Self-Regulatory Organizations; ISE Gemini, LLC; ISE Mercury, LLC; Order Granting Approval of Proposed Rule Changes, as Modified by Amendment Nos. 1 and 2 Thereto, To Permit Nasdaq Execution Services, LLC To Become an Affiliated Member of Each Exchange To Perform Certain Routing and Other Functions, 10811-10814 [2017-02992]

Download as PDF Federal Register / Vol. 82, No. 30 / Wednesday, February 15, 2017 / Notices rule changes, each as modified by Amendment Nos. 1 and 2, were published for comment in the Federal Register on December 29, 2016.5 The Commission received no comments on the proposed rule changes. This order grants approval of the proposed rule changes, each as modified by the respective Amendment Nos. 1 and 2. Services 3 Negotiated Service Agreement and Application for NonPublic Treatment of Materials Filed Under Seal; Filing Acceptance Date: February 8, 2017; Filing Authority: 39 CFR 3015.5; Public Representative: Kenneth R. Moeller; Comments Due: February 16, 2017. This notice will be published in the Federal Register. Ruth Ann Abrams, Secretary. [FR Doc. 2017–02978 Filed 2–14–17; 8:45 am] BILLING CODE 7710–FW–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–79995; File Nos. SR– ISEGemini–2016–16; SR–ISEMercury–2016– 22] Self-Regulatory Organizations; ISE Gemini, LLC; ISE Mercury, LLC; Order Granting Approval of Proposed Rule Changes, as Modified by Amendment Nos. 1 and 2 Thereto, To Permit Nasdaq Execution Services, LLC To Become an Affiliated Member of Each Exchange To Perform Certain Routing and Other Functions February 9, 2017. mstockstill on DSK3G9T082PROD with NOTICES I. Introduction On December 9, 2016, ISE Gemini, LLC (‘‘ISE Gemini’’) and ISE Mercury, LLC (‘‘ISE Mercury,’’ and each of ISE Gemini and ISE Mercury an ‘‘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 proposed rule changes related to the routing of orders, cancellation of orders, and handling of error positions. The proposed rule changes would also permit Nasdaq Execution Services, LLC (‘‘NES’’) to become an affiliated Member 3 of each Exchange to perform certain routing and other functions. On December 20, 2016, each Exchange filed Amendment No. 1 to its respective proposed rule change, which amended and replaced each original filing in its entirety. Also on December 20, 2016, each Exchange filed Amendment No. 2 to its respective proposed rule change.4 The proposed 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 A ‘‘Member’’ is an organization that has been approved to exercise certain trading rights on the Exchange. See ISE Gemini Rule 100(a)(23); ISE Mercury Rule 100(a)(23). 4 Each Amendment No. 2 amended the description of one of the inbound routing 2 17 VerDate Sep<11>2014 18:44 Feb 14, 2017 Jkt 241001 II. Background On June 21, 2016, the Commission approved a proposed rule change relating to a corporate transaction in which Nasdaq, Inc. would become the ultimate parent of International Securities Exchange, LLC (‘‘ISE’’), ISE Gemini, and ISE Mercury (collectively, the ‘‘ISE Exchanges’’).6 The transaction closed on June 30, 2016.7 Nasdaq, Inc. is the ultimate parent of NASDAQ BX, Inc. (‘‘BX’’), The NASDAQ Stock Market LLC (‘‘Nasdaq’’), and NASDAQ PHLX LLC (‘‘Phlx’’ and, together with Nasdaq and BX, the ‘‘Nasdaq Exchanges’’).8 Nasdaq, Inc. is also the ultimate parent of NES,9 a broker-dealer that is a member, and affiliate, of each of the Nasdaq Exchanges.10 As a result of this transaction, the ISE Exchanges and the Nasdaq Exchanges became affiliates,11 conditions that would apply. Specifically, each Exchange modified the third condition to specify that the report that FINRA will provide to the Exchange’s chief regulatory officer on a quarterly basis will quantify all alerts, of which the Exchange or FINRA (rather than solely FINRA) are aware, that identify NES as a participant that has potentially violated Commission or Exchange rules. 5 See Securities Exchange Act Release Nos. 79664 (December 22, 2016), 81 FR 96136 (‘‘ISE Gemini Notice’’); 79663 (December 22, 2016), 81 FR 96089 (‘‘ISE Mercury Notice’’). 6 See Securities Exchange Act Release No. 78119 (June 21, 2016), 81 FR 41611 (June 27, 2016) (SR– ISE–2016–11; SR–ISE Gemini–2016–05; SR–ISE Mercury–2016–10) (order approving Nasdaq, Inc.’s acquisition of ISE, ISE Gemini, and ISE Mercury) (‘‘Nasdaq Acquisition Order’’). 7 See http://ir.nasdaq.com/ releasedetail.cfm?releaseid=977785 (Nasdaq press release announcing completion of its acquisition). 8 See Nasdaq Acquisition Order, supra note 6, at 41611. 9 See Securities Exchange Act Release No. 69233 (March 25, 2013), 78 FR 19352 (March 29, 2013) (SR–NASDAQ–2013–028) (order approving a proposed rule change to make permanent a pilot program to permit Nasdaq to accept inbound orders routed by NES from the BX Equities market and PSX) at 19352 n.6 and accompanying text (‘‘BX Equity Routing Approval’’). See also ISE Gemini Notice, supra note 5, at 96137; ISE Mercury Notice, supra note 5, at 96089. 10 See Securities Exchange Act Release Nos. 79661 (December 22, 2016), 81 FR 96100 (December 29, 2016) (SR–BX–2016–068) at 96100; 79662 (December 22, 2016), 81 FR 96087 (December 29, 2016) (SR–NASDAQ–2016–169) at 96087; and 79660 (December 22, 2016), 81 FR 96060 (December 29, 2016) (SR–Phlx–2016–120) at 96061. See also ISE Gemini Notice, supra note 5, at 96137; ISE Mercury Notice, supra note 5, at 96089. 11 See Nasdaq Acquisition Order, supra note 6, at 41611 n.8. The Nasdaq Exchanges, together with ISE, ISE Gemini (with respect to ISE Mercury), and PO 00000 Frm 00078 Fmt 4703 Sfmt 4703 10811 and NES became an affiliate of the ISE Exchanges.12 As described in more detail below, ISE Gemini and ISE Mercury have now proposed rule changes (1) to permit each respective Exchange to receive inbound orders in options routed through NES from the Affiliated Exchanges, pursuant to certain limitations and conditions; and (2) to permit NES to become a Member of each Exchange to perform certain routing and other functions. ISE Gemini and ISE Mercury’s respective rulebooks incorporate by reference Chapter 19 of ISE’s rulebook, which contains rules relating to the routing of orders, cancellation of orders, and handling of certain error positions.13 ISE submitted a related proposed rule change to: (1) Route outbound orders in options listed and open for trading on ISE’s system to away markets through NES, either directly or through a third-party routing brokerdealer; (2) adopt rules regarding the cancellation of orders and the handling of certain error positions, including maintenance by NES of an error account; and (3) make related conforming changes.14 These ISE rules, which the Commission is also approving today, concerning the outbound routing of orders, cancellation of orders, and handling of error accounts, will be incorporated by reference into ISE Gemini and ISE Mercury’s rules,15 and are similar to ISE Mercury (with respect to ISE Gemini), are referred to herein as the ‘‘Affiliated Exchanges.’’ 12 See generally ISE Gemini Notice, supra note 5, at 96137 (discussing that NES is a broker-dealer owned and operated by Nasdaq, Inc. and affiliated with ISE Gemini and the Affiliated Exchanges); ISE Mercury Notice, supra note 5, at 96089 (discussing that NES is a broker-dealer owned and operated by Nasdaq, Inc. and affiliated with ISE Mercury and the Affiliated Exchanges). 13 See ISE Gemini Rules, Chapter 19 (incorporating by reference rules in ISE Rules, Chapter 19); ISE Mercury Rules, Chapter 19 (incorporating by reference rules in ISE Rules, Chapter 19). 14 See Securities Exchange Act Release No. 79665 (December 22, 2016), 81 FR 96092 (December 29, 2016) (‘‘ISE Notice’’) (notice of filing that proposes, among other things, to amend ISE Rules 1903, 1904, and 1905, and make conforming changes to ISE Rule 1901). The Commission is also today approving this proposed rule change. See Securities Exchange Act Release No. 79994 (February 9, 2017) (‘‘ISE Exchange Routing Order’’). 15 Consistent with the proposals by ISE Gemini and ISE Mercury described herein, the ISE rules that the Commission is approving today also (1) permit ISE to receive inbound orders in options routed through NES from the Affiliated Exchanges, pursuant to certain limitations and conditions; and (2) permit NES to become a Member of ISE to perform certain routing and other functions. See ISE Notice, supra note 14, at 96093–94; ISE Exchange Routing Order, supra note 14. E:\FR\FM\15FEN1.SGM 15FEN1 10812 Federal Register / Vol. 82, No. 30 / Wednesday, February 15, 2017 / Notices rules of Phlx,16 as well as the other Nasdaq Exchanges.17 Finally, ISE Gemini and ISE Mercury requested that the Commission approve their proposals to permit NES to become a Member of each respective Exchange, as required by ISE Gemini Rule 309 and ISE Mercury Rule 309 because of NES’s affiliation with the Exchanges,18 to perform certain functions relating to routing orders inbound from the Affiliated Exchanges, the outbound routing of orders to away markets, cancellation of orders, and the maintenance of an error account. mstockstill on DSK3G9T082PROD with NOTICES III. Discussion and Commission Findings After careful review, the Commission finds, as discussed in more detail below, that the proposed rule changes, as modified by Amendment Nos. 1 and 2, are consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.19 In particular, the Commission finds that the proposed rule changes, as modified by Amendment Nos. 1 and 2, are consistent with Section 6(b)(1) of the Act,20 which requires, among other things, that a national securities exchange be so organized and have the capacity to carry out the purpose 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 regulations thereunder, and the rules of the Exchange. Further, the Commission finds that the proposed rule changes, as modified by Amendment Nos. 1 and 2, are consistent with Section 6(b)(5) of the Act,21 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 16 See ISE Gemini Notice, supra note 5, at 96138; ISE Mercury Notice, supra note 5, at 96090–91. See also Phlx Rules 985(c)(2), 1080(m)(ii), (iii), and (v). 17 See Nasdaq Rule 2160(c) and Nasdaq Options Rules, Chapter VI, Section 11(d)–(g); and BX Rule 2140(c) and BX Options Rules, Chapter VI, Section 11(d)–(g). 18 See ISE Gemini Notice, supra note 5, at 96137; ISE Mercury Notice, supra note 5, at 96090. 19 In approving these proposed rule changes, the Commission has considered the proposed rules’ impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 20 15 U.S.C. 78f(b)(1). 21 15 U.S.C. 78f(b)(5). VerDate Sep<11>2014 18:44 Feb 14, 2017 Jkt 241001 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. A. Restriction on Affiliation As noted above, ISE Gemini and ISE Mercury proposed that NES be permitted to become a Member of each respective Exchange to perform certain routing and other functions, as described in more detail below.22 Absent Commission approval, ISE Gemini Rule 309 and ISE Mercury Rule 309 would prohibit NES from becoming a Member of either Exchange because of its affiliation with each Exchange and its affiliation with affiliates of each Exchange. Specifically, pursuant to ISE Gemini Rule 309, without prior Commission approval, a Member of the Exchange ‘‘shall not be or become an affiliate of the Exchange, or any facility of the Exchange, or any entity with which the Exchange or any facility of the Exchange is affiliated.’’ 23 ISE Mercury Rule 309 contains the same restriction.24 In the past, the Commission has expressed concern that the affiliation of an exchange with one of its members raises potential conflicts of interest and the potential for unfair competitive advantage.25 Although the Commission continues to be concerned about 22 See ISE Gemini Notice, supra note 5, at 96137; ISE Mercury Notice, supra note 5, at 96090. See also infra Sections III.B–C. 23 See ISE Gemini Rule 309. See also ISE Gemini Notice, supra note 5, at 96137. 24 See ISE Mercury Rule 309. See also ISE Mercury Notice, supra note 5, at 96090. 25 See, e.g., Securities Exchange Act Release Nos. 54170 (July 18, 2006), 71 FR 42149 (July 25, 2006) (SR–NASDAQ–2006–006) (order approving Nasdaq’s proposal to adopt Nasdaq Rule 2140, restricting affiliations between Nasdaq and its members); 53382 (February 27, 2006), 71 FR 11251 (March 6, 2006) (SR–NYSE–2005–77) (order approving the combination of the New York Stock Exchange, Inc. and Archipelago Holdings, Inc.); 58673 (September 29, 2008), 73 FR 57707 (October 3, 2008) (SR–Amex–2008–62 and SR–NYSE–2008– 60) (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–2008–85) (order approving the purchase by ISE Holdings of an ownership interest in Direct Edge Holdings LLC); 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.); 58375 (August 18, 2008), 73 FR 49498 (August 21, 2008) (File No. 10– 182) (order granting the exchange registration of BATS Exchange, Inc.); 61698 (March 12, 2010), 75 FR 13151 (March 18, 2010) (File Nos. 10–194 and 10–196) (order granting the exchange registration of EDGX Exchange, Inc. and EDGA Exchange, Inc.); and 62716 (August 13, 2010), 75 FR 51295 (August 19, 2010) (File No. 10–198) (order granting the exchange registration of BATS–Y Exchange, Inc.). PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 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, the Commission believes that it is consistent with the Act, as discussed in more detail below, to permit NES, an affiliate of each Exchange, to be a Member of each Exchange to perform each of the proposed functions, subject to the proposed limitations and conditions. The Commission also believes that the proposed limitations and conditions will mitigate its concerns about potential conflicts of interest and unfair competitive advantage,26 and that each Exchange’s proposed rules are designed to ensure that NES cannot use any information advantage it may have because of its affiliation with each Exchange.27 B. Inbound Routing As discussed above, NES is currently a member of each Nasdaq Exchange. NES also operates as a facility of each of Nasdaq, Phlx, and BX that provides outbound options routing from each to other market centers, subject to certain conditions.28 The Commission is approving today ISE’s proposal that NES operate as a facility of ISE that provides outbound options routing to other market centers, subject to similar conditions.29 The operation of NES as a facility of each of the Affiliated Exchanges providing outbound routing 26 See infra note 39 and accompanying text. infra note 40 and accompanying text. The Commission also notes that the functions to be performed by NES for ISE Gemini and ISE Mercury, as well as the related limitations and conditions, are consistent with those previously approved by the Commission for other exchanges. See, e.g., Securities Exchange Act Release Nos. 67256 (June 26, 2012), 77 FR 39277 (July 2, 2012) (SR–BX– 2012–030) (order approving rules relating to the establishment of the BX options market, including the use of an affiliated member for outbound and inbound routing of options orders) at 39280–82; and 67280 (June 27, 2012), 77 FR 39552 (July 3, 2012) (SR–BX–2012–034) (order approving a proposed rule change with respect to the authority of the BX or NES to cancel orders when a technical or systems issue occurs and the operation of an error account); BX Equity Routing Approval, supra note 9. In addition, the Commission is approving today ISE’s proposal to allow NES to become a member of ISE to perform equivalent functions, subject to the same limitations and conditions. See ISE Exchange Routing Order, supra note 14. 28 See Phlx Rule 1080(m)(ii) and (iii); Nasdaq Options Rules, Chapter VI, Section 11(d)–(f); BX Options Rules, Chapter VI, Section 11(d)–(f). The Commission notes that these conditions are consistent with the conditions the Commission is approving today for ISE Gemini and ISE Mercury’s operation of NES as a facility of each Exchange for outbound options routing to other market centers. See infra Section III.C. 29 See ISE Exchange Routing Order, supra note 14. 27 See E:\FR\FM\15FEN1.SGM 15FEN1 Federal Register / Vol. 82, No. 30 / Wednesday, February 15, 2017 / Notices mstockstill on DSK3G9T082PROD with NOTICES services will be subject to oversight by ISE, Nasdaq, BX, and Phlx, respectively, as well as Commission oversight. Each of the Affiliated Exchanges will be responsible for ensuring that NES’s outbound options routing services are operated consistent with Section 6 of the Act and with the respective Affiliated Exchange’s rules. In addition, the Affiliated Exchanges must each file with the Commission rule changes and fees relating to their outbound options routing services provided by NES. Recognizing that the Commission previously expressed concern that the affiliation of an exchange with one of its members raises the potential for unfair competitive advantage and potential conflicts of interest between an exchange’s self-regulatory obligations and its commercial interest, ISE Gemini and ISE Mercury proposed the following limitations and conditions to permit each Exchange to accept inbound options orders that NES routes in its capacity as a facility of the Affiliated Exchanges: 30 • First, each Exchange and the Financial Industry Regulatory Authority (‘‘FINRA’’) will maintain a Regulatory Services Agreement (‘‘RSA’’), as well as an agreement pursuant to Rule 17d–2 under the Act (‘‘17d–2 Agreement’’).31 Pursuant to the RSA and the 17d–2 Agreement, FINRA will be allocated regulatory responsibilities to review NES’s compliance with certain Exchange rules.32 Pursuant to the RSA, however, each Exchange retains ultimate responsibility for enforcing its rules with respect to NES. • Second, FINRA will monitor NES for compliance with each of the Exchange’s trading rules, and will collect and maintain certain related information.33 • Third, FINRA will provide a report to each Exchange’s chief regulatory officer (‘‘CRO’’), on a quarterly basis, 30 See ISE Gemini Notice, supra note 5, at 96137– 38; ISE Mercury Notice, supra note 5, at 96090. 31 17 CFR 240.17d–2. 32 NES is also subject to independent oversight by FINRA, its designated examining authority, for compliance with financial responsibility requirements. 33 Pursuant to the RSA, both FINRA and the respective Exchange will collect and maintain all alerts, complaints, investigations and enforcement actions in which NES (in its capacity as a facility of each of the Affiliated Exchanges routing orders to the Exchange) is identified as a participant that has potentially violated applicable Commission or Exchange rules. The respective 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 ISE Gemini Notice, supra note 5, at 96137 n.14 and accompanying text; ISE Mercury Notice, supra note 5, at 96090 n.14 and accompanying text. VerDate Sep<11>2014 18:44 Feb 14, 2017 Jkt 241001 that: (i) Quantifies all alerts (of which the Exchange or FINRA is aware) that identify NES as a participant that has potentially violated Commission, or the respective Exchange’s, rules, and (ii) lists all investigations that identify NES as a participant that has potentially violated Commission, or the respective Exchange’s, rules. • Fourth, ISE Gemini and ISE Mercury proposed to amend ISE Gemini Rule 309 and ISE Mercury Rule 309, respectively, to add ISE Gemini Rule 309(b) and ISE Mercury Rule 309(b), which will provide that Nasdaq, Inc., as the holding company owning both the Exchange and NES, shall establish and maintain procedures and internal controls reasonably designed to ensure that NES does not develop or implement changes to its system, based on nonpublic information obtained regarding planned changes to the Exchange’s systems as a result of its affiliation with the Exchange, until such information is available generally to similarly situated Exchange Members, in connection with the provision of inbound routing to the Exchange.34 The Commission finds that ISE Gemini and ISE Mercury’s proposed rule changes to permit each Exchange to accept inbound options orders routed by NES from its Affiliated Exchanges, including the related change to ISE Gemini Rule 309 and ISE Mercury Rule 309, are consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange. Specifically, the Commission finds that the proposed rule changes are consistent with Section 6(b)(1) of the Act,35 and Section 6(b)(5) of the Act.36 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.37 Although the Commission continues to be concerned about potential unfair competition and conflicts of interest between an exchange’s self-regulatory obligations and its commercial interest when the exchange is affiliated with one of its members, for the reasons discussed below, the Commission believes that it 34 See proposed ISE Gemini Rule 309(b); proposed ISE Mercury Rule 309(b). ISE Gemini and ISE Mercury each proposed to designate existing ISE Gemini Rule 309 and ISE Mercury Rule 309, respectively, as subparagraph (a). See proposed ISE Gemini Rule 309(a); proposed ISE Mercury Rule 309(a). 35 15 U.S.C. 78f(b)(1). See also supra note 20 and accompanying text. 36 15 U.S.C. 78f(b)(5). See also supra note 21 and accompanying text. 37 See supra note 25 and accompanying text. PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 10813 is consistent with the Act to permit NES, in its capacity as a facility of each of the Affiliated Exchanges, to route options orders inbound to ISE Gemini and ISE Mercury, subject to the limitations and conditions described above.38 The Commission believes that these limitations and conditions will mitigate its concerns about potential conflicts of interest and unfair competitive advantage. In particular, the Commission believes that a nonaffiliated SRO’s oversight of NES,39 combined with a non-affiliated SRO’s monitoring of NES’s compliance with each of the respective Exchange’s rules and quarterly reporting to the respective Exchange, will help to protect the independence of ISE Gemini and ISE Mercury’s regulatory responsibilities with respect to NES. The Commission also believes that proposed ISE Gemini Rule 309(b) and proposed ISE Mercury Rule 309(b) are designed to ensure that NES cannot use any information advantage it may have because of its affiliation with ISE Gemini or ISE Mercury.40 C. Outbound Routing, Cancellation of Orders, and Error Accounts As discussed above, the Commission is today approving a proposed rule change by ISE that will amend certain provisions in Chapter 19 of ISE’s rulebook, which is incorporated by reference to, and will therefore also become, the rules of ISE Gemini and ISE Mercury.41 Specifically, these new rules incorporated by reference will (1) permit ISE Gemini and ISE Mercury to route outbound orders in options listed and open for trading on their respective systems to away markets through NES, either directly or through a third-party routing broker-dealer; and (2) govern cancellation of orders by the Exchange or NES as either deems necessary to maintain a fair and orderly market if a technical or systems issue occurs at the Exchange, NES, or a routing destination, and the maintenance of an error account by NES for the purpose of addressing error positions that result from a 38 The Commission notes that these limitations and conditions are consistent with those previously approved by the Commission for other exchanges. See, e.g., Securities Exchange Act Release Nos. 67256, supra note 27, at 39281–82; and 69299 (March 25, 2013), 78 FR 19337 (March 29, 2013) (SR–Phlx–2013–15) (order approving a proposed rule change to make permanent a pilot program to permit PSX to accept inbound orders routed by NES from BX); and BX Equity Routing Approval, supra note 9. 39 This oversight will be accomplished through the 17d–2 Agreement between FINRA and each Exchange and the RSA. 40 See supra note 34 and accompanying text. 41 See supra notes 13–15 and accompanying text. E:\FR\FM\15FEN1.SGM 15FEN1 10814 Federal Register / Vol. 82, No. 30 / Wednesday, February 15, 2017 / Notices technical or systems issue at the Exchange, NES, a routing destination, or an unaffiliated third-party routing broker-dealer that affects one or more orders.42 The Commission found these rules, which will also become rules of ISE Gemini and ISE Mercury, to be consistent with the Act.43 ISE Gemini and ISE Mercury each proposed that NES be permitted to perform the same functions pursuant to the same conditions with respect to the outbound routing of orders, cancellation of orders, and the handling of error positions as set forth in the ISE proposal.44 As discussed in the ISE Exchange Routing Order, the Commission believes that the proposed rules and procedures regarding the Exchanges’ use of NES to route orders to away markets, cancellation of orders, and handling of error positions, which will also apply to ISE Gemini and ISE Mercury’s use of NES, are consistent with the Act, for the reasons, and pursuant to the protections and considerations, discussed in such order.45 In addition, the Exchanges propose to make a related, conforming rule change to ISE Gemini Rule 705 and ISE Mercury Rule 705, respectively, which do not incorporate by reference ISE’s rules. Currently, pursuant to ISE rules incorporated by reference, ISE Gemini and ISE Mercury utilize Linkage Handlers 46 unaffiliated with the Exchange to route outbound orders.47 Pursuant to the proposed rule change by ISE, as applied to the Exchanges, ISE Gemini and ISE Mercury will no longer utilize unaffiliated Linkage Handlers to route outbound orders and instead, NES will route orders to other options exchanges, either directly, or indirectly through unaffiliated third-party routing broker-dealers, on behalf of ISE Gemini mstockstill on DSK3G9T082PROD with NOTICES 42 See supra note 14 and accompanying text. 43 See ISE Exchange Routing Order, supra note 14. 44 See ISE Gemini Notice, supra note 5, at 96138; ISE Mercury Notice, supra note 5, at 96091. 45 See ISE Exchange Routing Order, supra note 14, at Section III.B and III.D. The proposal by ISE being approved today also makes other conforming changes to rules incorporated by reference. See ISE Exchange Routing Order, supra note 14. 46 A ‘‘Linkage Handler’’ is a broker that is unaffiliated with the Exchange with which the Exchange has contracted to provide Routing Services, as that term is defined in ISE Rule 1903, by routing ISO(s) to other exchange(s) as an agent on behalf of Public Customer and Non-Customer Orders according to the requirements of Rule 1901 (prohibition on trade-throughs) and Rule 1902 (prohibition on locked and crossed markets). See ISE Rule 1901, Supplementary Material .03. ISE Gemini Rules 100(a)(28) and (39), and ISE Mercury Rules 100(a)(28) and (39), define ‘‘Non-Customer Order’’ and ‘‘Public Customer Order,’’ respectively. 47 See ISE Rule 1903(a). VerDate Sep<11>2014 18:44 Feb 14, 2017 Jkt 241001 and ISE Mercury.48 Accordingly, ISE Gemini and ISE Mercury have proposed to remove ISE Gemini Rule 705(d)(4) and ISE Mercury Rule 705(d)(4), respectively, which provide an exception to the limits on compensation in ISE Gemini Rule 705(d) and ISE Mercury Rule 705(d) for Members to the extent such Members are acting as Linkage Handlers.49 ISE Gemini and ISE Mercury explained that Phlx does not have a similar provision and ISE is also removing this provision from its comparable rule.50 The Commission believes that this minor, conforming revision is consistent with the Act. SECURITIES AND EXCHANGE COMMISSION IV. Implementation of Proposed Rule Change Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (the ‘‘Act’’) 2 and Rule 19b–4 thereunder,3 notice is hereby given that, on January 25, 2017, NYSE MKT LLC (the ‘‘Exchange’’ or ‘‘NYSE MKT’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the selfregulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. ISE Gemini and ISE Mercury stated that they intend to begin implementation of the proposed rule changes in the first quarter of 2017 and third quarter of 2017, respectively, and that the migration will be on a symbolby-symbol basis.51 The Commission expects that the Exchanges will issue alerts to Members to announce the relevant migration date for specific symbols. ISE Gemini and ISE Mercury represented that they will add notations in each rulebook to cross-reference the amended rule text and clarify the respective implementation dates.52 III. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,53 that the proposed rule changes (SR–ISEGemini– 2016–16; SR–ISEMercury–2016–22), each as modified by their respective Amendment Nos. 1 and 2, be, and hereby are, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.54 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–02992 Filed 2–14–17; 8:45 am] BILLING CODE 8011–01–P 48 See ISE Exchange Routing Order, supra note 14. 49 See proposed ISE Gemini Rule 705(d); proposed ISE Mercury Rule 705(d). 50 See ISE Gemini Notice, supra note 5, at 96138; ISE Mercury Notice, supra note 5, at 96091. See also ISE Notice, supra note 14, at 96095 (noting that, unlike NES, Linkage Handlers are not affiliated with ISE and ISE does not believe that such an exception to compensation limits is necessary for NES). 51 See ISE Gemini Notice, supra note 5, at 96138; ISE Mercury Notice, supra note 5, at 96091. 52 See ISE Gemini Notice, supra note 5, at 96138; ISE Mercury Notice, supra note 5, at 96091. 53 15 U.S.C. 78s(b)(2). 54 17 CFR 200.30–3(a)(12). PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 [Release No. 34–79993; File No. SR– NYSEMKT–2017–01] Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing of Proposed Rule Change To Adopt New Equities Trading Rules To Transition Trading on the Exchange From a Floor Based Market With a Parity Allocation Model to Fully Automated Price-Time Priority Model on the Exchange’s New Trading Technology Platform, Pillar February 9, 2017. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes new rules to transition trading on the Exchange to Pillar, the Exchange’s new trading technology platform, and to operate as a fully-automated cash equities market. The proposed rule change is available on the Exchange’s Web site at www.nyse.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 self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. 1 15 U.S.C. 78s(b)(1). U.S.C. 78a. 3 17 CFR 240.19b–4. 2 15 E:\FR\FM\15FEN1.SGM 15FEN1

Agencies

[Federal Register Volume 82, Number 30 (Wednesday, February 15, 2017)]
[Notices]
[Pages 10811-10814]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-02992]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79995; File Nos. SR-ISEGemini-2016-16; SR-ISEMercury-
2016-22]


Self-Regulatory Organizations; ISE Gemini, LLC; ISE Mercury, LLC; 
Order Granting Approval of Proposed Rule Changes, as Modified by 
Amendment Nos. 1 and 2 Thereto, To Permit Nasdaq Execution Services, 
LLC To Become an Affiliated Member of Each Exchange To Perform Certain 
Routing and Other Functions

February 9, 2017.

I. Introduction

    On December 9, 2016, ISE Gemini, LLC (``ISE Gemini'') and ISE 
Mercury, LLC (``ISE Mercury,'' and each of ISE Gemini and ISE Mercury 
an ``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\ 
proposed rule changes related to the routing of orders, cancellation of 
orders, and handling of error positions. The proposed rule changes 
would also permit Nasdaq Execution Services, LLC (``NES'') to become an 
affiliated Member \3\ of each Exchange to perform certain routing and 
other functions. On December 20, 2016, each Exchange filed Amendment 
No. 1 to its respective proposed rule change, which amended and 
replaced each original filing in its entirety. Also on December 20, 
2016, each Exchange filed Amendment No. 2 to its respective proposed 
rule change.\4\ The proposed rule changes, each as modified by 
Amendment Nos. 1 and 2, were published for comment in the Federal 
Register on December 29, 2016.\5\ The Commission received no comments 
on the proposed rule changes. This order grants approval of the 
proposed rule changes, each as modified by the respective Amendment 
Nos. 1 and 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ A ``Member'' is an organization that has been approved to 
exercise certain trading rights on the Exchange. See ISE Gemini Rule 
100(a)(23); ISE Mercury Rule 100(a)(23).
    \4\ Each Amendment No. 2 amended the description of one of the 
inbound routing conditions that would apply. Specifically, each 
Exchange modified the third condition to specify that the report 
that FINRA will provide to the Exchange's chief regulatory officer 
on a quarterly basis will quantify all alerts, of which the Exchange 
or FINRA (rather than solely FINRA) are aware, that identify NES as 
a participant that has potentially violated Commission or Exchange 
rules.
    \5\ See Securities Exchange Act Release Nos. 79664 (December 22, 
2016), 81 FR 96136 (``ISE Gemini Notice''); 79663 (December 22, 
2016), 81 FR 96089 (``ISE Mercury Notice'').
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II. Background

    On June 21, 2016, the Commission approved a proposed rule change 
relating to a corporate transaction in which Nasdaq, Inc. would become 
the ultimate parent of International Securities Exchange, LLC 
(``ISE''), ISE Gemini, and ISE Mercury (collectively, the ``ISE 
Exchanges'').\6\ The transaction closed on June 30, 2016.\7\ Nasdaq, 
Inc. is the ultimate parent of NASDAQ BX, Inc. (``BX''), The NASDAQ 
Stock Market LLC (``Nasdaq''), and NASDAQ PHLX LLC (``Phlx'' and, 
together with Nasdaq and BX, the ``Nasdaq Exchanges'').\8\ Nasdaq, Inc. 
is also the ultimate parent of NES,\9\ a broker-dealer that is a 
member, and affiliate, of each of the Nasdaq Exchanges.\10\ As a result 
of this transaction, the ISE Exchanges and the Nasdaq Exchanges became 
affiliates,\11\ and NES became an affiliate of the ISE Exchanges.\12\
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    \6\ See Securities Exchange Act Release No. 78119 (June 21, 
2016), 81 FR 41611 (June 27, 2016) (SR-ISE-2016-11; SR-ISE Gemini-
2016-05; SR-ISE Mercury-2016-10) (order approving Nasdaq, Inc.'s 
acquisition of ISE, ISE Gemini, and ISE Mercury) (``Nasdaq 
Acquisition Order'').
    \7\ See http://ir.nasdaq.com/releasedetail.cfm?releaseid=977785 
(Nasdaq press release announcing completion of its acquisition).
    \8\ See Nasdaq Acquisition Order, supra note 6, at 41611.
    \9\ See Securities Exchange Act Release No. 69233 (March 25, 
2013), 78 FR 19352 (March 29, 2013) (SR-NASDAQ-2013-028) (order 
approving a proposed rule change to make permanent a pilot program 
to permit Nasdaq to accept inbound orders routed by NES from the BX 
Equities market and PSX) at 19352 n.6 and accompanying text (``BX 
Equity Routing Approval''). See also ISE Gemini Notice, supra note 
5, at 96137; ISE Mercury Notice, supra note 5, at 96089.
    \10\ See Securities Exchange Act Release Nos. 79661 (December 
22, 2016), 81 FR 96100 (December 29, 2016) (SR-BX-2016-068) at 
96100; 79662 (December 22, 2016), 81 FR 96087 (December 29, 2016) 
(SR-NASDAQ-2016-169) at 96087; and 79660 (December 22, 2016), 81 FR 
96060 (December 29, 2016) (SR-Phlx-2016-120) at 96061. See also ISE 
Gemini Notice, supra note 5, at 96137; ISE Mercury Notice, supra 
note 5, at 96089.
    \11\ See Nasdaq Acquisition Order, supra note 6, at 41611 n.8. 
The Nasdaq Exchanges, together with ISE, ISE Gemini (with respect to 
ISE Mercury), and ISE Mercury (with respect to ISE Gemini), are 
referred to herein as the ``Affiliated Exchanges.''
    \12\ See generally ISE Gemini Notice, supra note 5, at 96137 
(discussing that NES is a broker-dealer owned and operated by 
Nasdaq, Inc. and affiliated with ISE Gemini and the Affiliated 
Exchanges); ISE Mercury Notice, supra note 5, at 96089 (discussing 
that NES is a broker-dealer owned and operated by Nasdaq, Inc. and 
affiliated with ISE Mercury and the Affiliated Exchanges).
---------------------------------------------------------------------------

    As described in more detail below, ISE Gemini and ISE Mercury have 
now proposed rule changes (1) to permit each respective Exchange to 
receive inbound orders in options routed through NES from the 
Affiliated Exchanges, pursuant to certain limitations and conditions; 
and (2) to permit NES to become a Member of each Exchange to perform 
certain routing and other functions.
    ISE Gemini and ISE Mercury's respective rulebooks incorporate by 
reference Chapter 19 of ISE's rulebook, which contains rules relating 
to the routing of orders, cancellation of orders, and handling of 
certain error positions.\13\ ISE submitted a related proposed rule 
change to: (1) Route outbound orders in options listed and open for 
trading on ISE's system to away markets through NES, either directly or 
through a third-party routing broker-dealer; (2) adopt rules regarding 
the cancellation of orders and the handling of certain error positions, 
including maintenance by NES of an error account; and (3) make related 
conforming changes.\14\ These ISE rules, which the Commission is also 
approving today, concerning the outbound routing of orders, 
cancellation of orders, and handling of error accounts, will be 
incorporated by reference into ISE Gemini and ISE Mercury's rules,\15\ 
and are similar to

[[Page 10812]]

rules of Phlx,\16\ as well as the other Nasdaq Exchanges.\17\ Finally, 
ISE Gemini and ISE Mercury requested that the Commission approve their 
proposals to permit NES to become a Member of each respective Exchange, 
as required by ISE Gemini Rule 309 and ISE Mercury Rule 309 because of 
NES's affiliation with the Exchanges,\18\ to perform certain functions 
relating to routing orders inbound from the Affiliated Exchanges, the 
outbound routing of orders to away markets, cancellation of orders, and 
the maintenance of an error account.
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    \13\ See ISE Gemini Rules, Chapter 19 (incorporating by 
reference rules in ISE Rules, Chapter 19); ISE Mercury Rules, 
Chapter 19 (incorporating by reference rules in ISE Rules, Chapter 
19).
    \14\ See Securities Exchange Act Release No. 79665 (December 22, 
2016), 81 FR 96092 (December 29, 2016) (``ISE Notice'') (notice of 
filing that proposes, among other things, to amend ISE Rules 1903, 
1904, and 1905, and make conforming changes to ISE Rule 1901). The 
Commission is also today approving this proposed rule change. See 
Securities Exchange Act Release No. 79994 (February 9, 2017) (``ISE 
Exchange Routing Order'').
    \15\ Consistent with the proposals by ISE Gemini and ISE Mercury 
described herein, the ISE rules that the Commission is approving 
today also (1) permit ISE to receive inbound orders in options 
routed through NES from the Affiliated Exchanges, pursuant to 
certain limitations and conditions; and (2) permit NES to become a 
Member of ISE to perform certain routing and other functions. See 
ISE Notice, supra note 14, at 96093-94; ISE Exchange Routing Order, 
supra note 14.
    \16\ See ISE Gemini Notice, supra note 5, at 96138; ISE Mercury 
Notice, supra note 5, at 96090-91. See also Phlx Rules 985(c)(2), 
1080(m)(ii), (iii), and (v).
    \17\ See Nasdaq Rule 2160(c) and Nasdaq Options Rules, Chapter 
VI, Section 11(d)-(g); and BX Rule 2140(c) and BX Options Rules, 
Chapter VI, Section 11(d)-(g).
    \18\ See ISE Gemini Notice, supra note 5, at 96137; ISE Mercury 
Notice, supra note 5, at 96090.
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III. Discussion and Commission Findings

    After careful review, the Commission finds, as discussed in more 
detail below, that the proposed rule changes, as modified by Amendment 
Nos. 1 and 2, are consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange.\19\ In particular, the Commission finds that the proposed 
rule changes, as modified by Amendment Nos. 1 and 2, are consistent 
with Section 6(b)(1) of the Act,\20\ which requires, among other 
things, that a national securities exchange be so organized and have 
the capacity to carry out the purpose 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 regulations 
thereunder, and the rules of the Exchange. Further, the Commission 
finds that the proposed rule changes, as modified by Amendment Nos. 1 
and 2, are consistent with Section 6(b)(5) of the Act,\21\ 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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    \19\ In approving these proposed rule changes, the Commission 
has considered the proposed rules' impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \20\ 15 U.S.C. 78f(b)(1).
    \21\ 15 U.S.C. 78f(b)(5).
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A. Restriction on Affiliation

    As noted above, ISE Gemini and ISE Mercury proposed that NES be 
permitted to become a Member of each respective Exchange to perform 
certain routing and other functions, as described in more detail 
below.\22\ Absent Commission approval, ISE Gemini Rule 309 and ISE 
Mercury Rule 309 would prohibit NES from becoming a Member of either 
Exchange because of its affiliation with each Exchange and its 
affiliation with affiliates of each Exchange. Specifically, pursuant to 
ISE Gemini Rule 309, without prior Commission approval, a Member of the 
Exchange ``shall not be or become an affiliate of the Exchange, or any 
facility of the Exchange, or any entity with which the Exchange or any 
facility of the Exchange is affiliated.'' \23\ ISE Mercury Rule 309 
contains the same restriction.\24\
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    \22\ See ISE Gemini Notice, supra note 5, at 96137; ISE Mercury 
Notice, supra note 5, at 96090. See also infra Sections III.B-C.
    \23\ See ISE Gemini Rule 309. See also ISE Gemini Notice, supra 
note 5, at 96137.
    \24\ See ISE Mercury Rule 309. See also ISE Mercury Notice, 
supra note 5, at 96090.
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    In the past, the Commission has expressed concern that the 
affiliation of an exchange with one of its members raises potential 
conflicts of interest and the potential for unfair competitive 
advantage.\25\ Although the Commission continues to be concerned about 
potential unfair competition and conflicts of interest between an 
exchange's self-regulatory obligations and its commercial interest when 
the exchange is affiliated with one of its members, the Commission 
believes that it is consistent with the Act, as discussed in more 
detail below, to permit NES, an affiliate of each Exchange, to be a 
Member of each Exchange to perform each of the proposed functions, 
subject to the proposed limitations and conditions. The Commission also 
believes that the proposed limitations and conditions will mitigate its 
concerns about potential conflicts of interest and unfair competitive 
advantage,\26\ and that each Exchange's proposed rules are designed to 
ensure that NES cannot use any information advantage it may have 
because of its affiliation with each Exchange.\27\
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    \25\ See, e.g., Securities Exchange Act Release Nos. 54170 (July 
18, 2006), 71 FR 42149 (July 25, 2006) (SR-NASDAQ-2006-006) (order 
approving Nasdaq's proposal to adopt Nasdaq Rule 2140, restricting 
affiliations between Nasdaq and its members); 53382 (February 27, 
2006), 71 FR 11251 (March 6, 2006) (SR-NYSE-2005-77) (order 
approving the combination of the New York Stock Exchange, Inc. and 
Archipelago Holdings, Inc.); 58673 (September 29, 2008), 73 FR 57707 
(October 3, 2008) (SR-Amex-2008-62 and SR-NYSE-2008-60) (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-2008-85) (order approving the purchase by ISE Holdings 
of an ownership interest in Direct Edge Holdings LLC); 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.); 58375 (August 18, 2008), 73 FR 49498 (August 21, 2008) (File 
No. 10-182) (order granting the exchange registration of BATS 
Exchange, Inc.); 61698 (March 12, 2010), 75 FR 13151 (March 18, 
2010) (File Nos. 10-194 and 10-196) (order granting the exchange 
registration of EDGX Exchange, Inc. and EDGA Exchange, Inc.); and 
62716 (August 13, 2010), 75 FR 51295 (August 19, 2010) (File No. 10-
198) (order granting the exchange registration of BATS-Y Exchange, 
Inc.).
    \26\ See infra note 39 and accompanying text.
    \27\ See infra note 40 and accompanying text. The Commission 
also notes that the functions to be performed by NES for ISE Gemini 
and ISE Mercury, as well as the related limitations and conditions, 
are consistent with those previously approved by the Commission for 
other exchanges. See, e.g., Securities Exchange Act Release Nos. 
67256 (June 26, 2012), 77 FR 39277 (July 2, 2012) (SR-BX-2012-030) 
(order approving rules relating to the establishment of the BX 
options market, including the use of an affiliated member for 
outbound and inbound routing of options orders) at 39280-82; and 
67280 (June 27, 2012), 77 FR 39552 (July 3, 2012) (SR-BX-2012-034) 
(order approving a proposed rule change with respect to the 
authority of the BX or NES to cancel orders when a technical or 
systems issue occurs and the operation of an error account); BX 
Equity Routing Approval, supra note 9. In addition, the Commission 
is approving today ISE's proposal to allow NES to become a member of 
ISE to perform equivalent functions, subject to the same limitations 
and conditions. See ISE Exchange Routing Order, supra note 14.
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B. Inbound Routing

    As discussed above, NES is currently a member of each Nasdaq 
Exchange. NES also operates as a facility of each of Nasdaq, Phlx, and 
BX that provides outbound options routing from each to other market 
centers, subject to certain conditions.\28\ The Commission is approving 
today ISE's proposal that NES operate as a facility of ISE that 
provides outbound options routing to other market centers, subject to 
similar conditions.\29\ The operation of NES as a facility of each of 
the Affiliated Exchanges providing outbound routing

[[Page 10813]]

services will be subject to oversight by ISE, Nasdaq, BX, and Phlx, 
respectively, as well as Commission oversight. Each of the Affiliated 
Exchanges will be responsible for ensuring that NES's outbound options 
routing services are operated consistent with Section 6 of the Act and 
with the respective Affiliated Exchange's rules. In addition, the 
Affiliated Exchanges must each file with the Commission rule changes 
and fees relating to their outbound options routing services provided 
by NES.
---------------------------------------------------------------------------

    \28\ See Phlx Rule 1080(m)(ii) and (iii); Nasdaq Options Rules, 
Chapter VI, Section 11(d)-(f); BX Options Rules, Chapter VI, Section 
11(d)-(f). The Commission notes that these conditions are consistent 
with the conditions the Commission is approving today for ISE Gemini 
and ISE Mercury's operation of NES as a facility of each Exchange 
for outbound options routing to other market centers. See infra 
Section III.C.
    \29\ See ISE Exchange Routing Order, supra note 14.
---------------------------------------------------------------------------

    Recognizing that the Commission previously expressed concern that 
the affiliation of an exchange with one of its members raises the 
potential for unfair competitive advantage and potential conflicts of 
interest between an exchange's self-regulatory obligations and its 
commercial interest, ISE Gemini and ISE Mercury proposed the following 
limitations and conditions to permit each Exchange to accept inbound 
options orders that NES routes in its capacity as a facility of the 
Affiliated Exchanges: \30\
---------------------------------------------------------------------------

    \30\ See ISE Gemini Notice, supra note 5, at 96137-38; ISE 
Mercury Notice, supra note 5, at 96090.
---------------------------------------------------------------------------

     First, each Exchange and the Financial Industry Regulatory 
Authority (``FINRA'') will maintain a Regulatory Services Agreement 
(``RSA''), as well as an agreement pursuant to Rule 17d-2 under the Act 
(``17d-2 Agreement'').\31\ Pursuant to the RSA and the 17d-2 Agreement, 
FINRA will be allocated regulatory responsibilities to review NES's 
compliance with certain Exchange rules.\32\ Pursuant to the RSA, 
however, each Exchange retains ultimate responsibility for enforcing 
its rules with respect to NES.
---------------------------------------------------------------------------

    \31\ 17 CFR 240.17d-2.
    \32\ NES is also subject to independent oversight by FINRA, its 
designated examining authority, for compliance with financial 
responsibility requirements.
---------------------------------------------------------------------------

     Second, FINRA will monitor NES for compliance with each of 
the Exchange's trading rules, and will collect and maintain certain 
related information.\33\
---------------------------------------------------------------------------

    \33\ Pursuant to the RSA, both FINRA and the respective Exchange 
will collect and maintain all alerts, complaints, investigations and 
enforcement actions in which NES (in its capacity as a facility of 
each of the Affiliated Exchanges routing orders to the Exchange) is 
identified as a participant that has potentially violated applicable 
Commission or Exchange rules. The respective 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 ISE Gemini Notice, 
supra note 5, at 96137 n.14 and accompanying text; ISE Mercury 
Notice, supra note 5, at 96090 n.14 and accompanying text.
---------------------------------------------------------------------------

     Third, FINRA will provide a report to each Exchange's 
chief regulatory officer (``CRO''), on a quarterly basis, that: (i) 
Quantifies all alerts (of which the Exchange or FINRA is aware) that 
identify NES as a participant that has potentially violated Commission, 
or the respective Exchange's, rules, and (ii) lists all investigations 
that identify NES as a participant that has potentially violated 
Commission, or the respective Exchange's, rules.
     Fourth, ISE Gemini and ISE Mercury proposed to amend ISE 
Gemini Rule 309 and ISE Mercury Rule 309, respectively, to add ISE 
Gemini Rule 309(b) and ISE Mercury Rule 309(b), which will provide that 
Nasdaq, Inc., as the holding company owning both the Exchange and NES, 
shall establish and maintain procedures and internal controls 
reasonably designed to ensure that NES does not develop or implement 
changes to its system, based on non-public information obtained 
regarding planned changes to the Exchange's systems as a result of its 
affiliation with the Exchange, until such information is available 
generally to similarly situated Exchange Members, in connection with 
the provision of inbound routing to the Exchange.\34\
---------------------------------------------------------------------------

    \34\ See proposed ISE Gemini Rule 309(b); proposed ISE Mercury 
Rule 309(b). ISE Gemini and ISE Mercury each proposed to designate 
existing ISE Gemini Rule 309 and ISE Mercury Rule 309, respectively, 
as subparagraph (a). See proposed ISE Gemini Rule 309(a); proposed 
ISE Mercury Rule 309(a).
---------------------------------------------------------------------------

    The Commission finds that ISE Gemini and ISE Mercury's proposed 
rule changes to permit each Exchange to accept inbound options orders 
routed by NES from its Affiliated Exchanges, including the related 
change to ISE Gemini Rule 309 and ISE Mercury Rule 309, are consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange. Specifically, 
the Commission finds that the proposed rule changes are consistent with 
Section 6(b)(1) of the Act,\35\ and Section 6(b)(5) of the Act.\36\
---------------------------------------------------------------------------

    \35\ 15 U.S.C. 78f(b)(1). See also supra note 20 and 
accompanying text.
    \36\ 15 U.S.C. 78f(b)(5). See also supra note 21 and 
accompanying text.
---------------------------------------------------------------------------

    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.\37\ Although the Commission continues to be concerned about 
potential unfair competition and conflicts of interest between an 
exchange's self-regulatory obligations and its commercial interest when 
the exchange is affiliated with one of its members, for the reasons 
discussed below, the Commission believes that it is consistent with the 
Act to permit NES, in its capacity as a facility of each of the 
Affiliated Exchanges, to route options orders inbound to ISE Gemini and 
ISE Mercury, subject to the limitations and conditions described 
above.\38\
---------------------------------------------------------------------------

    \37\ See supra note 25 and accompanying text.
    \38\ The Commission notes that these limitations and conditions 
are consistent with those previously approved by the Commission for 
other exchanges. See, e.g., Securities Exchange Act Release Nos. 
67256, supra note 27, at 39281-82; and 69299 (March 25, 2013), 78 FR 
19337 (March 29, 2013) (SR-Phlx-2013-15) (order approving a proposed 
rule change to make permanent a pilot program to permit PSX to 
accept inbound orders routed by NES from BX); and BX Equity Routing 
Approval, supra note 9.
---------------------------------------------------------------------------

    The Commission believes that these limitations and conditions will 
mitigate its concerns about potential conflicts of interest and unfair 
competitive advantage. In particular, the Commission believes that a 
non-affiliated SRO's oversight of NES,\39\ combined with a non-
affiliated SRO's monitoring of NES's compliance with each of the 
respective Exchange's rules and quarterly reporting to the respective 
Exchange, will help to protect the independence of ISE Gemini and ISE 
Mercury's regulatory responsibilities with respect to NES. The 
Commission also believes that proposed ISE Gemini Rule 309(b) and 
proposed ISE Mercury Rule 309(b) are designed to ensure that NES cannot 
use any information advantage it may have because of its affiliation 
with ISE Gemini or ISE Mercury.\40\
---------------------------------------------------------------------------

    \39\ This oversight will be accomplished through the 17d-2 
Agreement between FINRA and each Exchange and the RSA.
    \40\ See supra note 34 and accompanying text.
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C. Outbound Routing, Cancellation of Orders, and Error Accounts

    As discussed above, the Commission is today approving a proposed 
rule change by ISE that will amend certain provisions in Chapter 19 of 
ISE's rulebook, which is incorporated by reference to, and will 
therefore also become, the rules of ISE Gemini and ISE Mercury.\41\ 
Specifically, these new rules incorporated by reference will (1) permit 
ISE Gemini and ISE Mercury to route outbound orders in options listed 
and open for trading on their respective systems to away markets 
through NES, either directly or through a third-party routing broker-
dealer; and (2) govern cancellation of orders by the Exchange or NES as 
either deems necessary to maintain a fair and orderly market if a 
technical or systems issue occurs at the Exchange, NES, or a routing 
destination, and the maintenance of an error account by NES for the 
purpose of addressing error positions that result from a

[[Page 10814]]

technical or systems issue at the Exchange, NES, a routing destination, 
or an unaffiliated third-party routing broker-dealer that affects one 
or more orders.\42\ The Commission found these rules, which will also 
become rules of ISE Gemini and ISE Mercury, to be consistent with the 
Act.\43\
---------------------------------------------------------------------------

    \41\ See supra notes 13-15 and accompanying text.
    \42\ See supra note 14 and accompanying text.
    \43\ See ISE Exchange Routing Order, supra note 14.
---------------------------------------------------------------------------

    ISE Gemini and ISE Mercury each proposed that NES be permitted to 
perform the same functions pursuant to the same conditions with respect 
to the outbound routing of orders, cancellation of orders, and the 
handling of error positions as set forth in the ISE proposal.\44\ As 
discussed in the ISE Exchange Routing Order, the Commission believes 
that the proposed rules and procedures regarding the Exchanges' use of 
NES to route orders to away markets, cancellation of orders, and 
handling of error positions, which will also apply to ISE Gemini and 
ISE Mercury's use of NES, are consistent with the Act, for the reasons, 
and pursuant to the protections and considerations, discussed in such 
order.\45\
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    \44\ See ISE Gemini Notice, supra note 5, at 96138; ISE Mercury 
Notice, supra note 5, at 96091.
    \45\ See ISE Exchange Routing Order, supra note 14, at Section 
III.B and III.D. The proposal by ISE being approved today also makes 
other conforming changes to rules incorporated by reference. See ISE 
Exchange Routing Order, supra note 14.
---------------------------------------------------------------------------

    In addition, the Exchanges propose to make a related, conforming 
rule change to ISE Gemini Rule 705 and ISE Mercury Rule 705, 
respectively, which do not incorporate by reference ISE's rules. 
Currently, pursuant to ISE rules incorporated by reference, ISE Gemini 
and ISE Mercury utilize Linkage Handlers \46\ unaffiliated with the 
Exchange to route outbound orders.\47\ Pursuant to the proposed rule 
change by ISE, as applied to the Exchanges, ISE Gemini and ISE Mercury 
will no longer utilize unaffiliated Linkage Handlers to route outbound 
orders and instead, NES will route orders to other options exchanges, 
either directly, or indirectly through unaffiliated third-party routing 
broker-dealers, on behalf of ISE Gemini and ISE Mercury.\48\ 
Accordingly, ISE Gemini and ISE Mercury have proposed to remove ISE 
Gemini Rule 705(d)(4) and ISE Mercury Rule 705(d)(4), respectively, 
which provide an exception to the limits on compensation in ISE Gemini 
Rule 705(d) and ISE Mercury Rule 705(d) for Members to the extent such 
Members are acting as Linkage Handlers.\49\ ISE Gemini and ISE Mercury 
explained that Phlx does not have a similar provision and ISE is also 
removing this provision from its comparable rule.\50\ The Commission 
believes that this minor, conforming revision is consistent with the 
Act.
---------------------------------------------------------------------------

    \46\ A ``Linkage Handler'' is a broker that is unaffiliated with 
the Exchange with which the Exchange has contracted to provide 
Routing Services, as that term is defined in ISE Rule 1903, by 
routing ISO(s) to other exchange(s) as an agent on behalf of Public 
Customer and Non-Customer Orders according to the requirements of 
Rule 1901 (prohibition on trade-throughs) and Rule 1902 (prohibition 
on locked and crossed markets). See ISE Rule 1901, Supplementary 
Material .03. ISE Gemini Rules 100(a)(28) and (39), and ISE Mercury 
Rules 100(a)(28) and (39), define ``Non-Customer Order'' and 
``Public Customer Order,'' respectively.
    \47\ See ISE Rule 1903(a).
    \48\ See ISE Exchange Routing Order, supra note 14.
    \49\ See proposed ISE Gemini Rule 705(d); proposed ISE Mercury 
Rule 705(d).
    \50\ See ISE Gemini Notice, supra note 5, at 96138; ISE Mercury 
Notice, supra note 5, at 96091. See also ISE Notice, supra note 14, 
at 96095 (noting that, unlike NES, Linkage Handlers are not 
affiliated with ISE and ISE does not believe that such an exception 
to compensation limits is necessary for NES).
---------------------------------------------------------------------------

IV. Implementation of Proposed Rule Change

    ISE Gemini and ISE Mercury stated that they intend to begin 
implementation of the proposed rule changes in the first quarter of 
2017 and third quarter of 2017, respectively, and that the migration 
will be on a symbol-by-symbol basis.\51\ The Commission expects that 
the Exchanges will issue alerts to Members to announce the relevant 
migration date for specific symbols. ISE Gemini and ISE Mercury 
represented that they will add notations in each rulebook to cross-
reference the amended rule text and clarify the respective 
implementation dates.\52\
---------------------------------------------------------------------------

    \51\ See ISE Gemini Notice, supra note 5, at 96138; ISE Mercury 
Notice, supra note 5, at 96091.
    \52\ See ISE Gemini Notice, supra note 5, at 96138; ISE Mercury 
Notice, supra note 5, at 96091.
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III. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\53\ that the proposed rule changes (SR-ISEGemini-2016-16; SR-
ISEMercury-2016-22), each as modified by their respective Amendment 
Nos. 1 and 2, be, and hereby are, approved.
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    \53\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\54\
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    \54\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-02992 Filed 2-14-17; 8:45 am]
 BILLING CODE 8011-01-P