
[Federal Register Volume 81, Number 250 (Thursday, December 29, 2016)]
[Notices]
[Pages 96060-96062]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-31475]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79660; File No. SR-Phlx-2016-120]


Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
of Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To 
Permit Phlx To Accept Inbound Options Orders Routed by Nasdaq Execution 
Services LLC

December 22, 2016.
    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 9, 2016, NASDAQ PHLX LLC (``Phlx'' or the ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change. On December 20, 2016, the Exchange filed 
Amendment No. 1 to the proposed rule change, which amended and replaced 
the original filing in its entirety. The proposed rule change, as 
modified by Amendment No. 1, is 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, as modified by Amendment No. 1 thereto, 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 proposes to permit Phlx to accept inbound options 
orders routed by Nasdaq Execution Services LLC (``NES'') from the 
International Securities Exchange, LLC (``ISE'') ISE Gemini, LLC (``ISE 
Gemini'') and ISE Mercury, LLC (``ISE Mercury'') (collectively ``ISE 
Exchanges'').

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.

[[Page 96061]]

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    In conjunction with the ISE Exchanges seeking approval to provide 
outbound routing services to all options markets using an affiliated 
routing broker, NES,\3\ Phlx proposes that NES be permitted to route 
orders from the ISE Exchanges to Phlx, subject to certain limitations 
and conditions, as described below.
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    \3\ See SR-ISE-2016-27, SR-ISEGemini-2016-16 and SR-ISE-Mercury-
2016-22 (not yet published).
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    NES is a broker-dealer and member of The Nasdaq Options Market LLC 
(``NOM''), Nasdaq BX, Inc. (``BX'') and Phlx (collectively ``Nasdaq 
Exchanges''). NES provides all routing functions for the Nasdaq 
Exchanges. The Nasdaq Exchanges and NES are permitted affiliates.\4\ 
Accordingly, the affiliate relationship between Phlx and NES, its 
member, raises the issue of an exchange's affiliation with a member of 
such exchange. Specifically, in connection with prior filings, the 
Commission has expressed concern that the affiliation of an exchange 
with one of its members raises the potential for unfair competitive 
advantage and potential conflicts of interest between an exchange's 
self-regulatory obligations and its commercial interests.\5\
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    \4\ See Phlx Rule 985, Nasdaq Rule 2160 and BX Rule 2140.
    \5\ See Securities Exchange Act Release Nos. 59153 (December 23, 
2008), 73 FR 80485 (December 31, 2008) (SR-NASDAQ-2008-098); and 
62736 (August 17, 2010), 75 FR 51861 (August 23, 2010) (SR-NASDAQ-
2010-100). See also Securities Exchange Act Release No. 58135 (July 
10, 2008), 73 FR 40898 (July 16, 2008) (SR-NASDAQ-2008-061) 
(Permitting NOS to be affiliated with Phlx).
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    Specifically, in connection with prior filings, the Commission has 
expressed concern that the affiliation of an exchange with one of its 
members raises the potential for unfair competitive advantage and 
potential conflicts of interest between an exchange's self-regulatory 
obligations and its commercial interests.\6\ The Nasdaq Exchanges 
received approval from the Commission to permit NES to become a member 
of these three markets subject to certain limitations and conditions in 
order to perform certain routing and other functions, respectively.\7\ 
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 
Nasdaq Exchanges previously proposed, and the Commission approved,\8\ 
NES's affiliation with the Nasdaq Exchanges to permit the Exchange to 
accept inbound orders that NES routes in its capacity as a facility 
from other Nasdaq Exchanges, subject to the certain limitations and 
conditions. Phlx now proposes to permit Phlx to accept inbound options 
orders that NES routes in its capacity as a facility of the ISE 
Exchanges, subject to the following limitations and conditions: \9\
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    \6\ Securities Exchange Act Release Nos. 71416 (January 28, 
2014), 79 FR 6244 (February 3, 2014) (SR-Phlx-2014-05); 71419 
(January 28, 2014), 79 FR 6247 (February 3, 2014) (SR-NASDAQ-2014-
007); and 714121 (January 28, 2014), 79 FR 6264 (February 3, 2014) 
(SR-BX-2014-003).
    \7\ See Securities Exchange Act Release Nos. 59721 (April 7, 
2009), 74 FR 17245 (April 14, 2009) (SR-Phlx-2009-32); 59779 (April 
16, 2009) 74 FR 18600 (April 23, 2009) (SR-Phlx-2009-32, Amendment 
No. 1) notice of filing of proposed rule change relating to enhanced 
electronic trading platform for options); 61667 (March 5, 2010), 75 
FR 11964 (March 12, 2016) (SR-Phlx-2010-36) (notice of filing and 
immediate effectiveness of proposed rule changes to establish 
procedures to prevent information advantages resulting from the 
affiliation between Phlx and NES); and 71416 (January 28, 2014), 79 
FR 6244 (February 3, 2014) (SR-Phlx-2014-05) (notice of filing and 
immediate effectiveness of proposed rule change to inbound routing 
of options orders). Nasdaq Options Services was the affiliated 
broker-dealer prior to a rule change to utilize NES, another 
affiliated broker-dealer of Nasdaq. See also Securities Exchange Act 
Release Nos. 63769 (January 25, 2011), 76 FR 5423 (January 31, 2011) 
(SR-BX-2011-003); 63859 (February 7, 2011), 76 FR 8391 (February 14, 
2011) (SR-BX-2011-007) (notice of filing of proposed rule change 
relating to permanent approval of the BX and NES inbound routing 
relationship); 71420 (January 28, 2014), 79 FR 6256 (February 3, 
2014) (SR-BX-2014-004) (notice of filing and immediate effectiveness 
of proposed rule change to inbound routing). See also Securities 
Exchange Act Release Nos. 65554 (October 13, 2011), 76 FR 65311 
(October 20, 2011) (SR-NASDAQ-2011-142); 71418 (January 28, 2014), 
79 FR 6262 (February 3, 2014) (SR-NASDAQ-2014-008) (notice of filing 
and immediate effectiveness of proposed rule change to inbound 
routing).
    \8\ Id.
    \9\ The Exchange notes that similar filings are proposed for the 
Nasdaq and BX markets. See SR-Nasdaq-2016-169 and SR-BX-2016-068 
(not published).
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     First, the Exchange and FINRA maintain a Regulatory 
Services Agreement (``RSA''), as well as an agreement pursuant to Rule 
17d-2 under the Act (``17d-2 Agreement'').\10\ Pursuant to the RSA and 
the 17d-2 Agreement, FINRA is allocated regulatory responsibilities to 
review NES's compliance with certain Exchange rules.\11\ Pursuant to 
the RSA, however, Phlx retains ultimate responsibility for enforcing 
its rules with respect to NES.
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    \10\ 17 CFR 240.17d-2. FINRA reviews NES' compliance for certain 
common rules. The RSA with FINRA specifies the types of business 
activities that NES may undertake and it also indicates the 
obligations to which NES is subject under the RSA. Among other 
things, NES must maintain a certain amount of net capital pursuant 
to SEC Rule 15c3-1(a)(1)(ii) and operate pursuant to SEC Rule 15c3-
3(k)(2)(ii). NES is permitted to route orders in options to the 
appropriate market center for execution in accordance with member 
order and requirements.
    \11\ 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 monitors NES for compliance with the 
Exchange's trading rules, and collects and maintains certain related 
information.\12\
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    \12\ Pursuant to the RSA, both FINRA and Phlx collect and 
maintain all alerts, complaints, investigations and enforcement 
actions in which NES (in its capacity as a facility of BX and NOM 
routing orders to Phlx) is identified as a participant that has 
potentially violated applicable Commission or Exchange rules. The 
Exchange and FINRA 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. 
Pursuant to the RSA, the Exchange and FINRA would be required to 
perform these activities with respect to NES acting in its capacity 
as a facility of each of the affiliated entities routing orders to 
Phlx.
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     Third, FINRA provides 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 Exchange 
rules.
     Fourth, Phlx has in place Phlx Rule 985(c)(2) which 
requires Nasdaq, Inc., 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.\13\
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    \13\ See Securities Exchange Act Release Nos. 59721 (April 7, 
2009), 74 FR 17245 (April 14, 2009) (SR-Phlx-2009-32); 59779 (April 
16, 2009), 74 FR 18600 (April 23, 2009) (SR-Phlx-2009-32, Amendment 
No. 1) notice of filing of proposed rule change relating to enhanced 
electronic trading platform for options); 61667 (March 5, 2010), 75 
FR 11964 (March 12, 2016) (SR-Phlx-2010-36) (notice of filing and 
immediate effectiveness of proposed rule changes to establish 
procedures to prevent information advantages resulting from the 
affiliation between Phlx and NES); and 71416 (January 28, 2014), 79 
FR 6244 (February 3, 2014) (SR-Phlx-2014-05) (notice of filing and 
immediate effectiveness of proposed rule change to inbound routing 
of options orders). Nasdaq Options Services was the affiliated 
broker-dealer prior to a rule change to utilize NES, another 
affiliated broker-dealer of Nasdaq.
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    The Exchange has met all the above-listed conditions in connection 
with

[[Page 96062]]

NES routing in its capacity as a facility of BX and NOM. By meeting the 
above conditions, the Exchange has set up mechanisms that protect the 
independence of the Exchange's regulatory responsibility 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. 
Because the Exchange has met all the above-listed conditions, it now 
seeks to permit an inbound routing relationship with the ISE Exchanges 
pursuant to the same conditions. The Exchange will continue to comply 
with the four conditions stated above.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\14\ in general, and with 
Sections 6(b)(5) of the Act,\15\ 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, because the 
proposed rule change will allow the Exchange to continue to receive 
inbound orders from NES, acting in its capacity as a facility of BX and 
NOM, in a manner consistent with prior approvals and established 
protections and will further be permitted to receive inbound orders 
from the ISE Exchanges, for which NES will also act in its capacity as 
a facility of those markets. The Exchange believes that the proposed 
conditions establish mechanisms that protect the independence of the 
Exchange's regulatory responsibility with respect to NES, as well as 
ensure that NES cannot use any information it may have because of its 
affiliation with the Exchange, or affiliation with other Nasdaq 
Exchanges or ISE Exchanges, to its advantage.
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    \14\ 15 U.S.C. 78f.
    \15\ 15 U.S.C. 78f(b)(5).
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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. 
Permitting Phlx to receive inbound orders from the ISE Exchanges does 
not create any issues of intra-market competition because it involves 
inbound routing from affiliated markets. Nor does it result in a burden 
on competition among exchanges, because there are many competing 
options exchanges that provide routing services, including through an 
affiliate.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or 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, as modified by Amendment No. 1, 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-2016-120 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Phlx-2016-120. 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-Phlx-2016-120, and should be 
submitted on or before January 19, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016-31475 Filed 12-28-16; 8:45 am]
 BILLING CODE 8011-01-P


