
[Federal Register Volume 76, Number 236 (Thursday, December 8, 2011)]
[Notices]
[Pages 76795-76797]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-31476]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65868; File No. SR-NASDAQ-2011-158]


 Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Modify Its Optional Anti-Internalization Functionality

December 2, 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 November 22, 2011, The NASDAQ Stock Market LLC (``NASDAQ'' or the 
``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. NASDAQ has 
designated the proposed rule change as constituting a 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

    NASDAQ is filing with the Securities and Exchange Commission 
(``Commission'') a proposed rule change to modify its optional anti-
internalization functionality.
    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, 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
    NASDAQ is proposing to provide a more granular alternative to the 
voluntary anti-internalization functionality. Under the proposal, 
market participants will be given the additional options of (1) 
assigning a group identification modifier at the port level; and (2) 
assigning different anti-internalization methodology to specific order 
entry ports.
    Currently, anti-internalization processing is available only on an 
MPID-wide basis with only a single methodology being allowed per MPID. 
Market participants direct that a particular version of anti-
internalization processing be applied to a particular MPID, which is 
then applied by the system to all quotes/orders entered using that 
MPID. Market participants have the option, when entering quotes/orders 
using the same MPID they do not wish to have automatically interact 
with each other in the System, to either direct the System to not 
execute any part of the interacting quotes/orders from the same MPID 
and, instead, cancel share amounts of the interacting quotes/orders 
back to the entering party with an arrangement that takes into 
consideration the size of the interacting quotes/orders (Decrement); 
or, regardless of the size of the interacting quotes/orders, cancelling 
the oldest of them in full (Cancel Oldest).\4\
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    \4\ See Exchange Rule 4757(a)(4).
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    Under the proposal, market participants entering quotes/orders 
under a specific MPID may voluntarily assign a unique group 
identification modifier that represents a group of quotes/orders from 
the same market participant identifier and order entry port (``Group 
ID''). The Group ID will be a two-character code composed of 
alphanumerics and/or spaces, assigned to a specific order entry port 
and updated by NASDAQ on behalf of the market participant. This 
additional option will direct the System to execute any so designated 
incoming quotes/orders against all eligible resting quotes/orders 
except those with the both the same MPID and same Group ID.
    If the market participant selects the option of utilizing the Group 
ID, the anti-internalization selection will be applied to all quotes/
orders entered using both the same MPID and the same Group ID. If the 
incoming order has both the same MPID and the same Group ID, the two 
orders will not execute against each other. If the two orders have the 
same MPID and different Group IDs, then the order will be eligible to 
execute against each other as designated by the anti-internalization 
method. For example:
    1. Incoming order ``A'' has an MPID of ``ABCD'' and Group ID 
``A1,'' resting order ``B'' has an MPID of ``ABCD'' and Group ID 
``A1'': in this scenario, these two orders would not execute against 
each other.
    2. Incoming order ``C'' has an MPID of ``EFGH'' and Group ID 
``XY,'' resting order ``D'' has an MPID of ``EFGH'' and Group ID 
``ZZ'': in this scenario, these

[[Page 76796]]

two orders would execute against each other.
    Additionally, market participants will now have the option to 
assign a different anti-internalization methodology (Decrement or 
Cancel Oldest) to different order entry ports. The anti-internalization 
method assigned to the port sending the incoming order will determine 
which methodology is applied to the orders prevented from matching. For 
example:
    FIRM XX (MPID ``ABCD'') utilizes three ports and has elected to 
assign Group IDs to their order entry ports for the purpose of Anti-
Internalization. Additionally, the market participant selected 
different Anti-internalization methodologies per port as follows:
    Port 1: Group ID A1; Anti-internalization methodology: Decrement.
    Port 2: Group ID A1; Anti-internalization methodology: Cancel 
Oldest.
    Port 3: Group ID B1; Anti-internalization methodology: Cancel 
Oldest.
    If an incoming order from Port 1 tries to interact with a resting 
order from Port 3, the orders will execute because they have the same 
MPID but different Group IDs.
    If an incoming order from Port 1 tries to interact with a resting 
order from Port 2, then the anti-internalization method selected for 
Port 1 will apply to the order. In this case, the Decrement method 
would apply.
    If an incoming order from Port 2 tries to interact with a resting 
order from Port 1, then the anti-internalization method selected for 
Port 2 will apply. In this case, the Cancel Oldest methodology would 
apply.
    Anti-internalization functionality 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 participants in reducing execution fees potentially resulting 
from the interaction of executable buy and sell trading interest from 
the same firm. 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. As such, market participants using 
anti-internalization functionality will need to take appropriate steps 
to ensure that public customer orders that do not execute because of 
the use of 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. Specifically, 
the Group ID allows firms to better manage order flow and prevent 
undesirable executions against themselves. NASDAQ notes that a similar 
functionality was effective upon filing with the Commission for EDGX 
Exchange, Inc.\7\
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    \5\ 15 U.S.C. 78f.
    \6\ 15 U.S.C. 78f(b)(5).
    \7\ See EDGX Exchange, Inc. Rule 11.9(f); Securities and 
Exchange Release No. 53428 (December 3, 2010), 75 FR 76763 (December 
9, 2010) (SR-EDGX-2010-18), which was based on NYSEArca Equities 
Rule 7.31(qq). NASDAQ's current proposal differs from EDGX Rule 
11.9(f) and NYSEArca Equities Rule 7.31(qq) in that there are 
additional methods relating to additional modifiers that do not 
apply to NASDAQ. Furthermore, EDGX utilizes the additional identity 
modifier at the port level as well as at the order level.
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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 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 from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \8\ and Rule 19b-
4(f)(6) thereunder.\9\
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    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 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. 
NASDAQ has satisfied this requirement.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \10\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6) \11\ permits the Commission to 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. NASDAQ requests that 
the Commission waive the 30-day operative delay so that NASDAQ may 
immediately offer its market participants the ability to better manage 
their order flow and prevent undesirable executions with themselves, 
which in turn may decrease costs to customers of such firms. The 
Commission notes that the proposal is based on similar rules of other 
exchanges \12\ and believes that waiving the 30-day operative delay 
\13\ is consistent with the protection of investors and the public 
interest. Therefore, the Commission designates the proposal operative 
upon filing.
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    \10\ 17 CFR 240.19b-4(f)(6).
    \11\ 17 CFR 240.19b-4(f)(6).
    \12\ See EDGX Exchange, Inc. Rule 11.9(f) and NYSEArca Equities 
Rule 7.31(qq).
    \13\ For 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 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.

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 email to rule-comments@sec.gov. Please include 
File

[[Page 76797]]

Number SR-NASDAQ-2011-158 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-2011-158. This 
file number should be included on the subject line if email 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,\14\ 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 publicly available. All 
submissions should refer to File Number SR-NASDAQ-2011-158 and should 
be submitted on or before December 29, 2011.
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    \14\ The text of the proposed rule change is available on the 
Commission's Web site at http://www.sec.gov/rules/sro.shtml.


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-31476 Filed 12-7-11; 8:45 am]
BILLING CODE 8011-01-P


