are for the benefit of a customer. 
This exception recognizes that, in some instances, an ETP Holder's 
nominal trading ahead may nevertheless benefit, rather than harm, a 
customer. It makes no difference to this analysis whether the customer 
specified that its order was to be executed on the Exchange, or whether 
the order can be characterized as being ``[held] for execution on the 
Exchange.''
    Amended Rule 11.23(a) also would be consistent with other SRO 
rules. For example, Financial Industry Regulatory Authority (``FINRA'') 
NASD Rule 2111 and IM-2110-2 both allow a firm to trade ahead of a 
customer order if, among other things, the member's proprietary trade 
is a riskless principal transaction, as defined in various NASD rules, 
that is used to facilitate a customer order. The definition of a 
riskless principal transaction in NASD rules is substantially similar 
to the definition in NSX Rule 11.23(a) except, of course, that it is 
not limited to orders held for execution on any particular securities 
exchange or in any particular venue.\3\ New York Stock Exchange 
(``NYSE'') Rule 92 also allows firms to trade ahead of customer orders 
where the firm's proprietary order is a riskless principal transaction 
designed to facilitate a customer order. NYSE Rule 92 does not require 
that an order be held for execution on the NYSE or any other venue or 
securities exchange to qualify for this exception.\4\ Amending Rule 
11.23(a) will therefore make NSX rules consistent with analogous SRO 
rules.
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    \3\ See, e.g., NASD Rule 4632(d)(3)(B) (defining a riskless 
principal transaction as a ``transaction in which a member after 
having received an order to buy a security, purchases the security 
as principal at the same price to satisfy the order to buy or, after 
having received an order to sell, sells the security as principal at 
the same price to satisfy the order to sell'') (cited in NASD Rule 
2111(f)(1) and IM-2110-2).
    \4\ NYSE Rule 92(c)(1) (``The facilitated order must be a 
`riskless principal transaction,' which is when a member or member 
organization, after having received an order to buy a security, 
purchases the security as principal at the same price to satisfy the 
order to buy or, after having received an order to sell, sells the 
security as principal at the same price to satisfy the order to 
sell.'')
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Statutory Basis

    The Exchange believes that the proposed rule change is consistent 
with

[[Page 70402]]

the provisions of Section 6(b) of the Securities Exchange Act of 1934 
(``Act''),\5\ which requires, among other things, that NSX Rules be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, and, in general, to 
protect investors and the public interest. The proposed rule change 
will clarify the application of Rule 12.6(d) and will more closely 
align that rule with the rules of other SROs.
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    \5\ 78 U.S.C. 78f(b).
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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 inappropriate burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The proposed rule change will take effect 30 days from the date of 
filing (or such shorter time as the Commission may designate) pursuant 
to Section 19(b)(3)(A)(ii) of the Act \6\ and subparagraph (f)(6) of 
Rule 19b-4 \7\ thereunder, because the proposal: (1) Does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) does not become operative for 30 days from the date of filing, 
or such shorter time as the Commission may designate if consistent with 
the protection of investors and the public interest; provided that the 
self-regulatory organization has given the Commission written notice of 
its intent to file the proposed rule change at least five business days 
prior to the filing date of the proposed rule change.\8\
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    \6\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \7\ 17 CFR 240.19b-4.
    \8\ As required under Rule 19b-4(f)(6)(iii), NSX provided the 
Commission with written notice of its intent to file the proposed 
rule change at least five business days prior to the filing date.
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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.\9\
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    \9\ 15 U.S.C. 78s(b)(3)(C).
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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-NSX-2008-20 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-NSX-2008-20. 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 
NSX. 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-NSX-
2008-20 and should be submitted on or before December 11, 2008.
    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).

Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-27579 Filed 11-19-08; 8:45 am]

BILLING CODE 8011-01-P
