
[Federal Register Volume 78, Number 61 (Friday, March 29, 2013)]
[Notices]
[Pages 19352-19353]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-07298]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69233; File No. SR-NASDAQ-2013-028]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Approving a Proposed Rule Change for the Permanent Approval of a Pilot 
Program To Permit NASDAQ To Accept Inbound Orders Routed by NASDAQ 
Execution Services LLC From the BX Equities Market and PSX

March 25, 2013.

I. Introduction

    On February 6, 2013, 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 thereunder,\2\ a 
proposed rule change requesting permanent approval of the Exchange's 
pilot program that permits the Exchange to accept inbound orders routed 
by NASDAQ Execution Services LLC (``NES'') from the NASDAQ OMX BX 
Equities Market of NASDAQ OMX BX, Inc. (``BX'') and the NASDAQ OMX PSX 
facility (``PSX'') of NASDAQ OMX PHLX LLC (``PHLX''). The proposed rule 
change was published for comment in the Federal Register on February 
14, 2013.\3\ 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\ See Securities Exchange Act Release No. 68891 (February 8, 
2013), 78 FR 10670 (``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, an 
Exchange member or an affiliate of an Exchange member in the absence of 
an effective filing under Section 19(b) of the Act.\4\ NES 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.\5\ NES is owned by NASDAQ OMX Group, Inc. (``NASDAQ 
OMX''), which also owns three registered securities exchanges--the 
Exchange, BX, and PHLX.\6\ Thus, NES is an affiliate of these 
exchanges.\7\ Absent an effective filing, NASDAQ Rule 2160(a) would 
prohibit NES from being a member of the Exchange.
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    \4\ 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(a)(2).
    \5\ See NASDAQ Rule 4758. See also Notice, supra note 3, 10670.
    \6\ 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'').
    \7\ See id. See also Notice, supra note 3, at 10670; and 
Securities Exchange Act No. 59153 (December 23, 2008), 73 FR 80485 
(December 31, 2008) (SR-NASDAQ-2008-098). On September 7, 2007, 
NASDAQ filed a proposed rule change codifying the function of NES. 
See Securities Exchange Release No. 56708 (October 26, 2007), 72 FR 
61925 (November 1, 2011) (SR-NASDAQ-2007-078).
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    On October 6, 2011, the Exchange filed a proposed rule change for 
NASDAQ to accept inbound orders routed from the NASDAQ OMX BX Equities 
Market of BX and PSX on a pilot basis subject to certain limitations 
and conditions.\8\ On February 6, 2013, the Exchange filed the instant 
proposal to allow the Exchange to accept such orders routed inbound by 
NES from BX and PSX on a permanent basis subject to certain limitations 
and conditions.\9\
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    \8\ See Securities Exchange Act Release No. 65554 (October 13, 
2011), 76 FR 65311 (October 20, 2011) (SR-NASDAQ-2011-142) (notice 
of proposed rule change to allow NASDAQ to accept inbound orders 
from the NASDAQ OMX BX Equities Market of BX and PSX on a one-year 
pilot basis). See also, Securities Exchange Act Release No. 67997 
(October 5, 2012), 77 FR 62293 (October 12, 2012) (extending one-
year pilot for an additional six-month period).
    \9\ See Notice, supra note 3.
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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.\10\ Specifically, the Commission finds that the proposed rule 
change is consistent with Section 6(b)(1) of the Act,\11\ 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,\12\ 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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    \10\ 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).
    \11\ 15 U.S.C. 78f(b)(1).
    \12\ 15 U.S.C. 78f(b)(5).
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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 NES's affiliation with the Exchange.\13\ Also 
recognizing that the Commission has 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 
previously implemented limitations and conditions to NES's affiliation 
with the Exchange to permit the Exchange to accept inbound orders that 
NES routes in its capacity as a facility of BX and PHLX on a pilot 
basis.\14\ The Exchange has proposed to permit NASDAQ to accept inbound 
orders that NES routes in its capacity as a facility of BX and PHLX on 
a permanent basis, subject to the same limitations and conditions of 
this pilot:
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    \13\ See supra, note 7, 73 FR at 80486. See also Notice, supra 
note 3, at 10670 n.8 and accompanying text.
    \14\ See Notice, supra note 3, at 10670.
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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 (``17d-2 
Agreement'').\15\ Pursuant to the Regulatory Contract and the 17d-2 
Agreement, FINRA will be allocated regulatory responsibilities to 
review NES's compliance with certain NASDAQ rules.\16\ Pursuant to the 
Regulatory Contract, however, the

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Exchange retains ultimate responsibility for enforcing its rules with 
respect to NES.
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    \15\ 17 CFR 240.17d-2.
    \16\ NES 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 NES for compliance with 
NASDAQ's trading rules, and will collect and maintain certain related 
information.\17\
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    \17\ Pursuant to the Regulatory Contract, 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 BX and PHLX 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 3, 
at 10670 n.11.
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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 NES as a participant that has potentially violated Commission 
or Exchange rules, and (ii) lists all investigations that identify NES 
as a participant that has potentially violated Commission or NASDAQ 
rules.
     Fourth, the Exchange has in place NASDAQ Rule 2160(c), 
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.
    The Exchange stated that it has met all the above-listed 
conditions. By meeting such conditions, the Exchange believes that it 
has set up mechanisms that protect the independence of the Exchange's 
regulatory responsibility with respect to NES, and has demonstrated 
that NES cannot use any information advantage it may have because of 
its affiliation with the Exchange.\18\ 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.\19\ 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 NES, in its capacity as a 
facility of BX and PHLX, to route orders inbound to the Exchange on a 
permanent basis instead of a pilot basis, subject to the limitations 
and conditions described above.\20\
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    \18\ See Notice, supra note 3, at 10671.
    \19\ 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.).
    \20\ The Commission notes that these limitations and conditions 
are consistent with those previously approved by the Commission for 
other exchanges. See, e.g., Securities Exchange Act Release Nos. 
67256 (June 26, 2012) 77 FR 39277 (July 2, 2012) (SR-BX-2012-030); 
and 64090 (March 17, 2011), 76 FR 16462 (March 23, 2011) (SR-BX-
2011-007).
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    The Exchange has proposed four ongoing conditions applicable to 
NES's routing activities, which are enumerated above. The Commission 
believes that these conditions will mitigate its concerns about 
potential conflicts of interest and unfair competitive advantage. In 
particular, the Commission believes that FINRA's oversight of NES,\21\ 
combined with FINRA's monitoring of NES'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 NES. The Commission also believes that the Exchange's 
Rule 2160 is designed to ensure that NES cannot use any information 
advantage it may have because of its affiliation with the Exchange.
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    \21\ This oversight will be accomplished through the 17d-2 
Agreement between FINRA and the Exchange and the Regulatory 
Contract. See Notice, supra note 3, at 10670 n.10 and accompanying 
text.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\22\ that the proposed rule change (SR-NASDAQ-2013-028) be, and 
hereby is, approved.
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    \22\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-07298 Filed 3-28-13; 8:45 am]
BILLING CODE 8011-01-P


