Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order Disapproving Proposed Rule Change To Establish “Benchmark Orders” Under NASDAQ Rule 4751(f), 3928-3931 [2013-00871]
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Federal Register / Vol. 78, No. 12 / Thursday, January 17, 2013 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.7
Kevin M. O’Neill,
Deputy Secretary.
disapprove the proposed rule change.7
On December 17, 2012, NASDAQ
submitted a response letter to the
comments on the proposal.8 This order
disapproves the proposed rule change.
[FR Doc. 2013–00874 Filed 1–16–13; 8:45 am]
II. Description of the Proposal
As set forth in more detail in the
Notice, the Exchange has proposed to
offer Benchmark Orders that would seek
to achieve the performance of a
specified benchmark—Volume
Weighted Average Price (‘‘VWAP’’),
Time Weighted Average Price
(‘‘TWAP’’), or Percent of Volume
(‘‘POV’’)—over a specified period of
time for a specified security.9 The
entering party would specify the
benchmark, period of time, and security,
as well as the other order information
common to all order types, such as buy/
sell side, shares and price.10
Benchmark Orders would be received
by NASDAQ but by their terms would
not be executable by the NASDAQ
matching engine upon entry.11 Rather,
NASDAQ would direct them to a system
application (‘‘Application’’) that is
licensed from a third-party provider and
dedicated to processing Benchmark
Orders.12 The Application would
process Benchmark Orders by
generating ‘‘Child Orders’’ in a manner
designed to achieve the desired
benchmark performance, i.e., VWAP,
TWAP or POV, in accordance with the
member’s instructions.13 Child Orders
would be executed within the NASDAQ
system under NASDAQ’s existing rules,
or made available for routing under
NASDAQ’s current routing rules.14 The
Application would not be capable of
executing Child Orders, but instead
would send Child Orders, using the
proper system protocol, to the NASDAQ
matching engine or to the NASDAQ
router as needed to complete the
Benchmark Order.15 Child Orders
would be processed in an identical
manner to orders generated
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68629; File No. SR–
NASDAQ–2012–059]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Order
Disapproving Proposed Rule Change
To Establish ‘‘Benchmark Orders’’
Under NASDAQ Rule 4751(f)
January 11, 2013.
I. Introduction
On May 1, 2012, The NASDAQ Stock
Market LLC (‘‘NASDAQ’’ 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 to
establish various ‘‘Benchmark Orders’’
under NASDAQ Rule 4751(f). The
proposed rule change was published for
comment in the Federal Register on
May 17, 2012.3 On June 26, 2012, the
Commission extended to August 15,
2012, the time period in which to
approve the proposed rule change,
disapprove the proposed rule change, or
institute proceedings to determine
whether to disapprove the proposed
rule change.4
On August 14, 2012, the Commission
instituted proceedings to determine
whether to approve or disapprove the
proposed rule change.5 The Commission
thereafter received two comment letters
on the proposal.6 On November 9, 2012,
the Commission issued a notice of
designation of a longer period for
Commission action on proceedings to
determine whether to approve or
pmangrum on DSK3VPTVN1PROD with
7 17
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 66972
(May 11, 2012), 77 FR 29435 (May 17, 2012)
(‘‘Notice’’).
4 See Securities Exchange Act Release No. 67258
(June 26, 2012), 77 FR 39314 (July 2, 2012).
5 See Securities Exchange Act Release No. 67655
(August 14, 2012), 77 FR 50191 (August 20, 2012)
(‘‘Order Instituting Proceedings’’).
6 See Letters to the Commission from Theodore R.
Lazo, Managing Director and Associate General
Counsel, SIFMA, dated October 5, 2012 (‘‘SIFMA
Letter’’); and James J. Angel, dated August 16, 2012
(‘‘Angel Letter’’).
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7 See Securities Exchange Act Release No. 68199
(November 9, 2012), 77 FR 68873 (November 16,
2012).
8 See Letter to the Commission from Jeffrey S.
Davis, Vice President and Deputy General Counsel,
NASDAQ, dated December 17, 2012 (‘‘NASDAQ
Letter’’).
9 See proposed NASDAQ Rule 4751(f)(15).
10 Id.; see also Notice, 77 FR at 29436.
11 See proposed NASDAQ Rule 4751(f)(15); see
also Notice, 77 FR at 29435–36.
12 See Notice, 77 FR at 29436.
13 See proposed NASDAQ Rule 4751(f)(15); see
also Notice, 77 FR at 29435–36.
14 See Notice, 77 FR at 29435. Child Orders that
require routing would be routed by NASDAQ
Execution Services, NASDAQ’s wholly-owned
routing broker-dealer. Id. at 29436 n.8. In addition,
fees applicable to existing orders and trades would
apply to Child Orders. Id. at 29436.
15 Id. at 29435–36.
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Sfmt 4703
independently of a Benchmark Order.16
NASDAQ states that the third-party
provider of the Application would have
no actionable advantage over NASDAQ
members with respect to the NASDAQ
system.17
NASDAQ represents that it would test
the Application rigorously and
regularly, monitor the Application
performance on a real-time and
continuous basis, and have access to the
technology, employees, books and
records of the third-party provider that
are related to the Application and its
interaction with NASDAQ.18 NASDAQ
states that it considers the Application
to be a functional offering of the
NASDAQ Stock Market, and that it
would be integrated closely with the
NASDAQ system and provided to
members subject to NASDAQ’s
obligations and responsibilities as a selfregulatory organization.19 In addition,
NASDAQ represents that it would
maintain control of and responsibility
for the Application.20
III. Discussion
Under Section 19(b)(2)(C) of the Act,
the Commission shall approve a
proposed rule change of a selfregulatory organization if it finds that
such proposed rule change is consistent
with the requirements of the Act, and
the rules and regulations thereunder
that are applicable to such
organization.21 The Commission shall
disapprove a proposed rule change if it
does not make such a finding.22 The
Commission’s Rules of Practice, under
Rule 700(b)(3), state that the ‘‘burden to
demonstrate that a proposed rule change
is consistent with the Exchange Act and
the rules and regulations issued
thereunder * * * is on the selfregulatory organization that proposed
the rule change’’ and that a ‘‘mere
assertion that the proposed rule change
is consistent with those requirements
* * * is not sufficient.’’ 23
16 Id.
at 29436.
17 Id.
18 Id.
19 Id.
20 Id.
at 29437.
15 U.S.C. 78s(b)(2)(C)(i).
22 See 15 U.S.C. 78s(b)(2)(C)(ii).
23 See 17 CFR 201.700. The description of a
proposed rule change, its purpose and operation, its
effect, and a legal analysis of its consistency with
applicable requirements must all be sufficiently
detailed and specific to support an affirmative
Commission finding. See id. Any failure of a selfregulatory organization to provide the information
elicited by Form 19b–4 may result in the
Commission not having a sufficient basis to make
an affirmative finding that a proposed rule change
is consistent with the Act and the rules and
regulations issued thereunder that are applicable to
the self-regulatory organization. Id.
21 See
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After careful consideration, the
Commission does not find 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.24 In particular, the
Commission does not find that the
proposed rule change is consistent with:
(i) Section 6(b)(5) of the Act,25 which
requires, among other things, that the
rules of a national securities exchange
be designed to promote just and
equitable principles of trade, to remove
impediments to and perfect the
mechanism of a free and open market
and a national market system, to protect
investors and the public interest, and
not to permit unfair discrimination
between customers, issuers, brokers, or
dealers; and (ii) Section 6(b)(8) of the
Act,26 which requires that the rules of
a national securities exchange not
impose any burden on competition not
necessary or appropriate in furtherance
of the Act.
In the Order Instituting Proceedings,
the Commission stressed, among other
things, that the application of
appropriate risk controls under the
Market Access Rule, Rule 15c3–5 under
the Act,27 is critically important to
maintaining a robust market
infrastructure.28 The Commission
expressed concern as to whether Child
Orders, which would be generated
solely by the Application and
presumably outside the control and
supervision of the broker-dealer firm
that entered the initial Benchmark
Order, would be subject to adequate pretrade risk checks, and noted that
NASDAQ’s proposal did not indicate
how or whether pre-trade controls
would be applied to Child Orders
generated by the Application.29
The Commission received two
comment letters on the proposed rule
change and a response from NASDAQ.30
In its comment letter, SIFMA objects to,
and urges the Commission to
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24 In
disapproving the proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
25 15 U.S.C. 78f(b)(5).
26 15 U.S.C. 78f(b)(8).
27 17 CFR 240.15c3–5. Rule 15c3–5 is designed to
ensure that broker-dealers appropriately control the
risks associated with market access, so as not to
jeopardize their own financial condition, that of
other market participants, the integrity of trading on
the securities markets, or the stability of the
financial system. See Securities Exchange Act
Release No. 63241 (November 3, 2010), 75 FR 69792
at 69794 (November 15, 2010).
28 See Order Instituting Proceedings, 77 FR at
50192.
29 Id.
30 See SIFMA Letter and Angel Letter, supra note
6; NASDAQ Letter, supra note 8.
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disapprove, the proposed rule change.31
SIFMA expresses the belief that
NASDAQ’s proposed rule change would
create a regulatory disparity giving
NASDAQ an inappropriate advantage
with respect to the Market Access Rule
over broker-dealers that provide the
same services that NASDAQ proposes.32
SIFMA notes that NASDAQ is not
subject to the Market Access Rule, and
its affiliated routing broker-dealer
benefits from significant exceptions to
the Market Access Rule, whereas brokerdealers unaffiliated with NASDAQ are
subject to all of the requirements of the
Market Access Rule when they offer
similar algorithmic trading services to
those NASDAQ proposes to offer, and
such requirements are reinforced
through regulatory examination and
oversight.33 Accordingly, SIFMA
‘‘urge[s] the Commission to assure that
the same regulatory requirements and
obligations would apply to Benchmark
Orders and Child Orders effected by
Nasdaq that would apply to those orders
if they were effected by a brokerdealer.’’ 34
SIFMA further states that it shares the
concern raised by the Commission in
the Order Instituting Proceedings that
Child Orders would not be subject to
appropriate controls to manage risk, and
that NASDAQ has not adequately
addressed how or whether the Child
Orders would be subject to adequate
pre-trade risk controls.35 SIFMA states
that, given that Child Orders would be
generated by a third-party Application
and outside of the control and
supervision of the broker-dealer that
submitted the Benchmark Order, Child
Orders would not be subject to the risk
controls that the entering firm is
required to have in place pursuant to
the Market Access Rule.36 SIFMA notes
that, while NASDAQ has stated in the
proposal that Child Orders will comport
with existing NASDAQ rules, including
those intended to enforce the Market
Access Rule, NASDAQ has provided no
details regarding how Child Orders will
meet these requirements.37 According to
SIFMA, this lack of detail raises
concerns about the potential for market
disruptions that NASDAQ’s proposed
algorithmic functionality could cause.38
According to the other commenter,
Angel, NASDAQ’s assurances in the
31 See
SIFMA Letter, supra note 6.
at 2.
33 Id. at 5.
34 Id. at 2.
35 Id. at 4.
36 Id. at 4–5.
37 Id. at 5.
38 Id.
32 Id.
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3929
proposal that it will have adequate risk
controls are credible.39
NASDAQ responds by, among other
things, committing to provide additional
risk management safeguards for
Benchmark Orders.40 Specifically,
NASDAQ states that, unlike existing
order types, which are subjected only
once to NASDAQ’s suite of
standardized, system-enforced riskmanagement checks, including but not
limited to duplicative and erroneous
order and credit threshold checks,
Benchmark Orders will trigger such
checks twice—once with respect to the
Benchmark Order itself at the time of
entry and a second time with respect to
each Child Order attributable to the
Benchmark Order.41 In addition,
NASDAQ states that it will provide new
safeguards, specifically designed for
Benchmark Orders, that compare each
Child Order to its parent Benchmark
Order to ensure that the system cannot
mistakenly create excess Child Orders
or otherwise ‘‘spray’’ orders to the
detriment of market participants.42
According to NASDAQ, if any of these
checks fail at any stage in the process,
the entire order will be cancelled.43
As the Commission noted in the
Order Instituting Proceedings, the
application of appropriate risk controls
under Rule 15c3–5 is critically
important to maintaining a robust
market infrastructure supporting the
protection of investors, investor
confidence, and fair, orderly, and
efficient markets for all participants.44
Under the proposal, the risk controls
required by Rule 15c3–5 would not be
applicable to Child Orders generated by
the proposed Application—a facility of
NASDAQ—but NASDAQ represents
that it would nevertheless impose
substantial risk controls to govern its
proposed Benchmark Orders, and in
particular with respect to the Child
Orders to which Rule 15c3–5 would not
directly apply. The representations
39 See
40 See
Angel Letter, supra note 6, at 2.
NASDAQ Letter, supra note 8, at 3.
41 Id.
42 Id. According to NASDAQ, there are four such
‘‘comparison’’ checks: (i) Child Order limit price
cannot violate the Parent Order limit price; (ii)
Child Order quantity cannot exceed the original
Parent Order quantity; (iii) Child Order quantity
cannot exceed the ‘‘leaves’’ balance of the Parent
Order; and (iv) Child Order quantity cannot be
greater than the eligible routing quantity. Id. at 3–
4. NASDAQ represents that it will conduct these
checks at four stages of the Benchmark Order
process: (i) at the point of entry; (ii) during the
processing of any Child Orders; (iii) after the
processing of Child Orders; and (iv) when Child
Orders are sent to be booked on NASDAQ or routed
to an away destination. Id. at 4.
43 Id.
44 See Order Instituting Proceedings, 77 FR at
50192.
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made in NASDAQ’s response letter, if
appropriately developed and reflected
in NASDAQ’s proposed rule change,
could potentially address the concerns
regarding the risk controls surrounding
Benchmark Orders, and whether in this
regard the proposal imposes an undue
burden on competition under the Act or
whether it is designed to promote just
and equitable principles of trade, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, to protect
investors and the public interest, and
not to permit unfair discrimination
between customers, issuers, brokers, or
dealers. NASDAQ, however, has not
amended its proposed rule change to
address this issue or detail its proposed
commitments with respect to the risk
controls it proposes to implement with
respect to Benchmark Orders.
Accordingly, the Commission does not
believe that it can make the finding that
NASDAQ’s proposal is consistent with
the requirements of Sections 6(b)(5) and
6(b)(8) of the Act.45
In the Order Instituting Proceedings,
the Commission also expressed concern
that NASDAQ’s proposed Benchmark
Order functionality could permit unfair
discrimination or impose an
unnecessary burden on competition.46
In this regard, SIFMA notes, among
other things, that the proposed
Benchmark Order functionality would
compete with algorithms that brokerdealers and other market participants
currently use and offer, and questions
whether it is appropriate for NASDAQ,
as a national securities exchange, to
offer that functionality.47 SIFMA states
that NASDAQ’s proposal could create
regulatory disparities that would give
NASDAQ an inappropriate advantage
over broker-dealers providing the same
services, both in terms of the Market
45 15
U.S.C. 78f(b)(5) and (b)(8).
Order Instituting Proceedings, 77 FR at
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46 See
50192.
47 See SIFMA Letter, supra note 6, at 2. In
addition, SIFMA notes that it shares an additional
concern raised by the Commission in the Order
Instituting Proceedings regarding whether
Benchmark Orders and Child Orders could receive
preferential treatment as compared to orders
generated by broker-dealers that choose to use a
competing algorithm. See SIFMA Letter, supra note
6, at 3. The other commenter, Angel, opines that
there could be a small time advantage from the
proximity of the Benchmark Order application to
the order entry gateway of NASDAQ’s matching
engine, but the amount of time gained by such
proximity would not likely result in a major
advantage. See Angel Letter, supra note 6, at 3. In
response to SIFMA, NASDAQ states that, as a selfregulatory organization, it is not permitted to give
and would not give Benchmark Orders any
preferential treatment vis a vis other orders entered
into NASDAQ systems. See NASDAQ Letter, supra
note 8, at 4.
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Access Rule 48 and other regulatory
requirements that apply to brokerdealers.49 Specifically, SIFMA observes
that NASDAQ has characterized the
Benchmark Order as part of its function
as a self-regulatory organization, and
states that this characterization is cause
for concern that NASDAQ would use
the doctrine of regulatory immunity to
shield the Exchange from any liability
that could arise out of the use of the
Benchmark Order functionality.50
SIFMA suggests that the proposed
functionality is not part of NASDAQ’s
role as a market regulator, but rather is
a commercial offering of the Exchange
that should not enjoy immunity from
liability that is not available to brokerdealers providing identical services.51
SIFMA further opines that ‘‘it would be
an incongruous result if NASDAQ were
permitted to use regulatory immunity as
a shield against liability, while
competing algorithm providers offering
the same services may assume
unlimited liability [without an] armslength agreement.’’ 52 SIFMA believes
that exchanges should not enjoy
regulatory immunity that is not
available to broker-dealers in providing
the same services.53
NASDAQ’s response letter takes the
position that, as a self-regulatory
organization, the doctrine of regulatory
immunity would apply to the services
that it proposes to offer.54 NASDAQ
believes that the proposal would not
give NASDAQ an inappropriate
advantage over broker-dealers, and that
the Application would be a functional
offering of the NASDAQ Stock Market
similar to other functions, including
order types, that process member
trading interest.55 NASDAQ states that it
has taken steps to ensure that the
Application performs to the standards
that the Commission sets for all selfregulatory organizations and complies
with applicable SEC regulations and
NASDAQ rules.56 According to
NASDAQ, it is beyond dispute that
NASDAQ is subject to regulation by the
Commission in providing access to a
facility of the Exchange such as
Benchmark Orders and that NASDAQ
must regulate its members’ use of such
facilities.57 NASDAQ states that, as a
national securities exchange under the
Act, it is, by definition, a self-regulatory
48 17
CFR 240.15c3–5.
SIFMA Letter, supra note 6, at 2.
50 Id. at 3.
51 Id. at 4.
52 Id. at 3.
53 Id. at 4.
54 See NASDAQ Letter, supra note 8, at 8.
55 Id. at 2, 4, 7–8.
56 Id. at 8.
57 Id.
49 See
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organization, and that SIFMA’s
contention that NASDAQ, in making the
proposal, is not acting as a selfregulatory organization is illogical and
inconsistent with the plain language of
the Act.58 Further, according to
NASDAQ, common law immunity is not
at issue in connection with the
Commission’s review of the proposal
and there is no need for the Commission
to discuss such immunity in analyzing
the consistency of the proposal with the
Act.59
NASDAQ also contends that the
proposed Benchmark Orders will
operate much like NASDAQ’s alreadyapproved order types, and that SIFMA
has identified no salient feature of
Benchmark Orders that distinguish
them from NASDAQ’s already-approved
order types, nor has SIFMA explained
how Benchmark Orders would compete
with broker systems any differently than
certain features of NASDAQ’s system
that already compete with broker
systems, such as routing and order
execution.60 NASDAQ further argues
that Benchmark Orders possess no
characteristics that the Commission has
described as belonging to broker-dealer
functions, and that Benchmark Orders
bear little or no resemblance to
traditional brokerage functions as
defined and applied by the
Commission.61
NASDAQ has acknowledged,
however, that Benchmark Orders are
designed to compete with services
currently offered by broker-dealers,
noting that ‘‘the establishment of
Benchmark Orders on NASDAQ will
enhance NASDAQ’s ability to compete
with similar functionality that already is
widely dispersed in the industry both
among members and trading venues.’’ 62
In addition, NASDAQ has stated that
‘‘[t]he Benchmark Order will not itself
be available for execution, but instead
will be used by a sub-system of the
trading system to generate a series of
‘Child Orders’ of the types that already
exist in the current NASDAQ rules.’’ 63
NASDAQ has further articulated that
‘‘Benchmark Orders will not be
executed by the NASDAQ matching
engine, but will upon entry be directed
58 Id.
59 Id.
at 7.
at 2, 4.
61 Id. at 7.
62 See Notice, 77 FR at 29437. In addition, Angel
notes that brokerage firms typically offer their
clients the ability to place orders designed to match
the VWAP, TWAP or POV, and that NASDAQ’s
proposal represents another example of the blurring
borders between exchanges and broker-dealers, and
states that there is nothing inherently wrong with
competition between the two. See Angel Letter,
supra note 6, at 2.
63 See Notice, 77 FR at 29435.
60 Id.
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to [the Application] dedicated to
processing Benchmark Orders.’’ 64
The Commission believes that one
significant difference between
Benchmark Orders and existing
NASDAQ or other exchange orders is
that the Benchmark Order is not
initially directed to the NASDAQ
matching engine for potential execution,
but instead is directed to the
Application for further processing and
the generation of Child Orders, to be
routed to the NASDAQ matching engine
or another trading center. Thus,
NASDAQ’s proposed Benchmark Order
is not an exchange order in the
traditional sense, in that it would not
immediately enter the Exchange’s order
book (i.e., NASDAQ Market Center) 65
for potential execution. Instead, it
essentially is an instruction that would
reside outside of the matching engine
and be processed by an Application,
which would then route orders to
NASDAQ, or another trading venue,
using a selected algorithm, over a
particular period of time, to achieve a
particular objective.
Because NASDAQ is proposing to
offer a novel order type designed to
compete with services offered by brokerdealers, the Commission must consider,
among other things, whether the
proposed rule change would impose an
unnecessary or inappropriate burden on
competition under Section 6(b)(8) of the
Act.66 As noted above, SIFMA is
concerned that NASDAQ’s proposal
could create regulatory disparities that
would give NASDAQ an inappropriate
advantage over broker-dealers providing
the same services, and that NASDAQ
‘‘would use the doctrine of regulatory
immunity to protect itself from any
liability that arises out of the
Benchmark Order functionality, through
systems issues or otherwise.’’ 67 In
addition, the Commission notes that
NASDAQ Rule 4626 generally provides
that ‘‘Nasdaq and its affiliates shall not
be liable for any losses, damages, or
other claims arising out of the Nasdaq
Market Center or its use.’’ 68
NASDAQ does not respond to
concerns raised by SIFMA with any
substantive analysis of whether
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64 Id.
at 29436.
65 The term ‘‘NASDAQ Market Center’’ is defined
in pertinent part as the ‘‘automated system for order
execution and trade reporting owned and operated
by The NASDAQ Stock Market LLC * * *
[comprising] an order execution service that enables
Participants to automatically execute transactions
in System Securities; and provides Participants
with sufficient monitoring and updating capability
to participate in an automated execution
environment.’’ See NASDAQ Rule 4751(a)(1).
66 15 U.S.C. 78f(b)(8).
67 See SIFMA Letter, supra note 6, at 3.
68 See NASDAQ Rule 4626.
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regulatory immunity, or exchange rules
limiting liability, in the context of
NASDAQ’s proposal to offer a service
traditionally provided by broker-dealers,
would impose an undue burden on
competition under the Act. NASDAQ
simply responds that this ‘‘judicially
recognized doctrine is not at issue in
connection with the Commission’s
review of NASDAQ’s Benchmark Order
Proposal’’ and that ‘‘[t]here is no need
for the Commission to discuss immunity
in analyzing the consistency of
NASDAQ’s Proposal with the Exchange
Act.’’ 69 Accordingly, the Commission
does not believe that it can make the
finding that NASDAQ’s proposal is
consistent with the requirements of
Section 6(b)(8) of the Act.70
As noted above, Rule 700(b)(3) of the
Commission’s Rules of Practice states
that ‘‘[t]he burden to demonstrate that a
proposed rule change is consistent with
the Exchange Act and the rules and
regulations thereunder * * * is on the
self-regulatory organization that
proposed the rule change’’ and that a
‘‘mere assertion that the proposed rule
change is consistent with those
requirements * * * is not sufficient.’’ 71
For the reasons set forth above, the
Commission does not believe that
NASDAQ has met its burden to
demonstrate that the proposed rule
change is consistent with the
requirements of the Act and the rules
and regulations thereunder.
IV. Conclusion
For the foregoing reasons, the
Commission does not find that the
proposed rule change is consistent with
the Act and the rules and regulations
thereunder applicable to a national
securities exchange, and, in particular,
with Sections 6(b)(5) and 6(b)(8) of the
Act.72
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,73 that the
proposed rule change (SR–NASDAQ–
2012–059) be, and hereby is,
disapproved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.74
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–00871 Filed 1–16–13; 8:45 am]
BILLING CODE 8011–01–P
69 See
NASDAQ Letter, supra note 8, at 7.
U.S.C. 78f(b)(8).
71 17 CFR 201.700(b)(3).
72 15 U.S.C. 78f(b)(5) and (b)(8).
73 15 U.S.C. 78s(b)(2).
74 17 CFR 200.30–3(a)(12).
70 15
PO 00000
Frm 00054
Fmt 4703
Sfmt 4703
3931
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68626; File No. SR–
NASDAQ–2012–149]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
a Proposed Rule Change To Modify
NASDAQ’s Order Execution Rebates
and Investor Support Program
January 11, 2013.
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 December
31, 2012, The NASDAQ Stock Market
LLC (‘‘NASDAQ’’ 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 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 proposing (i) to amend its
schedule of execution rebates under
Rule 7018(a), and (ii) to modify the
Investor Support Program (the ‘‘ISP’’)
under Rule 7014. While changes
pursuant to this proposal are effective
upon filing, the Exchange will
implement the proposed rule on January
2, 2013.
The text of the proposed rule change
is available on the Exchange’s Web site
at http://
www.nasdaq.cchwallstreet.com, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
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
the proposed rule change. The text of
these 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 aspects of such
statements.
1 15
2 17
E:\FR\FM\17JAN1.SGM
U.S.C. 78s(b)(1).
CFR 240.19b–4.
17JAN1
]]>Agencies
[Federal Register Volume 78, Number 12 (Thursday, January 17, 2013)]
[Notices]
[Pages 3928-3931]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-00871]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68629; File No. SR-NASDAQ-2012-059]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order
Disapproving Proposed Rule Change To Establish ``Benchmark Orders''
Under NASDAQ Rule 4751(f)
January 11, 2013.
I. Introduction
On May 1, 2012, The NASDAQ Stock Market LLC (``NASDAQ'' 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 to establish various ``Benchmark Orders'' under
NASDAQ Rule 4751(f). The proposed rule change was published for comment
in the Federal Register on May 17, 2012.\3\ On June 26, 2012, the
Commission extended to August 15, 2012, the time period in which to
approve the proposed rule change, disapprove the proposed rule change,
or institute proceedings to determine whether to disapprove the
proposed rule change.\4\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 66972 (May 11,
2012), 77 FR 29435 (May 17, 2012) (``Notice'').
\4\ See Securities Exchange Act Release No. 67258 (June 26,
2012), 77 FR 39314 (July 2, 2012).
---------------------------------------------------------------------------
On August 14, 2012, the Commission instituted proceedings to
determine whether to approve or disapprove the proposed rule change.\5\
The Commission thereafter received two comment letters on the
proposal.\6\ On November 9, 2012, the Commission issued a notice of
designation of a longer period for Commission action on proceedings to
determine whether to approve or disapprove the proposed rule change.\7\
On December 17, 2012, NASDAQ submitted a response letter to the
comments on the proposal.\8\ This order disapproves the proposed rule
change.
---------------------------------------------------------------------------
\5\ See Securities Exchange Act Release No. 67655 (August 14,
2012), 77 FR 50191 (August 20, 2012) (``Order Instituting
Proceedings'').
\6\ See Letters to the Commission from Theodore R. Lazo,
Managing Director and Associate General Counsel, SIFMA, dated
October 5, 2012 (``SIFMA Letter''); and James J. Angel, dated August
16, 2012 (``Angel Letter'').
\7\ See Securities Exchange Act Release No. 68199 (November 9,
2012), 77 FR 68873 (November 16, 2012).
\8\ See Letter to the Commission from Jeffrey S. Davis, Vice
President and Deputy General Counsel, NASDAQ, dated December 17,
2012 (``NASDAQ Letter'').
---------------------------------------------------------------------------
II. Description of the Proposal
As set forth in more detail in the Notice, the Exchange has
proposed to offer Benchmark Orders that would seek to achieve the
performance of a specified benchmark--Volume Weighted Average Price
(``VWAP''), Time Weighted Average Price (``TWAP''), or Percent of
Volume (``POV'')--over a specified period of time for a specified
security.\9\ The entering party would specify the benchmark, period of
time, and security, as well as the other order information common to
all order types, such as buy/sell side, shares and price.\10\
---------------------------------------------------------------------------
\9\ See proposed NASDAQ Rule 4751(f)(15).
\10\ Id.; see also Notice, 77 FR at 29436.
---------------------------------------------------------------------------
Benchmark Orders would be received by NASDAQ but by their terms
would not be executable by the NASDAQ matching engine upon entry.\11\
Rather, NASDAQ would direct them to a system application
(``Application'') that is licensed from a third-party provider and
dedicated to processing Benchmark Orders.\12\ The Application would
process Benchmark Orders by generating ``Child Orders'' in a manner
designed to achieve the desired benchmark performance, i.e., VWAP, TWAP
or POV, in accordance with the member's instructions.\13\ Child Orders
would be executed within the NASDAQ system under NASDAQ's existing
rules, or made available for routing under NASDAQ's current routing
rules.\14\ The Application would not be capable of executing Child
Orders, but instead would send Child Orders, using the proper system
protocol, to the NASDAQ matching engine or to the NASDAQ router as
needed to complete the Benchmark Order.\15\ Child Orders would be
processed in an identical manner to orders generated independently of a
Benchmark Order.\16\ NASDAQ states that the third-party provider of the
Application would have no actionable advantage over NASDAQ members with
respect to the NASDAQ system.\17\
---------------------------------------------------------------------------
\11\ See proposed NASDAQ Rule 4751(f)(15); see also Notice, 77
FR at 29435-36.
\12\ See Notice, 77 FR at 29436.
\13\ See proposed NASDAQ Rule 4751(f)(15); see also Notice, 77
FR at 29435-36.
\14\ See Notice, 77 FR at 29435. Child Orders that require
routing would be routed by NASDAQ Execution Services, NASDAQ's
wholly-owned routing broker-dealer. Id. at 29436 n.8. In addition,
fees applicable to existing orders and trades would apply to Child
Orders. Id. at 29436.
\15\ Id. at 29435-36.
\16\ Id. at 29436.
\17\ Id.
---------------------------------------------------------------------------
NASDAQ represents that it would test the Application rigorously and
regularly, monitor the Application performance on a real-time and
continuous basis, and have access to the technology, employees, books
and records of the third-party provider that are related to the
Application and its interaction with NASDAQ.\18\ NASDAQ states that it
considers the Application to be a functional offering of the NASDAQ
Stock Market, and that it would be integrated closely with the NASDAQ
system and provided to members subject to NASDAQ's obligations and
responsibilities as a self-regulatory organization.\19\ In addition,
NASDAQ represents that it would maintain control of and responsibility
for the Application.\20\
---------------------------------------------------------------------------
\18\ Id.
\19\ Id.
\20\ Id. at 29437.
---------------------------------------------------------------------------
III. Discussion
Under Section 19(b)(2)(C) of the Act, the Commission shall approve
a proposed rule change of a self-regulatory organization if it finds
that such proposed rule change is consistent with the requirements of
the Act, and the rules and regulations thereunder that are applicable
to such organization.\21\ The Commission shall disapprove a proposed
rule change if it does not make such a finding.\22\ The Commission's
Rules of Practice, under Rule 700(b)(3), state that the ``burden to
demonstrate that a proposed rule change is consistent with the Exchange
Act and the rules and regulations issued thereunder * * * is on the
self-regulatory organization that proposed the rule change'' and that a
``mere assertion that the proposed rule change is consistent with those
requirements * * * is not sufficient.'' \23\
---------------------------------------------------------------------------
\21\ See 15 U.S.C. 78s(b)(2)(C)(i).
\22\ See 15 U.S.C. 78s(b)(2)(C)(ii).
\23\ See 17 CFR 201.700. The description of a proposed rule
change, its purpose and operation, its effect, and a legal analysis
of its consistency with applicable requirements must all be
sufficiently detailed and specific to support an affirmative
Commission finding. See id. Any failure of a self-regulatory
organization to provide the information elicited by Form 19b-4 may
result in the Commission not having a sufficient basis to make an
affirmative finding that a proposed rule change is consistent with
the Act and the rules and regulations issued thereunder that are
applicable to the self-regulatory organization. Id.
---------------------------------------------------------------------------
[[Page 3929]]
After careful consideration, the Commission does not find 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.\24\ In particular, the Commission does not find
that the proposed rule change is consistent with: (i) Section 6(b)(5)
of the Act,\25\ which requires, among other things, that the rules of a
national securities exchange be designed to promote just and equitable
principles of trade, to remove impediments to and perfect the mechanism
of a free and open market and a national market system, to protect
investors and the public interest, and not to permit unfair
discrimination between customers, issuers, brokers, or dealers; and
(ii) Section 6(b)(8) of the Act,\26\ which requires that the rules of a
national securities exchange not impose any burden on competition not
necessary or appropriate in furtherance of the Act.
---------------------------------------------------------------------------
\24\ In disapproving the proposed rule change, the Commission
has considered the proposed rule's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
\25\ 15 U.S.C. 78f(b)(5).
\26\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------
In the Order Instituting Proceedings, the Commission stressed,
among other things, that the application of appropriate risk controls
under the Market Access Rule, Rule 15c3-5 under the Act,\27\ is
critically important to maintaining a robust market infrastructure.\28\
The Commission expressed concern as to whether Child Orders, which
would be generated solely by the Application and presumably outside the
control and supervision of the broker-dealer firm that entered the
initial Benchmark Order, would be subject to adequate pre-trade risk
checks, and noted that NASDAQ's proposal did not indicate how or
whether pre-trade controls would be applied to Child Orders generated
by the Application.\29\
---------------------------------------------------------------------------
\27\ 17 CFR 240.15c3-5. Rule 15c3-5 is designed to ensure that
broker-dealers appropriately control the risks associated with
market access, so as not to jeopardize their own financial
condition, that of other market participants, the integrity of
trading on the securities markets, or the stability of the financial
system. See Securities Exchange Act Release No. 63241 (November 3,
2010), 75 FR 69792 at 69794 (November 15, 2010).
\28\ See Order Instituting Proceedings, 77 FR at 50192.
\29\ Id.
---------------------------------------------------------------------------
The Commission received two comment letters on the proposed rule
change and a response from NASDAQ.\30\ In its comment letter, SIFMA
objects to, and urges the Commission to disapprove, the proposed rule
change.\31\ SIFMA expresses the belief that NASDAQ's proposed rule
change would create a regulatory disparity giving NASDAQ an
inappropriate advantage with respect to the Market Access Rule over
broker-dealers that provide the same services that NASDAQ proposes.\32\
SIFMA notes that NASDAQ is not subject to the Market Access Rule, and
its affiliated routing broker-dealer benefits from significant
exceptions to the Market Access Rule, whereas broker-dealers
unaffiliated with NASDAQ are subject to all of the requirements of the
Market Access Rule when they offer similar algorithmic trading services
to those NASDAQ proposes to offer, and such requirements are reinforced
through regulatory examination and oversight.\33\ Accordingly, SIFMA
``urge[s] the Commission to assure that the same regulatory
requirements and obligations would apply to Benchmark Orders and Child
Orders effected by Nasdaq that would apply to those orders if they were
effected by a broker-dealer.'' \34\
---------------------------------------------------------------------------
\30\ See SIFMA Letter and Angel Letter, supra note 6; NASDAQ
Letter, supra note 8.
\31\ See SIFMA Letter, supra note 6.
\32\ Id. at 2.
\33\ Id. at 5.
\34\ Id. at 2.
---------------------------------------------------------------------------
SIFMA further states that it shares the concern raised by the
Commission in the Order Instituting Proceedings that Child Orders would
not be subject to appropriate controls to manage risk, and that NASDAQ
has not adequately addressed how or whether the Child Orders would be
subject to adequate pre-trade risk controls.\35\ SIFMA states that,
given that Child Orders would be generated by a third-party Application
and outside of the control and supervision of the broker-dealer that
submitted the Benchmark Order, Child Orders would not be subject to the
risk controls that the entering firm is required to have in place
pursuant to the Market Access Rule.\36\ SIFMA notes that, while NASDAQ
has stated in the proposal that Child Orders will comport with existing
NASDAQ rules, including those intended to enforce the Market Access
Rule, NASDAQ has provided no details regarding how Child Orders will
meet these requirements.\37\ According to SIFMA, this lack of detail
raises concerns about the potential for market disruptions that
NASDAQ's proposed algorithmic functionality could cause.\38\ According
to the other commenter, Angel, NASDAQ's assurances in the proposal that
it will have adequate risk controls are credible.\39\
---------------------------------------------------------------------------
\35\ Id. at 4.
\36\ Id. at 4-5.
\37\ Id. at 5.
\38\ Id.
\39\ See Angel Letter, supra note 6, at 2.
---------------------------------------------------------------------------
NASDAQ responds by, among other things, committing to provide
additional risk management safeguards for Benchmark Orders.\40\
Specifically, NASDAQ states that, unlike existing order types, which
are subjected only once to NASDAQ's suite of standardized, system-
enforced risk-management checks, including but not limited to
duplicative and erroneous order and credit threshold checks, Benchmark
Orders will trigger such checks twice--once with respect to the
Benchmark Order itself at the time of entry and a second time with
respect to each Child Order attributable to the Benchmark Order.\41\ In
addition, NASDAQ states that it will provide new safeguards,
specifically designed for Benchmark Orders, that compare each Child
Order to its parent Benchmark Order to ensure that the system cannot
mistakenly create excess Child Orders or otherwise ``spray'' orders to
the detriment of market participants.\42\ According to NASDAQ, if any
of these checks fail at any stage in the process, the entire order will
be cancelled.\43\
---------------------------------------------------------------------------
\40\ See NASDAQ Letter, supra note 8, at 3.
\41\ Id.
\42\ Id. According to NASDAQ, there are four such ``comparison''
checks: (i) Child Order limit price cannot violate the Parent Order
limit price; (ii) Child Order quantity cannot exceed the original
Parent Order quantity; (iii) Child Order quantity cannot exceed the
``leaves'' balance of the Parent Order; and (iv) Child Order
quantity cannot be greater than the eligible routing quantity. Id.
at 3-4. NASDAQ represents that it will conduct these checks at four
stages of the Benchmark Order process: (i) at the point of entry;
(ii) during the processing of any Child Orders; (iii) after the
processing of Child Orders; and (iv) when Child Orders are sent to
be booked on NASDAQ or routed to an away destination. Id. at 4.
\43\ Id.
---------------------------------------------------------------------------
As the Commission noted in the Order Instituting Proceedings, the
application of appropriate risk controls under Rule 15c3-5 is
critically important to maintaining a robust market infrastructure
supporting the protection of investors, investor confidence, and fair,
orderly, and efficient markets for all participants.\44\ Under the
proposal, the risk controls required by Rule 15c3-5 would not be
applicable to Child Orders generated by the proposed Application--a
facility of NASDAQ--but NASDAQ represents that it would nevertheless
impose substantial risk controls to govern its proposed Benchmark
Orders, and in particular with respect to the Child Orders to which
Rule 15c3-5 would not directly apply. The representations
[[Page 3930]]
made in NASDAQ's response letter, if appropriately developed and
reflected in NASDAQ's proposed rule change, could potentially address
the concerns regarding the risk controls surrounding Benchmark Orders,
and whether in this regard the proposal imposes an undue burden on
competition under the Act or whether it is designed to promote just and
equitable principles of trade, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, to
protect investors and the public interest, and not to permit unfair
discrimination between customers, issuers, brokers, or dealers. NASDAQ,
however, has not amended its proposed rule change to address this issue
or detail its proposed commitments with respect to the risk controls it
proposes to implement with respect to Benchmark Orders. Accordingly,
the Commission does not believe that it can make the finding that
NASDAQ's proposal is consistent with the requirements of Sections
6(b)(5) and 6(b)(8) of the Act.\45\
---------------------------------------------------------------------------
\44\ See Order Instituting Proceedings, 77 FR at 50192.
\45\ 15 U.S.C. 78f(b)(5) and (b)(8).
---------------------------------------------------------------------------
In the Order Instituting Proceedings, the Commission also expressed
concern that NASDAQ's proposed Benchmark Order functionality could
permit unfair discrimination or impose an unnecessary burden on
competition.\46\ In this regard, SIFMA notes, among other things, that
the proposed Benchmark Order functionality would compete with
algorithms that broker-dealers and other market participants currently
use and offer, and questions whether it is appropriate for NASDAQ, as a
national securities exchange, to offer that functionality.\47\ SIFMA
states that NASDAQ's proposal could create regulatory disparities that
would give NASDAQ an inappropriate advantage over broker-dealers
providing the same services, both in terms of the Market Access Rule
\48\ and other regulatory requirements that apply to broker-
dealers.\49\ Specifically, SIFMA observes that NASDAQ has characterized
the Benchmark Order as part of its function as a self-regulatory
organization, and states that this characterization is cause for
concern that NASDAQ would use the doctrine of regulatory immunity to
shield the Exchange from any liability that could arise out of the use
of the Benchmark Order functionality.\50\ SIFMA suggests that the
proposed functionality is not part of NASDAQ's role as a market
regulator, but rather is a commercial offering of the Exchange that
should not enjoy immunity from liability that is not available to
broker-dealers providing identical services.\51\ SIFMA further opines
that ``it would be an incongruous result if NASDAQ were permitted to
use regulatory immunity as a shield against liability, while competing
algorithm providers offering the same services may assume unlimited
liability [without an] arms-length agreement.'' \52\ SIFMA believes
that exchanges should not enjoy regulatory immunity that is not
available to broker-dealers in providing the same services.\53\
---------------------------------------------------------------------------
\46\ See Order Instituting Proceedings, 77 FR at 50192.
\47\ See SIFMA Letter, supra note 6, at 2. In addition, SIFMA
notes that it shares an additional concern raised by the Commission
in the Order Instituting Proceedings regarding whether Benchmark
Orders and Child Orders could receive preferential treatment as
compared to orders generated by broker-dealers that choose to use a
competing algorithm. See SIFMA Letter, supra note 6, at 3. The other
commenter, Angel, opines that there could be a small time advantage
from the proximity of the Benchmark Order application to the order
entry gateway of NASDAQ's matching engine, but the amount of time
gained by such proximity would not likely result in a major
advantage. See Angel Letter, supra note 6, at 3. In response to
SIFMA, NASDAQ states that, as a self-regulatory organization, it is
not permitted to give and would not give Benchmark Orders any
preferential treatment vis a vis other orders entered into NASDAQ
systems. See NASDAQ Letter, supra note 8, at 4.
\48\ 17 CFR 240.15c3-5.
\49\ See SIFMA Letter, supra note 6, at 2.
\50\ Id. at 3.
\51\ Id. at 4.
\52\ Id. at 3.
\53\ Id. at 4.
---------------------------------------------------------------------------
NASDAQ's response letter takes the position that, as a self-
regulatory organization, the doctrine of regulatory immunity would
apply to the services that it proposes to offer.\54\ NASDAQ believes
that the proposal would not give NASDAQ an inappropriate advantage over
broker-dealers, and that the Application would be a functional offering
of the NASDAQ Stock Market similar to other functions, including order
types, that process member trading interest.\55\ NASDAQ states that it
has taken steps to ensure that the Application performs to the
standards that the Commission sets for all self-regulatory
organizations and complies with applicable SEC regulations and NASDAQ
rules.\56\ According to NASDAQ, it is beyond dispute that NASDAQ is
subject to regulation by the Commission in providing access to a
facility of the Exchange such as Benchmark Orders and that NASDAQ must
regulate its members' use of such facilities.\57\ NASDAQ states that,
as a national securities exchange under the Act, it is, by definition,
a self-regulatory organization, and that SIFMA's contention that
NASDAQ, in making the proposal, is not acting as a self-regulatory
organization is illogical and inconsistent with the plain language of
the Act.\58\ Further, according to NASDAQ, common law immunity is not
at issue in connection with the Commission's review of the proposal and
there is no need for the Commission to discuss such immunity in
analyzing the consistency of the proposal with the Act.\59\
---------------------------------------------------------------------------
\54\ See NASDAQ Letter, supra note 8, at 8.
\55\ Id. at 2, 4, 7-8.
\56\ Id. at 8.
\57\ Id.
\58\ Id.
\59\ Id. at 7.
---------------------------------------------------------------------------
NASDAQ also contends that the proposed Benchmark Orders will
operate much like NASDAQ's already-approved order types, and that SIFMA
has identified no salient feature of Benchmark Orders that distinguish
them from NASDAQ's already-approved order types, nor has SIFMA
explained how Benchmark Orders would compete with broker systems any
differently than certain features of NASDAQ's system that already
compete with broker systems, such as routing and order execution.\60\
NASDAQ further argues that Benchmark Orders possess no characteristics
that the Commission has described as belonging to broker-dealer
functions, and that Benchmark Orders bear little or no resemblance to
traditional brokerage functions as defined and applied by the
Commission.\61\
---------------------------------------------------------------------------
\60\ Id. at 2, 4.
\61\ Id. at 7.
---------------------------------------------------------------------------
NASDAQ has acknowledged, however, that Benchmark Orders are
designed to compete with services currently offered by broker-dealers,
noting that ``the establishment of Benchmark Orders on NASDAQ will
enhance NASDAQ's ability to compete with similar functionality that
already is widely dispersed in the industry both among members and
trading venues.'' \62\ In addition, NASDAQ has stated that ``[t]he
Benchmark Order will not itself be available for execution, but instead
will be used by a sub-system of the trading system to generate a series
of `Child Orders' of the types that already exist in the current NASDAQ
rules.'' \63\ NASDAQ has further articulated that ``Benchmark Orders
will not be executed by the NASDAQ matching engine, but will upon entry
be directed
[[Page 3931]]
to [the Application] dedicated to processing Benchmark Orders.'' \64\
---------------------------------------------------------------------------
\62\ See Notice, 77 FR at 29437. In addition, Angel notes that
brokerage firms typically offer their clients the ability to place
orders designed to match the VWAP, TWAP or POV, and that NASDAQ's
proposal represents another example of the blurring borders between
exchanges and broker-dealers, and states that there is nothing
inherently wrong with competition between the two. See Angel Letter,
supra note 6, at 2.
\63\ See Notice, 77 FR at 29435.
\64\ Id. at 29436.
---------------------------------------------------------------------------
The Commission believes that one significant difference between
Benchmark Orders and existing NASDAQ or other exchange orders is that
the Benchmark Order is not initially directed to the NASDAQ matching
engine for potential execution, but instead is directed to the
Application for further processing and the generation of Child Orders,
to be routed to the NASDAQ matching engine or another trading center.
Thus, NASDAQ's proposed Benchmark Order is not an exchange order in the
traditional sense, in that it would not immediately enter the
Exchange's order book (i.e., NASDAQ Market Center) \65\ for potential
execution. Instead, it essentially is an instruction that would reside
outside of the matching engine and be processed by an Application,
which would then route orders to NASDAQ, or another trading venue,
using a selected algorithm, over a particular period of time, to
achieve a particular objective.
---------------------------------------------------------------------------
\65\ The term ``NASDAQ Market Center'' is defined in pertinent
part as the ``automated system for order execution and trade
reporting owned and operated by The NASDAQ Stock Market LLC * * *
[comprising] an order execution service that enables Participants to
automatically execute transactions in System Securities; and
provides Participants with sufficient monitoring and updating
capability to participate in an automated execution environment.''
See NASDAQ Rule 4751(a)(1).
---------------------------------------------------------------------------
Because NASDAQ is proposing to offer a novel order type designed to
compete with services offered by broker-dealers, the Commission must
consider, among other things, whether the proposed rule change would
impose an unnecessary or inappropriate burden on competition under
Section 6(b)(8) of the Act.\66\ As noted above, SIFMA is concerned that
NASDAQ's proposal could create regulatory disparities that would give
NASDAQ an inappropriate advantage over broker-dealers providing the
same services, and that NASDAQ ``would use the doctrine of regulatory
immunity to protect itself from any liability that arises out of the
Benchmark Order functionality, through systems issues or otherwise.''
\67\ In addition, the Commission notes that NASDAQ Rule 4626 generally
provides that ``Nasdaq and its affiliates shall not be liable for any
losses, damages, or other claims arising out of the Nasdaq Market
Center or its use.'' \68\
---------------------------------------------------------------------------
\66\ 15 U.S.C. 78f(b)(8).
\67\ See SIFMA Letter, supra note 6, at 3.
\68\ See NASDAQ Rule 4626.
---------------------------------------------------------------------------
NASDAQ does not respond to concerns raised by SIFMA with any
substantive analysis of whether regulatory immunity, or exchange rules
limiting liability, in the context of NASDAQ's proposal to offer a
service traditionally provided by broker-dealers, would impose an undue
burden on competition under the Act. NASDAQ simply responds that this
``judicially recognized doctrine is not at issue in connection with the
Commission's review of NASDAQ's Benchmark Order Proposal'' and that
``[t]here is no need for the Commission to discuss immunity in
analyzing the consistency of NASDAQ's Proposal with the Exchange Act.''
\69\ Accordingly, the Commission does not believe that it can make the
finding that NASDAQ's proposal is consistent with the requirements of
Section 6(b)(8) of the Act.\70\
---------------------------------------------------------------------------
\69\ See NASDAQ Letter, supra note 8, at 7.
\70\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------
As noted above, Rule 700(b)(3) of the Commission's Rules of
Practice states that ``[t]he burden to demonstrate that a proposed rule
change is consistent with the Exchange Act and the rules and
regulations thereunder * * * is on the self-regulatory organization
that proposed the rule change'' and that a ``mere assertion that the
proposed rule change is consistent with those requirements * * * is not
sufficient.'' \71\ For the reasons set forth above, the Commission does
not believe that NASDAQ has met its burden to demonstrate that the
proposed rule change is consistent with the requirements of the Act and
the rules and regulations thereunder.
---------------------------------------------------------------------------
\71\ 17 CFR 201.700(b)(3).
---------------------------------------------------------------------------
IV. Conclusion
For the foregoing reasons, the Commission does not find that the
proposed rule change is consistent with the Act and the rules and
regulations thereunder applicable to a national securities exchange,
and, in particular, with Sections 6(b)(5) and 6(b)(8) of the Act.\72\
---------------------------------------------------------------------------
\72\ 15 U.S.C. 78f(b)(5) and (b)(8).
---------------------------------------------------------------------------
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\73\ that the proposed rule change (SR-NASDAQ-2012-059) be, and
hereby is, disapproved.
---------------------------------------------------------------------------
\73\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\74\
---------------------------------------------------------------------------
\74\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-00871 Filed 1-16-13; 8:45 am]
BILLING CODE 8011-01-P
