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]
Agencies
[Federal Register Volume 72, Number 83 (Tuesday, May 1, 2007)]
[Notices]
[Pages 23869-23874]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-8244]
[[Page 23869]]
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SECURITIES AND EXCHANGE COMMISSION
[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
Market
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
persons.
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\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\3\ Amendment No. 1 replaced and superseded the original filing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.
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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\
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\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.
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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 http://www.nasdaq.com, on
the Commission's Web site at http://www.sec.gov, at Nasdaq, and at the
Commission's Public Reference Room.
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\5\ See, e.g., Securities Exchange Act Release No. 55162
(January 24, 2007), 72 FR 4738 (February 1, 2007) (approving SR-
Amex-2006-106).
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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'').
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\6\ 15 U.S.C. 78f(g).
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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.
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\7\ 12 CFR part 220.
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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\
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\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
do.
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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.
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\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.
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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.
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\10\ See supra note 5.
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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
marketplace.
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
[[Page 23872]]
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.
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\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.
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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
standards.
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\12\ See, e.g., BOX Rules, Chapters IV and XIV.
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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
records.
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\13\ See BOX Rules, Chapter III.
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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.
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\14\ 15 U.S.C. 78k-1.
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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
process.
Regulation
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.
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\15\ 15 U.S.C. 78f.
\16\ 15 U.S.C. 78q(d).
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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.
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\17\ 17 CFR 240.17d-1.
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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.
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\18\ 17 CFR 240.17d-2.
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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
responsibility.
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\
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\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.
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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.
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\21\ 15 U.S.C. 78f.
\22\ 15 U.S.C. 78f(b)(5).
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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 (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. 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 (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 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\
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\23\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-8244 Filed 4-30-07; 8:45 am]
BILLING CODE 8010-01-P
