
[Federal Register: August 20, 2010 (Volume 75, Number 161)]
[Notices]               
[Page 51509-51512]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20au10-97]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62724; File No. SR-NASDAQ-2010-099]

 
Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change by the NASDAQ Stock Market LLC To Adopt a Definition of 
Professional and Require That All Professional Orders Be Appropriately 
Marked

August 16, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on August 6, 2010, The NASDAQ Stock Market LLC (``NASDAQ'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change as described in Items I and II below, which 
Items have been prepared by NASDAQ. 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

    NASDAQ is filing with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') a proposal for the NASDAQ Options Market 
(``NOM'' or ``Exchange'') to amend Chapter I, Section 1 (Definitions) 
to adopt a definition of ``Professional'' on the Exchange and require 
that all Professional orders be appropriately marked by Exchange 
Participants.
    The text of the proposed rule change is available from NASDAQ's Web 
site at http://nasdaq.cchwallstreet.com/Filings/, at NASDAQ's principal 
office, and at the Commission's Public Reference Room.

[[Page 51510]]

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

    In its filing with the Commission, NASDAQ 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. NASDAQ 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 this proposal is to amend Chapter I, Section 1 
(Definitions) to adopt a definition of ``Professional'' on the Exchange 
and require that all Professional orders be appropriately marked.
    This filing is similar to the recent filings of PHLX NASDAQ OMX, 
Inc. (``Phlx''), the International Securities Exchange, LLC (``ISE''), 
and Chicago Board Options Exchange, Incorporated, (``CBOE''), which 
dealt with establishing a new definition of ``professional'' as a 
person or entity that places a certain high volume of orders in listed 
options per day on average during a calendar month in his or her own 
beneficial account.\3\
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    \3\ See Securities Exchange Act Release Nos. 61802 (March 30, 
2010), 75 FR 17193 (April 5, 2010) (SR-Phlx-2010-05) (approval 
order); 61198 (December 17, 2009), 74 FR 68880 (December 29, 2009) 
(SR-CBOE-2009-078) (approval order); and 59287 (January 23, 2009), 
74 FR 5694 (January 30, 2009) (SR-ISE-2006-26) (approval order). A 
filing by NYSE Amex LLC (``NYSE Amex'') proposing a similar 
professional designation was based on the Phlx, ISE, and CBOE 
proposals. See Securities Exchange Act Release No. 61818 (March 31, 
2010), 75 FR 17457 (April 6, 2010) (SR-NYSEAmex-2010-18) (approval 
order). Phlx, ISE, CBOE, and NYSE Amex are known in this filing as 
the ``Professional Rule Exchanges.''
    The cited filings discuss, among other things, the need for a 
professional designation to be applied by members of the respective 
exchanges because the systems of such exchanges differentiate for 
execution or processing purposes based on order origin. NOM does not 
similarly differentiate among orders based on their origin.
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    Background
    A member of NOM is known as a Participant or Options Participant 
(``Participant'').\4\ This is a firm or organization that is registered 
with the Exchange pursuant to Chapter II for purposes of participating 
in options trading on NOM as a Nasdaq Options Order Entry Firm or 
Nasdaq Options Market Maker.\5\ Options traded by Participants (which 
may include trades on behalf of Public Customers) \6\ on NOM, a wholly 
electronic exchange, are electronically executable and routable. The 
NOM System \7\ and rules provide for the ranking, display, and 
execution of all orders in price/time priority without regard to the 
status of the person or entity entering an order.\8\ The Exchange notes 
that NOM has, in contrast to certain other options markets, a ``flat'' 
system that does not differentiate for execution or processing purposes 
among orders on the basis of who or what entity enters an order on the 
Exchange.\9\
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    \4\ See Chapter I, Section 1(a)(40). Some NOM Participants are 
also members of other options exchanges such as, for example, ISE, 
CBOE, or Phlx.
    \5\ Nasdaq Options Order Entry Firm or Order Entry Firm or OEF 
is defined in Chapter I, Section 1(a)(25) as: those Options 
Participants representing as agent Customer Orders on NOM and those 
non-Market Maker Participants conducting proprietary trading. Nasdaq 
Options Market Maker or Options Market Maker is defined in Chapter 
I, Section 1(a)(26) as: an Options Participant registered with the 
Exchange for the purpose of making markets in options contracts 
traded on the Exchange and that is vested with the rights and 
responsibilities specified in Chapter VII of these Rules.
    \6\ Public Customer is defined in Chapter I, Section 1(a)(48) 
as: a person that is not a broker or dealer in securities.
    \7\ System is defined in Chapter IV, Section 1(a) as: the 
automated system for order execution and trade reporting owned and 
operated by The Nasdaq Options Market LLC.
    \8\ See Securities Exchange Act Release No. 57478 (March 12, 
2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-
NASDAQ-2007-080) (approval order). See also Chapter VI, Section 10, 
which discusses the price/time execution algorithm for System orders 
and states, in relevant part, that the System will execute trading 
interest at the best price in the System before executing trading 
interest at the next best price, and that the System will execute 
displayed orders before non-displayed orders at the same price.
    \9\ In contrast to NOM, hybrid options exchanges such as, for 
example, Phlx and CBOE blend auction and electronic market 
structures that differentiate certain order priority and execution 
functions based upon, among other things, the origin of the order 
(e.g., whether the order was a customer, market maker, broker or 
dealer, firm, or other type of order); these exchanges also charge 
different fees based on order origin. NOM does, like other 
exchanges, differentiate fees based on order origin. For example, 
fees for removing liquidity in SPY options are different for 
customers than they are for market makers and firms. This filing 
does not propose any changes in respect of the NOM fee structure.
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    NASDAQ Options Services LLC (``NOS''), a member of the 
Exchange,\10\ is the Exchange's exclusive order router for all orders 
that come through the Exchange.\11\ NOS performs routing functions with 
respect to System Securities and Non-System Securities.\12\ The 
Exchange's general routing procedures are set forth in Chapter VI, 
Section 11 (Order Routing), which states in subsection (c) that, among 
other things, once routed by the System, an order becomes subject to 
the rules and procedures of the destination market.\13\ NOS also 
performs order routing services on behalf of Phlx.\14\
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    \10\ NOS is also a member of other options exchanges such as, 
for example, ISE and Phlx.
    \11\ See Securities Exchange Act Release No. 57478 (March 12, 
2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-
NASDAQ-2007-080) (approval order). See also Chapter VI, Section 
11(e), which states, in relevant part: NOM shall route orders in 
options via Nasdaq Options Services LLC, a broker-dealer that is a 
member of an unaffiliated SRO which is the designated examining 
authority for the broker-dealer. Nasdaq Options Services LLC serves 
as the Routing Facility of NOM. The sole function of the Routing 
Facility will be to route orders in options listed and open for 
trading on NOM to away markets pursuant to NOM rules solely on 
behalf of NOM. The Routing Facility is subject to regulation as a 
facility of Nasdaq, including the requirement to file proposed rule 
changes under Section 19 of the Act.
    \12\ Chapter VI, Section 1(b) states: ``System Securities'' 
shall mean all options that are currently trading on NOM pursuant to 
Chapter IV (Securities Traded on NOM) above. All other options shall 
be ``Non-System Securities.''
    \13\ Chapter VI, Section 11(c) states: Priority of Routed 
Orders. Orders sent by the System to other markets do not retain 
time priority with respect to other orders in the System and the 
System shall continue to execute other orders while routed orders 
are away at another market center. Once routed by the System, an 
order becomes subject to the rules and procedures of the destination 
market including, but not limited to, order cancellation. If a 
routed order is subsequently returned, in whole or in part, that 
order, or its remainder, shall receive a new time stamp reflecting 
the time of its return to the System.
    \14\ NOS routes certain orders in options listed and open for 
trading on the Phlx electronic order, trading and execution system 
(known as XL II) to away market centers. See Phlx Rule 
1080(m)(iii)(A) and Securities Exchange Act Release No. 59995 (May 
28, 2009), 74 FR 26750 (June 3, 2009) (SR-Phlx-2009-32) (approval 
order).
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    The exchanges that do the great majority of all U.S. options 
trading, namely the Professional Rule Exchanges CBOE, ISE, NYSE AMEX, 
and Phlx, already have rules that are similar to the Professional 
designation rule proposed by the Exchange (a professional is a person 
or entity that places 390 or more orders in listed options per day on 
average during a calendar month in his or her own beneficial account). 
These Professional Rule Exchanges make differentiations based on 
whether an order is marked professional or otherwise. Some Exchange 
Participants are, as noted, also members of Professional Rule Exchanges 
such as CBOE, ISE, or Phlx. As members of these exchanges, such 
Exchange Participants are subject to the professional designation rules 
of the Professional Rule Exchanges. Similarly, NOS is a member of 
several Professional Rule Exchanges. Exchange rules indicate that 
orders routed by NOS become subject to the rules and

[[Page 51511]]

procedures of the destination markets (away exchanges).\15\
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    \15\ Once routed by the System, an order becomes subject to the 
rules and procedures of the destination market including, but not 
limited to, order cancellation. See Chapter VI, Section 11(c).
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    The Exchange believes that disparate rules in respect of 
Professional order designation, and lack of uniform application of such 
rules, do not promote the best regulation and may, in fact, encourage 
regulatory arbitrage.\16\ The Exchange believes that it is therefore 
prudent and necessary to have a Professional designation rule as is 
commonplace in the industry, particularly where NOS (like Exchange 
Participants) is a member of several exchanges that have rules 
requiring professional order designations.
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    \16\ The Exchange believes that the risk of regulatory arbitrage 
is heightened where not all exchanges have Professional designation 
rules; and there is a lack of uniformity regarding Professional Rule 
Exchanges marking orders as Professional when routing such orders 
away.
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    The Proposal
    The Exchange proposes new Chapter I, Section 1(a)(48) to state that 
the term ``Professional'' means any person or entity that (i) is not a 
broker or dealer in securities, and (ii) places more than 390 orders in 
listed options per day on average during a calendar month for its own 
beneficial account(s). A Participant or a Public Customer may, without 
limitation, be a Professional. Moreover, in order to properly represent 
orders entered on the Exchange according to the new definition, a 
Participant will be required to appropriately mark all Professional 
orders.\17\ To comply with this requirement, Participants will be 
required to review their Public Customers' activity on at least a 
quarterly basis to determine whether orders that are not for the 
account of a broker-dealer should be represented as Professional 
orders.\18\ The Exchange will issue a notice to Participants via OTA or 
ORA outlining the procedures for the implementation of the proposal.
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    \17\ The Exchange intends to require Participants to indentify 
Professional orders submitted electronically by identifying them in 
the customer type field, and will notify Participants via an Options 
Trader Alert (``OTA'') or Options Regulatory Alert (``ORA'') 
regarding this requirement.
    \18\ Participants will be required to conduct a quarterly review 
and make any appropriate changes to the way in which they are 
representing orders within five business days after the end of each 
calendar quarter. While Participants will only be required to review 
their accounts on a quarterly basis, if during a quarter the 
Exchange identifies a customer for which orders are being 
represented as other than Professional orders but that has averaged 
more than 390 orders per day during a month, the Exchange will 
notify the Participant and the Participant will be required to 
change the manner in which it is representing the customer's orders 
within five business days. This is similar to the process of other 
options exchanges that have adopted a professional designation. See, 
e.g., Securities Exchange Act Release No. 61802 (March 30, 2010), 75 
FR 17193 (April 5, 2010) (SR-Phlx-2010-05) (approval order).
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    The Professional definition proposed by NOM is similar to the 
Professional designation that has been adopted by Phlx, ISE, CBOE, and 
NYSE Amex.\19\ As noted, the Professional definition will not impact 
the Exchange's price/time order entry (priority) system.\20\ Instead, 
the Exchange's proposal will ensure that Exchange Participants mark 
their Professional orders properly, that is, similarly in terms of 
professional order identification regardless of whether the order is 
placed on NOM or some other Professional Order Exchange. Moreover, with 
the proposed Professional designation in place, the Exchange will be 
able to accept orders that are marked professional.\21\
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    \19\ See supra note 3.
    \20\ For example, unlike the Phlx proposal (which, among other 
things, discusses that Professional orders on Phlx will be treated 
in the same manner as off-floor brokers in terms of certain priority 
rules), the Exchange's proposal does not address or impact any 
priority relationship for Professional as opposed to other NOM 
orders.
    \21\ Currently, NOM only accepts orders that are marked as 
customer, firm, market maker, or away market maker orders. 
Professional orders that may not now be accepted by NOM must be sent 
to other Exchanges. While the Exchange does not intend to 
differentiate among Professional and other orders for priority 
purposes, it may, in the future, feel that it is appropriate to 
differentiate its routing or other fees in respect of Professional 
as opposed to other orders; and if so, the Exchange intends to file 
an appropriate fee-related rule filing(s). The Exchange does not 
address its fee structure in the present filing.
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    The designation of Professional or Professional order would not 
result in any different treatment of such orders for purposes of NOM 
rules concerning away market protection. That is, all non broker or 
dealer orders, including those that meet the definition of Professional 
orders, would continue to be treated equally for purposes of Exchange 
away market protection rules.\22\
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    \22\ See, e.g., Chapter VI, Section 11 and Chapter XII.
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    The Exchange believes that identifying Professional accounts based 
upon the average number of orders entered in qualified accounts is an 
appropriately objective approach that will reasonably distinguish such 
persons and entities from retail investors or market participants. The 
Exchange proposes the threshold of 390 orders per day on average over a 
calendar month, because it believes that this number far exceeds the 
number of orders that are entered by retail investors in a single 
day.\23\ Moreover, the 390 orders per day threshold proposed by NOM 
directly corresponds to the daily order volume recognized by Phlx and 
other options exchanges that have, as previously discussed, established 
professional order designations.\24\ In addition, basing the standard 
on the number of orders that are entered in listed options for a 
qualified account(s) assures that professional account holders cannot 
inappropriately avoid the purpose of the rule by spreading their 
trading activity over multiple exchanges, and using an average number 
over a calendar month will prevent gaming of the 390 order 
threshold.\25\
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    \23\ 390 orders is equal to the total number of orders that a 
person would place in a day if that person entered one order every 
minute from market open to market close. Many of the largest retail-
oriented electronic brokers offer lower commission rates to 
customers they define as ``active traders.'' Publicly available 
information from the websites of Charles Schwab, Fidelity, TD 
Ameritrade and OptionsXpress all define ``active trader'' as someone 
who executes only a few options trades per month. The highest 
required trading activity to qualify as an active trader among these 
four firms was 35 trades per quarter. See Securities Exchange Act 
Release No. 57254 at note 11 (which also notes that a study of one 
of the largest retail-oriented options brokerage firms indicated 
that on a typical trading day, options orders were entered with 
respect to 5,922 different customer accounts. There was only one 
order entered with respect to 3,765 of the 5,922 different customer 
accounts on this day, and there were only 17 customer accounts with 
respect to which more than ten orders were entered. The highest 
number of orders entered with respect to any one account over the 
course of an entire week was 27).
    \24\ The similarity of the Exchange's proposed Professional 
order definition to that of other options exchanges is important 
from the regulatory perspective, that is from a desire to promote a 
national market system that minimizes regulatory arbitrage.
    \25\ The Exchange intends to notify Participants via OTA or ORA 
that this proposal will be implemented on the first trading day of 
the month after the approval or effectiveness of this proposal.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \26\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \27\ in particular, in that it 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 facilitating transactions in 
securities, and to remove impediments to and perfect the mechanisms of 
a free and open market and a national market system, by defining 
Professional and indicating that all Professional orders shall be 
appropriately marked by Participants.
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    \26\ 15 U.S.C. 78f(b).
    \27\ 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 result 
in any burden on competition that is not

[[Page 51512]]

necessary or appropriate in furtherance of the purposes of the Act.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be 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 Exchange 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-2010-099 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-2010-099. 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-
NASDAQ-2010-099 and should be submitted on or before September 10, 
2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-20658 Filed 8-19-10; 8:45 am]
BILLING CODE 8010-01-P

