Self-Regulatory Organizations; Notice of Filing of a Proposed Rule Change by the NASDAQ Stock Market LLC To Adopt a Definition of Professional and Require That All Professional Orders Be Appropriately Marked, 51509-51512 [2010-20658]

Download as PDF sroberts on DSKD5P82C1PROD with NOTICES Federal Register / Vol. 75, No. 161 / Friday, August 20, 2010 / Notices with respect to the Funds utilizing the Manager of Managers Structure is substantially equivalent to the role of the individual portfolio managers employed by traditional investment company advisory firms. In the absence of exemptive relief from Section 15(a) of the Act, when a new Subadviser is proposed for retention by a Fund or the Trust on behalf of one or more Funds, shareholders would be required to approve the Subadvisory Agreement with that Subadviser. Similarly, approval by the shareholders of the affected Fund would be required in order to amend an existing Subadvisory Agreement in any material respect or in order to continue to retain an existing Subadviser whose Subadvisory Agreement is ‘‘assigned’’ as a result of a change of control. Obtaining shareholder approval would be costly and slow, and potentially harmful to the affected Fund and its shareholders. Applicants also note that the Advisory Agreement will remain fully subject to the shareholder approval requirements in section 15(a) of the Act and rule 18f– 2 under the Act, including the requirement for shareholder voting. Applicants’ Conditions: Applicants agree that any order granting the requested relief will be subject to the following conditions: 1. Before a Fund may rely on the order requested in the application, the operation of the Fund in the manner described in the application will be approved by a majority of the Fund’s outstanding voting securities, as defined in the Act, or, in the case of a Fund whose public shareholders purchase shares on the basis of a prospectus containing the disclosure contemplated by condition 2 below, by the initial shareholder(s) before offering shares of that sub-advised Fund to the public. 2. The prospectus for each Fund relying on the order requested in the application will disclose the existence, substance, and effect of any order granted pursuant to the application. Each Fund relying on the order requested in the application will hold itself out to the public as utilizing the Manager of Managers Structure described in the application. The prospectus will prominently disclose that the Adviser has ultimate responsibility (subject to oversight by the Board) to oversee the Subadvisers and recommend their hiring, termination, and replacement. 3. Within 90 days of the hiring of a new Subadviser, the affected Fund shareholders will be furnished all information about the new Subadviser that would be included in a proxy statement. To meet this obligation, the VerDate Mar<15>2010 17:19 Aug 19, 2010 Jkt 220001 Fund will provide shareholders of the affected Fund within 90 days of hiring a new Subadviser with an information statement meeting the requirements of Regulation 14C, Schedule 14C and Item 22 of Schedule 14A under the Securities Exchange Act of 1934, as amended. 4. The Adviser will not enter into a subadvisory agreement with any Affiliated Subadviser without such agreement, including the compensation to be paid thereunder, being approved by the shareholders of the applicable Fund. 5. At all times, at least a majority of the Board will be Independent Trustees, and the nomination of new or additional Independent Trustees will be placed within the discretion of the thenexisting Independent Trustees. 6. Whenever a subadviser change is proposed for a Fund with an Affiliated Subadviser, the Board, including a majority of the Independent Trustees, will make a separate finding, reflected in the applicable Board minutes, that such change is in the best interests of the Fund and its shareholders, and does not involve a conflict of interest from which the Adviser or the Affiliated Subadviser derives an inappropriate advantage. 7. The Adviser will provide general management services to each Fund that is sub-advised, including overall supervisory responsibility for the general management and investment of the Fund’s assets and, subject to review and approval of the Board, will: (i) Set each Fund’s overall investment strategies; (ii) evaluate, select and recommend Subadvisers to manage all or a part of a Fund’s assets; (iii) allocate and, when appropriate, reallocate a Fund’s assets among one or more Subadvisers; (iv) monitor and evaluate the performance of Subadvisers; and (v) implement procedures reasonably designed to ensure that the Subadvisers comply with the relevant Fund’s investment objective, policies and restrictions. 8. No trustee or officer of the Trust or a Fund, or director, manager or officer of the Adviser, will own directly or indirectly (other than through a pooled investment vehicle that is not controlled by such person), any interest in a Subadviser except for: (a) Ownership of interests in the Adviser, or (b) ownership of less than 1% of the outstanding securities of any class of equity or debt of any publicly traded company that is either a Subadviser or an entity that controls, is controlled by, or is under common control with a Subadviser. 9. In the event the Commission adopts a rule under the Act providing PO 00000 Frm 00073 Fmt 4703 Sfmt 4703 51509 substantially similar relief to that in the order requested in the application, the requested order will expire on the effective date of that rule. For the Commission, by the Division of Investment Management, under delegated authority. Florence E. Harmon, Deputy Secretary. [FR Doc. 2010–20673 Filed 8–19–10; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–62724; File No. SR– NASDAQ–2010–099] Self-Regulatory Organizations; Notice of Filing of a Proposed Rule Change by the NASDAQ Stock Market LLC To Adopt a Definition of Professional and Require That All Professional Orders Be Appropriately Marked August 16, 2010. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1, and Rule 19b–4 2 thereunder, notice is hereby given that on August 6, 2010, The NASDAQ Stock Market LLC (‘‘NASDAQ’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by NASDAQ. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change NASDAQ is filing with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) a proposal for the NASDAQ Options Market (‘‘NOM’’ or ‘‘Exchange’’) to amend Chapter I, Section 1 (Definitions) to adopt a definition of ‘‘Professional’’ on the Exchange and require that all Professional orders be appropriately marked by Exchange Participants. The text of the proposed rule change is available from NASDAQ’s Web site at https://nasdaq.cchwallstreet.com/ Filings/, at NASDAQ’s principal office, and at the Commission’s Public Reference Room. 1 15 2 17 E:\FR\FM\20AUN1.SGM U.S.C. 78s(b)(1). CFR 240.19b–4. 20AUN1 51510 Federal Register / Vol. 75, No. 161 / Friday, August 20, 2010 / Notices 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 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 sroberts on DSKD5P82C1PROD with NOTICES 1. Purpose The purpose of this proposal is to amend Chapter I, Section 1 (Definitions) to adopt a definition of ‘‘Professional’’ on the Exchange and require that all Professional orders be appropriately marked. This filing is similar to the recent filings of PHLX NASDAQ OMX, Inc. (‘‘Phlx’’), the International Securities Exchange, LLC (‘‘ISE’’), and Chicago Board Options Exchange, Incorporated, (‘‘CBOE’’), which dealt with establishing a new definition of ‘‘professional’’ as a person or entity that places a certain high volume of orders in listed options per day on average during a calendar month in his or her own beneficial account.3 Background A member of NOM is known as a Participant or Options Participant (‘‘Participant’’).4 This is a firm or organization that is registered with the Exchange pursuant to Chapter II for purposes of participating in options 3 See Securities Exchange Act Release Nos. 61802 (March 30, 2010), 75 FR 17193 (April 5, 2010) (SR– Phlx–2010–05) (approval order); 61198 (December 17, 2009), 74 FR 68880 (December 29, 2009) (SR– CBOE–2009–078) (approval order); and 59287 (January 23, 2009), 74 FR 5694 (January 30, 2009) (SR–ISE–2006–26) (approval order). A filing by NYSE Amex LLC (‘‘NYSE Amex’’) proposing a similar professional designation was based on the Phlx, ISE, and CBOE proposals. See Securities Exchange Act Release No. 61818 (March 31, 2010), 75 FR 17457 (April 6, 2010) (SR–NYSEAmex–2010– 18) (approval order). Phlx, ISE, CBOE, and NYSE Amex are known in this filing as the ‘‘Professional Rule Exchanges.’’ The cited filings discuss, among other things, the need for a professional designation to be applied by members of the respective exchanges because the systems of such exchanges differentiate for execution or processing purposes based on order origin. NOM does not similarly differentiate among orders based on their origin. 4 See Chapter I, Section 1(a)(40). Some NOM Participants are also members of other options exchanges such as, for example, ISE, CBOE, or Phlx. VerDate Mar<15>2010 17:19 Aug 19, 2010 Jkt 220001 trading on NOM as a Nasdaq Options Order Entry Firm or Nasdaq Options Market Maker.5 Options traded by Participants (which may include trades on behalf of Public Customers) 6 on NOM, a wholly electronic exchange, are electronically executable and routable. The NOM System 7 and rules provide for the ranking, display, and execution of all orders in price/time priority without regard to the status of the person or entity entering an order.8 The Exchange notes that NOM has, in contrast to certain other options markets, a ‘‘flat’’ system that does not differentiate for execution or processing purposes among orders on the basis of who or what entity enters an order on the Exchange.9 NASDAQ Options Services LLC (‘‘NOS’’), a member of the Exchange,10 is the Exchange’s exclusive order router for all orders that come through the Exchange.11 NOS performs routing 5 Nasdaq Options Order Entry Firm or Order Entry Firm or OEF is defined in Chapter I, Section 1(a)(25) as: those Options Participants representing as agent Customer Orders on NOM and those nonMarket Maker Participants conducting proprietary trading. Nasdaq Options Market Maker or Options Market Maker is defined in Chapter I, Section 1(a)(26) as: an Options Participant registered with the Exchange for the purpose of making markets in options contracts traded on the Exchange and that is vested with the rights and responsibilities specified in Chapter VII of these Rules. 6 Public Customer is defined in Chapter I, Section 1(a)(48) as: a person that is not a broker or dealer in securities. 7 System is defined in Chapter IV, Section 1(a) as: the automated system for order execution and trade reporting owned and operated by The Nasdaq Options Market LLC. 8 See Securities Exchange Act Release No. 57478 (March 12, 2008), 73 FR 14521 (March 18, 2008) (SR–NASDAQ–2007–004 and SR–NASDAQ–2007– 080) (approval order). See also Chapter VI, Section 10, which discusses the price/time execution algorithm for System orders and states, in relevant part, that the System will execute trading interest at the best price in the System before executing trading interest at the next best price, and that the System will execute displayed orders before nondisplayed orders at the same price. 9 In contrast to NOM, hybrid options exchanges such as, for example, Phlx and CBOE blend auction and electronic market structures that differentiate certain order priority and execution functions based upon, among other things, the origin of the order (e.g., whether the order was a customer, market maker, broker or dealer, firm, or other type of order); these exchanges also charge different fees based on order origin. NOM does, like other exchanges, differentiate fees based on order origin. For example, fees for removing liquidity in SPY options are different for customers than they are for market makers and firms. This filing does not propose any changes in respect of the NOM fee structure. 10 NOS is also a member of other options exchanges such as, for example, ISE and Phlx. 11 See Securities Exchange Act Release No. 57478 (March 12, 2008), 73 FR 14521 (March 18, 2008) (SR–NASDAQ–2007–004 and SR–NASDAQ–2007– 080) (approval order). See also Chapter VI, Section 11(e), which states, in relevant part: NOM shall route orders in options via Nasdaq Options Services LLC, a broker-dealer that is a member of an PO 00000 Frm 00074 Fmt 4703 Sfmt 4703 functions with respect to System Securities and Non-System Securities.12 The Exchange’s general routing procedures are set forth in Chapter VI, Section 11 (Order Routing), which states in subsection (c) that, among other things, once routed by the System, an order becomes subject to the rules and procedures of the destination market.13 NOS also performs order routing services on behalf of Phlx.14 The exchanges that do the great majority of all U.S. options trading, namely the Professional Rule Exchanges CBOE, ISE, NYSE AMEX, and Phlx, already have rules that are similar to the Professional designation rule proposed by the Exchange (a professional is a person or entity that places 390 or more orders in listed options per day on average during a calendar month in his or her own beneficial account). These Professional Rule Exchanges make differentiations based on whether an order is marked professional or otherwise. Some Exchange Participants are, as noted, also members of Professional Rule Exchanges such as CBOE, ISE, or Phlx. As members of these exchanges, such Exchange Participants are subject to the professional designation rules of the Professional Rule Exchanges. Similarly, NOS is a member of several Professional Rule Exchanges. Exchange rules indicate that orders routed by NOS become subject to the rules and unaffiliated SRO which is the designated examining authority for the broker-dealer. Nasdaq Options Services LLC serves as the Routing Facility of NOM. The sole function of the Routing Facility will be to route orders in options listed and open for trading on NOM to away markets pursuant to NOM rules solely on behalf of NOM. The Routing Facility is subject to regulation as a facility of Nasdaq, including the requirement to file proposed rule changes under Section 19 of the Act. 12 Chapter VI, Section 1(b) states: ‘‘System Securities’’ shall mean all options that are currently trading on NOM pursuant to Chapter IV (Securities Traded on NOM) above. All other options shall be ‘‘Non-System Securities.’’ 13 Chapter VI, Section 11(c) states: Priority of Routed Orders. Orders sent by the System to other markets do not retain time priority with respect to other orders in the System and the System shall continue to execute other orders while routed orders are away at another market center. Once routed by the System, an order becomes subject to the rules and procedures of the destination market including, but not limited to, order cancellation. If a routed order is subsequently returned, in whole or in part, that order, or its remainder, shall receive a new time stamp reflecting the time of its return to the System. 14 NOS routes certain orders in options listed and open for trading on the Phlx electronic order, trading and execution system (known as XL II) to away market centers. See Phlx Rule 1080(m)(iii)(A) and Securities Exchange Act Release No. 59995 (May 28, 2009), 74 FR 26750 (June 3, 2009) (SR– Phlx–2009–32) (approval order). E:\FR\FM\20AUN1.SGM 20AUN1 Federal Register / Vol. 75, No. 161 / Friday, August 20, 2010 / Notices sroberts on DSKD5P82C1PROD with NOTICES procedures of the destination markets (away exchanges).15 The Exchange believes that disparate rules in respect of Professional order designation, and lack of uniform application of such rules, do not promote the best regulation and may, in fact, encourage regulatory arbitrage.16 The Exchange believes that it is therefore prudent and necessary to have a Professional designation rule as is commonplace in the industry, particularly where NOS (like Exchange Participants) is a member of several exchanges that have rules requiring professional order designations. The Proposal The Exchange proposes new Chapter I, Section 1(a)(48) to state that the term ‘‘Professional’’ means any person or entity that (i) is not a broker or dealer in securities, and (ii) places more than 390 orders in listed options per day on average during a calendar month for its own beneficial account(s). A Participant or a Public Customer may, without limitation, be a Professional. Moreover, in order to properly represent orders entered on the Exchange according to the new definition, a Participant will be required to appropriately mark all Professional orders.17 To comply with this requirement, Participants will be required to review their Public Customers’ activity on at least a quarterly basis to determine whether orders that are not for the account of a broker-dealer should be represented as Professional orders.18 The Exchange 15 Once routed by the System, an order becomes subject to the rules and procedures of the destination market including, but not limited to, order cancellation. See Chapter VI, Section 11(c). 16 The Exchange believes that the risk of regulatory arbitrage is heightened where not all exchanges have Professional designation rules; and there is a lack of uniformity regarding Professional Rule Exchanges marking orders as Professional when routing such orders away. 17 The Exchange intends to require Participants to indentify Professional orders submitted electronically by identifying them in the customer type field, and will notify Participants via an Options Trader Alert (‘‘OTA’’) or Options Regulatory Alert (‘‘ORA’’) regarding this requirement. 18 Participants will be required to conduct a quarterly review and make any appropriate changes to the way in which they are representing orders within five business days after the end of each calendar quarter. While Participants will only be required to review their accounts on a quarterly basis, if during a quarter the Exchange identifies a customer for which orders are being represented as other than Professional orders but that has averaged more than 390 orders per day during a month, the Exchange will notify the Participant and the Participant will be required to change the manner in which it is representing the customer’s orders within five business days. This is similar to the process of other options exchanges that have adopted a professional designation. See, e.g., Securities Exchange Act Release No. 61802 (March 30, 2010), 75 FR 17193 (April 5, 2010) (SR–Phlx– 2010–05) (approval order). VerDate Mar<15>2010 17:19 Aug 19, 2010 Jkt 220001 will issue a notice to Participants via OTA or ORA outlining the procedures for the implementation of the proposal. The Professional definition proposed by NOM is similar to the Professional designation that has been adopted by Phlx, ISE, CBOE, and NYSE Amex.19 As noted, the Professional definition will not impact the Exchange’s price/time order entry (priority) system.20 Instead, the Exchange’s proposal will ensure that Exchange Participants mark their Professional orders properly, that is, similarly in terms of professional order identification regardless of whether the order is placed on NOM or some other Professional Order Exchange. Moreover, with the proposed Professional designation in place, the Exchange will be able to accept orders that are marked professional.21 The designation of Professional or Professional order would not result in any different treatment of such orders for purposes of NOM rules concerning away market protection. That is, all non broker or dealer orders, including those that meet the definition of Professional orders, would continue to be treated equally for purposes of Exchange away market protection rules.22 The Exchange believes that identifying Professional accounts based upon the average number of orders entered in qualified accounts is an appropriately objective approach that will reasonably distinguish such persons and entities from retail investors or market participants. The Exchange proposes the threshold of 390 orders per day on average over a calendar month, because it believes that this number far exceeds the number of orders that are entered by retail investors in a single day.23 Moreover, 19 See supra note 3. example, unlike the Phlx proposal (which, among other things, discusses that Professional orders on Phlx will be treated in the same manner as off-floor brokers in terms of certain priority rules), the Exchange’s proposal does not address or impact any priority relationship for Professional as opposed to other NOM orders. 21 Currently, NOM only accepts orders that are marked as customer, firm, market maker, or away market maker orders. Professional orders that may not now be accepted by NOM must be sent to other Exchanges. While the Exchange does not intend to differentiate among Professional and other orders for priority purposes, it may, in the future, feel that it is appropriate to differentiate its routing or other fees in respect of Professional as opposed to other orders; and if so, the Exchange intends to file an appropriate fee-related rule filing(s). The Exchange does not address its fee structure in the present filing. 22 See, e.g., Chapter VI, Section 11 and Chapter XII. 23 390 orders is equal to the total number of orders that a person would place in a day if that person entered one order every minute from market open to market close. Many of the largest retailoriented electronic brokers offer lower commission 20 For PO 00000 Frm 00075 Fmt 4703 Sfmt 4703 51511 the 390 orders per day threshold proposed by NOM directly corresponds to the daily order volume recognized by Phlx and other options exchanges that have, as previously discussed, established professional order designations.24 In addition, basing the standard on the number of orders that are entered in listed options for a qualified account(s) assures that professional account holders cannot inappropriately avoid the purpose of the rule by spreading their trading activity over multiple exchanges, and using an average number over a calendar month will prevent gaming of the 390 order threshold.25 2. Statutory Basis The Exchange believes that its proposal is consistent with Section 6(b) of the Act 26 in general, and furthers the objectives of Section 6(b)(5) of the Act 27 in particular, in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, and to remove impediments to and perfect the mechanisms of a free and open market and a national market system, by defining Professional and indicating that all Professional orders shall be appropriately marked by Participants. 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 rates to customers they define as ‘‘active traders.’’ Publicly available information from the websites of Charles Schwab, Fidelity, TD Ameritrade and OptionsXpress all define ‘‘active trader’’ as someone who executes only a few options trades per month. The highest required trading activity to qualify as an active trader among these four firms was 35 trades per quarter. See Securities Exchange Act Release No. 57254 at note 11 (which also notes that a study of one of the largest retail-oriented options brokerage firms indicated that on a typical trading day, options orders were entered with respect to 5,922 different customer accounts. There was only one order entered with respect to 3,765 of the 5,922 different customer accounts on this day, and there were only 17 customer accounts with respect to which more than ten orders were entered. The highest number of orders entered with respect to any one account over the course of an entire week was 27). 24 The similarity of the Exchange’s proposed Professional order definition to that of other options exchanges is important from the regulatory perspective, that is from a desire to promote a national market system that minimizes regulatory arbitrage. 25 The Exchange intends to notify Participants via OTA or ORA that this proposal will be implemented on the first trading day of the month after the approval or effectiveness of this proposal. 26 15 U.S.C. 78f(b). 27 15 U.S.C. 78f(b)(5). E:\FR\FM\20AUN1.SGM 20AUN1 51512 Federal Register / Vol. 75, No. 161 / Friday, August 20, 2010 / Notices necessary or appropriate in furtherance of the purposes of the Act. 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 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove the proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Exchange Act. Comments may be submitted by any of the following methods: sroberts on DSKD5P82C1PROD with NOTICES Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–NASDAQ–2010–099 on the subject line. Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–NASDAQ–2010–099. 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 (https://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 VerDate Mar<15>2010 17:19 Aug 19, 2010 Jkt 220001 Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 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; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR– NASDAQ–2010–099 and should be submitted on or before September 10, 2010. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.28 Florence E. Harmon, Deputy Secretary. [FR Doc. 2010–20658 Filed 8–19–10; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–62732; File No. SR–NYSE– 2010–56] Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing of Proposed Rule Change Amending Its Price List To Reflect Fees Charged for Co-Location Services August 16, 2010. Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (the ‘‘Act’’) 2 and Rule 19b–4 thereunder,3 notice is hereby given that, on August 3, 2010, New York Stock Exchange LLC (‘‘NYSE’’ or the ‘‘Exchange’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. 28 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 15 U.S.C. 78a. 3 17 CFR 240.19b–4. 1 15 PO 00000 Frm 00076 Fmt 4703 Sfmt 4703 I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend its Price List to reflect fees charged for colocation services, as described more fully herein. The text of the proposed rule change is available at the Exchange, the Commission’s Public Reference Room, on the Commission’s Web site at https://www.sec.gov, and the Exchange’s Web site at https://www.nyse.com. 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 self-regulatory organization 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 those 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 parts of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to amend its Price List to identify fees pertaining to co-location services, which allow Users 4 of the Exchange to rent space on premises controlled by the Exchange in order that they may locate their electronic servers in close physical proximity to the Exchange’s trading and execution systems. The Exchange plans to begin operating a data center in Mahwah, New Jersey, from which it will offer co-location services. The Exchange will offer space at the data center in cabinets with power usage capability of either four or eight kilowatts (kW).5 In 4 For the purposes of this filing, the term ‘‘Users’’ includes any ‘‘member organization,’’ as that term is defined in NYSE Rule 2(b) and any ‘‘Sponsored Participant,’’ as that term is defined in NYSE Rule 123B.30(a)(ii)(B). 5 The Exchange also allows Users, for a monthly fee (i.e., 40% of the applicable monthly per kW fee), to obtain an option for future use on available, unused cabinet space in proximity to their existing cabinet space. Specifically, Users may reserve cabinet space of up to 30% of the cabinet space under contract, which the Exchange will endeavor to provide as close as reasonably possible to the User’s existing cabinet space, taking into consideration power availability within segments of the data center and the overall efficiency of use of data center resources as determined by the Exchange. (If the 30% measurement results in a fractional cabinet, the cabinet count is adjusted up to the next increment.) If reserved cabinet space becomes needed for use, the reserving User will E:\FR\FM\20AUN1.SGM 20AUN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 75, Number 161 (Friday, August 20, 2010)]
[Notices]
[Pages 51509-51512]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-20658]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62724; File No. SR-NASDAQ-2010-099]


Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change by the NASDAQ Stock Market LLC To Adopt a Definition of 
Professional and Require That All Professional Orders Be Appropriately 
Marked

August 16, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on August 6, 2010, The NASDAQ Stock Market LLC (``NASDAQ'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change as described in Items I and II below, which 
Items have been prepared by NASDAQ. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASDAQ is filing with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') a proposal for the NASDAQ Options Market 
(``NOM'' or ``Exchange'') to amend Chapter I, Section 1 (Definitions) 
to adopt a definition of ``Professional'' on the Exchange and require 
that all Professional orders be appropriately marked by Exchange 
Participants.
    The text of the proposed rule change is available from NASDAQ's Web 
site at https://nasdaq.cchwallstreet.com/Filings/, at NASDAQ's principal 
office, and at the Commission's Public Reference Room.

[[Page 51510]]

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 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
    The purpose of this proposal is to amend Chapter I, Section 1 
(Definitions) to adopt a definition of ``Professional'' on the Exchange 
and require that all Professional orders be appropriately marked.
    This filing is similar to the recent filings of PHLX NASDAQ OMX, 
Inc. (``Phlx''), the International Securities Exchange, LLC (``ISE''), 
and Chicago Board Options Exchange, Incorporated, (``CBOE''), which 
dealt with establishing a new definition of ``professional'' as a 
person or entity that places a certain high volume of orders in listed 
options per day on average during a calendar month in his or her own 
beneficial account.\3\
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    \3\ See Securities Exchange Act Release Nos. 61802 (March 30, 
2010), 75 FR 17193 (April 5, 2010) (SR-Phlx-2010-05) (approval 
order); 61198 (December 17, 2009), 74 FR 68880 (December 29, 2009) 
(SR-CBOE-2009-078) (approval order); and 59287 (January 23, 2009), 
74 FR 5694 (January 30, 2009) (SR-ISE-2006-26) (approval order). A 
filing by NYSE Amex LLC (``NYSE Amex'') proposing a similar 
professional designation was based on the Phlx, ISE, and CBOE 
proposals. See Securities Exchange Act Release No. 61818 (March 31, 
2010), 75 FR 17457 (April 6, 2010) (SR-NYSEAmex-2010-18) (approval 
order). Phlx, ISE, CBOE, and NYSE Amex are known in this filing as 
the ``Professional Rule Exchanges.''
    The cited filings discuss, among other things, the need for a 
professional designation to be applied by members of the respective 
exchanges because the systems of such exchanges differentiate for 
execution or processing purposes based on order origin. NOM does not 
similarly differentiate among orders based on their origin.
---------------------------------------------------------------------------

    Background
    A member of NOM is known as a Participant or Options Participant 
(``Participant'').\4\ This is a firm or organization that is registered 
with the Exchange pursuant to Chapter II for purposes of participating 
in options trading on NOM as a Nasdaq Options Order Entry Firm or 
Nasdaq Options Market Maker.\5\ Options traded by Participants (which 
may include trades on behalf of Public Customers) \6\ on NOM, a wholly 
electronic exchange, are electronically executable and routable. The 
NOM System \7\ and rules provide for the ranking, display, and 
execution of all orders in price/time priority without regard to the 
status of the person or entity entering an order.\8\ The Exchange notes 
that NOM has, in contrast to certain other options markets, a ``flat'' 
system that does not differentiate for execution or processing purposes 
among orders on the basis of who or what entity enters an order on the 
Exchange.\9\
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    \4\ See Chapter I, Section 1(a)(40). Some NOM Participants are 
also members of other options exchanges such as, for example, ISE, 
CBOE, or Phlx.
    \5\ Nasdaq Options Order Entry Firm or Order Entry Firm or OEF 
is defined in Chapter I, Section 1(a)(25) as: those Options 
Participants representing as agent Customer Orders on NOM and those 
non-Market Maker Participants conducting proprietary trading. Nasdaq 
Options Market Maker or Options Market Maker is defined in Chapter 
I, Section 1(a)(26) as: an Options Participant registered with the 
Exchange for the purpose of making markets in options contracts 
traded on the Exchange and that is vested with the rights and 
responsibilities specified in Chapter VII of these Rules.
    \6\ Public Customer is defined in Chapter I, Section 1(a)(48) 
as: a person that is not a broker or dealer in securities.
    \7\ System is defined in Chapter IV, Section 1(a) as: the 
automated system for order execution and trade reporting owned and 
operated by The Nasdaq Options Market LLC.
    \8\ See Securities Exchange Act Release No. 57478 (March 12, 
2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-
NASDAQ-2007-080) (approval order). See also Chapter VI, Section 10, 
which discusses the price/time execution algorithm for System orders 
and states, in relevant part, that the System will execute trading 
interest at the best price in the System before executing trading 
interest at the next best price, and that the System will execute 
displayed orders before non-displayed orders at the same price.
    \9\ In contrast to NOM, hybrid options exchanges such as, for 
example, Phlx and CBOE blend auction and electronic market 
structures that differentiate certain order priority and execution 
functions based upon, among other things, the origin of the order 
(e.g., whether the order was a customer, market maker, broker or 
dealer, firm, or other type of order); these exchanges also charge 
different fees based on order origin. NOM does, like other 
exchanges, differentiate fees based on order origin. For example, 
fees for removing liquidity in SPY options are different for 
customers than they are for market makers and firms. This filing 
does not propose any changes in respect of the NOM fee structure.
---------------------------------------------------------------------------

    NASDAQ Options Services LLC (``NOS''), a member of the 
Exchange,\10\ is the Exchange's exclusive order router for all orders 
that come through the Exchange.\11\ NOS performs routing functions with 
respect to System Securities and Non-System Securities.\12\ The 
Exchange's general routing procedures are set forth in Chapter VI, 
Section 11 (Order Routing), which states in subsection (c) that, among 
other things, once routed by the System, an order becomes subject to 
the rules and procedures of the destination market.\13\ NOS also 
performs order routing services on behalf of Phlx.\14\
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    \10\ NOS is also a member of other options exchanges such as, 
for example, ISE and Phlx.
    \11\ See Securities Exchange Act Release No. 57478 (March 12, 
2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-
NASDAQ-2007-080) (approval order). See also Chapter VI, Section 
11(e), which states, in relevant part: NOM shall route orders in 
options via Nasdaq Options Services LLC, a broker-dealer that is a 
member of an unaffiliated SRO which is the designated examining 
authority for the broker-dealer. Nasdaq Options Services LLC serves 
as the Routing Facility of NOM. The sole function of the Routing 
Facility will be to route orders in options listed and open for 
trading on NOM to away markets pursuant to NOM rules solely on 
behalf of NOM. The Routing Facility is subject to regulation as a 
facility of Nasdaq, including the requirement to file proposed rule 
changes under Section 19 of the Act.
    \12\ Chapter VI, Section 1(b) states: ``System Securities'' 
shall mean all options that are currently trading on NOM pursuant to 
Chapter IV (Securities Traded on NOM) above. All other options shall 
be ``Non-System Securities.''
    \13\ Chapter VI, Section 11(c) states: Priority of Routed 
Orders. Orders sent by the System to other markets do not retain 
time priority with respect to other orders in the System and the 
System shall continue to execute other orders while routed orders 
are away at another market center. Once routed by the System, an 
order becomes subject to the rules and procedures of the destination 
market including, but not limited to, order cancellation. If a 
routed order is subsequently returned, in whole or in part, that 
order, or its remainder, shall receive a new time stamp reflecting 
the time of its return to the System.
    \14\ NOS routes certain orders in options listed and open for 
trading on the Phlx electronic order, trading and execution system 
(known as XL II) to away market centers. See Phlx Rule 
1080(m)(iii)(A) and Securities Exchange Act Release No. 59995 (May 
28, 2009), 74 FR 26750 (June 3, 2009) (SR-Phlx-2009-32) (approval 
order).
---------------------------------------------------------------------------

    The exchanges that do the great majority of all U.S. options 
trading, namely the Professional Rule Exchanges CBOE, ISE, NYSE AMEX, 
and Phlx, already have rules that are similar to the Professional 
designation rule proposed by the Exchange (a professional is a person 
or entity that places 390 or more orders in listed options per day on 
average during a calendar month in his or her own beneficial account). 
These Professional Rule Exchanges make differentiations based on 
whether an order is marked professional or otherwise. Some Exchange 
Participants are, as noted, also members of Professional Rule Exchanges 
such as CBOE, ISE, or Phlx. As members of these exchanges, such 
Exchange Participants are subject to the professional designation rules 
of the Professional Rule Exchanges. Similarly, NOS is a member of 
several Professional Rule Exchanges. Exchange rules indicate that 
orders routed by NOS become subject to the rules and

[[Page 51511]]

procedures of the destination markets (away exchanges).\15\
---------------------------------------------------------------------------

    \15\ Once routed by the System, an order becomes subject to the 
rules and procedures of the destination market including, but not 
limited to, order cancellation. See Chapter VI, Section 11(c).
---------------------------------------------------------------------------

    The Exchange believes that disparate rules in respect of 
Professional order designation, and lack of uniform application of such 
rules, do not promote the best regulation and may, in fact, encourage 
regulatory arbitrage.\16\ The Exchange believes that it is therefore 
prudent and necessary to have a Professional designation rule as is 
commonplace in the industry, particularly where NOS (like Exchange 
Participants) is a member of several exchanges that have rules 
requiring professional order designations.
---------------------------------------------------------------------------

    \16\ The Exchange believes that the risk of regulatory arbitrage 
is heightened where not all exchanges have Professional designation 
rules; and there is a lack of uniformity regarding Professional Rule 
Exchanges marking orders as Professional when routing such orders 
away.
---------------------------------------------------------------------------

    The Proposal
    The Exchange proposes new Chapter I, Section 1(a)(48) to state that 
the term ``Professional'' means any person or entity that (i) is not a 
broker or dealer in securities, and (ii) places more than 390 orders in 
listed options per day on average during a calendar month for its own 
beneficial account(s). A Participant or a Public Customer may, without 
limitation, be a Professional. Moreover, in order to properly represent 
orders entered on the Exchange according to the new definition, a 
Participant will be required to appropriately mark all Professional 
orders.\17\ To comply with this requirement, Participants will be 
required to review their Public Customers' activity on at least a 
quarterly basis to determine whether orders that are not for the 
account of a broker-dealer should be represented as Professional 
orders.\18\ The Exchange will issue a notice to Participants via OTA or 
ORA outlining the procedures for the implementation of the proposal.
---------------------------------------------------------------------------

    \17\ The Exchange intends to require Participants to indentify 
Professional orders submitted electronically by identifying them in 
the customer type field, and will notify Participants via an Options 
Trader Alert (``OTA'') or Options Regulatory Alert (``ORA'') 
regarding this requirement.
    \18\ Participants will be required to conduct a quarterly review 
and make any appropriate changes to the way in which they are 
representing orders within five business days after the end of each 
calendar quarter. While Participants will only be required to review 
their accounts on a quarterly basis, if during a quarter the 
Exchange identifies a customer for which orders are being 
represented as other than Professional orders but that has averaged 
more than 390 orders per day during a month, the Exchange will 
notify the Participant and the Participant will be required to 
change the manner in which it is representing the customer's orders 
within five business days. This is similar to the process of other 
options exchanges that have adopted a professional designation. See, 
e.g., Securities Exchange Act Release No. 61802 (March 30, 2010), 75 
FR 17193 (April 5, 2010) (SR-Phlx-2010-05) (approval order).
---------------------------------------------------------------------------

    The Professional definition proposed by NOM is similar to the 
Professional designation that has been adopted by Phlx, ISE, CBOE, and 
NYSE Amex.\19\ As noted, the Professional definition will not impact 
the Exchange's price/time order entry (priority) system.\20\ Instead, 
the Exchange's proposal will ensure that Exchange Participants mark 
their Professional orders properly, that is, similarly in terms of 
professional order identification regardless of whether the order is 
placed on NOM or some other Professional Order Exchange. Moreover, with 
the proposed Professional designation in place, the Exchange will be 
able to accept orders that are marked professional.\21\
---------------------------------------------------------------------------

    \19\ See supra note 3.
    \20\ For example, unlike the Phlx proposal (which, among other 
things, discusses that Professional orders on Phlx will be treated 
in the same manner as off-floor brokers in terms of certain priority 
rules), the Exchange's proposal does not address or impact any 
priority relationship for Professional as opposed to other NOM 
orders.
    \21\ Currently, NOM only accepts orders that are marked as 
customer, firm, market maker, or away market maker orders. 
Professional orders that may not now be accepted by NOM must be sent 
to other Exchanges. While the Exchange does not intend to 
differentiate among Professional and other orders for priority 
purposes, it may, in the future, feel that it is appropriate to 
differentiate its routing or other fees in respect of Professional 
as opposed to other orders; and if so, the Exchange intends to file 
an appropriate fee-related rule filing(s). The Exchange does not 
address its fee structure in the present filing.
---------------------------------------------------------------------------

    The designation of Professional or Professional order would not 
result in any different treatment of such orders for purposes of NOM 
rules concerning away market protection. That is, all non broker or 
dealer orders, including those that meet the definition of Professional 
orders, would continue to be treated equally for purposes of Exchange 
away market protection rules.\22\
---------------------------------------------------------------------------

    \22\ See, e.g., Chapter VI, Section 11 and Chapter XII.
---------------------------------------------------------------------------

    The Exchange believes that identifying Professional accounts based 
upon the average number of orders entered in qualified accounts is an 
appropriately objective approach that will reasonably distinguish such 
persons and entities from retail investors or market participants. The 
Exchange proposes the threshold of 390 orders per day on average over a 
calendar month, because it believes that this number far exceeds the 
number of orders that are entered by retail investors in a single 
day.\23\ Moreover, the 390 orders per day threshold proposed by NOM 
directly corresponds to the daily order volume recognized by Phlx and 
other options exchanges that have, as previously discussed, established 
professional order designations.\24\ In addition, basing the standard 
on the number of orders that are entered in listed options for a 
qualified account(s) assures that professional account holders cannot 
inappropriately avoid the purpose of the rule by spreading their 
trading activity over multiple exchanges, and using an average number 
over a calendar month will prevent gaming of the 390 order 
threshold.\25\
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    \23\ 390 orders is equal to the total number of orders that a 
person would place in a day if that person entered one order every 
minute from market open to market close. Many of the largest retail-
oriented electronic brokers offer lower commission rates to 
customers they define as ``active traders.'' Publicly available 
information from the websites of Charles Schwab, Fidelity, TD 
Ameritrade and OptionsXpress all define ``active trader'' as someone 
who executes only a few options trades per month. The highest 
required trading activity to qualify as an active trader among these 
four firms was 35 trades per quarter. See Securities Exchange Act 
Release No. 57254 at note 11 (which also notes that a study of one 
of the largest retail-oriented options brokerage firms indicated 
that on a typical trading day, options orders were entered with 
respect to 5,922 different customer accounts. There was only one 
order entered with respect to 3,765 of the 5,922 different customer 
accounts on this day, and there were only 17 customer accounts with 
respect to which more than ten orders were entered. The highest 
number of orders entered with respect to any one account over the 
course of an entire week was 27).
    \24\ The similarity of the Exchange's proposed Professional 
order definition to that of other options exchanges is important 
from the regulatory perspective, that is from a desire to promote a 
national market system that minimizes regulatory arbitrage.
    \25\ The Exchange intends to notify Participants via OTA or ORA 
that this proposal will be implemented on the first trading day of 
the month after the approval or effectiveness of this proposal.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \26\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \27\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, and to remove impediments to and perfect the mechanisms of 
a free and open market and a national market system, by defining 
Professional and indicating that all Professional orders shall be 
appropriately marked by Participants.
---------------------------------------------------------------------------

    \26\ 15 U.S.C. 78f(b).
    \27\ 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

[[Page 51512]]

necessary or appropriate in furtherance of the purposes of the Act.

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 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Exchange Act. Comments may be submitted 
by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2010-099 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2010-099. 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 (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for Web site 
viewing and printing in the Commission's Public Reference Room, 100 F 
Street, NE., Washington, DC 20549, on official business days between 
the hours of 10 a.m. and 3 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; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
NASDAQ-2010-099 and should be submitted on or before September 10, 
2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
---------------------------------------------------------------------------

    \28\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-20658 Filed 8-19-10; 8:45 am]
BILLING CODE 8010-01-P

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