
[Federal Register Volume 78, Number 159 (Friday, August 16, 2013)]
[Notices]
[Pages 50126-50128]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-19906]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70158; File No. SR-BX-2013-047]


Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of 
Filing of a Proposed Rule Change To Assume Operational Responsibility 
for Certain Surveillance Activity Currently Performed by FINRA Under 
the Exchange's Authority and Supervision

August 12, 2013.
    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 July 31, 2013 NASDAQ OMX BX, Inc. (``BX'' or ``Exchange''), 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to assume operational responsibility for 
certain surveillance activity currently performed by the Financial 
Industry Regulatory Authority (``FINRA'') under the Exchange's 
authority and supervision.

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
    Section 6 of the Act requires that national securities exchanges 
enforce their members' compliance with federal securities laws and 
rules as well as the exchanges' own rules.\3\ As a self-regulatory 
organization (``SRO''), BX must conduct surveillance of trading on the 
Exchange as part of a comprehensive regulatory program that also 
includes member examinations and investigation and prosecution of 
suspicious activity. Since its acquisition by The NASDAQ OMX Group, 
Inc., BX has contracted with FINRA through various regulatory services 
agreements to perform certain surveillance and other regulatory 
functions on its behalf. However, as the Commission has made clear with 
respect to BX's affiliate, the NASDAQ Stock Exchange LLC (``NASDAQ''), 
``the Nasdaq Exchange bears the responsibility for self-regulatory 
conduct and primary liability for self-regulatory failures, not the SRO 
retained to perform regulatory functions on the Exchange's behalf.'' 
\4\
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    \3\ 15 U.S.C. 78f.
    \4\ Securities Exchange Act Release No. 53128 at 28 (January 13, 
2006), 71 FR 3550, 3556 (January 23, 2006).
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    Notwithstanding its use of FINRA, the Exchange has also retained 
operational responsibility for a number of surveillance and other 
regulatory functions including real-time surveillance, qualification of 
companies listed on NASDAQ and most surveillance related to its 
affiliated options markets. Historically BX retained operational 
responsibility in areas where BX's expertise regarding its own markets, 
technology and listed companies enhanced regulation. For the reasons 
outlined below, BX now proposes to reallocate operational 
responsibility from FINRA to BX Regulation for a limited number of 
equities surveillance patterns and related review functions focused on:
     Manipulation patterns that monitor solely BX activity, 
including patterns that monitor activity that might impact the opening 
and closing cross process on NASDAQ and compliance with minimum bid 
listing requirements by companies listed on NASDAQ, and
     Monitoring of compliance by NASDAQ member firms with 
elements of Regulation M and NASDAQ Rule 4619 compliance, which will 
include data from BX.
    FINRA operates a full suite of equities surveillance patterns on 
behalf of BX that covers many types of potential misconduct. In recent 
years FINRA, with BX's oversight and approval, modified a number of 
these BX patterns to incorporate data from markets operated by NYSE 
Euronext. BX plans to continue to participate in this cross-market 
surveillance performed by FINRA, some of which focuses on identifying 
similar violative activity, which will not be impacted by this 
proposal. However, a limited number of FINRA's patterns only review BX 
market data and detect conduct occurring only on the Exchange. These 
patterns incorporate unique elements of BX's market structure and focus 
on trading activity in the BX that might impact the opening and closing 
cross process on NASDAQ,\5\ as well as activity on BX that might impact 
minimum bid listing standards for securities listed on NASDAQ, an area 
already regulated by NASDAQ. An additional pattern monitors attempts to 
manipulate BX using small orders to advantage larger orders placed on 
the opposite side of the BX market at an improved price (often referred 
to as ``odd lot manipulation'' or ``mini-manipulation'').
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    \5\ FINRA runs additional patterns looking for manipulation of 
trading on BX as part of its cross market manipulation patterns.
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    BX believes that its expertise in its own market structure coupled 
with its continued monitoring of these activities in real-time will 
enable it to enhance existing patterns to better detect improper 
activity on its market. In addition, these patterns, the underlying 
rules, and analytical requirements are similar to patterns BX 
regulatory personnel already operate for affiliated options markets. 
For example, BX regulatory personnel routinely monitor affiliated 
options markets for market closing activity and other patterns designed 
to detect various types of price influence.
    In a separate filing NASDAQ also proposes to assume operational 
responsibility for real-time monitoring of compliance by market makers 
that are members of an underwriting syndicate with the quoting and 
trading restrictions in Rules 101 and 103 under the Act \6\ and NASDAQ 
Rule 4619.\7\ The activity is monitored in real-time and firms are 
called upon receipt of regulatory alerts to prevent potential or 
further violations. MarketWatch already has responsibility for 
monitoring similar activity on BX by market makers participating in 
secondary offerings, although this surveillance is not

[[Page 50127]]

currently active as BX does not have any registered market makers. 
However, the pattern run for NASDAQ would incorporate BX data, thereby 
adding to the efficacy of the NASDAQ pattern.
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    \6\ 17 CFR 242.101 and 17 CFR 242.103.
    \7\ SR-NASDAQ-2013-102.
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    BX plans to operate the surveillance patterns referenced above in 
the SMARTS surveillance system. SMARTS is a state-of-the-art 
surveillance platform used in 26 markets and by 9 government regulators 
around the world. BX plans to use SMARTS for both real-time monitoring 
and the limited non-real time surveillance covered by this proposal. 
Running the patterns in real-time will permit an expedited review of 
critical alerts that previously would not have been completed the same 
day. It will now be easier to quickly compare unusual activity noted as 
part of BX's operations monitoring of market activity with surveillance 
alerts. BX anticipates being able to refer a broader cross section of 
problematic activity to FINRA for expedited review than was previously 
the case.
    BX Regulation intends to leverage its existing staff of experienced 
analysts, lawyers, programmers and market structure experts to perform 
the new functions covered by this proposal. This group is working with 
BX's regulatory technology group to develop and test the surveillance 
patterns that will run in the SMARTS system. This distribution of 
responsibilities was the result of detailed discussions between BX and 
FINRA that focused on reallocating responsibilities based on the core 
competencies of each organization. BX Regulation and FINRA have 
developed comprehensive plans covering the transition and the groups 
have met regularly over more than nine months to ensure a smooth 
transition of the work and prevent any gaps in surveillance coverage. 
BX and FINRA anticipate a phased transition of patterns, with BX 
formally relieving FINRA of operational responsibility for each pattern 
once testing, training, procedures and other preparations are 
completed. FINRA will retire each pattern once relieved of 
responsibility. After the transition, BX Regulation will review 
surveillance alerts and refer potentially violative conduct to FINRA 
using existing processes and systems. FINRA will continue to have 
operational responsibility for the vast majority of surveillances 
involving BX's equity market as well as examination and enforcement 
matters, subject to BX's supervision and ultimate responsibility.
    The provisions of BX Rule 0150 require that BX obtain Commission 
approval if regulatory functions subject to the regulatory services 
agreement in effect at the time BX first executed the agreement in 2008 
are no longer performed by FINRA or another independent self-regulatory 
organization. For the reasons stated above, BX believes that the 
reassignment of operational responsibility for a limited number of 
equities surveillance patterns will further its regulatory program and 
benefit investors and the markets. Commission approval of the proposal 
would allow NASDAQ OMX to better leverage data and systems across its 
three equities exchanges, including NASDAQ OMX PHLX, an affiliate of 
BX, that does not have an equivalent to Rule 0150 requiring Commission 
approval for this reallocation.
    In addition, BX notes that its proposal is consistent with, but 
more limited than, surveillance work performed by other national 
securities exchanges. The SEC has previously approved several 
applications for registration as national securities exchanges in which 
the SRO proposed to perform its own surveillance function. For example, 
the SEC approved BATS Exchange's application where BATS performed most 
surveillance for its markets, finding in its approval order that it was 
consistent with the Act for BATS Exchange to contract with FINRA to 
perform regulatory functions limited to ``examination, enforcement, and 
disciplinary functions.'' \8\ Similarly, BX understands that Miami 
International Securities Exchange (``MIAX'') performs the majority of 
its surveillance operations in-house. This is consistent with MIAX's 
Form 1, which states that the new exchange entered into a regulatory 
services agreement with CBOE that is limited to ``conducting certain 
market surveillances'' in addition to other regulatory work.\9\
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    \8\ Securities Exchange Act Release No. 34-58375 (August 18, 
2008), 73 FR 49498 (August 21, 2008).
    \9\ Securities Exchange Act Release No. 34-68341 (December 3, 
2012), 77 FR 73065 (December 7, 2012) (emphasis added).
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2. Statutory Basis
    BX believes that the proposed rule change is consistent with the 
provisions of Section 6 of the Act,\10\ in general and with Sections 
6(b)(5) of the Act,\11\ in particular in that it 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 Exchange believes that 
this proposal is in keeping with those principles by leveraging the 
SMARTS technology system that has the ability to operate in real-time 
and, as a consequence, will permit BX to react more quickly to 
potential manipulation in the applicable regulatory areas covered by 
this proposal. The surveillance patterns to be reallocated to BX 
involve solely activity on BX's own market. BX believes that its 
expertise in its own market structure, coupled with its existing 
monitoring of these activities in real-time, will enable it to enhance 
current patterns to better detect improper activity on its market. In 
addition, BX will be able to leverage the knowledge and the regulatory 
staff that already perform similar work for affiliated options markets.
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    \10\ 15 U.S.C. 78f.
    \11\ 15 U.S.C. 78f(b)(5).
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    BX will continue to refer potentially violative conduct to FINRA 
for further review. Moreover, FINRA will continue to perform the vast 
majority of surveillance activity for BX's equities market, in many 
cases using patterns that incorporate data from other market centers. 
FINRA will also perform examination and enforcement work, subject to 
BX's supervision and ultimate responsibility.
    BX also believes the proposal is consistent with the Act because, 
as the Commission has made clear on many occasions, an SRO cannot 
delegate its ultimate responsibility for surveillance in the absence of 
an SEC-approved agreement under Section 17(d)(2) of the Act, and 
therefore must remain involved and responsible for its regulatory 
program. In addition, BX notes that its proposal is consistent with, 
but more limited than, surveillance work performed by other national 
securities exchanges. As noted above, the SEC has previously approved 
several applications for registration as national securities exchanges 
in which the SRO proposed to perform its own surveillance function.\12\ 
BX believes it would therefore be consistent with the Act for BX to 
perform a much more limited surveillance function than has been 
approved for other exchanges and, in fact, more limited than 
surveillance functions BX already performs for non-cash equities 
markets.
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    \12\ See supra notes 8 and 9, and accompanying text discussing 
the surveillance work by BATS and MIAX.

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[[Page 50128]]

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

    The Exchange 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

    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 Exchange 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-BX-2013-047 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-BX-2013-047. 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 
10:00 a.m. and 3:00 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-BX-2013-047, and should be 
submitted on or before September 6, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-19906 Filed 8-15-13; 8:45 am]
BILLING CODE 8011-01-P


