Self-Regulatory Organizations; NASDAQ BX, Inc.; The Nasdaq Stock Market LLC; NASDAQ PHLX LLC; Order Granting Approval of Proposed Rule Changes, as Modified by Amendment No. 1s, To Accept Orders Routed Inbound From the International Stock Exchange, LLC, ISE Gemini, LLC, and ISE Mercury, LLC, by Nasdaq Execution Services, LLC, 10844-10846 [2017-02993]

Download as PDF 10844 Federal Register / Vol. 82, No. 30 / Wednesday, February 15, 2017 / Notices or send an email to: PRA_Mailbox@ sec.gov. Comments must be submitted to OMB within 30 days of this notice. Dated: February 8, 2017. Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–02974 Filed 2–14–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–79996; File Nos. SR–BX– 2016–068; SR–NASDAQ–2016–169; SR– Phlx–2016–120] Self-Regulatory Organizations; NASDAQ BX, Inc.; The Nasdaq Stock Market LLC; NASDAQ PHLX LLC; Order Granting Approval of Proposed Rule Changes, as Modified by Amendment No. 1s, To Accept Orders Routed Inbound From the International Stock Exchange, LLC, ISE Gemini, LLC, and ISE Mercury, LLC, by Nasdaq Execution Services, LLC February 9, 2017. I. Introduction On December 9, 2016, NASDAQ BX, Inc. (‘‘BX’’), The NASDAQ Stock Market LLC (‘‘Nasdaq’’), and NASDAQ PHLX LLC (‘‘Phlx’’ and, each of BX, Nasdaq, and Phlx a ‘‘NASDAQ Exchange’’ 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 proposed rule changes to permit BX, Phlx, and The NASDAQ Options Market LLC (‘‘NOM’’) 3 to accept options orders routed inbound from the International Stock Exchange, LLC (‘‘ISE’’), ISE Gemini, LLC (‘‘ISE Gemini’’), and ISE Mercury, LLC (‘‘ISE Mercury’’ and, together with ISE and ISE Gemini, the ‘‘ISE Exchanges’’) by Nasdaq Execution Services, LLC (‘‘NES’’), an affiliate of both the NASDAQ Exchanges and the ISE Exchanges (the NASDAQ Exchanges, together with the ISE Exchanges, the ‘‘Affiliated Exchanges’’).4 On December 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 NOM is a facility of Nasdaq. See Nasdaq Options Rules, Chapter I, Section 1(a)(28). 4 The ISE Exchanges submitted related proposed rule changes that, among other things, would permit each ISE Exchange to use NES to route options orders outbound to away markets. See Securities Exchange Act Release Nos. 79665 (December 22, 2016), 81 FR 96092 (December 29, 2016) (SR–ISE–2016–27); 79664 (December 22, 2016), 81 FR 96136 (December 29, 2016) (SR– ISEGemini–2016–16); and 79663 (December 22, 2016), 81 FR 96089 (December 29, 2016) (SR– ISEMercury–2016–22). The Commission is also mstockstill on DSK3G9T082PROD with NOTICES 2 17 VerDate Sep<11>2014 18:44 Feb 14, 2017 Jkt 241001 20, 2016, each of the NASDAQ Exchanges filed an Amendment No. 1 to its respective proposed rule change. The proposed rule changes, each as modified by Amendment No. 1 thereto, were published for comment in the Federal Register on December 29, 2016.5 The Commission received no comments on the proposals. This order approves the proposed rule changes, as modified by their respective Amendment No. 1s. II. Background Phlx Rule 985(b)(i)(A) prohibits Phlx or any entity with which it is affiliated from, directly or indirectly, acquiring or maintaining an ownership interest in, or engaging in a business venture with, an Exchange member or an affiliate of an Exchange member in the absence of an effective filing under Section 19(b) of the Act.6 Nasdaq’s and BX’s rules include similar prohibitions.7 NES is a registered broker-dealer that is a member of NOM,8 BX,9 and Phlx,10 and currently provides to members of each, optional routing services to other markets.11 NES is owned by Nasdaq, Inc.,12 which also owns all of the today approving these proposed rules changes. See Securities Exchange Act Release Nos. 79994 (February 9, 2017); and 79995 (February 9, 2017) (‘‘ISE Exchange Routing Orders’’). 5 See Securities Exchange Act Release Nos. 79661 (December 22, 2016), 81 FR 96100 (SR–BX–2016– 068) (‘‘BX Notice’’); 79662 (December 22, 2016), 81 FR 96087 (SR–NASDAQ–2016–169) (‘‘Nasdaq Notice’’); and 79660 (December 22, 2016), 81 FR 96060 (SR–Phlx–2016–120) (‘‘Phlx Notice’’). 6 15 U.S.C. 78s(b). Phlx Rule 985 also prohibits a Phlx member from being or becoming an affiliate of Phlx, or an affiliate of an entity affiliated with Phlx, in the absence of an effective filing under Section 19(b) of the Act. See Phlx Rule 958(b)(i)(B). 7 Pursuant to Nasdaq Rule 2160(a): ‘‘(1) Nasdaq or any entity with which it is affiliated shall not, directly or indirectly, acquire or maintain an ownership interest in, or engage in a business venture with, a Nasdaq member or an affiliate of a Nasdaq member in the absence of an effective filing under Section 19(b) of the Act; and (2) a Nasdaq member shall not be or become an affiliate of Nasdaq, or an affiliate of an entity affiliated with Nasdaq, in the absence of an effective filing under Section 19(b) of the Act.’’ Pursuant to BX Rule 2140(a): ‘‘(1) [BX] or any entity with which it is affiliated shall not, directly or indirectly, acquire or maintain an ownership interest in, or engage in a business venture with, [a BX] member or an affiliate of [a BX] member in the absence of an effective filing under Section 19(b) of the Act; and (2) [a BX] member shall not be or become an affiliate of [BX], or an affiliate of an entity affiliated with [BX], in the absence of an effective filing under Section 19(b) of the Act.’’ 8 See Nasdaq Notice, supra note 5, at 96087. 9 See BX Notice, supra note 5, at 96100. 10 See Phlx Notice, supra note 5, at 96061. 11 See Phlx Rule 1080(m)(iii); Nasdaq Options Rules, Chapter VI, Section 11(e); and BX Options Rules, Chapter VI, Section 11(e). See also Phlx Notice, supra note 5, at 96061; Nasdaq Notice, supra note 5, at 96087; and BX Notice, supra note 5, at 96100. 12 See Securities Exchange Act Release No. 69233 (March 25, 2013), 78 FR 19352 (March 29, 2013) PO 00000 Frm 00111 Fmt 4703 Sfmt 4703 Affiliated Exchanges.13 Thus, NES is an affiliate of the NASDAQ Exchanges, as well as an affiliate of the ISE Exchanges. Absent an effective filing, the rules of Nasdaq, BX, and Phlx would prohibit NES from being a member of each of those Exchanges. Today, NES is a member of each of the NASDAQ Exchanges and performs certain limited activities for each, pursuant to effective filings pursuant to Section 19(b).14 Among other activities, each of the NASDAQ Exchanges accepts options orders routed inbound from each of the other NASDAQ Exchanges pursuant to certain limitations and conditions.15 With the current proposed rule changes, the NASDAQ Exchanges seek approval to permit NES to also route options orders inbound from the ISE Exchanges pursuant to those same limitations and conditions.16 III. Discussion and Commission Findings After careful review, the Commission finds that the proposed rule changes, each as modified by Amendment No. 1, (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. 13 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 a proposed rule change relating to Nasdaq, Inc.’s acquisition of ISE, ISE Gemini, and ISE Mercury). 14 See, e.g., supra note 11; and Securities Exchange Act Release Nos. 69233, supra note 12; 69232 (March 25, 2013), 78 FR 19342 (March 29, 2013) (SR–BX–2013–013) (order approving a proposed rule change to make permanent a pilot program to permit BX to accept inbound orders routed by NES from PSX); 69229 (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); 71416 (January 28, 2014), 79 FR 6244 (February 3, 2014) (SR–Phlx–2014–05) (notice of filing and immediate effectiveness of proposed rule change to permit Phlx to receive inbound orders in options routed through NES from NOM and BX); 71420 (January 28, 2014), 79 FR 6256 (February 3, 2014)(SR–BX– 2014–004) (notice of filing and immediate effectiveness of proposed rule change to permit BX to receive inbound orders in options routed through NES from NOM and Phlx); and 71418 (January 28, 2014), 79 FR 6262 (February 3, 2014) (SR– NASDAQ–2014–008) (notice of filing and immediate effectiveness of proposed rule change to permit NOM to receive inbound orders in options routed through NES from BX and Phlx). 15 See Securities Exchange Act Release Nos. 71416, supra note 14; 71420, supra note 14; and 71418, supra note 14. With respect to Nasdaq, routing of options orders is permitted into NOM from BX and Phlx, into Phlx from NOM and BX, and into BX from NOM and Phlx. See id. 16 See Phlx Notice, supra note 5, at 96062; Nasdaq Notice, supra note 5, at 96088; and BX Notice, supra note 5, at 96101. In the case of Nasdaq, Nasdaq proposes to permit NES to route options orders into NOM. See Nasdaq Notice, supra note 5, at 96087. E:\FR\FM\15FEN1.SGM 15FEN1 Federal Register / Vol. 82, No. 30 / Wednesday, February 15, 2017 / Notices mstockstill on DSK3G9T082PROD with NOTICES are consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.17 Specifically, the Commission finds that the proposed rule changes are consistent with Section 6(b)(1) of the Act,18 which requires, among other things, that a national securities exchange be so organized and have the capacity to carry out the purposes of the Act, and to comply and enforce compliance by its members and persons associated with its members, with the provisions of the Act, the rules and regulation thereunder, and the rules of the exchange. Further, the Commission finds that the proposed rule changes are consistent with Section 6(b)(5) of the Act,19 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. For each of the ISE Exchanges, NES will operate as a facility that provides outbound options routing from the respective ISE Exchange to other market centers, subject to certain conditions.20 The operation of NES as a facility of each of the ISE Exchanges providing outbound routing services will be subject to oversight by each of the ISE Exchanges, respectively, as well as Commission oversight. Each of the ISE Exchanges will be responsible for ensuring that NES’s outbound options routing services are operated consistent with Section 6 of the Act and ISE, ISE Gemini, and ISE Mercury’s rules, respectively. In addition, the ISE 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 has expressed concern regarding the 17 In approving these proposed rule changes, the Commission has considered the proposed rules’ impact on efficiency, competition and capital formation. 15 U.S.C. 78c(f). 18 15 U.S.C. 78f(b)(1). 19 15 U.S.C. 78f(b)(5). 20 See ISE Exchange Routing Orders, supra note 4. VerDate Sep<11>2014 18:44 Feb 14, 2017 Jkt 241001 potential for conflicts of interest in instances where a member firm is affiliated with an exchange to which it is routing orders, each NASDAQ Exchange previously implemented limitations and conditions on its affiliation with NES to permit the Exchange to accept inbound options orders that NES routes in its capacity as a facility of the other NASDAQ Exchanges.21 Again recognizing the concern previously expressed by the Commission, each NASDAQ Exchange now proposes that it be permitted 22 to accept inbound options orders that NES routes in its capacity as a facility of ISE, ISE Gemini, and ISE Mercury, subject to those same limitations and conditions, as follows: 23 • First, each NASDAQ 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’’).24 Pursuant to the RSA and the 17d–2 Agreement, FINRA will be allocated regulatory responsibilities to review NES’s compliance with certain Nasdaq, BX, and Phlx rules, respectively.25 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.26 21 See supra note 15 and accompanying text. the case of Nasdaq, the Exchange requests that NOM be permitted to accept inbound options orders that NES routes in its capacity as a facility of the ISE Exchanges. See Nasdaq Notice, supra note 5, at 96087. 23 See Phlx Notice, supra note 5, at 96061; Nasdaq Notice, supra note 5, at 96087–88; BX Notice, supra note 5, at 96101. 24 17 CFR 240.17d–2. 25 NES is also subject to independent oversight by FINRA, its designated examining authority, for compliance with financial responsibility requirements. 26 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 ISE 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 Nasdaq Notice, supra note 5, at 96088 n.12; BX Notice, supra note 5, at 96101 n.12; and Phlx Notice, supra note 5, at 96061 n.12. Each of the NASDAQ Exchanges state that the RSA functions in this manner in connection with NES routing in its capacity as a facility of the other NASDAQ Exchanges, and each now seeks to permit an inbound routing relationship with the ISE Exchanges pursuant to the same conditions. See 22 In PO 00000 Frm 00112 Fmt 4703 Sfmt 4703 10845 • 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, Nasdaq, BX, and Phlx each have in place a rule that requires Nasdaq, Inc., as the holding company owning both the Exchange and NES, to 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.27 Each of the NASDAQ Exchanges has stated that it has met all of the abovelisted conditions in connection with NES routing in its capacity as a facility of the other NASDAQ Exchanges, and will comply with these conditions in connection with NES routing in its capacity as a facility of the ISE Exchanges. By meeting such conditions, each NASDAQ Exchange believes that it has set up mechanisms that protect the independence of the Exchange’s regulatory responsibility with respect to NES, and has demonstrated that NES cannot use any information advantage it may have because of its affiliation with each NASDAQ Exchange.28 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.29 Although the Commission Phlx Notice, supra note 5, at 96061–62 & n.12; Nasdaq Notice, supra note 5, at 96088 & n.12; and BX Notice, supra note 5, at 96101 & n.12. 27 See Nasdaq Rule 2160(c); Phlx Rule 985(c)(2); BX Rule 2140(c). The NASDAQ Exchange rules each state that ‘‘NASDAQ OMX Group, Inc.’’ shall establish and maintain these procedures and controls. Nasdaq, Inc. was formerly known as NASDAQ OMX Group, Inc. See Securities Exchange Act Release No. 75421 (July 10, 2015), 80 FR 42136 (July 16, 2015) (SR–BSECC–2015–001; SR–BX– 2015–030; SR–NASDAQ–2015–058; SR–Phlx– 2015–46; SR–SCCP–2015–01). 28 See Nasdaq Notice, supra note 5, at 96088; Phlx Notice, supra note 5, at 96061–62; BX Notice, supra note 5, at 96101. 29 See, e.g., Securities Exchange Act Release Nos. 54170 (July 18, 2006), 71 FR 42149 (July 25, 2006) (SR–NASDAQ–2006–006) (order approving E:\FR\FM\15FEN1.SGM Continued 15FEN1 10846 Federal Register / Vol. 82, No. 30 / Wednesday, February 15, 2017 / Notices mstockstill on DSK3G9T082PROD with NOTICES continues to be concerned about potential unfair competition and conflicts of interest between an exchange’s self-regulatory obligations and its commercial interest when the exchange is affiliated with one of its members, for the reasons discussed below, the Commission believes that it is consistent with the Act to permit NES, in its capacity as a facility of each of the ISE Exchanges, to route options orders inbound to each of the NASDAQ Exchanges, subject to the limitations and conditions described above.30 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,31 combined with a non-affiliated SRO’s monitoring of NES’s compliance with each of the NASDAQ Exchange’s rules and quarterly reporting to each NASDAQ Exchange, will help to protect the independence of Nasdaq’s, BX’s, and Phlx’s regulatory responsibilities with respect to NES. The Commission also believes that the Exchanges’ rules are designed to ensure that NES cannot use any information advantage it may have because of its affiliation with Nasdaq, BX, or Phlx, respectively.32 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.). 30 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 (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) at 39281–39282; 69233, supra note 12; 69232, supra note 14; 69229, supra note 14; and the ISE Exchange Routing Orders, supra note 4. 31 This oversight will be accomplished through the 17d–2 Agreement and the RSA. 32 See supra note 27 and accompanying text. VerDate Sep<11>2014 18:44 Feb 14, 2017 Jkt 241001 V. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,33 that the proposed rule changes (SR–BX–2016– 068; SR–NASDAQ–2016–169; SR–Phlx– 2016–120), each as modified by their respective Amendment No. 1, be, and hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.34 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–02993 Filed 2–14–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–80003; File No. SR–CBOE– 2017–011] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the Fees Schedule February 9, 2017. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on January 27, 2017, Chicago Board Options Exchange, Incorporated (the ‘‘Exchange’’ or ‘‘CBOE’’) 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 Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend its Fees Schedule. The text of the proposed rule change is also available on the Exchange’s Web site (https:// www.cboe.com/AboutCBOE/ CBOELegalRegulatoryHome.aspx), at the Exchange’s Office of the Secretary, and at the Commission’s Public Reference Room. 33 15 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 34 17 PO 00000 Frm 00113 Fmt 4703 Sfmt 4703 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 and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to amend its Marketing Fee program, effective February 1, 2017. By way of background the Marketing Fee is assessed on certain transactions of Market-Makers resulting from (i) customer orders from payment accepting firms, or (ii) customer orders that have designated a ‘‘Preferred Market-Maker’’ (‘‘PMM’’) under CBOE Rule 8.13. The funds collected via this Marketing Fee are then put into pools controlled by DPMs and PMMs. The DPM or PMM controlling a certain pool of funds can then determine the order flow provider(s) to which the funds should be directed in order to encourage such order flow provider(s) to send orders to the Exchange. On each order, an order flow provider can designate the Preferred Market-Maker to which the funds generated from the order sent by the order flow provider should be allocated (a ‘‘Preferred order’’). The Exchange proposes to expand the Marketing Fee program to Lead MarketMakers (‘‘LMMs’’). Under the proposed rule change, LMMs would be given access to the Marketing Fee funds generated from those orders on which the LMM was preferred (i.e., designated) and those funds would be collected by CBOE and disbursed by CBOE according to the instructions of the LMM. The Exchange notes that expanding the Marketing Fee program to LMMs allows LMMs to amass a pool of funds with which to use to incent order flow providers to send order flow to the Exchange. This increased order flow would benefit all market participants on the Exchange. The Exchange also notes that as with DPMs and PMMs, an LMM may have access to the Marketing Fee funds generated from a Preferred order regardless of whether that LMM has an appointment in the class in which the E:\FR\FM\15FEN1.SGM 15FEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 82, Number 30 (Wednesday, February 15, 2017)]
[Notices]
[Pages 10844-10846]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-02993]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79996; File Nos. SR-BX-2016-068; SR-NASDAQ-2016-169; 
SR-Phlx-2016-120]


Self-Regulatory Organizations; NASDAQ BX, Inc.; The Nasdaq Stock 
Market LLC; NASDAQ PHLX LLC; Order Granting Approval of Proposed Rule 
Changes, as Modified by Amendment No. 1s, To Accept Orders Routed 
Inbound From the International Stock Exchange, LLC, ISE Gemini, LLC, 
and ISE Mercury, LLC, by Nasdaq Execution Services, LLC

February 9, 2017.

I. Introduction

    On December 9, 2016, NASDAQ BX, Inc. (``BX''), The NASDAQ Stock 
Market LLC (``Nasdaq''), and NASDAQ PHLX LLC (``Phlx'' and, each of BX, 
Nasdaq, and Phlx a ``NASDAQ Exchange'' 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\ proposed rule changes to permit BX, Phlx, 
and The NASDAQ Options Market LLC (``NOM'') \3\ to accept options 
orders routed inbound from the International Stock Exchange, LLC 
(``ISE''), ISE Gemini, LLC (``ISE Gemini''), and ISE Mercury, LLC 
(``ISE Mercury'' and, together with ISE and ISE Gemini, the ``ISE 
Exchanges'') by Nasdaq Execution Services, LLC (``NES''), an affiliate 
of both the NASDAQ Exchanges and the ISE Exchanges (the NASDAQ 
Exchanges, together with the ISE Exchanges, the ``Affiliated 
Exchanges'').\4\ On December 20, 2016, each of the NASDAQ Exchanges 
filed an Amendment No. 1 to its respective proposed rule change. The 
proposed rule changes, each as modified by Amendment No. 1 thereto, 
were published for comment in the Federal Register on December 29, 
2016.\5\ The Commission received no comments on the proposals. This 
order approves the proposed rule changes, as modified by their 
respective Amendment No. 1s.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ NOM is a facility of Nasdaq. See Nasdaq Options Rules, 
Chapter I, Section 1(a)(28).
    \4\ The ISE Exchanges submitted related proposed rule changes 
that, among other things, would permit each ISE Exchange to use NES 
to route options orders outbound to away markets. See Securities 
Exchange Act Release Nos. 79665 (December 22, 2016), 81 FR 96092 
(December 29, 2016) (SR-ISE-2016-27); 79664 (December 22, 2016), 81 
FR 96136 (December 29, 2016) (SR-ISEGemini-2016-16); and 79663 
(December 22, 2016), 81 FR 96089 (December 29, 2016) (SR-ISEMercury-
2016-22). The Commission is also today approving these proposed 
rules changes. See Securities Exchange Act Release Nos. 79994 
(February 9, 2017); and 79995 (February 9, 2017) (``ISE Exchange 
Routing Orders'').
    \5\ See Securities Exchange Act Release Nos. 79661 (December 22, 
2016), 81 FR 96100 (SR-BX-2016-068) (``BX Notice''); 79662 (December 
22, 2016), 81 FR 96087 (SR-NASDAQ-2016-169) (``Nasdaq Notice''); and 
79660 (December 22, 2016), 81 FR 96060 (SR-Phlx-2016-120) (``Phlx 
Notice'').
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II. Background

    Phlx Rule 985(b)(i)(A) prohibits Phlx or any entity with which it 
is affiliated from, directly or indirectly, acquiring or maintaining an 
ownership interest in, or engaging in a business venture with, an 
Exchange member or an affiliate of an Exchange member in the absence of 
an effective filing under Section 19(b) of the Act.\6\ Nasdaq's and 
BX's rules include similar prohibitions.\7\ NES is a registered broker-
dealer that is a member of NOM,\8\ BX,\9\ and Phlx,\10\ and currently 
provides to members of each, optional routing services to other 
markets.\11\ NES is owned by Nasdaq, Inc.,\12\ which also owns all of 
the Affiliated Exchanges.\13\ Thus, NES is an affiliate of the NASDAQ 
Exchanges, as well as an affiliate of the ISE Exchanges. Absent an 
effective filing, the rules of Nasdaq, BX, and Phlx would prohibit NES 
from being a member of each of those Exchanges. Today, NES is a member 
of each of the NASDAQ Exchanges and performs certain limited activities 
for each, pursuant to effective filings pursuant to Section 19(b).\14\ 
Among other activities, each of the NASDAQ Exchanges accepts options 
orders routed inbound from each of the other NASDAQ Exchanges pursuant 
to certain limitations and conditions.\15\ With the current proposed 
rule changes, the NASDAQ Exchanges seek approval to permit NES to also 
route options orders inbound from the ISE Exchanges pursuant to those 
same limitations and conditions.\16\
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    \6\ 15 U.S.C. 78s(b). Phlx Rule 985 also prohibits a Phlx member 
from being or becoming an affiliate of Phlx, or an affiliate of an 
entity affiliated with Phlx, in the absence of an effective filing 
under Section 19(b) of the Act. See Phlx Rule 958(b)(i)(B).
    \7\ Pursuant to Nasdaq Rule 2160(a): ``(1) Nasdaq or any entity 
with which it is affiliated shall not, directly or indirectly, 
acquire or maintain an ownership interest in, or engage in a 
business venture with, a Nasdaq member or an affiliate of a Nasdaq 
member in the absence of an effective filing under Section 19(b) of 
the Act; and (2) a Nasdaq member shall not be or become an affiliate 
of Nasdaq, or an affiliate of an entity affiliated with Nasdaq, in 
the absence of an effective filing under Section 19(b) of the Act.''
    Pursuant to BX Rule 2140(a): ``(1) [BX] or any entity with which 
it is affiliated shall not, directly or indirectly, acquire or 
maintain an ownership interest in, or engage in a business venture 
with, [a BX] member or an affiliate of [a BX] member in the absence 
of an effective filing under Section 19(b) of the Act; and (2) [a 
BX] member shall not be or become an affiliate of [BX], or an 
affiliate of an entity affiliated with [BX], in the absence of an 
effective filing under Section 19(b) of the Act.''
    \8\ See Nasdaq Notice, supra note 5, at 96087.
    \9\ See BX Notice, supra note 5, at 96100.
    \10\ See Phlx Notice, supra note 5, at 96061.
    \11\ See Phlx Rule 1080(m)(iii); Nasdaq Options Rules, Chapter 
VI, Section 11(e); and BX Options Rules, Chapter VI, Section 11(e). 
See also Phlx Notice, supra note 5, at 96061; Nasdaq Notice, supra 
note 5, at 96087; and BX Notice, supra note 5, at 96100.
    \12\ 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.
    \13\ 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 a proposed rule 
change relating to Nasdaq, Inc.'s acquisition of ISE, ISE Gemini, 
and ISE Mercury).
    \14\ See, e.g., supra note 11; and Securities Exchange Act 
Release Nos. 69233, supra note 12; 69232 (March 25, 2013), 78 FR 
19342 (March 29, 2013) (SR-BX-2013-013) (order approving a proposed 
rule change to make permanent a pilot program to permit BX to accept 
inbound orders routed by NES from PSX); 69229 (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); 71416 (January 28, 
2014), 79 FR 6244 (February 3, 2014) (SR-Phlx-2014-05) (notice of 
filing and immediate effectiveness of proposed rule change to permit 
Phlx to receive inbound orders in options routed through NES from 
NOM and BX); 71420 (January 28, 2014), 79 FR 6256 (February 3, 
2014)(SR-BX-2014-004) (notice of filing and immediate effectiveness 
of proposed rule change to permit BX to receive inbound orders in 
options routed through NES from NOM and Phlx); and 71418 (January 
28, 2014), 79 FR 6262 (February 3, 2014) (SR-NASDAQ-2014-008) 
(notice of filing and immediate effectiveness of proposed rule 
change to permit NOM to receive inbound orders in options routed 
through NES from BX and Phlx).
    \15\ See Securities Exchange Act Release Nos. 71416, supra note 
14; 71420, supra note 14; and 71418, supra note 14. With respect to 
Nasdaq, routing of options orders is permitted into NOM from BX and 
Phlx, into Phlx from NOM and BX, and into BX from NOM and Phlx. See 
id.
    \16\ See Phlx Notice, supra note 5, at 96062; Nasdaq Notice, 
supra note 5, at 96088; and BX Notice, supra note 5, at 96101. In 
the case of Nasdaq, Nasdaq proposes to permit NES to route options 
orders into NOM. See Nasdaq Notice, supra note 5, at 96087.
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
changes, each as modified by Amendment No. 1,

[[Page 10845]]

are consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\17\ Specifically, the Commission finds that the proposed rule 
changes are consistent with Section 6(b)(1) of the Act,\18\ which 
requires, among other things, that a national securities exchange be so 
organized and have the capacity to carry out the purposes of the Act, 
and to comply and enforce compliance by its members and persons 
associated with its members, with the provisions of the Act, the rules 
and regulation thereunder, and the rules of the exchange. Further, the 
Commission finds that the proposed rule changes are consistent with 
Section 6(b)(5) of the Act,\19\ 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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    \17\ In approving these proposed rule changes, the Commission 
has considered the proposed rules' impact on efficiency, competition 
and capital formation. 15 U.S.C. 78c(f).
    \18\ 15 U.S.C. 78f(b)(1).
    \19\ 15 U.S.C. 78f(b)(5).
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    For each of the ISE Exchanges, NES will operate as a facility that 
provides outbound options routing from the respective ISE Exchange to 
other market centers, subject to certain conditions.\20\ The operation 
of NES as a facility of each of the ISE Exchanges providing outbound 
routing services will be subject to oversight by each of the ISE 
Exchanges, respectively, as well as Commission oversight. Each of the 
ISE Exchanges will be responsible for ensuring that NES's outbound 
options routing services are operated consistent with Section 6 of the 
Act and ISE, ISE Gemini, and ISE Mercury's rules, respectively. In 
addition, the ISE Exchanges must each file with the Commission rule 
changes and fees relating to their outbound options routing services 
provided by NES.
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    \20\ See ISE Exchange Routing Orders, supra note 4.
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    Recognizing that the Commission has expressed concern regarding the 
potential for conflicts of interest in instances where a member firm is 
affiliated with an exchange to which it is routing orders, each NASDAQ 
Exchange previously implemented limitations and conditions on its 
affiliation with NES to permit the Exchange to accept inbound options 
orders that NES routes in its capacity as a facility of the other 
NASDAQ Exchanges.\21\ Again recognizing the concern previously 
expressed by the Commission, each NASDAQ Exchange now proposes that it 
be permitted \22\ to accept inbound options orders that NES routes in 
its capacity as a facility of ISE, ISE Gemini, and ISE Mercury, subject 
to those same limitations and conditions, as follows: \23\
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    \21\ See supra note 15 and accompanying text.
    \22\ In the case of Nasdaq, the Exchange requests that NOM be 
permitted to accept inbound options orders that NES routes in its 
capacity as a facility of the ISE Exchanges. See Nasdaq Notice, 
supra note 5, at 96087.
    \23\ See Phlx Notice, supra note 5, at 96061; Nasdaq Notice, 
supra note 5, at 96087-88; BX Notice, supra note 5, at 96101.
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     First, each NASDAQ 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'').\24\ Pursuant to the RSA and the 
17d-2 Agreement, FINRA will be allocated regulatory responsibilities to 
review NES's compliance with certain Nasdaq, BX, and Phlx rules, 
respectively.\25\ Pursuant to the RSA, however, each Exchange retains 
ultimate responsibility for enforcing its rules with respect to NES.
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    \24\ 17 CFR 240.17d-2.
    \25\ NES is also subject to independent oversight by FINRA, its 
designated examining authority, for compliance with financial 
responsibility requirements.
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     Second, FINRA will monitor NES for compliance with each of 
the Exchange's trading rules, and will collect and maintain certain 
related information.\26\
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    \26\ 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 ISE 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 Nasdaq Notice, supra 
note 5, at 96088 n.12; BX Notice, supra note 5, at 96101 n.12; and 
Phlx Notice, supra note 5, at 96061 n.12. Each of the NASDAQ 
Exchanges state that the RSA functions in this manner in connection 
with NES routing in its capacity as a facility of the other NASDAQ 
Exchanges, and each now seeks to permit an inbound routing 
relationship with the ISE Exchanges pursuant to the same conditions. 
See Phlx Notice, supra note 5, at 96061-62 & n.12; Nasdaq Notice, 
supra note 5, at 96088 & n.12; and BX Notice, supra note 5, at 96101 
& n.12.
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     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, Nasdaq, BX, and Phlx each have in place a rule 
that requires Nasdaq, Inc., as the holding company owning both the 
Exchange and NES, to 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.\27\
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    \27\ See Nasdaq Rule 2160(c); Phlx Rule 985(c)(2); BX Rule 
2140(c). The NASDAQ Exchange rules each state that ``NASDAQ OMX 
Group, Inc.'' shall establish and maintain these procedures and 
controls. Nasdaq, Inc. was formerly known as NASDAQ OMX Group, Inc. 
See Securities Exchange Act Release No. 75421 (July 10, 2015), 80 FR 
42136 (July 16, 2015) (SR-BSECC-2015-001; SR-BX-2015-030; SR-NASDAQ-
2015-058; SR-Phlx-2015-46; SR-SCCP-2015-01).
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    Each of the NASDAQ Exchanges has stated that it has met all of the 
above-listed conditions in connection with NES routing in its capacity 
as a facility of the other NASDAQ Exchanges, and will comply with these 
conditions in connection with NES routing in its capacity as a facility 
of the ISE Exchanges. By meeting such conditions, each NASDAQ Exchange 
believes that it has set up mechanisms that protect the independence of 
the Exchange's regulatory responsibility with respect to NES, and has 
demonstrated that NES cannot use any information advantage it may have 
because of its affiliation with each NASDAQ Exchange.\28\
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    \28\ See Nasdaq Notice, supra note 5, at 96088; Phlx Notice, 
supra note 5, at 96061-62; BX Notice, supra note 5, at 96101.
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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.\29\ Although the Commission

[[Page 10846]]

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 ISE Exchanges, to route options orders inbound 
to each of the NASDAQ Exchanges, subject to the limitations and 
conditions described above.\30\
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    \29\ 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.).
    \30\ 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 (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) at 39281-39282; 69233, supra note 12; 69232, supra 
note 14; 69229, supra note 14; and the ISE Exchange Routing Orders, 
supra note 4.
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    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,\31\ combined with a non-
affiliated SRO's monitoring of NES's compliance with each of the NASDAQ 
Exchange's rules and quarterly reporting to each NASDAQ Exchange, will 
help to protect the independence of Nasdaq's, BX's, and Phlx's 
regulatory responsibilities with respect to NES. The Commission also 
believes that the Exchanges' rules are designed to ensure that NES 
cannot use any information advantage it may have because of its 
affiliation with Nasdaq, BX, or Phlx, respectively.\32\
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    \31\ This oversight will be accomplished through the 17d-2 
Agreement and the RSA.
    \32\ See supra note 27 and accompanying text.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\33\ that the proposed rule changes (SR-BX-2016-068; SR-NASDAQ-
2016-169; SR-Phlx-2016-120), each as modified by their respective 
Amendment No. 1, be, and hereby is, approved.
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    \33\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
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    \34\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-02993 Filed 2-14-17; 8:45 am]
BILLING CODE 8011-01-P

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