
[Federal Register Volume 82, Number 30 (Wednesday, February 15, 2017)]
[Notices]
[Pages 10844-10846]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-02993]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79996; File Nos. SR-BX-2016-068; SR-NASDAQ-2016-169; 
SR-Phlx-2016-120]


Self-Regulatory Organizations; NASDAQ BX, Inc.; The Nasdaq Stock 
Market LLC; NASDAQ PHLX LLC; Order Granting Approval of Proposed Rule 
Changes, as Modified by Amendment No. 1s, To Accept Orders Routed 
Inbound From the International Stock Exchange, LLC, ISE Gemini, LLC, 
and ISE Mercury, LLC, by Nasdaq Execution Services, LLC

February 9, 2017.

I. Introduction

    On December 9, 2016, NASDAQ BX, Inc. (``BX''), The NASDAQ Stock 
Market LLC (``Nasdaq''), and NASDAQ PHLX LLC (``Phlx'' and, each of BX, 
Nasdaq, and Phlx a ``NASDAQ Exchange'' or ``Exchange'') 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\ proposed rule changes to permit BX, Phlx, 
and The NASDAQ Options Market LLC (``NOM'') \3\ to accept options 
orders routed inbound from the International Stock Exchange, LLC 
(``ISE''), ISE Gemini, LLC (``ISE Gemini''), and ISE Mercury, LLC 
(``ISE Mercury'' and, together with ISE and ISE Gemini, the ``ISE 
Exchanges'') by Nasdaq Execution Services, LLC (``NES''), an affiliate 
of both the NASDAQ Exchanges and the ISE Exchanges (the NASDAQ 
Exchanges, together with the ISE Exchanges, the ``Affiliated 
Exchanges'').\4\ On December 20, 2016, each of the NASDAQ Exchanges 
filed an Amendment No. 1 to its respective proposed rule change. The 
proposed rule changes, each as modified by Amendment No. 1 thereto, 
were published for comment in the Federal Register on December 29, 
2016.\5\ The Commission received no comments on the proposals. This 
order approves the proposed rule changes, as modified by their 
respective Amendment No. 1s.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ NOM is a facility of Nasdaq. See Nasdaq Options Rules, 
Chapter I, Section 1(a)(28).
    \4\ The ISE Exchanges submitted related proposed rule changes 
that, among other things, would permit each ISE Exchange to use NES 
to route options orders outbound to away markets. See Securities 
Exchange Act Release Nos. 79665 (December 22, 2016), 81 FR 96092 
(December 29, 2016) (SR-ISE-2016-27); 79664 (December 22, 2016), 81 
FR 96136 (December 29, 2016) (SR-ISEGemini-2016-16); and 79663 
(December 22, 2016), 81 FR 96089 (December 29, 2016) (SR-ISEMercury-
2016-22). The Commission is also today approving these proposed 
rules changes. See Securities Exchange Act Release Nos. 79994 
(February 9, 2017); and 79995 (February 9, 2017) (``ISE Exchange 
Routing Orders'').
    \5\ See Securities Exchange Act Release Nos. 79661 (December 22, 
2016), 81 FR 96100 (SR-BX-2016-068) (``BX Notice''); 79662 (December 
22, 2016), 81 FR 96087 (SR-NASDAQ-2016-169) (``Nasdaq Notice''); and 
79660 (December 22, 2016), 81 FR 96060 (SR-Phlx-2016-120) (``Phlx 
Notice'').
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II. Background

    Phlx Rule 985(b)(i)(A) prohibits Phlx 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.\6\ Nasdaq's and 
BX's rules include similar prohibitions.\7\ NES is a registered broker-
dealer that is a member of NOM,\8\ BX,\9\ and Phlx,\10\ and currently 
provides to members of each, optional routing services to other 
markets.\11\ NES is owned by Nasdaq, Inc.,\12\ which also owns all of 
the Affiliated Exchanges.\13\ Thus, NES is an affiliate of the NASDAQ 
Exchanges, as well as an affiliate of the ISE Exchanges. Absent an 
effective filing, the rules of Nasdaq, BX, and Phlx would prohibit NES 
from being a member of each of those Exchanges. Today, NES is a member 
of each of the NASDAQ Exchanges and performs certain limited activities 
for each, pursuant to effective filings pursuant to Section 19(b).\14\ 
Among other activities, each of the NASDAQ Exchanges accepts options 
orders routed inbound from each of the other NASDAQ Exchanges pursuant 
to certain limitations and conditions.\15\ With the current proposed 
rule changes, the NASDAQ Exchanges seek approval to permit NES to also 
route options orders inbound from the ISE Exchanges pursuant to those 
same limitations and conditions.\16\
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    \6\ 15 U.S.C. 78s(b). Phlx Rule 985 also prohibits a Phlx member 
from being or becoming an affiliate of Phlx, or an affiliate of an 
entity affiliated with Phlx, in the absence of an effective filing 
under Section 19(b) of the Act. See Phlx Rule 958(b)(i)(B).
    \7\ Pursuant to Nasdaq Rule 2160(a): ``(1) Nasdaq or any entity 
with which it is affiliated shall not, directly or indirectly, 
acquire or maintain an ownership interest in, or engage 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; and (2) a Nasdaq member shall not be or become an affiliate 
of Nasdaq, or an affiliate of an entity affiliated with Nasdaq, in 
the absence of an effective filing under Section 19(b) of the Act.''
    Pursuant to BX Rule 2140(a): ``(1) [BX] or any entity with which 
it is affiliated shall not, directly or indirectly, acquire or 
maintain an ownership interest in, or engage in a business venture 
with, [a BX] member or an affiliate of [a BX] member in the absence 
of an effective filing under Section 19(b) of the Act; and (2) [a 
BX] member shall not be or become an affiliate of [BX], or an 
affiliate of an entity affiliated with [BX], in the absence of an 
effective filing under Section 19(b) of the Act.''
    \8\ See Nasdaq Notice, supra note 5, at 96087.
    \9\ See BX Notice, supra note 5, at 96100.
    \10\ See Phlx Notice, supra note 5, at 96061.
    \11\ See Phlx Rule 1080(m)(iii); Nasdaq Options Rules, Chapter 
VI, Section 11(e); and BX Options Rules, Chapter VI, Section 11(e). 
See also Phlx Notice, supra note 5, at 96061; Nasdaq Notice, supra 
note 5, at 96087; and BX Notice, supra note 5, at 96100.
    \12\ See Securities Exchange Act Release No. 69233 (March 25, 
2013), 78 FR 19352 (March 29, 2013) (SR-NASDAQ-2013-028) (order 
approving a proposed rule change to make permanent a pilot program 
to permit NASDAQ to accept inbound orders routed by NES from the BX 
Equities market and PSX) at 19352 n.6 and accompanying text.
    \13\ See Securities Exchange Act Release No. 78119 (June 21, 
2016), 81 FR 41611 (June 27, 2016) (SR-ISE-2016-11; SR-ISE Gemini-
2016-05; SR-ISE Mercury-2016-10) (order approving a proposed rule 
change relating to Nasdaq, Inc.'s acquisition of ISE, ISE Gemini, 
and ISE Mercury).
    \14\ See, e.g., supra note 11; and Securities Exchange Act 
Release Nos. 69233, supra note 12; 69232 (March 25, 2013), 78 FR 
19342 (March 29, 2013) (SR-BX-2013-013) (order approving a proposed 
rule change to make permanent a pilot program to permit BX to accept 
inbound orders routed by NES from PSX); 69229 (March 25, 2013), 78 
FR 19337 (March 29, 2013) (SR-Phlx-2013-15) (order approving a 
proposed rule change to make permanent a pilot program to permit PSX 
to accept inbound orders routed by NES from BX); 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 permit 
Phlx to receive inbound orders in options routed through NES from 
NOM and BX); 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 permit BX to receive inbound orders in 
options routed through NES from NOM and Phlx); and 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 permit NOM to receive inbound orders in options routed 
through NES from BX and Phlx).
    \15\ See Securities Exchange Act Release Nos. 71416, supra note 
14; 71420, supra note 14; and 71418, supra note 14. With respect to 
Nasdaq, routing of options orders is permitted into NOM from BX and 
Phlx, into Phlx from NOM and BX, and into BX from NOM and Phlx. See 
id.
    \16\ See Phlx Notice, supra note 5, at 96062; Nasdaq Notice, 
supra note 5, at 96088; and BX Notice, supra note 5, at 96101. In 
the case of Nasdaq, Nasdaq proposes to permit NES to route options 
orders into NOM. See Nasdaq Notice, supra note 5, at 96087.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
changes, each as modified by Amendment No. 1,

[[Page 10845]]

are consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\17\ Specifically, the Commission finds that the proposed rule 
changes are consistent with Section 6(b)(1) of the Act,\18\ 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 changes are consistent with 
Section 6(b)(5) of the Act,\19\ 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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    \17\ In approving these proposed rule changes, the Commission 
has considered the proposed rules' impact on efficiency, competition 
and capital formation. 15 U.S.C. 78c(f).
    \18\ 15 U.S.C. 78f(b)(1).
    \19\ 15 U.S.C. 78f(b)(5).
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    For each of the ISE Exchanges, NES will operate as a facility that 
provides outbound options routing from the respective ISE Exchange to 
other market centers, subject to certain conditions.\20\ The operation 
of NES as a facility of each of the ISE Exchanges providing outbound 
routing services will be subject to oversight by each of the ISE 
Exchanges, respectively, as well as Commission oversight. Each of the 
ISE Exchanges will be responsible for ensuring that NES's outbound 
options routing services are operated consistent with Section 6 of the 
Act and ISE, ISE Gemini, and ISE Mercury's rules, respectively. In 
addition, the ISE Exchanges must each file with the Commission rule 
changes and fees relating to their outbound options routing services 
provided by NES.
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    \20\ See ISE Exchange Routing Orders, supra note 4.
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    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, each NASDAQ 
Exchange previously implemented limitations and conditions on its 
affiliation with NES to permit the Exchange to accept inbound options 
orders that NES routes in its capacity as a facility of the other 
NASDAQ Exchanges.\21\ Again recognizing the concern previously 
expressed by the Commission, each NASDAQ Exchange now proposes that it 
be permitted \22\ to accept inbound options orders that NES routes in 
its capacity as a facility of ISE, ISE Gemini, and ISE Mercury, subject 
to those same limitations and conditions, as follows: \23\
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    \21\ See supra note 15 and accompanying text.
    \22\ In the case of Nasdaq, the Exchange requests that NOM be 
permitted to accept inbound options orders that NES routes in its 
capacity as a facility of the ISE Exchanges. See Nasdaq Notice, 
supra note 5, at 96087.
    \23\ See Phlx Notice, supra note 5, at 96061; Nasdaq Notice, 
supra note 5, at 96087-88; BX Notice, supra note 5, at 96101.
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     First, each NASDAQ Exchange and the Financial Industry 
Regulatory Authority (``FINRA'') will maintain a Regulatory Services 
Agreement (``RSA''), as well as an agreement pursuant to Rule 17d-2 
under the Act (``17d-2 Agreement'').\24\ Pursuant to the RSA and the 
17d-2 Agreement, FINRA will be allocated regulatory responsibilities to 
review NES's compliance with certain Nasdaq, BX, and Phlx rules, 
respectively.\25\ Pursuant to the RSA, however, each Exchange retains 
ultimate responsibility for enforcing its rules with respect to NES.
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    \24\ 17 CFR 240.17d-2.
    \25\ 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 each of 
the Exchange's trading rules, and will collect and maintain certain 
related information.\26\
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    \26\ Pursuant to the RSA, both FINRA and the respective Exchange 
will collect and maintain all alerts, complaints, investigations and 
enforcement actions in which NES (in its capacity as a facility of 
each of the ISE Exchanges routing orders to the Exchange) is 
identified as a participant that has potentially violated applicable 
Commission or Exchange rules. The respective 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 Nasdaq Notice, supra 
note 5, at 96088 n.12; BX Notice, supra note 5, at 96101 n.12; and 
Phlx Notice, supra note 5, at 96061 n.12. Each of the NASDAQ 
Exchanges state that the RSA functions in this manner in connection 
with NES routing in its capacity as a facility of the other NASDAQ 
Exchanges, and each now seeks to permit an inbound routing 
relationship with the ISE Exchanges pursuant to the same conditions. 
See Phlx Notice, supra note 5, at 96061-62 & n.12; Nasdaq Notice, 
supra note 5, at 96088 & n.12; and BX Notice, supra note 5, at 96101 
& n.12.
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     Third, FINRA will provide a report to each 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 the respective Exchange's, rules, and (ii) lists all investigations 
that identify NES as a participant that has potentially violated 
Commission, or the respective Exchange's, rules.
     Fourth, Nasdaq, BX, and Phlx each have in place a rule 
that 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 routing to the Exchange.\27\
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    \27\ See Nasdaq Rule 2160(c); Phlx Rule 985(c)(2); BX Rule 
2140(c). The NASDAQ Exchange rules each state that ``NASDAQ OMX 
Group, Inc.'' shall establish and maintain these procedures and 
controls. Nasdaq, Inc. was formerly known as NASDAQ OMX Group, Inc. 
See Securities Exchange Act Release No. 75421 (July 10, 2015), 80 FR 
42136 (July 16, 2015) (SR-BSECC-2015-001; SR-BX-2015-030; SR-NASDAQ-
2015-058; SR-Phlx-2015-46; SR-SCCP-2015-01).
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    Each of the NASDAQ Exchanges has stated that it has met all of the 
above-listed conditions in connection with NES routing in its capacity 
as a facility of the other NASDAQ Exchanges, and will comply with these 
conditions in connection with NES routing in its capacity as a facility 
of the ISE Exchanges. By meeting such conditions, each NASDAQ 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 each NASDAQ Exchange.\28\
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    \28\ See Nasdaq Notice, supra note 5, at 96088; Phlx Notice, 
supra note 5, at 96061-62; BX Notice, supra note 5, at 96101.
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    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.\29\ Although the Commission

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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 each of the ISE Exchanges, to route options orders inbound 
to each of the NASDAQ Exchanges, subject to the limitations and 
conditions described above.\30\
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    \29\ 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-2008-85) (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.).
    \30\ 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) 
(order approving rules relating to the establishment of the BX 
options market) at 39281-39282; 69233, supra note 12; 69232, supra 
note 14; 69229, supra note 14; and the ISE Exchange Routing Orders, 
supra note 4.
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    The Commission believes that these limitations and conditions 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 NES,\31\ combined with a non-
affiliated SRO's monitoring of NES's compliance with each of the NASDAQ 
Exchange's rules and quarterly reporting to each NASDAQ Exchange, will 
help to protect the independence of Nasdaq's, BX's, and Phlx's 
regulatory responsibilities with respect to NES. The Commission also 
believes that the Exchanges' rules are designed to ensure that NES 
cannot use any information advantage it may have because of its 
affiliation with Nasdaq, BX, or Phlx, respectively.\32\
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    \31\ This oversight will be accomplished through the 17d-2 
Agreement and the RSA.
    \32\ See supra note 27 and accompanying text.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\33\ that the proposed rule changes (SR-BX-2016-068; SR-NASDAQ-
2016-169; SR-Phlx-2016-120), each as modified by their respective 
Amendment No. 1, be, and hereby is, approved.
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    \33\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
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    \34\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-02993 Filed 2-14-17; 8:45 am]
BILLING CODE 8011-01-P


