
[Federal Register Volume 76, Number 121 (Thursday, June 23, 2011)]
[Notices]
[Pages 36950-36951]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-15671]



[[Page 36950]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64696; File No. SR-NASDAQ-2011-083]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Adopt Anti-Internalization Functionality for Registered Market Makers 
on the NASDAQ Options Market

 June 17, 2011.
    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 June 14, 2011, The NASDAQ Stock Market LLC (the ``Exchange'' 
or ``NASDAQ'') 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 comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C.78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is filing this proposed rule change to adopt anti-
internalization functionality for registered market makers on the 
NASDAQ Options Market. NASDAQ proposes to implement the rule change 
thirty days after the date of filing or as soon thereafter as 
practicable. The text of the proposed rule change is available at 
http://nasdaq.cchwallstreet.com/, at NASDAQ's principal office, 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 aspects of such 
statements.

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

1. Purpose
    NASDAQ is proposing to provide anti-internalization (``AIQ'') 
functionality to registered market makers on the NASDAQ Options Market. 
Under the proposal, quotes and orders entered by market makers using 
the same market participant identifier (``MPID'') will automatically be 
prevented from interacting with each other in the System. Rather than 
executing quotes or orders from the same MPID, the System will instead 
cancel the oldest of the quotes and orders back to the entering party.
    Anti-internalization functionality was requested by market makers 
or those considering making markets on NOM. Anti-internalization 
processing is available only to market makers and only on an individual 
MPID basis. Registered market makers that conduct order entry business 
via alternative MPIDs will not be afforded the protection of AIQ 
functionality with respect to such alternative MPIDs. NASDAQ considered 
making AIQ functionality available to other participants, but rejected 
that approach due to lack of interest and to maintain simplicity of 
system processing.\3\
---------------------------------------------------------------------------

    \3\ If demand should arise from other participants, NASDAQ will 
reconsider providing this functionality to all participants at that 
time.
---------------------------------------------------------------------------

    Anti-internalization functionality is widely available and has been 
for many years.\4\ It is designed to assist market participants in 
complying with certain rules and regulations of the Employee Retirement 
Income Security Act (``ERISA'') that preclude and/or limit managing 
broker-dealers of such accounts from trading as principal with orders 
generated for those accounts. It can also assist market makers in 
reducing trading costs from unwanted executions potentially resulting 
from the interaction of executable buy and sell trading interest from 
the same firm when performing the same market making function.
---------------------------------------------------------------------------

    \4\ See, e.g., NASDAQ Rule 4757(a)(4), NYSE Arca Equities Rule 
7.31(qq)(2), and BATS Rule 11.9(f)(2).
---------------------------------------------------------------------------

    NASDAQ notes that use of the functionality does not relieve or 
otherwise modify the duty of best execution owed to orders received 
from public customers. Options market makers generally do not display 
customer orders in market making quotations, opting instead to enter 
customer orders using separate identifiers. In the event that an 
options market maker opts to include a customer order within a market 
making quotation, the market maker must take appropriate steps to 
ensure that public customer orders that do not execute due to anti-
internalization functionality ultimately receive the same execution 
price (or better) they would have originally obtained if execution of 
the order was not inhibited by the functionality.
2. Statutory Basis
    NASDAQ believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\5\ in general, and with 
Sections 6(b)(5) of the Act,\6\ 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 is consistent with this provision in that it assists market 
makers in performing their quotation obligations, and prevents market 
makers from violating applicable provisions of ERISA. Market makers 
remain able to utilize alternative MPIDs without the use of AIQ 
functionality.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78f.
    \6\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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 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 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 after the date of the filing, or such 
shorter time as the Commission may designate, it has become effective 
pursuant to Section

[[Page 36951]]

19(b)(3)(A) of the Act \7\ and Rule 19b-4(f)(6) thereunder.\8\
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78s(b)(3)(A).
    \8\ 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.
---------------------------------------------------------------------------

    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 necessary or 
appropriate in the public interest, for the protection of investors, or 
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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2011-083 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-2011-083. 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 such 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-2011-083 and should be submitted on or before July 14, 2011.
---------------------------------------------------------------------------

    \9\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-15671 Filed 6-22-11; 8:45 am]
BILLING CODE 8011-01-P


