
[Federal Register: February 3, 2009 (Volume 74, Number 21)]
[Notices]               
[Page 5952-5954]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03fe09-59]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59310; File No. SR-NASDAQ-2009-005]

 
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change as Modified by Amendment No. 1 
Thereto To Reduce The Order Exposure Period on the NASDAQ Options 
Market

January 28, 2009.
    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 23, 2009, The NASDAQ Stock Market LLC (``NASDAQ'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change as described in Items I and II below, which Items have been 
prepared by the Exchange. Amendment 1 was filed on January 27, 2009. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, 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

    Specifically, NASDAQ is proposing to amend Chapter VII, Section 12 
of the NASDAQ rule manual governing the NASDAQ Options Market to 
provide that: (i) Options Participants may not execute as principal 
against orders on the limit order book they represent as agent unless 
such agency orders are first exposed on the limit order book for at 
least one (1) second, or the Options Participant has been bidding or 
offering on the Exchange for at least one (1) second prior to receiving 
an agency order that is executable against such order, and (ii) Options 
Participants must expose orders they represent as agent for at least 
one (1) second before such orders may be automatically executed, in 
whole or in part, against orders solicited from members and non-member 
broker-dealers to transact with such orders.\3\
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    \3\ Amendment 1 makes a technical correction to conform 
Commentary .03 to the proposed new rule language.
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    The text of the proposed rule change is below. Proposed new 
language is in italics; proposed deletions are in brackets.\4\
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    \4\ Changes are marked to the rule text that appears in the 
electronic NASDAQ Manual found at http://wallstreet.cch.com/nasdaq/.
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* * * * *
    Chapter VII, Market Participants:
    Sec. 12 Order Exposure Requirements:
    With respect to orders routed to NOM, Options Participants may not 
execute as principal orders they represent as agent unless (i) agency 
orders are first exposed on NOM for at least one (1) second [three (3) 
seconds] or (ii) the Options Participant has been bidding or offering 
on NOM for at least one (1) second [three (3) seconds] prior to 
receiving an agency order that is executable against such bid or offer.
    Commentary:
    .01 and .02 No change.
    .03 With respect to non-displayed trading interest, including the 
reserve portion, the exposure requirement of subsection (i) is 
satisfied if the displayable portion of the order is displayed at its 
displayable price for one [three] seconds.
    .04 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 self-regulatory organization 
included statements concerning the purpose of,

[[Page 5953]]

and basis for, the proposed rule change and discussed any comments it 
received on the proposed rule change. The text of those 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
    The purpose of the proposed rule change is to reduce the exposure 
time during which Options Participants may not execute as principal 
against orders they represent as agent while continuing to afford the 
opportunity for other market participants to execute at or better than 
the limit order price during such exposure period.
    Chapter VII, Section 12 currently provide that an Options 
Participant \5\ may not execute as principal against orders on the 
limit order book they represent as agent unless: (a) Agency orders are 
first exposed on the limit order book for at least three seconds, or 
(b) the Options Participant has been bidding or offering on the 
Exchange for at least three (3) seconds prior to receiving an agency 
order that is executable against such order.
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    \5\ 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 Exchange for purposes of participating in 
options trading on NOM as a ``Nasdaq Options Order Entry Firm'' or 
``Nasdaq Options Market Maker''.
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    In addition, Options Participants must expose orders they represent 
as agent for at least three (3) seconds before such orders may be 
automatically executed, in whole or in part, against orders solicited 
from members and non-member broker-dealers to transact with such 
orders. Under the proposal, these exposure periods would be reduced to 
one second.
    The Exchange adopted the 3-second exposure period upon its initial 
creation, based upon similar requirements and functionality already in 
existence on other options exchanges.\6\ The three-second order 
handling and exposure period assumes that three seconds is not long 
enough to permit human interaction with the orders. Rather, market 
participants had become sufficiently automated that they could react to 
these orders electronically. In this context, the Exchange believes it 
would be in all market participants' best interest to minimize the 
exposure period to a time frame that continues to allow adequate time 
for market participants to respond electronically, as both the order 
being exposed and the participants responding are subject to market 
risk during the exposure period. In this respect, the Exchange states 
that its experience with the three-second exposure time period 
indicates that one second would provide an adequate response time. The 
Exchange does not believe it is necessary or beneficial to the orders 
being exposed to continue to subject them to market risk for a full 
three seconds.
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    \6\ Securities Exchange Act Release No. 57478 (March 12, 2008), 
73 FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004).
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    The Exchange has numerous market participants that have the 
capability and do opt to respond within a one-second exposure period on 
the Exchange's fully automated trading platform for options. Recently, 
the Exchange distributed a survey to all NOM Options Participants. To 
substantiate that its members could receive, process, and communicate a 
response back to the Exchange within one second, the survey asked 
members to identify how many milliseconds it took for (i) a broadcast 
from the Exchange to reach their systems; (ii) their systems to 
generate responses; and (iii) their responses to reach the Exchange. 
The survey results indicate that the time it takes a message to travel 
between the Exchange and its members is not more than 100 milliseconds 
each way. The survey also indicated that it typically takes not more 
than 50 milliseconds for member systems to process the information and 
generate a response. Thus, the survey indicated that it typically takes 
not more than 250 milliseconds for members to receive, process, and 
respond to broadcast messages related to the various Mechanisms. 
Additionally, all 8 members that responded to the survey indicated that 
reducing the exposure period to one second would not impair their 
ability to participate in orders affected by the proposal. The Exchange 
believes that this information provides additional support for its 
assertion that reducing the exposure periods from three seconds to one 
second will continue to provide members with sufficient time to ensure 
effective interaction with orders.
    The Exchange is submitting the instant proposal in order to remain 
competitive with other exchanges that have reduced the exposure period 
from 3 seconds to 1 second.\7\ The Exchange believes that reducing its 
order handling and exposure periods from three seconds to one second 
will benefit market participants. The Exchange further believes that 
reducing the time periods to one second will allow it to provide 
investors and other market participants with more timely executions, 
thereby reducing market risk.\8\
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    \7\ See Securities Exchange Act Release Nos. 57849 (May 22, 
2008), 73 FR 31167 (May 30, 2008) (SR-CBOE-2008-16); and 58224 (July 
25, 2008), 73 FR 44303 (July 30, 2008) (SR-ISE-2007-94).
    \8\ The Exchange believes that the proposed timeframe would give 
market participants sufficient time to respond, compete, and provide 
price improvement for orders. The Exchange also notes that 
electronic systems are readily available to, if not already in place 
for, Exchange members that allow them to respond in a meaningful way 
within the proposed timeframe.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \9\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \10\ 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, by providing investors with more timely execution of their 
options orders, while ensuring that there is adequate exposure of limit 
orders in the Exchange's marketplace.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASDAQ 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. To the contrary, NASDAQ is adopting this 
proposed rule change in response to the competitive advantage enjoyed 
by options exchanges that have already reduced the order exposure 
requirement from three seconds to one second.

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

    None.

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

    Within 35 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

[[Page 5954]]

(ii) as to which the Phlx consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.
    The Exchange has requested accelerated approval of this proposed 
rule change prior to the 30th day after the date of publication of the 
notice in the Federal Register. The Commission is considering granting 
accelerated approval of the proposed rule change at the end of a 15-day 
comment period.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the proposal, including whether it 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-NASDAQ-2009-005 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-2009-005. 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 offices 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-2009-005 and 
should be submitted on or before February 18, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-2226 Filed 2-2-09; 8:45 am]

BILLING CODE 8011-01-P
