Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order Approving a Proposed Rule Change Requesting Permanent Approval of the Pilot Program Permitting NASDAQ OMX PSX To Accept Inbound Orders That Nasdaq Execution Services, LLC Routes in Its Capacity as a Facility of the NASDAQ Stock Market LLC, 3539-3541 [2012-1288]
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<![CDATA[
Federal Register / Vol. 77, No. 15 / Tuesday, January 24, 2012 / Notices
Moreover, prior to the commencement
of trading, the Exchange will inform its
ETP Holders in an Information Bulletin
of the special characteristics and risks
associated with trading the Shares. The
Information Bulletin will also reference
the FINRA Regulatory Notices regarding
sales practice and customer margin
requirements for FINRA members
applicable to leveraged ETFs and
options on leveraged ETFs.
The proposed rule change is designed
to perfect the mechanism of a free and
open market and, in general, to protect
investors and the public interest in that
it will facilitate the listing and trading
of additional types of exchange-traded
products that will enhance competition
among market participants, to the
benefit of investors and the marketplace.
As noted above, the Exchange has in
place surveillance procedures relating to
trading in the Shares and may obtain
information via ISG from other
exchanges that are members of ISG or
with which the Exchange has entered
into a comprehensive surveillance
sharing agreement. In addition, as noted
above, investors will have ready access
to information regarding the Funds’
holdings, IOPV, and quotation and last
sale information for the Shares.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
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
No written comments were solicited
or received with respect to the proposed
rule change.
srobinson on DSK4SPTVN1PROD with NOTICES
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 (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which 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.
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17:25 Jan 23, 2012
Jkt 226001
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–NYSEArca–2012–04 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–NYSEArca–2012–04. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet 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 Section, 100 F Street, NE.,
Washington, DC 20549–1090, on official
business days between 10 a.m. and 3
p.m. Copies of the filing will also be
available for inspection and copying at
the NYSE’s principal office and on its
Internet Web site at www.nyse.com. 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–NYSEArca–2012–04 and
should be submitted on or before
February 14, 2012.
PO 00000
Frm 00107
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3539
For the Commission, by the Division
of Trading and Markets, pursuant to
delegated authority.21
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–1290 Filed 1–23–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–66178; File No. SR–Phlx–
2011–170]
Self-Regulatory Organizations;
NASDAQ OMX PHLX LLC; Order
Approving a Proposed Rule Change
Requesting Permanent Approval of the
Pilot Program Permitting NASDAQ
OMX PSX To Accept Inbound Orders
That Nasdaq Execution Services, LLC
Routes in Its Capacity as a Facility of
the NASDAQ Stock Market LLC
January 18, 2012.
I. Introduction
On December 1, 2011, NASDAQ OMX
PHLX LLC (‘‘Phlx’’ 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 Exchange’s NASDAQ OMX
PSX system (‘‘PSX’’) to accept certain
inbound orders that Nasdaq Execution
Services, LLC (‘‘NES’’) routes in its
capacity as a facility of the NASDAQ
Stock Market LLC (‘‘Nasdaq’’). The
proposed rule change was published for
comment in the Federal Register on
December 15, 2011.3 The Commission
received no comment letters regarding
the proposed rule change. This order
approves the proposed rule change.
II. Background
Exchange Rule 985(b) prohibits the
Exchange or any entity with which it is
affiliated from, directly or indirectly,
acquiring or maintaining an ownership
interest in, or engaging in a business
venture with, an Exchange member or
an affiliate of an Exchange member in
the absence of an effective filing under
Section 19(b) of the Exchange Act.4 NES
is a broker-dealer that is a member of
the Exchange, and currently provides to
members of Nasdaq optional routing
21 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 65934
(December 9, 2011), 76 FR 78060 (‘‘Notice’’).
4 15 U.S.C. 78s(b).
1 15
E:\FR\FM\24JAN1.SGM
24JAN1
3540
Federal Register / Vol. 77, No. 15 / Tuesday, January 24, 2012 / Notices
services to other market centers.5 NES is
owned by The NASDAQ OMX Group,
Inc. (‘‘NASDAQ OMX’’), which also
owns three registered securities
exchanges—Nasdaq, the Exchange, and
NASDAQ OMX BX, Inc.6 Thus, NES is
an affiliate of each of these exchanges.
Absent an effective filing, Exchange
Rule 985(b) would prohibit NES from
being a member of the Exchange.
On September 9, 2010, the
Commission approved the Exchange’s
proposed rule change relating to the
establishment of PSX as a platform for
trading NMS stocks.7 As part of this
approval, the Exchange was approved to
receive inbound routes of cash equities
orders by NES in its capacity as an order
routing facility of Nasdaq on a pilot
basis.8 The Exchange now seeks
permanent approval of this inbound
routing pilot.9
srobinson on DSK4SPTVN1PROD with NOTICES
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.10 Specifically, the
Commission finds that the proposed
rule change is consistent with Section
6(b)(1) of the Act,11 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,12 which requires,
5 NES operates as a facility of Nasdaq that
provides outbound routing from Nasdaq to other
market centers, subject to certain conditions. See
Nasdaq Exchange Rule 4758(b).
6 See Securities Exchange Act Release No. 58179
(July 17, 2008), 73 FR 42874 (July 23, 2008) (SR–
Phlx–2008–31) (‘‘Phlx Approval Order’’). See also
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).
7 See Securities Exchange Act Release No. 62877
(September 9, 2010), 75 FR 56633 (September 16,
2010) (SR–Phlx–2010–79) (‘‘PSX Approval Order’’).
8 See PSX Approval Order. See also Securities
Exchange Act Release No. 65552 (October 13, 2011),
76 FR 64989 (October 19, 2011) (SR–Phlx–2011–
139) (extending the inbound routing pilot through
April 8, 2012).
9 See Notice.
10 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).
11 15 U.S.C. 78f(b)(1).
12 15 U.S.C. 78f(b)(5).
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17:25 Jan 23, 2012
Jkt 226001
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 to which it
is routing orders, the Exchange
previously implemented limitations and
conditions to NES’s affiliation with the
Exchange to permit the Exchange to
accept inbound orders that NES routes
in its capacity as a facility of Nasdaq, on
a pilot basis.13 The Exchange now seeks
to make this pilot permanent.
Specifically, the Exchange states it is in
compliance with the following
limitations and conditions:14
• First, the Exchange and FINRA have
entered into a regulatory services
agreement (‘‘FINRA RSA’’) pursuant to
which FINRA reviews NES’s
compliance with the Exchange’s rules
through FINRA’s examination
program.15 Pursuant to the FINRA RSA,
however, the Exchange retains ultimate
responsibility for enforcing its rules
with respect to NES.
• Second, FINRA and the Exchange 16
will monitor NES for compliance with
PSX’s trading rules, and collect and
maintain certain related information.17
13 See PSX Approval Order, 75 FR at 56637—
56638.
14 See Notice, 76 FR at 78061.
15 The Exchange also states that NES is subject to
independent oversight by FINRA, its Designated
Examining Authority, for compliance with financial
responsibility requirements. See Notice, 76 FR at
78061, n.5.
16 Personnel performing real-time oversight of
equity trading on Nasdaq will also perform similar
functions with respect to PSX pursuant to a
regulatory services agreement among Nasdaq, the
Exchange, NASDAQ OMX BX, Inc., and NASDAQ
OMX (the ‘‘Intercompany RSA’’) under the
direction, authority, and oversight of Phlx’s Chief
Regulatory Officer (‘‘CRO’’) and the Regulatory
Oversight Committee (‘‘ROC’’) of its Board of
Directors.
17 Pursuant to the FINRA RSA, both the Exchange
and FINRA will collect and maintain all alerts,
complaints, investigations and enforcement actions
in which NES (in its capacity as a facility of Nasdaq
routing orders to the Exchange) is identified as a
PO 00000
Frm 00108
Fmt 4703
Sfmt 4703
• Third, FINRA will provide a report
to the Exchange’s Chief Regulatory
Officer (‘‘CRO’’), on at least a quarterly
basis, that: (i) quantifies all alerts (of
which the Exchange and FINRA become
aware) that identify NES as a participant
that has potentially violated
Commission or Exchange rules and (ii)
quantifies the number of investigations
that identify NES as a participant that
has potentially violated Exchange or
Commission Rules.18
• Fourth, the Exchange adopted Rule
985(c)(2), which requires NASDAQ
OMX, as the holding company owning
NES and the Exchange, to establish and
maintain procedures and internal
controls reasonably designed to ensure
that NES does not develop or implement
changes to its system on the basis of
non-public information regarding
planned changes to the Exchange’s
systems, obtained 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 routing to the Exchange.19
• Fifth, routing of orders from NES to
the Exchange, in NES’s capacity as a
facility of Nasdaq, will be authorized for
a pilot period of twelve months, as
further extended to April 8, 2012.20
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
NES, and has demonstrated that NES
cannot use any information advantage it
may have because of its affiliation with
the Exchange.21
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.22 Although the Commission
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 78061, n.7.
18 See id.
19 See Phlx Rule 985(c)(2). See also Notice, 76 FR
at 78061.
20 See Notice, 76 FR at 78061.
21 See
id.
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
22 See,
E:\FR\FM\24JAN1.SGM
24JAN1
Federal Register / Vol. 77, No. 15 / Tuesday, January 24, 2012 / Notices
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
NES, in its capacity as a facility of
Nasdaq, 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 NES’s
inbound routing activities in its capacity
as a facility of Nasdaq, 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 NES,23 combined with
FINRA’s monitoring of NES’s
compliance with the Exchange’s rules
and quarterly reporting to Phlx’s CRO,
will help to protect the independence of
the Exchange’s regulatory
responsibilities with respect to NES.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,24 that the
proposed rule change (SR–Phlx–2011–
170) be, and hereby is, approved.
For the Commission, by the Division
of Trading and Markets, pursuant to
delegated authority.25
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–1288 Filed 1–23–12; 8:45 am]
srobinson on DSK4SPTVN1PROD with NOTICES
BILLING CODE 8011–01–P
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.).
23 This oversight will be accomplished through
the FINRA RSA between the Exchange and FINRA,
and, as applicable, a 17d–2 Agreement. See PSX
Approval Order, 75 FR at 56638, n.80 and
accompanying text.
24 15 U.S.C. 78s(b)(2).
25 17 CFR 200.30–3(a)(12).
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17:25 Jan 23, 2012
Jkt 226001
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–66176; File No. SR–EDGX–
2012–03]
Self-Regulatory Organizations; EDGX
Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change to Amend EDGX Rule
1.5(q)
January 18, 2012.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on January
13, 2012, the EDGX Exchange, Inc. (the
‘‘Exchange’’ or the ‘‘EDGX’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which items have
been prepared by the self-regulatory
organization. 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
EDGX Exchange, Inc. (‘‘EDGX’’ or the
‘‘Exchange’’), proposes to amend EDGX
Rule 1.5(q) to change the starting time
of the Pre-Opening Session from 7 a.m.
Eastern Time (‘‘ET’’) to 8 a.m. ET. The
Exchange proposes to make a
conforming amendment to Rule
14.1(c)(2) to change the reference for the
starting time of the Pre-Opening Session
from 7 a.m. ET to 8 a.m. ET. Through
this filing, the Exchange proposes to
amend the rule text from SR–EDGX–
2011–27,3 which proposed to change
the Pre-Opening Session starting time to
7 a.m. ET. The text of the proposed rule
change is attached as Exhibit 5 and is
available on the Exchange’s Web site at
www.directedge.com, at the Exchange’s
principal office, and at the Public
Reference Room of the Commission.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of, and basis for,
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 65197
(August 25, 2011), 76 FR 54281 (August 31, 2011)
(SR–EDGX–2011–27). For the purposes of this
filing, the Exchange will refer to SR–EDGX–2011–
27 as the ‘‘August 25 Rule Filing.’’ Given that the
August 25 Rule Filing was immediately effective
but not operative, the Exchange proposes to amend
its rule text in this filing.
2 17
PO 00000
Frm 00109
Fmt 4703
Sfmt 4703
3541
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
self-regulatory organization has
prepared summaries, set forth in
sections A, B, and C below, of the most
significant aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange filed a rule change to
amend EDGX Rule 1.5(q) to change the
starting time of the Pre-Opening Session
from 8 a.m. ET to 7 a.m. ET.4 This
change would have allowed the
Exchange to compete with other
exchanges that open their markets for
entry of orders prior to 8 a.m. ET.5 The
Exchange proposes to amend the rule
text of its August 25 Rule Filing at this
time in order to accommodate Members
who initially expressed an interest in
the change in Pre-Opening Session time
to begin at 7 a.m. ET; but, after further
consideration, Members confirmed that
they were no longer interested because
the additional costs and resources
needed to open earlier outweighed any
incidental benefits from increased
trading activity that they would incur.
As such, based on the Exchange’s
feedback from Members it surveyed in
September 2011, the Exchange
confirmed that no Members adversely
relied upon the August 25 Rule Filing.
At this time, the Exchange has not
implemented the 7 a.m. ET starting time
for the Pre-Opening Session because it
has not notified its Members pursuant to
the language in the August 25 Rule
Filing.6 In addition, the Exchange notes
Members are not adversely impacted by
the amendment to the rule text of the
August 25 Rule Filing as no Members
were required to incur any costs or
make any changes to their systems to
comply with the earlier Pre-Opening
time if they were not planning to trade
beginning at 7 a.m. ET.
4 Id. The Exchange initially proposed to expand
its operational hours to open the System earlier so
that Members could enter and execute orders
beginning at 7 a.m. ET rather than 8 a.m. ET.
5 See The NASDAQ Stock Market LLC Rule 4617
(opens at 7 a.m. EST). See also NASDAQ OMX BX
Rule 4617 (opens at 7 a.m. EST); NYSE Arca
Equities Rule 7.34 (opens at 1 a.m. Pacific Time).
6 See Securities Exchange Act Release No. 65197
(August 25, 2011), 76 FR 54281 (August 31, 2011)
(SR–EDGX–2011–27), stating the Exchange will
provide notice to Members in an information
circular when the proposed rule change will be
effective, which will be no later than January 1,
2012.
E:\FR\FM\24JAN1.SGM
24JAN1
]]>Agencies
[Federal Register Volume 77, Number 15 (Tuesday, January 24, 2012)]
[Notices]
[Pages 3539-3541]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-1288]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66178; File No. SR-Phlx-2011-170]
Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Order
Approving a Proposed Rule Change Requesting Permanent Approval of the
Pilot Program Permitting NASDAQ OMX PSX To Accept Inbound Orders That
Nasdaq Execution Services, LLC Routes in Its Capacity as a Facility of
the NASDAQ Stock Market LLC
January 18, 2012.
I. Introduction
On December 1, 2011, NASDAQ OMX PHLX LLC (``Phlx'' 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 Exchange's NASDAQ OMX PSX system (``PSX'') to accept certain
inbound orders that Nasdaq Execution Services, LLC (``NES'') routes in
its capacity as a facility of the NASDAQ Stock Market LLC (``Nasdaq'').
The proposed rule change was published for comment in the Federal
Register on December 15, 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. 65934 (December 9,
2011), 76 FR 78060 (``Notice'').
---------------------------------------------------------------------------
II. Background
Exchange Rule 985(b) prohibits the Exchange or any entity with
which it is affiliated from, directly or indirectly, acquiring or
maintaining an ownership interest in, or engaging in a business venture
with, an Exchange member or an affiliate of an Exchange member in the
absence of an effective filing under Section 19(b) of the Exchange
Act.\4\ NES is a broker-dealer that is a member of the Exchange, and
currently provides to members of Nasdaq optional routing
[[Page 3540]]
services to other market centers.\5\ NES is owned by The NASDAQ OMX
Group, Inc. (``NASDAQ OMX''), which also owns three registered
securities exchanges--Nasdaq, the Exchange, and NASDAQ OMX BX, Inc.\6\
Thus, NES is an affiliate of each of these exchanges. Absent an
effective filing, Exchange Rule 985(b) would prohibit NES from being a
member of the Exchange.
---------------------------------------------------------------------------
\4\ 15 U.S.C. 78s(b).
\5\ NES operates as a facility of Nasdaq that provides outbound
routing from Nasdaq to other market centers, subject to certain
conditions. See Nasdaq Exchange Rule 4758(b).
\6\ See Securities Exchange Act Release No. 58179 (July 17,
2008), 73 FR 42874 (July 23, 2008) (SR-Phlx-2008-31) (``Phlx
Approval Order''). See also 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).
---------------------------------------------------------------------------
On September 9, 2010, the Commission approved the Exchange's
proposed rule change relating to the establishment of PSX as a platform
for trading NMS stocks.\7\ As part of this approval, the Exchange was
approved to receive inbound routes of cash equities orders by NES in
its capacity as an order routing facility of Nasdaq on a pilot
basis.\8\ The Exchange now seeks permanent approval of this inbound
routing pilot.\9\
---------------------------------------------------------------------------
\7\ See Securities Exchange Act Release No. 62877 (September 9,
2010), 75 FR 56633 (September 16, 2010) (SR-Phlx-2010-79) (``PSX
Approval Order'').
\8\ See PSX Approval Order. See also Securities Exchange Act
Release No. 65552 (October 13, 2011), 76 FR 64989 (October 19, 2011)
(SR-Phlx-2011-139) (extending the inbound routing pilot through
April 8, 2012).
\9\ 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.\10\ Specifically, the Commission finds that the proposed rule
change is consistent with Section 6(b)(1) of the Act,\11\ 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,\12\ 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.
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\10\ 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).
\11\ 15 U.S.C. 78f(b)(1).
\12\ 15 U.S.C. 78f(b)(5).
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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 to which it is routing
orders, the Exchange previously implemented limitations and conditions
to NES's affiliation with the Exchange to permit the Exchange to accept
inbound orders that NES routes in its capacity as a facility of Nasdaq,
on a pilot basis.\13\ The Exchange now seeks to make this pilot
permanent. Specifically, the Exchange states it is in compliance with
the following limitations and conditions:\14\
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\13\ See PSX Approval Order, 75 FR at 56637--56638.
\14\ See Notice, 76 FR at 78061.
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First, the Exchange and FINRA have entered into a
regulatory services agreement (``FINRA RSA'') pursuant to which FINRA
reviews NES's compliance with the Exchange's rules through FINRA's
examination program.\15\ Pursuant to the FINRA RSA, however, the
Exchange retains ultimate responsibility for enforcing its rules with
respect to NES.
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\15\ The Exchange also states that NES is subject to independent
oversight by FINRA, its Designated Examining Authority, for
compliance with financial responsibility requirements. See Notice,
76 FR at 78061, n.5.
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Second, FINRA and the Exchange \16\ will monitor NES for
compliance with PSX's trading rules, and collect and maintain certain
related information.\17\
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\16\ Personnel performing real-time oversight of equity trading
on Nasdaq will also perform similar functions with respect to PSX
pursuant to a regulatory services agreement among Nasdaq, the
Exchange, NASDAQ OMX BX, Inc., and NASDAQ OMX (the ``Intercompany
RSA'') under the direction, authority, and oversight of Phlx's Chief
Regulatory Officer (``CRO'') and the Regulatory Oversight Committee
(``ROC'') of its Board of Directors.
\17\ Pursuant to the FINRA RSA, both the Exchange and FINRA will
collect and maintain all alerts, complaints, investigations and
enforcement actions in which NES (in its capacity as a facility of
Nasdaq routing orders to the Exchange) 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 78061, n.7.
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Third, FINRA will provide a report to the Exchange's Chief
Regulatory Officer (``CRO''), on at least a quarterly basis, that: (i)
quantifies all alerts (of which the Exchange and FINRA become aware)
that identify NES as a participant that has potentially violated
Commission or Exchange rules and (ii) quantifies the number of
investigations that identify NES as a participant that has potentially
violated Exchange or Commission Rules.\18\
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\18\ See id.
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Fourth, the Exchange adopted Rule 985(c)(2), which
requires NASDAQ OMX, as the holding company owning NES and the
Exchange, to establish and maintain procedures and internal controls
reasonably designed to ensure that NES does not develop or implement
changes to its system on the basis of non-public information regarding
planned changes to the Exchange's systems, obtained 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 routing to the Exchange.\19\
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\19\ See Phlx Rule 985(c)(2). See also Notice, 76 FR at 78061.
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Fifth, routing of orders from NES to the Exchange, in
NES's capacity as a facility of Nasdaq, will be authorized for a pilot
period of twelve months, as further extended to April 8, 2012.\20\
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\20\ See Notice, 76 FR at 78061.
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 NES, and has demonstrated
that NES cannot use any information advantage it may have because of
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its affiliation with the Exchange.\21\
\21\ See id.
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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.\22\ Although the Commission
[[Page 3541]]
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 NES, in its capacity as a
facility of Nasdaq, 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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\22\ 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
NES's inbound routing activities in its capacity as a facility of
Nasdaq, 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 NES,\23\ combined with FINRA's
monitoring of NES's compliance with the Exchange's rules and quarterly
reporting to Phlx's CRO, will help to protect the independence of the
Exchange's regulatory responsibilities with respect to NES.
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\23\ This oversight will be accomplished through the FINRA RSA
between the Exchange and FINRA, and, as applicable, a 17d-2
Agreement. See PSX Approval Order, 75 FR at 56638, n.80 and
accompanying text.
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\24\ that the proposed rule change (SR-Phlx-2011-170) be, and
hereby is, approved.
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\24\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
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\25\ 17 CFR 200.30-3(a)(12).
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-1288 Filed 1-23-12; 8:45 am]
BILLING CODE 8011-01-P
