
[Federal Register Volume 77, Number 129 (Thursday, July 5, 2012)]
[Notices]
[Pages 39758-39760]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-16374]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67295; File No. SR-NASDAQ-2012-061]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC.; 
Order Approving a Proposed Rule Change for the NASDAQ Options Market To 
Accept Inbound Orders From NASDAQ OMX BX's New Options Market

June 28, 2012.

I. Introduction

    On May 15, 2012, The NASDAQ Stock Market LLC (``Exchange'' or 
``NASDAQ'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4

[[Page 39759]]

thereunder,\2\ a proposed rule change for the NASDAQ Options Market 
(``NOM'') \3\ to accept inbound options orders routed by NASDAQ Options 
Services LLC (``NOS'') from NASDAQ OMX BX (``BX'') on a one year pilot 
basis in connection with the establishment of a new options market by 
BX. The proposed rule change was published for comment in the Federal 
Register on May 24, 2012.\4\ The Commission received no comment letters 
regarding the proposed rule change. This order approves the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ NOM is the Exchange's options trading facility.
    \4\ See Securities Exchange Act Release No. 67027 (May 18, 
2012), 77 FR 31057 (``Notice'').
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II. Background

    NASDAQ Rule 2160(a) prohibits the Exchange or any entity with which 
it is affiliated from, directly or indirectly, acquiring or maintaining 
an ownership interest in, or engaging in a business venture with, a 
NASDAQ member or an affiliate of a NASDAQ member in the absence of an 
effective filing under Section 19(b) of the Act.\5\ NOS is a registered 
broker-dealer that is a member of the Exchange, and currently provides 
to members of the Exchange optional routing services to other 
markets.\6\ NOS is owned by NASDAQ OMX Group, Inc. (``NASDAQ OMX''), 
which also owns three registered securities exchanges--the Exchange, 
BX, and NASDAQ OMX PHLX LLC (``PHLX'').\7\ Thus, NOS is an affiliate of 
these exchanges.\8\ Absent an effective filing, NASDAQ Rule 2160(a) 
would prohibit NOS from being a member of the Exchange. The Commission 
initially approved NOS's affiliation with NASDAQ and its affiliated 
exchanges in connection with the establishment of NOM and NASDAQ OMX's 
acquisition of BX and PHLX,\9\ and NOS currently performs certain 
limited activities for each.\10\ With the current proposed rule change, 
the Exchange seeks approval to permit NOS to perform a new function.
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    \5\ 15 U.S.C. 78s(b). NASDAQ Rule 2160 also prohibits a NASDAQ 
member from being or becoming an affiliate of NASDAQ, or an 
affiliate of an entity affiliated with NASDAQ, in the absence of an 
effective filing under Section 19(b). See NASDAQ Rule 2160(b).
    \6\ See Notice, supra note 4, at 31057 n.4 and accompanying 
text.
    \7\ See Securities Exchange Act Release No. 58324 (August 7, 
2008), 73 FR 46936 (August 12, 2008) (SR-BSE-2008-02; SR-BSE-2008-
23; SR-BSE-2008-25; SR-BSECC-2008-01) (order approving NASDAQ OMX's 
acquisition of BX) (``BX Acquisition Order''); Securities Exchange 
Act Release No. 58179 (July 17, 2008), 73 FR 42874 (July 23, 2008) 
(SR-PHLX-2008-31) (order approving NASDAQ OMX's acquisition of PHLX) 
(``PHLX Acquisition Order'').
    \8\ See id. See also Notice, supra note 4, at 31058.
    \9\ See Securities Exchange Act Release No. 57478 (March 12, 
2008), 73 FR 14521, 14532-14533 (March 18, 2008) (SR-NASDAQ-2007-004 
and SR-NASDAQ-2007-080) (``NOM Approval Order''); BX Acquisition 
Order, supra note 7, at 46944; and PHLX Acquisition Order, supra 
note 7, at 42877.
    \10\ See, e.g., NASDAQ Options Rule Chapter VI, Section 11(e) 
(governing order routing on NOM); and Securities Exchange Act 
Release No. 59948 (May 20, 2009), 74 FR 25784 (May 29, 2009) (SR-
NASDAQ-2009-047) (relating to the routing of orders by NOS inbound 
to NOM from PHLX) (``PHLX Inbound Release'').
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    On May 1, 2012, BX filed a proposed rule change to establish a new 
BX options market (``BX Options''), which will be an electronic trading 
system that trades options.\11\ As part of its proposal, BX proposed 
that NOS provide BX with outbound options routing services to other 
markets, including its affiliate NASDAQ. On May 15, 2012, the Exchange 
filed the instant proposal to allow the Exchange to accept such options 
orders routed inbound by NOS from BX, on a one year pilot basis, 
subject to certain limitations and conditions.\12\
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    \11\ See Securities Exchange Act Release No. 66983 (May 14, 
2012), 77 FR 29730 (May 18, 2012) (SR-BX-2012-030) (notice of 
propose rule change to adopt rules for the new BX options market) 
(``BX Options Proposal'').
    On June 26, 2012, the Commission approved the BX Options 
Proposal. See Securities Exchange Act Release No. 67256 (June 26, 
2012) (``BX Options Approval'').
    \12\ See Notice, supra note 4.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\13\ Specifically, the Commission finds that the proposed rule 
change is consistent with Section 6(b)(1) of the Act,\14\ which 
requires, among other things, that a national securities exchange be so 
organized and have the capacity to carry out the purposes of the Act, 
and to comply and enforce compliance by its members and persons 
associated with its members, with the provisions of the Act, the rules 
and regulation thereunder, and the rules of the Exchange. Further, the 
Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\15\ which requires, among other things, 
that the rules of a national securities exchange be 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, and 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. Section 6(b)(5) also 
requires that the rules of an exchange not be designed to permit unfair 
discrimination among customers, issuers, brokers, or dealers.
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    \13\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition and 
capital formation. 15 U.S.C. 78c(f).
    \14\ 15 U.S.C. 78f(b)(1).
    \15\ 15 U.S.C. 78f(b)(5).
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    NOS will operate as a facility of BX that provides outbound options 
routing from BX Options to other market centers, subject to certain 
conditions.\16\ The operation of NOS as a facility of BX providing 
outbound routing services from BX Options will be subject to BX 
oversight, as well as Commission oversight. BX will be responsible for 
ensuring that NOS's outbound options routing service is operated 
consistent with Section 6 of the Act and BX rules. In addition, BX must 
file with the Commission rule changes and fees relating to BX's 
outbound options routing services.
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    \16\ See BX Options Approval, supra note 7, at Section II.D.
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    Recognizing that the Commission has previously expressed concern 
regarding the potential for conflicts of interest in instances where a 
member firm is affiliated with an exchange of which it is a member, the 
Exchange previously proposed, and the Commission approved, limitations 
and conditions on NOS's affiliation with the Exchange.\17\ Also 
recognizing that the Commission has previously expressed concern 
regarding the potential for conflicts of interest in instances where a 
member firm is affiliated with an exchange to which it is routing 
orders, the Exchange proposed the following limitations and conditions 
to NOS's affiliation with the Exchange to permit the Exchange to accept 
inbound options orders that NOS routes in its capacity as a facility of 
BX:\18\
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    \17\ See NOM Approval Order, supra note 9, at 14521. See also 
Notice, supra note 4, at 31058 n.9 and accompanying text. In 
addition, the Exchange has authority to accept inbound orders that 
NOS routes in its capacity as a facility of PHLX, subject to certain 
limitations and conditions. See PHLX Inbound Release, supra note 10, 
at 25784. See also Notice, supra note 4, at 31058 n.10 and 
accompanying text.
    \18\ See Notice, supra note 4, at 31058.
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     First, the Exchange and the Financial Industry Regulatory 
Authority (``FINRA'') will maintain a Regulatory Contract, as well as 
an agreement pursuant to Rule 17d-2 under the Act

[[Page 39760]]

(``17d-2 Agreement'').\19\ Pursuant to the Regulatory Contract and the 
17d-2 Agreement, FINRA will be allocated regulatory responsibilities to 
review NOS's compliance with certain Exchange rules.\20\ Pursuant to 
the Regulatory Contract, however, the Exchange retains ultimate 
responsibility for enforcing its rules with respect to NOS.
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    \19\ 17 CFR 240.17d-2.
    \20\ NOS is also subject to independent oversight by FINRA, its 
designated examining authority, for compliance with financial 
responsibility requirements.
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     Second, FINRA will monitor NOS for compliance with the 
Exchange's trading rules, and will collect and maintain certain related 
information.\21\
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    \21\ Pursuant to the Regulatory Contract, both FINRA and the 
Exchange will collect and maintain all alerts, complaints, 
investigations and enforcement actions in which NOS (in its capacity 
as a facility of BX 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. See Notice, supra note 4, at 31058 
n.14.
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     Third, FINRA will provide a report to the Exchange's chief 
regulatory officer (``CRO''), on a quarterly basis, that: (i) 
Quantifies all alerts (of which the Exchange or FINRA is aware) that 
identify NOS as a participant that has potentially violated Commission 
or Exchange rules, and (ii) lists all investigations that identify NOS 
as a participant that has potentially violated Commission or Exchange 
rules.
     Fourth, the Exchange is amending NASDAQ Rule 2160(c) to 
require NASDAQ OMX, as the holding company owning both the Exchange and 
NOS, to establish and maintain procedures and internal controls 
reasonably designed to ensure that NOS 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 options order routing to the Exchange.\22\
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    \22\ The Commission notes that prior to this proposed rule 
change, NASDAQ Rule 2160(c) only applied with respect to the 
Exchange's equity order routing facility, NASDAQ Execution Services 
LLC. As a result of this proposed rule change, NASDAQ Rule 2160(c) 
will be applicable to NOS.
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     Fifth, the Exchange proposes that the routing of options 
orders from NOS to the Exchange, in NOS's capacity as a facility of BX, 
be authorized for a pilot period of one year.
    In the past, the Commission has expressed concern that the 
affiliation of an exchange with one of its members raises potential 
conflicts of interest, and the potential for unfair competitive 
advantage.\23\ Although the Commission continues to be concerned about 
potential unfair competition and conflicts of interest between an 
exchange's self-regulatory obligations and its commercial interest when 
the exchange is affiliated with one of its members, for the reasons 
discussed below, the Commission believes that it is consistent with the 
Act to permit NOS, in its capacity as a facility of BX, to route 
options orders inbound to the Exchange on a pilot basis, subject to the 
limitations and conditions described above.\24\
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    \23\ See, e.g., Securities Exchange Act Release Nos. 54170 (July 
18, 2006), 71 FR 42149 (July 25, 2006) (SR-NASDAQ-2006-006) (order 
approving NASDAQ's proposal to adopt NASDAQ Rule 2140, restricting 
affiliations between NASDAQ and its members); 53382 (February 27, 
2006), 71 FR 11251 (March 6, 2006) (SR-NYSE-2005-77) (order 
approving the combination of the New York Stock Exchange, Inc. and 
Archipelago Holdings, Inc.); 58673 (September 29, 2008), 73 FR 57707 
(October 3, 2008) (SR-Amex-2008-62 and SR-NYSE-2008-60) (order 
approving the combination of NYSE Euronext and the American Stock 
Exchange LLC); 59135 (December 22, 2008), 73 FR 79954 (December 30, 
2008) (SR-ISE-2009-85) (order approving the purchase by ISE Holdings 
of an ownership interest in Direct Edge Holdings LLC); 59281 
(January 22, 2009), 74 FR 5014 (January 28, 2009) (SR-NYSE-2008-120) 
(order approving a joint venture between NYSE and BIDS Holdings 
L.P.); 58375 (August 18, 2008), 73 FR 49498 (August 21, 2008) (File 
No. 10-182) (order granting the exchange registration of BATS 
Exchange, Inc.); 61698 (March 12, 2010), 75 FR 13151 (March 18, 
2010) (File Nos. 10-194 and 10-196) (order granting the exchange 
registration of EDGX Exchange, Inc. and EDGA Exchange, Inc.); and 
62716 (August 13, 2010), 75 FR 51295 (August 19, 2010) (File No. 10-
198) (order granting the exchange registration of BATS-Y Exchange, 
Inc.).
    \24\ The Commission notes that these limitations and conditions 
are consistent with those previously approved by the Commission for 
other exchanges. See, e.g., BX Options Approval, supra note 11, at 
II.D.2.
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    The Commission believes that these limitations and conditions 
enumerated above will mitigate its concerns about potential conflicts 
of interest and unfair competitive advantage. In particular, the 
Commission believes that a non-affiliated SRO's oversight of NOS,\25\ 
combined with a non-affiliated SRO's monitoring of NOS's compliance 
with the Exchange's rules and quarterly reporting to the Exchange, will 
help to protect the independence of the Exchange's regulatory 
responsibilities with respect to NOS. The Commission also believes that 
the Exchange's proposed amendments to NASDAQ Rule 2160(c) are designed 
to ensure that NOS cannot use any information advantage it may have 
because of its affiliation with the Exchange. Furthermore, the 
Commission believes that the Exchange's proposal to allow NOS to route 
options orders inbound to the Exchange from BX, on a pilot basis, will 
provide the Exchange and the Commission an opportunity to assess the 
impact of any conflicts of interest of allowing an affiliated member of 
the Exchange to route orders inbound to the Exchange and whether such 
affiliation provides an unfair competitive advantage.
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    \25\ This oversight will be accomplished through the 17d-2 
Agreement between FINRA and the Exchange and the Regulatory 
Contract. See Notice, supra note 4, at 31058 n.12 and accompanying 
text.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\26\ that the proposed rule change (SR-NASDAQ-2012-061) be, and 
hereby is, approved.
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    \26\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-16374 Filed 7-3-12; 8:45 am]
BILLING CODE 8011-01-P


