
[Federal Register Volume 76, Number 241 (Thursday, December 15, 2011)]
[Notices]
[Pages 78060-78062]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-32167]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65934; File No. SR-Phlx-2011-170]


Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing of Proposed Rule Change to Request Permanent Approval of the 
Pilot Program to Permit NASDAQ OMX PSX to Accept Inbound Orders that 
Nasdaq Execution Services, LLC Routes in its Capacity as a Facility of 
The NASDAQ Stock Market LLC

December 9, 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 December 1, 2011, NASDAQ OMX PHLX LLC (``Phlx'' or the ``Exchange'') 
filed with the Securities and Exchange Commission (q``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

    Phlx is filing this proposed rule change to request permanent 
approval of the Exchange's pilot program to permit the Exchange's 
NASDAQ OMX PSX system (``PSX'') to accept inbound orders that Nasdaq 
Execution Services, LLC (``NES'') routes in its capacity as a facility 
of The NASDAQ Stock Market

[[Page 78061]]

LLC (``NASDAQ''). Phlx proposes to implement the rule change upon 
Commission approval. The text of the proposed rule change is available 
at http://nasdaqomxphlx.cchwallstreet.com/nasdaqomxphlx/phlx, at Phlx'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
    Currently, NES is the approved outbound routing facility of NASDAQ 
for cash equities, providing outbound routing from NASDAQ to other 
market centers.\3\ PSX also has been previously approved to receive 
inbound routes of cash equities orders by NES in its capacity as an 
order routing facility of NASDAQ on a pilot basis.\4\ The Exchange 
hereby seeks permanent approval to permit PSX to accept inbound orders 
that NES routes in its capacity as a facility of NASDAQ (subject to the 
attendant obligations and conditions).
---------------------------------------------------------------------------

    \3\ See NASDAQ Rule 4758. See also Securities Exchange Act 
Release Nos. 50311 (September 3, 2004), 69 FR 54818 (September 10, 
2004) (Order Granting Application for a Temporary Conditional 
Exemption Pursuant To Section 36(a) of the Exchange Act by the 
National Association of Securities Dealers, Inc. Relating to the 
Acquisition of an ECN by The Nasdaq Stock Market, Inc.) and 52902 
(December 7, 2005), 70 FR 73810 (December 13, 2005) (SR-NASD-2005-
128) (Order Approving a Proposed Rule Change To Establish Rules 
Governing the Operation of the INET System).
    \4\ See Securities Exchange Act Release No. 62877 (September 9, 
2010), 75 FR 56633 (September 16, 2010) (SR-Phlx-2010-79) (the ``PSX 
Approval Order''). See also Securities Exchange Act Release No. 
65552 (October 13, 2011), 76 FR 64989 (October 19, 2011) (Sr-Phlx-
2011-139) (extending pilot through April 8, 2012).
---------------------------------------------------------------------------

    During the pilot period, the Exchange committed to the following 
conditions:
    1. Pursuant to a regulatory services agreement (the ``FINRA RSA'') 
between the Exchange and Financial Industry Regulatory Authority, Inc. 
(``FINRA''), FINRA will review NES's compliance with the Exchange's 
rules through FINRA's examination program.\5\ Pursuant to the FINRA 
RSA, however, the Exchange retains ultimate responsibility for 
enforcing its rules with respect to NES.
---------------------------------------------------------------------------

    \5\ In addition, NES is subject to independent oversight by 
FINRA, its Designated Examining Authority, for compliance with 
financial responsibility requirements.
---------------------------------------------------------------------------

    2. FINRA and the Exchange \6\ will monitor NES for compliance with 
the Exchange's trading rules, and will collect and maintain certain 
related information.\7\
---------------------------------------------------------------------------

    \6\ Personnel performing real-time oversight of equity trading 
on NASDAQ will also perform similar functions with respect to PSX 
pursuant to a regulatory services agreement among NASDAQ, the 
Exchange, NASDAQ OMX BX, Inc., and NASDAQ OMX (the ``Intercompany 
RSA'') under the direction, authority, and oversight of Phlx's Chief 
Regulatory Officer (``CRO'') and the Regulatory Oversight Committee 
(``ROC'') of its Board of Directors.
    \7\ Pursuant to the FINRA RSA, both FINRA and the Exchange will 
collect and maintain all alerts, complaints, investigations and 
enforcement actions in which NES (in its capacity as a facility of 
Nasdaq routing orders to the Exchange) is identified as a 
participant that has potentially violated applicable Commission or 
Exchange rules. The Exchange and FINRA will retain these records in 
an easily accessible manner in order to facilitate any potential 
review conducted by the Commission's Office of Compliance 
Inspections and Examinations.
---------------------------------------------------------------------------

    3. FINRA will provide a report to the Exchange's CRO, on a 
quarterly basis, that: (i) Quantifies all alerts (of which FINRA and 
the Exchange are aware) that identify NES as a participant that has 
potentially violated Commission or Exchange rules, and (ii) quantifies 
the number of all investigations that identify NES as a participant 
that has potentially violated Commission or Exchange rules.
    4. The Exchange will adopt and maintain Rule 985(c)(2), which 
requires NASDAQ OMX, as the holding company owning both the Exchange 
and NES, to establish and maintain procedures and internal controls 
reasonably designed to ensure that NES does not develop or implement 
changes to its system, based on non-public information obtained 
regarding planned changes to the Exchange's systems as a result of its 
affiliation with the Exchange, until such information is available 
generally to similarly situated Exchange members, in connection with 
the provision of inbound order routing to the Exchange.
    5. The routing of orders from NES to the Exchange, in NES's 
capacity as a facility of NASDAQ, will be authorized for a pilot period 
of twelve months (later extended for an additional six months).
    The Exchange has met all the above-listed conditions. By meeting 
the above-conditions, the Exchange has set up mechanisms that protect 
the independence of the Exchange's regulatory responsibilities with 
respect to NES, as well as demonstrate that NES cannot use any 
information advantage it may have because of its affiliation with the 
Exchange. Since the Exchange has met all the above-listed conditions, 
it now seeks permanent approval of the PSX and NES inbound routing 
relationship. The Exchange will continue to comply with conditions 1-4 
on an ongoing basis.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\8\ in general, and with 
Section 6(b)(5) of the Act,\9\ 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 proposed rule change will allow the Exchange to continue receiving 
inbound routes of equities orders from NES acting in its capacity as a 
facility of NASDAQ, in a manner consistent with prior approvals and 
established protections. The Exchange believes that its having met the 
commitments established during the pilot program demonstrates that (i) 
The Exchange has mechanisms to protect the independence of the 
Exchange's regulatory responsibilities with respect to NES, and (ii) 
NES cannot use any information advantage it may have because of its 
affiliation with the Exchange.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78f.
    \9\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    Phlx 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.

[[Page 78062]]

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 (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 (ii) as to 
which the self-regulatory organization consents, the Commission shall: 
(a) By order approve or disapprove such 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 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 Number SR-Phlx-2011-170 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-Phlx-2011-170. 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, 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 publicly available. All 
submissions should refer to File Number SR-Phlx-2011-170 and should be 
submitted on or before January 5, 2012.
---------------------------------------------------------------------------

    \10\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-32167 Filed 12-14-11; 8:45 am]
BILLING CODE 8011-01-P


