Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto To Establish Rules Governing the Trading of Options on the NASDAQ Options Market, 23869-23874 [E7-8244]


[Federal Register Volume 72, Number 83 (Tuesday, May 1, 2007)]
[Pages 23869-23874]
From the Federal Register Online via the Government Printing Office []
[FR Doc No: E7-8244]

[[Page 23869]]



[Release No. 34-55667; File No. SR-NASDAQ-2007-004]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto To 
Establish Rules Governing the Trading of Options on the NASDAQ Options 

April 25, 2007.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'' or ``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on January 30, 2007, The NASDAQ Stock Market LLC 
(``Nasdaq'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I, II, and III below, which Items have been substantially 
prepared by Nasdaq. On April 24, 2007, Nasdaq filed Amendment No. 1 to 
the proposal.\3\ The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced and superseded the original filing 
in its entirety.

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

    Nasdaq proposes to adopt rules to govern participation in the 
NASDAQ Options Market, LLC (``NOM''), which will be an options exchange 
facility of Nasdaq. Nasdaq represents that NOM will operate a fully 
automated, price/time priority execution system built on the core 
functionality of Nasdaq's recently-approved Single Book equities 
platform, meaning that Nasdaq will operate its options market much as 
it operates its cash equities market today.\4\

    \4\ Nasdaq will file with the Commission pursuant to Rule 19b-4 
under the Act a separate proposed rule change to establish NOM as a 
facility (as defined in Section 3(a)(2) of the Act) of Nasdaq.

    Nasdaq believes that NOM will benefit individual investors, options 
trading firms, and the options market generally. The entry of an 
innovative, low cost competitor such as Nasdaq will promote 
competition, spurring existing markets to improve their own execution 
systems and reduce trading costs. NOM will differentiate its market by 
offering executions in price/time priority, a feature that should 
increase order interaction and yield better executions. NOM's execution 
system will be designed to quote in penny increments where consistent 
with the Commission's penny pilot program for options, advancing the 
Commission's efforts to move the industry to penny quoting in an 
orderly fashion and helping to narrow spreads, reduce payment for order 
flow, and enhance price competition.\5\ The text of the proposed rule 
change is available on Nasdaq's Web site at, on 
the Commission's Web site at, at Nasdaq, and at the 
Commission's Public Reference Room.

    \5\ See, e.g., Securities Exchange Act Release No. 55162 
(January 24, 2007), 72 FR 4738 (February 1, 2007) (approving SR-

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

    In its filing with the Commission, Nasdaq included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it had received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. Nasdaq 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
    Nasdaq is proposing to adopt a series of rules in connection with 
NOM, which will be a facility of Nasdaq. NOM will operate an electronic 
trading system developed to trade options (``System'') that will 
provide for the electronic display and execution of orders in price/
time priority without regard to the status of the entities that are 
entering orders. The System will provide a routing service for orders 
when trading interest is not present on NOM, and will link with and 
comply with the obligations of the Plan for the Purpose of Creating and 
Operating an Intermarket Linkage (``Linkage Plan'').
NOM Options Participants
    All Nasdaq members will be eligible to participate in NOM provided 
that Nasdaq specifically authorizes them to trade in the System. New 
Nasdaq members will be required to fulfill the requirements of the 
Nasdaq Rule 1000 Series as well as the incremental requirements set 
forth in the proposed options rules; existing Nasdaq members will be 
required to comply with the incremental requirements of the proposed 
options rules. The proposed rules avoid to the greatest extent possible 
proposing requirements that overlap with the rules already set forth in 
the Rule 1000 Series of the Nasdaq Rule Manual.
    NOM will have only one category of members, known as ``Options 
Participants.'' Only Options Participants will be permitted to transact 
business on NOM via the System. Nasdaq will authorize any Options 
Participant who meets certain enumerated qualification requirements to 
obtain access to NOM. Among other things, Options Participants must be 
registered as broker-dealers pursuant to the Act and have as the 
principal purpose of being an Options Participant the conduct of a 
securities business. Every Options Participant shall at all times 
maintain membership in another registered options exchange that is not 
registered solely under Section 6(g) of the Act.\6\ It is Nasdaq's 
intent not to serve as a Designated Options Examining Authority, and 
Nasdaq will work with the Commission and the other registered options 
exchanges to ensure that each Options Participant will have as its DOEA 
a registered options exchange other than Nasdaq. Options Participants 
that transact business with customers must at all times be members of 
the National Association of Securities Dealers (``NASD'').

    \6\ 15 U.S.C. 78f(g).

    There will be two types of Options Participants, Options Order 
Entry Firms (``OEFs'') and Options Market Makers. OEFs will be those 
Options Participants representing customer orders as agent on NOM and 
non-market maker participants conducting proprietary trading as 
principal. NOM will not list an options series for trading unless at 
least one Options Market Maker is registered in that options series. In 
addition, before NOM opens trading for any additional series of an 
options class, it would require at least one Options Market Maker to be 
registered for trading in that particular series. NOM may suspend or 
terminate any registration of an Options Market Maker when, in NOM's 
judgment, the interests of a fair and orderly market are best served by 
such action.
    Options Market Makers are Options Participants registered with 
Nasdaq as Options Market Makers and registered with NOM in one or more 
series of options listed on NOM. Nasdaq is proposing to permit Options 
Market Makers to register on a series-by-series basis. Nasdaq does not 
view NOM as a ``one-stop-shop'' for trading all options. Nasdaq 
believes that permitting Options

[[Page 23870]]

Market Makers to limit their registration to series in which they are 
eager to provide liquidity is an efficient way to identify options that 
will be actively traded on NOM. This will also allow Nasdaq to mitigate 
its use of excessive quote message capacity of the national market 
system and of vendors. To encourage Options Market Makers to provide 
liquidity in the greatest number of options series, Nasdaq is proposing 
to require Options Market Makers to execute at least 75% of their total 
options contracts executed on NOM in options series in which they are 
registered as Options Market Makers.
    To become an Options Market Maker, an Options Participant is 
required to register by filing a written application. NOM will not 
place any limit on the number of entities that may become Options 
Market Makers. NOM Options Market Makers will be required to 
electronically engage in a course of dealing to enhance liquidity 
available on NOM and to assist in the maintenance of fair and orderly 
markets. Among other things, Options Market Makers would have to 
satisfy the following responsibilities and duties during trading: (i) 
Maintain a two-sided market for at least 10 contracts in at least 
seventy-five percent (75%) of the options series to which the Options 
Market Maker is registered; (ii) participate in the opening; and (iii) 
maintain minimum net capital in accordance with Commission and Nasdaq 
Rules. Substantial or continued failure by an Options Market Maker to 
meet any of its obligations and duties will subject the Options Market 
Maker to disciplinary action, suspension, or revocation of the Options 
Market Maker's registration in one or more options series.
    Options Market Makers receive certain benefits for carrying out 
their duties. For example, a lender may extend credit to a broker-
dealer without regard to the restrictions in Regulation T of the Board 
of Governors of the Federal Reserve System \7\ if the credit is to be 
used to finance the broker-dealer's activities as a market maker on a 
national securities exchange. Thus, an Options Market Maker has a 
corresponding obligation to hold itself out as willing to buy and sell 
options for its own account on a regular or continuous basis to justify 
this favorable treatment. This goal will be supported by Nasdaq's 
proposal to require Options Market Makers to execute at least 75% of 
their total contracts in series in which they are registered Options 
Market Makers.

    \7\ 12 CFR part 220.

    Nasdaq is proposing an Order Exposure requirement comparable to 
that which currently applies on other registered options exchanges. 
Specifically, as set forth in Chapter VII, Section 14, with respect to 
orders routed to NOM, Options Participants may not execute as principal 
orders they represent as agent unless (i) Agency orders are first 
exposed on NOM for at least three (3) seconds, or (ii) the Options 
Participant has been bidding or offering on NOM for at least three (3) 
seconds prior to receiving an agency order that is executable against 
such bid or offer.
Execution System
    Nasdaq's options trading system will leverage Nasdaq's current 
state of the art technology, including its customer connectivity, 
messaging protocols, quotation and execution engine, order router, data 
feeds, and network infrastructure. This approach minimizes the 
technical effort required for existing Nasdaq members to begin trading 
options on NOM. As a result, NOM will closely resemble Nasdaq's 
equities market, but will differ from most existing options exchanges 
by, most prominently, offering true price/time priority across all 
orders and participants rather than differentiating between 
Participant/trading interest classes.\8\

    \8\ Nasdaq has determined that its proposed execution system can 
execute accommodation trades and, therefore, Nasdaq does not propose 
to offer a Cabinet Trading System as other exchanges have chosen to 

    Like the Nasdaq system for equities, all trading interest entered 
into the Options Trading System will be automatically executable. 
Orders entered into the system will be displayed anonymously or with 
attribution or non-displayed. For Participants seeking to trade 
anonymously, the NOM execution system will offer fully anonymous 
trading, however, options trades are not currently anonymous through 
settlement. NOM will become an exchange member of the Options Clearing 
Corporation (``OCC'').\9\ The System will be linked to OCC for Nasdaq 
to transmit locked-in trades for clearance and settlement.

    \9\ Nasdaq Execution Services will maintain its OCC membership 
as it will maintain the ability to route orders to the options 
exchanges as Nasdaq's broker-dealer subsidiary.

    Hours of Operation. The options trading system will operate between 
the hours of 8 a.m. ET and market close, with all orders being 
available for execution from 9:30 a.m. to market close.
    Minimum Quotation and Trading Increments. Nasdaq is proposing to 
apply the following quotation increments: (1) If the options series is 
trading at less than $3.00, five (5) cents; (2) if the options series 
is trading at $3.00 or higher, ten (10) cents; and (3) if the options 
series is trading pursuant to the Penny Pilot program\10\ one (1) cent 
if the options series is trading at less than $3.00, five (5) cents if 
the options series is trading at $3.00 or higher, except for the QQQQs, 
where the minimum quoting increment will be one cent for all series. In 
addition, Nasdaq is proposing that the minimum trading increment for 
options contracts traded on NOM will be one (1) cent for all series.

    \10\ See supra note 5.

    NASDAQ Opening/Halt and Closing Crosses. The NOM system will 
support a single price opening or re-opening via an electronic cross. 
The NOM crosses at the opening and at the resumption of trading 
following a halt are modeled on the highly-acclaimed crosses that 
Nasdaq developed for the trading of equities, as set forth in Nasdaq 
Rules 4753 (Halt Cross) and 4754 (Closing Cross).
    At the opening of trading and also at any resumption following a 
halt, NOM will execute a cross modeled on the Nasdaq Halt Cross. The 
Halt Cross will be used, rather than the Nasdaq Opening Cross, because 
the Opening Cross is designed to operate in the midst of a continuous 
market such as exists for equities prior to 9:30 a.m., whereas the Halt 
Cross is designed to operate in the absence of a continuous market such 
as exists for equities that are halted and also exists for options 
trading at 9:30 a.m. Registered Options Market Makers will be required 
to participate in the opening of the market by, at a minimum, opening 
their quotations. Orders may be submitted, modified, and cancelled 
throughout a brief pre-opening phase preceding the commencement of 
trading on the market. During this pre-opening phase, NOM will 
calculate and disseminate a theoretical opening price, order imbalance, 
and the size and direction of any imbalance. Thereafter, NOM will 
determine via algorithm a single price at which a particular options 
series will open and will match via algorithm the maximum number of 
available orders.
    At the close of trading, NOM will conduct a single price cross 
based upon the Nasdaq Closing Cross for equities. The NOM Closing Cross 
will utilize the same elements as the opening/halt

[[Page 23871]]

crosses, including the dissemination of potential closing prices and 
imbalance information as well as algorithms to determine the closing 
cross price and to pair available orders. The closing cross differs 
from the opening/halt crosses in that NOM will offer special market-on-
close and limit-on-close orders that only participate in the closing 
cross and not in the continuous market.
    Order Types. The proposed System will make available to 
Participants Limit Orders, Discretionary Orders, Reserve Orders, 
Minimum Quantity Orders, Market Orders, and Price Improving Orders with 
characteristics and functionality similar to what is currently approved 
for use in the Nasdaq's equities trading facility. Nasdaq does not 
propose to adopt ``complex'' orders at this time, but may propose them 
for separate consideration in the future.
    ``Limit Orders'' are orders to buy or sell options at a specified 
price or better. A limit order is marketable when, for a limit order to 
buy, at the time it is entered into the System, the order is priced at 
the current inside offer or higher, or for a limit order to sell, at 
the time it is entered into the System, the order is priced at the 
inside bid or lower.
    ``Discretionary Orders'' are orders that have a displayed price and 
size, as well as a non-displayed discretionary price range, at which 
the entering party, if necessary, is also willing to buy or sell. The 
non-displayed trading interest is not entered into the System book but 
is, along with the displayed size, converted to an Immediate or Cancel 
(``IOC'') buy (sell) order priced at the highest (lowest) price in the 
discretionary price range when displayed contracts become available on 
the opposite side of the market or an execution takes place at any 
price within the discretionary price range. The generation of this IOC 
order is triggered by the automatic cancellation of the displayed 
contracts portion of the Discretionary Order. If more than one 
Discretionary Order is available for conversion to an IOC order, the 
system will convert and process all such orders in the same priority in 
which such Discretionary Orders were entered. If an IOC order is not 
executed in full, the unexecuted portion of the order is automatically 
re-posted and displayed in the System book with a new time stamp, at 
its original displayed price, and with its non-displayed discretionary 
price range.
    ``Reserve Orders'' are limit orders that have both a displayed size 
as well as an additional non-displayed amount. Both the displayed and 
non-displayed portions of the Reserve Order are available for potential 
execution against incoming orders. If the displayed portion of a 
Reserve Order is fully executed, the System will replenish the display 
portion from reserve. A new timestamp is created for the replenished 
portion of the order each time it is replenished from reserve, while 
the reserve portion retains the time-stamp of its original entry.
    ``Minimum Quantity Orders'' are orders that require that a 
specified minimum quantity of contracts be obtained, or the order is 
cancelled. Minimum Quantity Orders may only be entered with a time-in-
force designation of IOC. Minimum Quantity Orders with an IOC time in 
force received prior to the opening cross will be rejected.
    ``Market Orders'' are orders to buy or sell at the best price 
available at the time of execution.
    ``Price Improving Orders'' are orders to buy or sell an option at a 
specified price at an increment smaller than the minimum price 
variation in the security. Price Improving Orders may be entered in 
increments as small as one cent. Price improving orders that are 
available for display will be displayed at the appropriate minimum 
quotation increment (rounding down to the proper increment for buys, up 
to the proper increment for sells).
    Time in Force Designations. Participants entering orders into the 
System may designate such orders to remain in force and available for 
display and/or potential execution for varying periods of time. Unless 
cancelled earlier, once these time periods expire, the order (or the 
unexecuted portion thereof) is returned to the entering party.
    ``Expire Time'' or ``EXPR'' are orders that, if after entry into 
the System, the order is not fully executed, the order (or the 
unexecuted portion thereof) shall remain available for potential 
display and/or execution for the amount of time specified by the 
entering Participant unless canceled by the entering party. EXPR Orders 
will be available for entry from 8 a.m. until market close and for 
execution from 9:30 a.m. until market close.
    ``Immediate Or Cancel'' or ``IOC'' orders are orders that if, after 
entry into the System, a marketable limit order (or unexecuted portion 
thereof) becomes non-marketable, the order (or unexecuted portion 
thereof) will be canceled and returned to the entering participant. IOC 
Orders will be available for entry from 8 a.m. until market close and 
for potential execution from 9:30 a.m. until market close. IOC Orders 
entered between 8 a.m. and 9:30 a.m. Eastern Time will be held within 
the System until 9:30 a.m. at which time the System shall determine 
whether such orders are marketable.
    ``DAY'' orders are orders that if, after entry into the System, the 
order is not fully executed, the order (or unexecuted portion thereof) 
will remain available for potential display and/or execution until 
market close, unless canceled by the entering party, after which it 
shall be returned to the entering party. DAY Orders will be available 
for entry from 8 a.m. until market close and for potential execution 
from 9:30 a.m. until market close.
    ``Good Til Cancelled'' or ``GTC'' orders are orders that if, after 
entry into System, the order is not fully executed, the order (or 
unexecuted portion thereof) will remain available for potential display 
and/or execution unless cancelled by the entering party, or until the 
option expires, whichever comes first. GTC Orders will be available for 
entry from 8 a.m. until market close and for potential execution from 
9:30 a.m. until market close.
    Order Display/Matching System. The System will be based upon 
functionality currently approved for use in Nasdaq's equities trading 
system. Specifically, the System will allow participants to enter 
priced limit orders to buy and sell NOM-listed options as attributed, 
non-attributed, or non-displayed orders. Attributable Orders are 
designated for display (price and size) next to the Participant's MPID. 
Non-Attributable Orders are entered by a Participant and designated for 
display (price and size) on an anonymous basis in the order display 
service of the System. Non-Displayed Orders are not displayed in the 
System, but nevertheless remain available for potential execution 
against all incoming orders until executed in full or cancelled.
    Options Participants will be permitted to enter multiple orders at 
single or multiple price levels and will have the option to have a 
portion of their order held in reserve and not displayed to the 
    Routing. NOM will support orders that are designated to be routed 
to the National Best Bid and Offer (``NBBO'') as well as orders that 
will execute only within NOM. Orders that are designated to execute at 
the NBBO will be routed to other options markets to be executed when 
Nasdaq is not at the NBBO, consistent with the Options InterMarket 
Linkage. The system will ensure that orders designated to only execute 
within the system will not create a trade through or locked or crossed 
market violation.
    Book Processing. The System, like the equities facility, will have 
a single

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execution algorithm based on price/time priority. For each order, among 
equally-priced or better-priced trading interest, the System executes 
against available contra-side displayed contract amounts in full, in 
price/time priority, before then moving to any non-displayed contracts 
which are likewise executed in price/time priority.
    Data Feed. The System will create a proprietary data feed which 
will include all displayed orders, both attributable and non-
attributable. Initially, in order to save capacity, the proprietary 
data will not include the market participant identifiers for 
attributable orders.
Linkage Plan Rules
    NOM will participate in the Linkage Plan to receive orders from 
options exchanges that use the Options Intermarket Linkage 
(``Linkage'') to route orders. Nasdaq plans to use its proprietary 
order router to send orders to other options exchanges. Nonetheless, in 
order to participate and to receive orders, NOM is proposing to adopt 
rules relating to the Linkage that are substantially similar to the 
rules in place on all of the options exchanges that are Participants to 
the Linkage Plan.
    In general, the proposed rules contain relevant definitions, 
establish the conditions pursuant to which Market Makers may enter 
Linkage orders, impose obligations on NOM regarding how it must process 
incoming Linkage orders, and establish a general standard that Options 
Participants should avoid trade-throughs. The proposed NOM Rules 
establish potential regulatory liability for Options Participants who 
engage in a pattern or practice of trading through other exchanges, 
establish obligations with respect to locked and crossed markets, and 
restrict a market maker on NOM from sending principal orders (other 
than principal acting as agent [``P/A''] orders), which reflect 
unexecuted customer orders through the Linkage if the market maker 
affects less than 80% of specified order flow on NOM.
    For those limited instances where Nasdaq does use the Linkage to 
send orders, Nasdaq is proposing to designate one Market Maker per 
eligible class as the ``InterMarket Linkage Market Maker'' or ``ILM'' 
to be responsible for settling P/A and Satisfaction orders that would 
be sent to away markets through the Linkage for a given class of 
options trading on NOM.\11\ The ILM responsible for such orders will be 
specifically designated in each Eligible Class traded on NOM and will 
be required to adhere to the responsibilities of an Eligible Market 
Maker, as set forth in the Linkage Plan.

    \11\ The ILM will perform the same functions that the BOX 
InterMarket Linkage Market Maker performs on the Boston Options 
Exchange facility of the Boston Stock Exchange (``BOX''). See BOX 
Rules, Chapter VI, Section 5(a)(ix) and Chapter XII.

    The ILM also will be required to act with due diligence with regard 
to the interests of orders entrusted to it and fulfill other duties of 
an agent, including, but not limited to, ensuring that such orders, 
regardless of their size or source, receive proper representation and 
timely execution in accordance with the terms of the orders and the 
rules of NOM. NOM will immediately route all P/A orders on behalf of 
the ILM according to these instructions. The order would be generated 
automatically by NOM and routed to the away exchange with the required 
clearing information included. Each execution received from an away 
exchange would result in the automatic generation of a trade execution 
on NOM between the original order and the ILM. This designation of ILM 
will ensure that P/A and Satisfaction orders will be handled in 
accordance with the Linkage Plan.
Securities Traded on NOM
    Nasdaq proposes to adopt listing standards for Options traded on 
NOM (Chapter IV of the proposed rules) as well as for Index Options 
(Chapter VIX) that are identical to the approved rules of other options 
exchanges.\12\ Nasdaq will join the Options Listings Procedures Plan 
and will list and trade options already listed on other options 
exchanges. Nasdaq will gradually phase-in its trading of options, 
beginning with a selection of actively traded options. At least 
initially, Nasdaq does not plan to develop new options products or 
listing standards. Nasdaq is aware that, in the event Nasdaq determines 
to trade an options class not listed on another registered options 
exchange or within Nasdaq's existing listing standards, Nasdaq will be 
required to submit a proposed rule change to establish listing 

    \12\ See, e.g., BOX Rules, Chapters IV and XIV.

Conduct and Operational Rules for Options Participants
    Nasdaq proposes to adopt rules that are substantially similar to 
the approved rules of other options exchanges. Thus, Nasdaq proposes to 
adopt rules that are substantially similar to the rules of BOX 
regarding: exercises and deliveries (NOM proposed rules, Chapter VIII); 
records, reports, and audits (Chapter IX); summaries and suspensions 
and minor rule violations (Chapter X); doing business with the public 
(Chapter XI); and margin (Chapter XIII).
    Nasdaq proposes to adopt Business Conduct Rules (Chapter III) that 
are consistent with the BOX Business Conduct Rules, with certain 
exceptions.\13\ Specifically, with respect to Position Limits (Section 
7), Exceptions from Position Limits (Section 8), Exercise Limits 
(Section 9), and Reports Related to Position Limits (Section 10), 
Nasdaq is proposing to apply the limits established pursuant to the 
rules of the Chicago Board Options Exchange (``CBOE''), although NOM 
will establish such limits for products not traded on the CBOE. By 
expressly incorporating an already-approved limit, Nasdaq will ensure 
that an appropriate limit is in place at all times without the need to 
continually adjust its rules or to disrupt the operations of its 
participants. With respect to financial and operational rules, Nasdaq 
proposes to adopt rules similar to those of existing options exchanges 
regarding exercises and deliveries, margin, net capital, and books and 

    \13\ See BOX Rules, Chapter III.

National Market System
    NOM will operate as a full and equal participant in the national 
market system for options trading established under Section 11A of the 
Act,\14\ just as its equities market participates today. NOM will 
become a member of the Options Price Reporting Authority, the Options 
Linkage Authority, the Options Regulatory Surveillance Authority, and 
the Options Listing Procedures Plan.

    \14\ 15 U.S.C. 78k-1.

    NOM expects to participate in those plans on the same terms 
currently applicable to current members of those plans, and it expects 
little or no plan impact due to the fact that NOM's market will operate 
on price/time priority. Nasdaq has contacted the leadership of each 
options-related national market system plan to begin the membership 
    NOM will leverage many of the structures that Nasdaq established to 
operate a national securities exchange in compliance with Section 6 of 
the Act.\15\ As described in more detail below, there will be three 
elements of that regulation: (1) Nasdaq will join the existing options 
industry agreements pursuant to Section 17(d) of the Act,\16\ as it did 
with respect to equities; (2) Nasdaq's Regulatory Services Agreement 
with NASD will govern many aspects of the regulation

[[Page 23873]]

and discipline of members that participate in options trading, just as 
it does for equities regulation; and (3) Nasdaq will perform options 
listing regulation as well as real-time regulation of options trading 
as it does today for equities. The principle here, again, is that 
Nasdaq will regulate its options market much as it does the equities 
market today.

    \15\ 15 U.S.C. 78f.
    \16\ 15 U.S.C. 78q(d).

    Section 17(d) of the Act and the related Exchange Act rules permit 
self-regulatory organizations (``SROs'') to allocate certain regulatory 
responsibilities to avoid duplicative oversight and regulation. Under 
Exchange Act Rule 17d-1,\17\ the Commission designates one SRO to be 
the Designated Examining Authority (``DEA'') for each broker-dealer 
that is a member of more than one SRO. The DEA is responsible for the 
financial aspects of that broker-dealer's regulatory oversight. Because 
Nasdaq members also must be members of at least one other SRO, Nasdaq 
would generally not be designated as the DEA for any of its members.

    \17\ 17 CFR 240.17d-1.

    Rule 17d-2 under the Act \18\ permits SROs to file with the 
Commission plans under which the SROs allocate among each other the 
responsibility to receive regulatory reports from, and examine and 
enforce compliance with, specified provisions of the Act and rules 
thereunder and SRO rules by firms that are members of more than one SRO 
(``common members''). If such a plan is declared effective by the 
Commission, an SRO that is a party to the plan is relieved of 
regulatory responsibility as to any common member for whom 
responsibility is allocated under the plan to another SRO.

    \18\ 17 CFR 240.17d-2.

    All of the options exchanges, NASD, and the New York Stock Exchange 
have entered into the Options Sales Practices Agreement, a Rule 17d-2 
agreement. Under this Agreement, the examining SROs will examine firms 
that are common members of Nasdaq and the particular examining SRO for 
compliance with certain provisions of the Act, certain of the rules and 
regulations adopted thereunder, certain examining SRO rules, and 
certain NOM Rules. In addition, NOM Rules contemplate participation in 
this Agreement by requiring that any Options Participant also be a 
member of at least one of the examining SROs.
    For those regulatory responsibilities that fall outside the scope 
of any Rule 17d-2 agreements, Nasdaq will retain full regulatory 
responsibility under the Exchange Act. However, Nasdaq has entered into 
a Regulatory Services Agreement with NASD, pursuant to which NASD 
personnel operate as agents for Nasdaq in performing certain of these 
functions. As is the case with Nasdaq's equities market, Nasdaq will 
supervise NASD Regulation and continue to bear ultimate regulatory 
    Finally, as it does with equities, Nasdaq Regulation will perform 
real-time surveillance of NOM for the purpose of maintaining a fair and 
orderly market at all times. As it does with Nasdaq's equities trading, 
Nasdaq Regulation will monitor Nasdaq's options trading market on a 
real-time basis to identify unusual trading patterns and determine 
whether particular trading activity requires further regulatory 
investigation by NASD.
    In addition, Nasdaq Regulation will oversee the process for 
determining and implementing trade halts, identifying and responding to 
unusual market conditions, and administering Nasdaq's process for 
identifying and remediating ``obvious errors'' by and among its Options 
Participants.\19\ Nasdaq proposed rules (Chapter V) regarding halts, 
unusual market conditions, extraordinary market volatility, and audit 
trail are closely modeled on the approved rules of the BOX.\20\

    \19\ Nasdaq's proposed Obvious Error guidelines and procedures 
closely resemble the rules of the Philadelphia Stock Exchange, 
particularly with respect to the establishment of a Theoretical 
Price against which to measure for obvious errors.
    \20\ See BOX Rules, Chapter V.

2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
Section 6 of the Act,\21\ in general, and with Section 6(b)(5) of the 
Act,\22\ in particular, in that it is designed 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 national market system, and in general, to 
protect investors and the public interest; and are not designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers, or to regulate by virtue of any authority conferred by this 
title matters not related to the purposes of this title or to the 
administration of the exchange.

    \21\ 15 U.S.C. 78f.
    \22\ 15 U.S.C. 78f(b)(5).

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

    Nasdaq 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. Nasdaq operates in an intensely 
competitive global marketplace for listings, financial products, 
transaction services, and market data. Relying on its array of services 
and benefits, Nasdaq competes for the privilege of providing market and 
listing services to broker-dealers and issuers. Nasdaq's ability to 
compete in this environment is based in large part on the quality of 
its trading systems, the overall quality of its market and its 
attractiveness to the largest number of investors, as measured by 
speed, likelihood and cost of executions, as well as spreads, fairness, 
and transparency.
    With these aspects of competition as a guide, Nasdaq designed its 
current proposal to create the fastest, fairest, most transparent, most 
efficient, and least expensive trading venue available for the trading 
of options. The proposed system will incorporate the best functional 
elements from Nasdaq's equity trading system. The resulting system will 
reduce overall trading costs and increase price competition, both pro-
competitive developments. Nasdaq believes that the resulting system 
will have the pro-competitive effect of spurring further initiative and 
innovation among market centers and market participants. Market 
participants that disagree and do not view these developments as pro-
competitive, will have the flexibility to use only those functions that 
improve their trading or to not use the system at all; participation in 
the system in whole or in part is completely voluntary.

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 35 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 Nasdaq consents, the Commission will:
    (A) By order approve such proposed rule change; or

[[Page 23874]]

    (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 amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (; or
     Send an e-mail to Please include 
File Number SR-NASDAQ-2007-004 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2007-004. This 
file number should be included on the subject line if e-mail 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 ( 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 inspection 
and copying in the Commission's Public Reference Room. Copies of such 
filing also will be available for inspection and copying at the 
principal office of Nasdaq.
    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 publicly 
available. All submissions should refer to File Number SR-NASDAQ-2007-
004 and should be submitted on or before May 22, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\23\

    \23\ 17 CFR 200.30-3(a)(12).

Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-8244 Filed 4-30-07; 8:45 am]