[Federal Register Volume 83, Number 186 (Tuesday, September 25, 2018)]
[Notices]
[Pages 48483-48486]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-20898]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84227; File No. SR-BX-2018-045]


Self-Regulatory Organizations; Nasdaq BX, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change To Amend the Equity 
Rule 6950 Series Concerning the Order Audit Trail System To Make 
Conforming and Technical Changes

September 20, 2018.
    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 September 12, 2018, Nasdaq BX, Inc. (``BX'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II below, which Items 
have been prepared by the Exchange. The Exchange filed the proposal as 
a ``non-controversial'' rule change pursuant to Section 19(b)(3)(A) of 
the Act \3\ and Rule 19b-4(f)(6) thereunder.\4\ The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to the [sic] Rule 6950 Series concerning the 
Order Audit Trail System to make conforming and technical changes.
    The text of the proposed rule change is available on the Exchange's 
website at http://nasdaqbx.cchwallstreet.com/, at the principal office 
of the Exchange, and at the Commission's Public Reference Room.

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
    The Exchange is proposing to amend the Equity Rule 6950 Series \5\ 
concerning the Order Audit Trail System to: (1) Renumber the whole 
Equity Rule 6950 Series to conform it to the numbering convention used 
by the Nasdaq Stock Market LLC (``Nasdaq'') and FINRA; (2) amend Equity 
Rule 7410A to expand two exemptions and to make technical changes to 
text under the Rule; (3) delete inapplicable text from Equity Rules 
7430A, 7440A and 7450A and make other conforming changes to these 
Rules; (4) reorganize rule text under Equity Rule 7450A; (5) delete 
current Equity Rules 6957and 6958.
---------------------------------------------------------------------------

    \5\ The term ``Equity Rules'' means the numbered rules set forth 
in the Exchange Manual denominated as the 0100, 1000, 2000, 3000, 
4000, 5000, 6000, 7000, 8000, 9000, 10000, and 11000 Series Rules. 
See Equity Rule 0120(p). The Exchange is proposing to make it clear 
in the proposed rules that references to rules of the Exchange are 
``Equity Rules.''
---------------------------------------------------------------------------

    The Exchange's Equity Rule 6950 Series imposes an obligation on 
Exchange members to record in electronic form and report to FINRA on a 
daily basis certain information with respect to orders originated, 
received, transmitted, modified, canceled, or executed by members in 
Nasdaq- and Exchange-listed stocks. FINRA's Order Audit Trail System 
(``OATS'') captures this order information and integrates it with quote 
and transaction information to create a time-sequenced record of 
orders, quotes, and transactions. This information is used by FINRA 
staff to conduct surveillance and investigations of members for 
potential violation of Exchange rules and federal securities laws.
    The Exchange adopted the Equity Rule 6950 Series to copy Nasdaq and 
FINRA OATS rules, where appropriate. As a general principle, the 
Exchange endeavors to keep its rules worded and structured as closely 
as possible to the FINRA rules on which they are based, including 
FINRA's OATS rules under its Rule 7000 Series. In instances where the 
FINRA rules are inapplicable to the Exchange, such as FINRA Rule 
7410(o)(2), which concerns an exception to the definition of a 
Reporting Member relating to members operating on equities floors, the 
Exchange has not copied those FINRA rules. Generally, the Exchange also 
seeks to keep the Equity Rule 6950 Series consistent with Nasdaq's Rule 
7400A Series, which should also be materially identical to the related 
rules of the Exchange. The proposed changes will harmonize Exchange 
rules with analogous Nasdaq and FINRA rules, which have been amended 
since the Exchange first adopted its rules.
First Change
    The Exchange is proposing to renumber the Equity Rule 6950 Series 
to a new Equity Rule 7000A Series, which is identical to how Nasdaq 
presents its OATS rules. This will allow the Exchange's OATS rules to 
follow the numbering convention used by Nasdaq and FINRA. Like Nasdaq, 
the Exchange is proposing to add an ``A'' to each of the rules so that 
they do not conflict with the existing Equity Rule 7000 Series within 
the Exchange's rule book yet also follow FINRA's numbering convention. 
FINRA's OATS rules are under the FINRA Rule 7400 Series and individual 
rule numbers align with those of Nasdaq's OATS rules and those proposed 
by the Exchange. As part of this change, the Exchange is also updating 
references to rules in the Equity Rule 6950 Series to the renumbered 
rules in the Equity Rule 7000A Series. Relatedly, the Exchange is 
correcting citations in Equity Rules 7430A, 7440A, and 7450A that 
currently reference NASD rule [sic] that have been renumbered as FINRA 
rules.

[[Page 48484]]

Second Change
    The Exchange is amending Equity Rule 7410A to conform it to the 
rules of Nasdaq. The Exchange is proposing to add new text as paragraph 
(a) noting that terms used in the Rule have the same meanings as are 
ascribed to those terms in the Exchange's By-Laws and in its other 
rules, unless otherwise noted, which is identical to Nasdaq's Rule 
7410A. Consequently, the Exchange is renumbering current paragraphs 
(a)-(n) as paragraphs (b)-(o). The Exchange is also amending Equity 
Rule 7410A to make technical changes that harmonize the definitions of 
``Electronic Communication Network,'' ``Index Arbitrage Trade,'' 
``Intermarket Sweep Order,'' and ``Program Trade'' with the definitions 
of those terms in the Nasdaq Rules.\6\
---------------------------------------------------------------------------

    \6\ The Exchange is not adopting the definition of ``NMS Stock'' 
found under Nasdaq Rule 7410A(j). The term is not used in the BX 
OATS rules. In addition, the term is not used in the Nasdaq OATS 
rules. The term is used in FINRA Rule 7410(k) defining ``Order Audit 
Trail System,'' whereas BX and Nasdaq instead reference Exchange and 
Nasdaq listed securities under Equity Rule 7410A(k) and Nasdaq 
listed securities under Nasdaq Rule 7410A(l).
---------------------------------------------------------------------------

    The Exchange is also proposing to adopt the same limited exemption 
from OATS order data recordation requirements provided under Nasdaq 
Rule 7410A(k) for BX members that are registered market makers in 
standardized options on any market. Equity Rule 7410A(j) defines the 
term ``Order'' and provides a limited exemption from the definition for 
a proprietary transaction originated by a trading desk in the ordinary 
course of a member's market making activities. The Exchange is 
proposing to adopt a second limited exemption currently available under 
Nasdaq's analogous definition of ``Order.'' \7\ That limited exemption 
excludes from the definition of an ``Order'' a bona fide hedge 
transaction involving a Nasdaq-listed equity security originated by a 
trading desk in the ordinary course of the member's options market 
making activities.\8\ As noted by Nasdaq in adopting the exemption, 
OATS was designed to provide an accurate, time-sequenced record of 
orders and transactions, beginning with the receipt of an equity order 
at the first point of contact between the broker-dealer and the 
customer or counterparty and further documenting the life of the equity 
order through the process of execution.\9\ The proposed rule change 
does not impact the customer protection orientation of OATS since, by 
definition, bona fide hedging transactions in equity securities that 
are undertaken by options market makers do not involve customer orders 
in those equity securities. Rather, bona fide hedging transactions in 
equity securities are undertaken by an options market maker to hedge 
against the firm risk that it creates through its conduct as a 
registered options market maker. Accordingly, submitting bona fide 
hedging transactions to OATS recording requirements provides no 
customer protection or equivalent regulatory benefit. It is also very 
expensive for firms that are not currently FINRA members or that do not 
currently trade Exchange or Nasdaq equities to develop and maintain the 
compliance systems and compliance staff required to continuously 
monitor the daily transmission of OATS data. For these reasons, the 
Exchange is proposing to adopt such an exemption, available to its 
options market makers.
---------------------------------------------------------------------------

    \7\ See Nasdaq Rule 7410A(k).
    \8\ The Exchange notes that Nasdaq capitalizes the term ``Bona 
Fide Hedge Transaction'' in Nasdaq Rule 7410A(k), although the term 
is not defined in Nasdaq's rules. The Exchange believes that 
capitalizing the term was an error and is therefore not capitalizing 
the term in Equity Rule 7410A(k).
    \9\ See Securities Exchange Act Release No. 59369 (February 6, 
2009), 74 FR 7278 (February 13, 2009) (SR-NASDAQ-2008-097).
---------------------------------------------------------------------------

    The Exchange is proposing to amend Equity Rule 7410A(n)(1) to 
harmonize the rule with FINRA Rule 7410(o)(1)(A) and Nasdaq Rule 
7410A(o)(1)(A). Equity Rule 7410A(n) defines a ``Reporting Member'' as 
a member that receives or originates an order and has an obligation to 
record and report information under Equity Rules 7440A and 7450A. The 
Rule also provides an exception to the general definition of a 
``Reporting Member'' if the member meets four conditions.\10\ The first 
condition in subparagraph (n)(1), which is the only condition at issue 
in this proposal, is that currently the member engages in a non-
discretionary order routing process, pursuant to which it immediately 
routes, by electronic or other means, all of its orders to a single 
receiving Reporting Member. On May 12, 2014, FINRA amended FINRA Rule 
7410(o)(1)(A) to allow a member to satisfy this condition by permitting 
a member to alternatively route its orders to two receiving Reporting 
Members, if two related requirements were met.\11\ First, the orders 
must be routed by the member to each receiving Reporting Member on a 
pre-determined schedule approved by FINRA. Second, the FINRA member's 
orders must be routed to two receiving Reporting Members pursuant to 
the schedule for a time period not to exceed one year. Under FINRA's 
rule as amended, FINRA members may continue to rely on the exception 
from the definition of Reporting Member if it [sic] routes all of its 
[sic] orders to a single Reporting Member, provided the other 
conditions of the exception are met. Consequently, BX is also keeping 
its existing single receiving Reporting Member exception and adding a 
second exception for two receiving Reporting Members. FINRA noted in 
adopting the change that the rule was intended to accommodate 
introducing firms that transition to a different clearing firm over 
time and, during the transition, route their orders [sic] two different 
clearing firms, both of which report the introducing firm's information 
to OATS during the transition time. Nasdaq recently amended its rule to 
incorporate this change.\12\ The Exchange believes that this additional 
limited exception is appropriate for its members, which likewise may 
encounter a transition to a different clearing firm whereby a member 
would no longer be eligible for the exception to the definition of 
Reporting Member. Accordingly, the Exchange is proposing to adopt the 
FINRA rule text under Equity Rule 7410A(n)(1)(B).
---------------------------------------------------------------------------

    \10\ The four conditions are provided under Equity Rules 
7410A(n)(1)-(4).
    \11\ See Securities Exchange Act Release No. 72191 (May 20, 
2014), 79 FR 30219 (May 27, 2014) (SR-FINRA-2014-024).
    \12\ See Securities Exchange Act Release No. 83115 (April 26, 
2018), 83 FR 19384 (May 2, 2018) (SR-NASDAQ-2018-030).
---------------------------------------------------------------------------

Third Change
    The Exchange is proposing to amend Equity Rules 7430A(a), 7440A(a) 
and 7450A(a) to delete text concerning FINRA's process of transitioning 
certain NASD rules into a new FINRA rulebook because this transition 
period has ended and the text is obsolete. The Exchange is also 
proposing to make technical changes that update citations to the 
appropriate FINRA rules under Equity Rules 7430A(a), 7440A(a) and 
7450A(a).\13\ Consistent with Nasdaq Rule 7440A(d)(2), the Exchange is 
proposing to add new Equity Rule 7440A(d)(2), which provides that 
references to FINRA Rules 5320, 7440, and 7450 shall be construed as 
references to Equity Rules IM-2110-2, 7440A, and 7450A, respectively. 
Last, the Exchange is making minor clarifying changes under Equity 
Rules 7440A(d)(1) and (2) to make it clear that certain rules

[[Page 48485]]

noted thereunder are references to FINRA rules.
---------------------------------------------------------------------------

    \13\ The Exchange notes that Rule 7450A(b) requires both 
Proprietary Trading Firms as well as their associated persons to 
comply with FINRA Rule 7450 in limited circumstances, whereas 
Nasdaq's Rule 7450A only requires compliance by Proprietary Trading 
Firms. The Exchange believes that this is an omission in the Nasdaq 
rule and is accordingly not adjusting the Exchange rule.
---------------------------------------------------------------------------

Fourth Change
    The Exchange is proposing to delete paragraph (c) from current 
Equity Rule 6954 (which will be renumbered Equity Rule 7440A and 
paragraph (d) from current Equity Rule 6955 (which will be renumbered 
Equity Rule 7450A), and move the text to Equity Rules 7440A(a) and 
7450A(a), respectively, with minor technical differences to correct 
citations.\14\ The Rules explain that the Exchange and FINRA are 
parties to the FINRA Regulatory Contract, pursuant to which FINRA has 
agreed to perform certain functions on behalf of the Exchange. The 
Rules also note that members are complying with current Equity Rules 
6954 and 6955 by complying with NASD Rules 6954 and 6955, respectively. 
Nasdaq places the same text as current Equity Rules 6954(d) and 6955(d) 
under Nasdaq Rules 7440A(a) and 7450A(a), respectively. Thus, the 
Exchange is moving the text, as amended, under Equity Rules 7440A(a) 
and 7450A(a). As a consequence, the Exchange is changing the lettering 
of paragraphs (d) and (e) of current Equity Rule 6954 to paragraphs (c) 
and (d), respectively, of Equity Rule 7440A, and the lettering of 
paragraph (e) of current Equity Rule 6955 to paragraph (d) of Equity 
Rule 7450A.
---------------------------------------------------------------------------

    \14\ The Exchange is not including text from current Equity 
Rules 6954(c) and 6955(d), which notes that members are complying 
with these rules by complying with the related FINRA rules, in 
Equity Rules 7440A(a) and 7450A(a). The Exchange believes these 
sentences are duplicative of the first sentence of Equity Rules 
7440A(a) and 7450A(a). The Exchange notes that Nasdaq's Rules 
7440A(a) and 7450A(a) include this duplicative text.
---------------------------------------------------------------------------

Fifth Change
    The Exchange is proposing to delete current Equity Rules 6957 and 
6958. Equity Rule 6957 concerns compliance with NASD Rule 6954. NASD 
Rule 6954 provided the effective dates of requirements of the Order 
Audit Trail System, all of which have passed. FINRA has deleted NASD 
Rule 6954 and consequently, the Exchange is proposing to delete Equity 
Rule 6957.
    The Exchange is proposing to delete current Equity Rule 6958, which 
will be renumbered Equity Rule 7470A and held in reserve. Current 
Equity Rule 6958 provided an exemption from the order recording and 
data transmission requirements of current Equity Rules 6954 and 6955, 
which are OATS rules applicable to manual orders. The exemption has not 
been requested by any Exchange member to date and the Exchange does not 
believe that Exchange members are likely to need the exemption, since 
the vast majority of such members to which the rule applies are 
electronic proprietary trading firms that would not qualify for the 
exemption.\15\ Thus, the Exchange is proposing to eliminate the rule 
text under Equity Rule 6958 from its rule book, renumber the rule to 
Equity Rule 7470A, and hold the rule in reserve.
---------------------------------------------------------------------------

    \15\ The Exchange notes that Nasdaq does not have an analogous 
rule, having eliminated similar text recently for the same reasons. 
See note 10 [sic], supra.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\16\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\17\ in particular, in that it is designed to 
promote just and equitable principles of trade, 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, by harmonizing the Exchange's OATS rules with those of FINRA, 
on which they are based, and with those of Nasdaq, which they should 
largely match. Consequently, the proposed change will conform Exchange 
Rules to changes made to corresponding FINRA and Nasdaq rules, thus 
promoting consistent regulatory standards with respect to rules that 
FINRA enforces pursuant to its Regulatory Services Agreements with the 
Exchange and Nasdaq. With respect to the proposed amendment to Equity 
Rule 7410A(n)(1), the exemption will provide Exchange members with the 
same flexibility to transition to a new clearing firm that both Nasdaq 
and FINRA members currently enjoy. The rule is intended to accommodate 
introducing firms that transition to a different clearing firm over 
time and, during the transition, route their orders to two different 
clearing firms, both of which report the introducing firm's information 
to OATS during the transition time. Adopting the new and amended rule 
text under Equity Rule 7410A will also align the Exchange rulebook with 
Nasdaq's and FINRA's, thereby reducing complexity from FINRA's work 
under a regulatory services agreement with the Exchange.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that adopting the new limited exception to 
the definition of ``Order'' is consistent with the Act because it 
provides a very narrow exemption from reporting transactions that are 
done to manage risk and facilitate options market making. Bona fide 
hedging transactions in equity securities that are undertaken by 
options market makers do not involve customer orders in those equity 
securities and thus do not implicate customer protection issues. 
Moreover, information regarding bona fide hedging transactions retained 
by a registered BX Options Market market maker is otherwise available 
to FINRA and BX Regulation through the Exchange's electronic delivery 
systems, upon request. This information includes trade reporting data, 
including order time and sales data captured by the Exchange system.
    With respect to the proposed technical corrections to the rules, 
the Exchange believes that these changes are consistent with the Act 
because they will prevent investor confusion that may be caused by 
including in the Rules incorrect rule citations, defunct rule text and 
expired exemptions.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed rule change align 
[sic] the Exchange's rules with those of Nasdaq and FINRA, which will 
assist FINRA in its oversight work done pursuant to a regulatory 
services agreement. The proposed changes also provide uniform standards 
with which market participants must comply. Consequently, the Exchange 
does not believe that the proposed changes implicate competition at 
all.

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

    Because the proposed rule change does not: (i) Significantly affect 
the protection of investors or the public interest; (ii) impose any 
significant burden on competition; and (iii) become operative prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, it has become effective pursuant to 
Section 19(b)(3)(A) of the Act \18\ and Rule 19b-4(f)(6) 
thereunder.\19\
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78s(b)(3)(A).
    \19\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.

---------------------------------------------------------------------------

[[Page 48486]]

    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

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 [email protected]. Please include 
File Number SR-BX-2018-045 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-BX-2018-045. 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 website (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 website 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 the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-BX-2018-045 and should be submitted on 
or before October 16, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
Brent J. Fields,
Secretary.
---------------------------------------------------------------------------

    \20\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

[FR Doc. 2018-20898 Filed 9-24-18; 8:45 am]
BILLING CODE 8011-01-P


