Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Order Approving a Proposed Rule Change Requesting Permanent Approval of the Pilot Program Permitting BOX To Accept Inbound Routes by NOS, 54277-54279 [2011-22221]

Download as PDF Federal Register / Vol. 76, No. 169 / Wednesday, August 31, 2011 / Notices clearing member that maintains CME Group shares are different than those that apply to a CME clearing member that does not. The purpose of the proposed rule change in this filing is to make clarifying revisions to the CME rulebook to more accurately reflect these fee differentials. The rule changes affecting the CME rulebook are included in File No. SR–CME–2011–02. CME notes that it submitted the rule changes that are the subject of this filing to its primary regulator, the Commodity Futures Trading Commission (‘‘CFTC’’), in a separate filing.5 This filing also included corresponding changes to the rulebook of its affiliated exchanges, The Board of Trade of the City of Chicago, Inc. (‘‘CBOT’’) and New York Mercantile Exchange, Inc. (‘‘NYMEX’’). The text of the CME rule proposed amendments is in Section I of this notice, with additions underlined and deletions in brackets. The proposed effective date for these rule amendments is August 12, 2011 (i.e., ten business days after the date of CME’s submission to the CFTC).6 The proposed CME rule amendments do not significantly affect the securities clearing operations of CME or any related rights or obligations of CME clearing members. The proposed rule changes are intended to clarify the application of certain proprietary trading exchange fees to a CME clearing member that maintains CME shares and to those that do not. These changes do not affect CME’s credit default swap clearing activities in any significant way. As such, the proposed rule change is properly filed under Section 19(b)(3)(A) 7 and Rule 19b–4(f)(4)(ii) 8 thereunder because it effects a change in an existing service of a registered clearing agency that primarily affects the futures clearing operations of the clearing agency with respect to futures that are not security futures and does not significantly affect any securities clearing operations of the clearing agency or any related rights or jlentini on DSK4TPTVN1PROD with NOTICES 5 CME submitted its filing to the CFTC pursuant to CFTC Regulation 40.6 on July 28, 2011 with a proposed effective date of August 12, 2011 relating to the following CME Group rules: CME and CBOT Rule 106.I. (Affiliate Member Firm), CME Rules 900.A. (CME Clearing Members) and 900.B. (Financial Instrument Clearing Member), CBOT Rules 900 (Categories of Clearing Members) and 901 (General Requirements and Obligations), and NYMEX Rule 900.A. (NYMEX Clearing Members). 6 The Commission notes that the proposed rule change became effective upon filing under Section 19(b)(3)(A) of the Act. CME’s statement indicates that the proposed rule change, which became effective on August 12, 2011, became operative that same day. 7 Supra note 3. 8 Supra note 4. VerDate Mar<15>2010 16:51 Aug 30, 2011 Jkt 223001 obligations of the clearing agency or persons using such service. B. Self-Regulatory Organization’s Statement on Burden on Competition CME does not believe that the proposed rule change will have any impact, or impose any burden, on competition. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others CME has not solicited, and does not intend to solicit, comments regarding this proposed rule change. CME has not received any unsolicited written comments from interested parties. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change was filed pursuant to Section 19(b)(3)(A) 9 of the Act and paragraph (f)(4)(ii) of Rule 19b– 4 10 became effective on August 12, 2011, the same date CME’s corresponding filing with the CFTC became effective. At any time within sixty days of the filing of such rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: • Electronic comments may be submitted by using 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 No. SR–CME–2011– 02 on the subject line. • Paper comments should be sent 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–CME–2011–02. 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. Copies of such filing also will be available for inspection and copying at the principal office of CME. 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–CME– 2011–02 and should be submitted on or before September 21, 2011. For the Commission by the Division of Trading and Markets, pursuant to delegated authority.11 Elizabeth M. Murphy, Secretary. [FR Doc. 2011–22223 Filed 8–30–11; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–65199; File No. SR–BX– 2011–045] Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Order Approving a Proposed Rule Change Requesting Permanent Approval of the Pilot Program Permitting BOX To Accept Inbound Routes by NOS August 25, 2011. I. Introduction On July 13, 2011, NASDAQ OMX BX, Inc. (‘‘BX’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change requesting permanent approval of the Exchange’s pilot program to permit the Boston Options Exchange (‘‘BOX’’) to accept certain inbound orders that 11 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 9 Supra note 3. 10 Supra note 4. PO 00000 Frm 00088 Fmt 4703 1 15 Sfmt 4703 54277 E:\FR\FM\31AUN1.SGM 31AUN1 54278 Federal Register / Vol. 76, No. 169 / Wednesday, August 31, 2011 / Notices Nasdaq Options Services, LLC (‘‘NOS’’) routes from Nasdaq Options Market (‘‘NOM’’). The proposed rule change was published for comment in the Federal Register on July 20, 2011.3 The Commission received no comment letters regarding the proposed rule change. This order approves the proposed rule change. jlentini on DSK4TPTVN1PROD with NOTICES II. Background BOX is an options trading facility of the Exchange under Section 3(a)(2) of the Act.4 Chapter XXXIX, Section 2 of the Grandfathered Rules of the Exchange prohibits the Exchange or any entity with which it is affiliated from acquiring or maintaining an ownership interest in a member in the absence of an effective filing under Section 19(b) of the Act.5 NOS is a broker-dealer that is a member of the Exchange, and currently provides to members of the Nasdaq Stock Market LLC (‘‘Nasdaq’’) that are NOM participants optional routing services to other market centers.6 NOS is owned by The NASDAQ OMX Group, Inc. (‘‘NASDAQ OMX’’), which also owns three registered securities exchanges— Nasdaq, the Exchange, and NASDAQ OMX PHLX LLC.7 Thus, NOS is an 3 See Securities Exchange Act Release No. 64896 (July 15, 2011), 76 FR 43740 (‘‘Notice’’). 4 See Chapter 1, Section 1(a)(6) of the Rules of the Boston Options Exchange Group LLC. See also Securities Exchange Act Release No. 60349 (July 20, 2009), 74 FR 37071 (July 27, 2009) (SR–BX–2009– 035) (‘‘BOX Routing Pilot Release’’). 5 15 U.S.C. 78s(b). 6 NOS operates as a facility of Nasdaq that provides outbound routing from NOM to other market centers, subject to certain conditions. See NOM Rules Chapter VI, Section 11(e). See also BOX Routing Pilot Release, 74 FR at 37071. 7 See Securities Exchange Act Release No. 58324 (August 7, 2008), 73 FR 46936 (August 12, 2008) (SR–BSE–2008–02; SR–BSE–2008–23; SR–BSE– 2008–25; SR–BSECC–2008–01) (‘‘BSE Approval Order’’). See also Securities Exchange Act Release No. 58179 (July 17, 2008), 73 FR 42874 (July 23, 2008) (order approving NASDAQ OMX’s acquisition of Phlx.) NASDAQ OMX acquired the Exchange in August 2008. Prior to the acquisition, the Exchange owned a 21.87% interest in Boston Options Exchange Group, LLC (‘‘BOX LLC’’), the operator of BOX. Boston Options Exchange Regulation, LLC (‘‘BOXR’’) is a wholly-owned subsidiary of the Exchange, to which the Exchange has delegated, pursuant to a delegation plan, certain selfregulatory responsibilities related to BOX. At the closing of the acquisition by NASDAQ OMX, the Exchange transferred its interest in BOX LLC to MX US, a wholly-owned subsidiary of the Montreal Exchange Inc. Although the Exchange no longer holds an ownership interest in BOX LLC, it continues to hold self-regulatory obligations with respect to BOX. The Exchange, together with BOXR, retains regulatory control over BOX, and the Exchange, as the SRO, remains responsible for ensuring compliance with the federal securities laws and all applicable rules and regulations. NASDAQ OMX also currently indirectly owns NOS, a registered broker-dealer and a BOX market participant. Thus, NOS is deemed an affiliate of the VerDate Mar<15>2010 16:51 Aug 30, 2011 Jkt 223001 affiliate of each of these exchanges. Absent an effective filing, Chapter XXXIX, Section 2 of the Grandfathered Rules of the Exchange would prohibit NOS from being a member of the Exchange. On August 7, 2008, in connection with the acquisition of the Exchange by NASDAQ OMX, the Commission approved an affiliation between the Exchange and NOS for the limited purpose of permitting NOS to provide routing services for Nasdaq for orders that first attempt to access liquidity on Nasdaq’s system before routing to the Exchange, subject to certain other limitations and conditions.8 On July 17, 2009, the Exchange filed an immediately effective proposed rule change to modify the conditions for the affiliation between NOS and the Exchange, to permit the Exchange to receive certain orders routed by NOS from NOM without first checking the NOM book for liquidity on a one-year pilot basis.9 Specifically, the Exchange proposed to permit NOS to route from NOM Exchange Direct Orders and orders in NOM Non-System Securities (including Exchange Direct Orders).10 The Exchange now seeks permanent approval of this inbound routing pilot.11 III. Discussion and Commission Findings After careful review, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.12 Specifically, the Commission finds that the proposed rule change is consistent with Section 6(b)(1) of the Act,13 which requires, among other things, that a national Exchange, BOX and BOXR. See BOX Routing Pilot Release, 76 FR at 37071. See also BSE Approval Order, 76 FR 46936. 8 See BSE Approval Order, 73 FR at 46944. 9 See BOX Routing Pilot Release. 10 NOS provides to NOM participants routing services to other market centers. Pursuant to Nasdaq’s rules, NOS: (1) Routes orders in options currently trading on NOM, referred to as ‘‘System Securities;’’ and (2) routes orders in options that are not currently trading on NOM (‘‘Non-System Securities’’). See NOM Rules, Chapter VI, Section 1(b) and 11. When routing Non-System Securities, NOS is not regulated as a facility of Nasdaq, but as a broker-dealer regulated by its designated examining authority. See also BOX Routing Pilot Release, 74 FR at 37071. ‘‘Exchange Direct Orders’’ are orders that are directed to an exchange other than NOM as directed by the entering party without checking the NOM book. See NOM Rules Chapter VI, Section 1(e)(7). 11 See Notice. 12 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition and capital formation. 15 U.S.C. 78c(f). 13 15 U.S.C. 78f(b)(1). PO 00000 Frm 00089 Fmt 4703 Sfmt 4703 securities exchange be so organized and have the capacity to carry out the purposes of the Act, and to comply and enforce compliance by its members and persons associated with its members, with the provisions of the Act, the rules and regulation thereunder, and the rules of the Exchange. Further, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act,14 which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices; to promote just and equitable principles of trade; to foster cooperation and coordination with persons engaged in regulating, clearing, settling, and processing information with respect to, and facilitating transactions in securities; to remove impediments to and perfect the mechanism of a free and open market and a national market system; and, in general, to protect investors and the public interest. Section 6(b)(5) also requires that the rules of an exchange not be designed to permit unfair discrimination among customers, issuers, brokers, or dealers. Recognizing that the Commission has previously expressed concern regarding the potential for conflicts of interest in instances where a member firm is affiliated with an exchange of which it is a member, the Exchange previously proposed, and the Commission approved, limitations and conditions on NOS’s affiliation with the Exchange.15 Also recognizing that the Commission has expressed concern regarding the potential for conflicts of interest in instances where a member firm is affiliated with an exchange to which it is routing orders, the Exchange previously implemented limitations and conditions to NOS’s affiliation with the Exchange to permit the Exchange to accept orders routed inbound to BOX by NOS from NOM that do not first attempt to access liquidity on the NOM book.16 The Exchange states it has met these conditions: 17 • First, the Exchange and FINRA have entered into a Regulatory Contract. Pursuant to the Regulatory Contract, FINRA has been allocated regulatory responsibilities to review NOS’s compliance with BOX’s rules through FINRA’s examination program.18 Also 14 15 U.S.C. 78f(b)(5). BSE Approval Order, 73 FR at 46944. 16 See BOX Routing Pilot Release, 74 FR at 37072. 17 See Notice, 76 FR at 43741. 18 The Exchange also states that NOS is subject to independent oversight by FINRA, its Designated Examining Authority, for compliance with financial responsibility requirements. See Notice, 76 FR at 43740, n.8. 15 See E:\FR\FM\31AUN1.SGM 31AUN1 Federal Register / Vol. 76, No. 169 / Wednesday, August 31, 2011 / Notices pursuant to the Regulatory Contract, however, BX retains ultimate responsibility for enforcing its rules with respect to NOS, except to the extent they are covered by an agreement with FINRA pursuant to Rule 17d–2 under the Act (‘‘17d–2 Agreement’’),19 in which case FINRA is allocated regulatory responsibility. • Second, FINRA and BX will monitor NOS for compliance with the Exchange’s trading rules, and will collect and maintain certain related information.20 • Third, FINRA will provide a report to the BOXR’s chief regulatory officer (‘‘CRO’’), on a quarterly basis, that: (i) Quantifies all alerts (of which FINRA is aware) that identify NES as a participant that has potentially violated Commission or Exchange rules, and (ii) lists all investigations that identify NES as a participant that has potentially violated Commission or Exchange rules.21 • Fourth, the Exchange has adopted Chapter XXXIX, Section 2(c) of the Grandfathered Rules of the Exchange, which requires NASDAQ OMX, as the holding company owning NOS and affiliated with BOX through the ownership of the Exchange, to establish and maintain procedures and internal controls reasonably designed to ensure that NOS does not develop or implement changes to its system, based on non-public information obtained regarding planned changes to the Exchange’s systems as a result of its affiliation with the Exchange, until such information is available generally to similarly situated Exchange members, in connection with the provision of inbound order routing to the Exchange.22 • Fifth, NOS was authorized to route NOM Exchange Direct Orders without checking the NOM book, and orders in NOM non-system securities, inbound to the Exchange from NOM for a pilot period of twelve months, which was 19 17 CFR 240.17d–2. to the Regulatory Contract, both FINRA and the Exchange will collect and maintain all alerts, complaints, investigations and enforcement actions in which NOS (in its capacity as a facility of Nasdaq routing orders to BOX) is identified as a participant that has potentially violated applicable Commission or Exchange rules. The Exchange and FINRA will retain these records in an easily accessible manner in order to facilitate any potential review conducted by the Commission’s Office of Compliance Inspections and Examinations. See Notice, 76 FR at 43741, n.10. 21 See id. 22 See chapter XXXIX, Section 2(c) of the Grandfathered Rules of the Exchange. See also Notice, 76 FR at 43741. jlentini on DSK4TPTVN1PROD with NOTICES 20 Pursuant VerDate Mar<15>2010 16:51 Aug 30, 2011 Jkt 223001 subsequently extended to September 15, 2011.23 The Exchange believes that by meeting the above-listed conditions it has set up mechanisms that protect the independence of the Exchange’s regulatory responsibility with respect to NOS, and has demonstrated that NOS cannot use any information advantage it may have because of its affiliation with the Exchange.24 In the past, the Commission has expressed concern that the affiliation of an exchange with one of its members raises potential conflicts of interest, and the potential for unfair competitive advantage.25 Although the Commission continues to be concerned about potential unfair competition and conflicts of interest between an exchange’s self-regulatory obligations and its commercial interest when the exchange is affiliated with one of its members, for the reasons discussed below, the Commission believes that it is consistent with the Act to permit NOS to provide inbound routing to the Exchange on a permanent basis instead of a pilot basis, subject to the other conditions described above. The Exchange has proposed four ongoing conditions applicable to NOS’s routing activities, which are enumerated above. The Commission believes that these conditions mitigate its concerns about potential conflicts of interest and unfair competitive advantage. In particular, the Commission believes that FINRA’s oversight of NOS,26 combined with FINRA’s monitoring of NOS’s compliance with BOX’s rules and quarterly reporting to the BOXR’s CRO, 23 See Notice, 76 FR at 43741. See also Securities Exchange Act Release No. 65177 (August 19, 2011) (SR–BX–2011–058). The Commission notes that the original pilot period of twelve months began on August 16, 2009, but was extended several times. See Notice, 76 FR at 43740, n.5.; and SR–BX–2011– 058, supra. 24 See BOX Routing Pilot Release, 76 FR at 43741. e.g., Securities Exchange Act Release Nos. 54170 (July 18, 2006), 71 FR 42149 (July 25, 2006) (SR–NASDAQ–2006–006) (order approving Nasdaq’s proposal to adopt Nasdaq Rule 2140, restricting affiliations between Nasdaq and its members); 53382 (February 27, 2006), 71 FR 11251 (March 6, 2006) (SR–NYSE–2005–77) (order approving the combination of the New York Stock Exchange, Inc. and Archipelago Holdings, Inc.); 58673 (September 29, 2008), 73 FR 57707 (October 8, 2008) (SR–Amex–2008–62) (order approving the combination of NYSE Euronext and the American Stock Exchange LLC); 59135 (December 22, 2008), 73 FR 79954 (December 30, 2008) (SR–ISE–2009– 85) (order approving the purchase by ISE Holdings of an ownership interest in DirectEdge Holdings LLC); and 59281 (January 22, 2009), 74 FR 5014 (January 28, 2009) (SR–NYSE–2008–120) (order approving a joint venture between NYSE and BIDS Holdings L.P.). 26 This oversight will be accomplished through the Regulatory Contract between the Exchange and FINRA, and, as applicable, a 17d–2 Agreement. 25 See, PO 00000 Frm 00090 Fmt 4703 Sfmt 4703 54279 will help to protect the independence of the Exchange’s regulatory responsibilities with respect to NOS. The Commission also believes that Chapter XXXIX, Section 2(c) of the Exchange’s Grandfathered Rules is designed to ensure that NOS cannot use any information advantage it may have because of its affiliation with the Exchange. IV. Conclusion It Is Therefore Ordered, pursuant to Section 19(b)(2) of the Act,27 that the proposed rule change (SR–BX–2011– 045) be, and hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.28 Elizabeth M. Murphy, Secretary. [FR Doc. 2011–22221 Filed 8–30–11; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–65195; File No. SR–Phlx– 2011–117] Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to the Active SQF Port Fee and the Order Entry Port Fee August 25, 2011. 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 12, 2011, NASDAQ OMX PHLX LLC (‘‘Phlx’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III 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. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend the Exchange’s Fee Schedule to reflect that the Exchange will not assess a charge for the use of additional Active Specialized Quote Feed (‘‘SQF’’) Ports and Order Entry Ports in limited circumstances. The text of the proposed rule change is available on the Exchange’s Web site 27 15 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 28 17 E:\FR\FM\31AUN1.SGM 31AUN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 76, Number 169 (Wednesday, August 31, 2011)]
[Notices]
[Pages 54277-54279]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-22221]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65199; File No. SR-BX-2011-045]


Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Order 
Approving a Proposed Rule Change Requesting Permanent Approval of the 
Pilot Program Permitting BOX To Accept Inbound Routes by NOS

August 25, 2011.

I. Introduction

    On July 13, 2011, NASDAQ OMX BX, Inc. (``BX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change 
requesting permanent approval of the Exchange's pilot program to permit 
the Boston Options Exchange (``BOX'') to accept certain inbound orders 
that

[[Page 54278]]

Nasdaq Options Services, LLC (``NOS'') routes from Nasdaq Options 
Market (``NOM''). The proposed rule change was published for comment in 
the Federal Register on July 20, 2011.\3\ The Commission received no 
comment letters regarding the proposed rule change. This order approves 
the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 64896 (July 15, 
2011), 76 FR 43740 (``Notice'').
---------------------------------------------------------------------------

II. Background

    BOX is an options trading facility of the Exchange under Section 
3(a)(2) of the Act.\4\ Chapter XXXIX, Section 2 of the Grandfathered 
Rules of the Exchange prohibits the Exchange or any entity with which 
it is affiliated from acquiring or maintaining an ownership interest in 
a member in the absence of an effective filing under Section 19(b) of 
the Act.\5\ NOS is a broker-dealer that is a member of the Exchange, 
and currently provides to members of the Nasdaq Stock Market LLC 
(``Nasdaq'') that are NOM participants optional routing services to 
other market centers.\6\ NOS is owned by The NASDAQ OMX Group, Inc. 
(``NASDAQ OMX''), which also owns three registered securities 
exchanges--Nasdaq, the Exchange, and NASDAQ OMX PHLX LLC.\7\ Thus, NOS 
is an affiliate of each of these exchanges. Absent an effective filing, 
Chapter XXXIX, Section 2 of the Grandfathered Rules of the Exchange 
would prohibit NOS from being a member of the Exchange.
---------------------------------------------------------------------------

    \4\ See Chapter 1, Section 1(a)(6) of the Rules of the Boston 
Options Exchange Group LLC. See also Securities Exchange Act Release 
No. 60349 (July 20, 2009), 74 FR 37071 (July 27, 2009) (SR-BX-2009-
035) (``BOX Routing Pilot Release'').
    \5\ 15 U.S.C. 78s(b).
    \6\ NOS operates as a facility of Nasdaq that provides outbound 
routing from NOM to other market centers, subject to certain 
conditions. See NOM Rules Chapter VI, Section 11(e). See also BOX 
Routing Pilot Release, 74 FR at 37071.
    \7\ See Securities Exchange Act Release No. 58324 (August 7, 
2008), 73 FR 46936 (August 12, 2008) (SR-BSE-2008-02; SR-BSE-2008-
23; SR-BSE-2008-25; SR-BSECC-2008-01) (``BSE Approval Order''). See 
also Securities Exchange Act Release No. 58179 (July 17, 2008), 73 
FR 42874 (July 23, 2008) (order approving NASDAQ OMX's acquisition 
of Phlx.)
    NASDAQ OMX acquired the Exchange in August 2008. Prior to the 
acquisition, the Exchange owned a 21.87% interest in Boston Options 
Exchange Group, LLC (``BOX LLC''), the operator of BOX. Boston 
Options Exchange Regulation, LLC (``BOXR'') is a wholly-owned 
subsidiary of the Exchange, to which the Exchange has delegated, 
pursuant to a delegation plan, certain self-regulatory 
responsibilities related to BOX.
    At the closing of the acquisition by NASDAQ OMX, the Exchange 
transferred its interest in BOX LLC to MX US, a wholly-owned 
subsidiary of the Montreal Exchange Inc. Although the Exchange no 
longer holds an ownership interest in BOX LLC, it continues to hold 
self-regulatory obligations with respect to BOX. The Exchange, 
together with BOXR, retains regulatory control over BOX, and the 
Exchange, as the SRO, remains responsible for ensuring compliance 
with the federal securities laws and all applicable rules and 
regulations.
    NASDAQ OMX also currently indirectly owns NOS, a registered 
broker-dealer and a BOX market participant. Thus, NOS is deemed an 
affiliate of the Exchange, BOX and BOXR. See BOX Routing Pilot 
Release, 76 FR at 37071. See also BSE Approval Order, 76 FR 46936.
---------------------------------------------------------------------------

    On August 7, 2008, in connection with the acquisition of the 
Exchange by NASDAQ OMX, the Commission approved an affiliation between 
the Exchange and NOS for the limited purpose of permitting NOS to 
provide routing services for Nasdaq for orders that first attempt to 
access liquidity on Nasdaq's system before routing to the Exchange, 
subject to certain other limitations and conditions.\8\ On July 17, 
2009, the Exchange filed an immediately effective proposed rule change 
to modify the conditions for the affiliation between NOS and the 
Exchange, to permit the Exchange to receive certain orders routed by 
NOS from NOM without first checking the NOM book for liquidity on a 
one-year pilot basis.\9\ Specifically, the Exchange proposed to permit 
NOS to route from NOM Exchange Direct Orders and orders in NOM Non-
System Securities (including Exchange Direct Orders).\10\ The Exchange 
now seeks permanent approval of this inbound routing pilot.\11\
---------------------------------------------------------------------------

    \8\ See BSE Approval Order, 73 FR at 46944.
    \9\ See BOX Routing Pilot Release.
    \10\ NOS provides to NOM participants routing services to other 
market centers. Pursuant to Nasdaq's rules, NOS: (1) Routes orders 
in options currently trading on NOM, referred to as ``System 
Securities;'' and (2) routes orders in options that are not 
currently trading on NOM (``Non-System Securities''). See NOM Rules, 
Chapter VI, Section 1(b) and 11. When routing Non-System Securities, 
NOS is not regulated as a facility of Nasdaq, but as a broker-dealer 
regulated by its designated examining authority. See also BOX 
Routing Pilot Release, 74 FR at 37071. ``Exchange Direct Orders'' 
are orders that are directed to an exchange other than NOM as 
directed by the entering party without checking the NOM book. See 
NOM Rules Chapter VI, Section 1(e)(7).
    \11\ See Notice.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\12\ Specifically, the Commission finds that the proposed rule 
change is consistent with Section 6(b)(1) of the Act,\13\ which 
requires, among other things, that a national securities exchange be so 
organized and have the capacity to carry out the purposes of the Act, 
and to comply and enforce compliance by its members and persons 
associated with its members, with the provisions of the Act, the rules 
and regulation thereunder, and the rules of the Exchange. Further, the 
Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\14\ which requires, among other things, 
that the rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices; to promote just and 
equitable principles of trade; to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, and processing 
information with respect to, and facilitating transactions in 
securities; to remove impediments to and perfect the mechanism of a 
free and open market and a national market system; and, in general, to 
protect investors and the public interest. Section 6(b)(5) also 
requires that the rules of an exchange not be designed to permit unfair 
discrimination among customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \12\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition and 
capital formation. 15 U.S.C. 78c(f).
    \13\ 15 U.S.C. 78f(b)(1).
    \14\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Recognizing that the Commission has previously expressed concern 
regarding the potential for conflicts of interest in instances where a 
member firm is affiliated with an exchange of which it is a member, the 
Exchange previously proposed, and the Commission approved, limitations 
and conditions on NOS's affiliation with the Exchange.\15\ Also 
recognizing that the Commission has expressed concern regarding the 
potential for conflicts of interest in instances where a member firm is 
affiliated with an exchange to which it is routing orders, the Exchange 
previously implemented limitations and conditions to NOS's affiliation 
with the Exchange to permit the Exchange to accept orders routed 
inbound to BOX by NOS from NOM that do not first attempt to access 
liquidity on the NOM book.\16\ The Exchange states it has met these 
conditions: \17\
---------------------------------------------------------------------------

    \15\ See BSE Approval Order, 73 FR at 46944.
    \16\ See BOX Routing Pilot Release, 74 FR at 37072.
    \17\ See Notice, 76 FR at 43741.
---------------------------------------------------------------------------

     First, the Exchange and FINRA have entered into a 
Regulatory Contract. Pursuant to the Regulatory Contract, FINRA has 
been allocated regulatory responsibilities to review NOS's compliance 
with BOX's rules through FINRA's examination program.\18\ Also

[[Page 54279]]

pursuant to the Regulatory Contract, however, BX retains ultimate 
responsibility for enforcing its rules with respect to NOS, except to 
the extent they are covered by an agreement with FINRA pursuant to Rule 
17d-2 under the Act (``17d-2 Agreement''),\19\ in which case FINRA is 
allocated regulatory responsibility.
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    \18\ The Exchange also states that NOS is subject to independent 
oversight by FINRA, its Designated Examining Authority, for 
compliance with financial responsibility requirements. See Notice, 
76 FR at 43740, n.8.
    \19\ 17 CFR 240.17d-2.
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     Second, FINRA and BX will monitor NOS for compliance with 
the Exchange's trading rules, and will collect and maintain certain 
related information.\20\
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    \20\ Pursuant to the Regulatory Contract, both FINRA and the 
Exchange will collect and maintain all alerts, complaints, 
investigations and enforcement actions in which NOS (in its capacity 
as a facility of Nasdaq routing orders to BOX) is identified as a 
participant that has potentially violated applicable Commission or 
Exchange rules. The Exchange and FINRA will retain these records in 
an easily accessible manner in order to facilitate any potential 
review conducted by the Commission's Office of Compliance 
Inspections and Examinations. See Notice, 76 FR at 43741, n.10.
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     Third, FINRA will provide a report to the BOXR's chief 
regulatory officer (``CRO''), on a quarterly basis, that: (i) 
Quantifies all alerts (of which FINRA is aware) that identify NES as a 
participant that has potentially violated Commission or Exchange rules, 
and (ii) lists all investigations that identify NES as a participant 
that has potentially violated Commission or Exchange rules.\21\
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    \21\ See id.
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     Fourth, the Exchange has adopted Chapter XXXIX, Section 
2(c) of the Grandfathered Rules of the Exchange, which requires NASDAQ 
OMX, as the holding company owning NOS and affiliated with BOX through 
the ownership of the Exchange, to establish and maintain procedures and 
internal controls reasonably designed to ensure that NOS does not 
develop or implement changes to its system, based on non-public 
information obtained regarding planned changes to the Exchange's 
systems as a result of its affiliation with the Exchange, until such 
information is available generally to similarly situated Exchange 
members, in connection with the provision of inbound order routing to 
the Exchange.\22\
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    \22\ See chapter XXXIX, Section 2(c) of the Grandfathered Rules 
of the Exchange. See also Notice, 76 FR at 43741.
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     Fifth, NOS was authorized to route NOM Exchange Direct 
Orders without checking the NOM book, and orders in NOM non-system 
securities, inbound to the Exchange from NOM for a pilot period of 
twelve months, which was subsequently extended to September 15, 
2011.\23\
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    \23\ See Notice, 76 FR at 43741. See also Securities Exchange 
Act Release No. 65177 (August 19, 2011) (SR-BX-2011-058). The 
Commission notes that the original pilot period of twelve months 
began on August 16, 2009, but was extended several times. See 
Notice, 76 FR at 43740, n.5.; and SR-BX-2011-058, supra.

The Exchange believes that by meeting the above-listed conditions it 
has set up mechanisms that protect the independence of the Exchange's 
regulatory responsibility with respect to NOS, and has demonstrated 
that NOS cannot use any information advantage it may have because of 
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its affiliation with the Exchange.\24\

    \24\ See BOX Routing Pilot Release, 76 FR at 43741.
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    In the past, the Commission has expressed concern that the 
affiliation of an exchange with one of its members raises potential 
conflicts of interest, and the potential for unfair competitive 
advantage.\25\ Although the Commission continues to be concerned about 
potential unfair competition and conflicts of interest between an 
exchange's self-regulatory obligations and its commercial interest when 
the exchange is affiliated with one of its members, for the reasons 
discussed below, the Commission believes that it is consistent with the 
Act to permit NOS to provide inbound routing to the Exchange on a 
permanent basis instead of a pilot basis, subject to the other 
conditions described above.
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    \25\ See, e.g., Securities Exchange Act Release Nos. 54170 (July 
18, 2006), 71 FR 42149 (July 25, 2006) (SR-NASDAQ-2006-006) (order 
approving Nasdaq's proposal to adopt Nasdaq Rule 2140, restricting 
affiliations between Nasdaq and its members); 53382 (February 27, 
2006), 71 FR 11251 (March 6, 2006) (SR-NYSE-2005-77) (order 
approving the combination of the New York Stock Exchange, Inc. and 
Archipelago Holdings, Inc.); 58673 (September 29, 2008), 73 FR 57707 
(October 8, 2008) (SR-Amex-2008-62) (order approving the combination 
of NYSE Euronext and the American Stock Exchange LLC); 59135 
(December 22, 2008), 73 FR 79954 (December 30, 2008) (SR-ISE-2009-
85) (order approving the purchase by ISE Holdings of an ownership 
interest in DirectEdge Holdings LLC); and 59281 (January 22, 2009), 
74 FR 5014 (January 28, 2009) (SR-NYSE-2008-120) (order approving a 
joint venture between NYSE and BIDS Holdings L.P.).
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    The Exchange has proposed four ongoing conditions applicable to 
NOS's routing activities, which are enumerated above. The Commission 
believes that these conditions mitigate its concerns about potential 
conflicts of interest and unfair competitive advantage. In particular, 
the Commission believes that FINRA's oversight of NOS,\26\ combined 
with FINRA's monitoring of NOS's compliance with BOX's rules and 
quarterly reporting to the BOXR's CRO, will help to protect the 
independence of the Exchange's regulatory responsibilities with respect 
to NOS. The Commission also believes that Chapter XXXIX, Section 2(c) 
of the Exchange's Grandfathered Rules is designed to ensure that NOS 
cannot use any information advantage it may have because of its 
affiliation with the Exchange.
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    \26\ This oversight will be accomplished through the Regulatory 
Contract between the Exchange and FINRA, and, as applicable, a 17d-2 
Agreement.
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IV. Conclusion

    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\27\ that the proposed rule change (SR-BX-2011-045) be, and hereby 
is, approved.
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    \27\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-22221 Filed 8-30-11; 8:45 am]
BILLING CODE 8011-01-P

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