Federal Register / Vol. 72, No. 83 / Tuesday, May 1, 2007 / Notices 23869 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3 Amendment No. 1 replaced and superseded the 

original filing in its entirety. 

4 Nasdaq will file with the Commission pursuant 

to Rule 19b–4 under the Act a separate proposed 

rule change to establish NOM as a facility (as 

defined in Section 3(a)(2) of the Act) of Nasdaq. 

5 See, e.g., Securities Exchange Act Release No. 

55162 (January 24, 2007), 72 FR 4738 (February 1, 

2007) (approving SR–Amex–2006–106). 6 15 U.S.C. 78f(g). 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–55667; File No. SR– 

NASDAQ–2007–004] 

Self-Regulatory Organizations; The 

NASDAQ Stock Market LLC; Notice of 

Filing of Proposed Rule Change and 

Amendment No. 1 Thereto To Establish 

Rules Governing the Trading of 

Options on the NASDAQ Options 

Market 

April 25, 2007. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 (‘‘Act’’ 

or ‘‘Exchange Act’’),1 and Rule 19b–4 

thereunder,2 notice is hereby given that 

on January 30, 2007, The NASDAQ 

Stock Market LLC (‘‘Nasdaq’’) filed with 

the Securities and Exchange 

Commission (‘‘Commission’’ or ‘‘SEC’’) 

the proposed rule change as described 

in Items I, II, and III below, which Items 

have been substantially prepared by 

Nasdaq. On April 24, 2007, Nasdaq filed 

Amendment No. 1 to the proposal.3 The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change, as amended, from interested 

persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

Nasdaq proposes to adopt rules to 

govern participation in the NASDAQ 

Options Market, LLC (‘‘NOM’’), which 

will be an options exchange facility of 

Nasdaq. Nasdaq represents that NOM 

will operate a fully automated, price/ 

time priority execution system built on 

the core functionality of Nasdaq’s 

recently-approved Single Book equities 

platform, meaning that Nasdaq will 

operate its options market much as it 

operates its cash equities market today.4

Nasdaq believes that NOM will 

benefit individual investors, options 

trading firms, and the options market 

generally. The entry of an innovative, 

low cost competitor such as Nasdaq will 

promote competition, spurring existing 

markets to improve their own execution 

systems and reduce trading costs. NOM 

will differentiate its market by offering 

executions in price/time priority, a 

feature that should increase order 

interaction and yield better executions. 

NOM’s execution system will be 

designed to quote in penny increments 

where consistent with the Commission’s 

penny pilot program for options, 

advancing the Commission’s efforts to 

move the industry to penny quoting in 

an orderly fashion and helping to 

narrow spreads, reduce payment for 

order flow, and enhance price 

competition.5 The text of the proposed 

rule change is available on Nasdaq’s 

Web site at http://www.nasdaq.com, on 

the Commission’s Web site at http:// 

www.sec.gov, at Nasdaq, 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, 

Nasdaq included statements concerning 

the purpose of and basis for the 

proposed rule change and discussed any 

comments it had received on the 

proposed rule change. The text of these 

statements may be examined at the 

places specified in Item IV below. 

Nasdaq 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 

Nasdaq is proposing to adopt a series 

of rules in connection with NOM, which 

will be a facility of Nasdaq. NOM will 

operate an electronic trading system 

developed to trade options (‘‘System’’) 

that will provide for the electronic 

display and execution of orders in 

price/time priority without regard to the 

status of the entities that are entering 

orders. The System will provide a 

routing service for orders when trading 

interest is not present on NOM, and will 

link with and comply with the 

obligations of the Plan for the Purpose 

of Creating and Operating an 

Intermarket Linkage (‘‘Linkage Plan’’). 

NOM Options Participants 

All Nasdaq members will be eligible 

to participate in NOM provided that 

Nasdaq specifically authorizes them to 

trade in the System. New Nasdaq 

members will be required to fulfill the 

requirements of the Nasdaq Rule 1000 

Series as well as the incremental 

requirements set forth in the proposed 

options rules; existing Nasdaq members 

will be required to comply with the 

incremental requirements of the 

proposed options rules. The proposed 

rules avoid to the greatest extent 

possible proposing requirements that 

overlap with the rules already set forth 

in the Rule 1000 Series of the Nasdaq 

Rule Manual. 

NOM will have only one category of 

members, known as ‘‘Options 

Participants.’’ Only Options Participants 

will be permitted to transact business on 

NOM via the System. Nasdaq will 

authorize any Options Participant who 

meets certain enumerated qualification 

requirements to obtain access to NOM. 

Among other things, Options 

Participants must be registered as 

broker-dealers pursuant to the Act and 

have as the principal purpose of being 

an Options Participant the conduct of a 

securities business. Every Options 

Participant shall at all times maintain 

membership in another registered 

options exchange that is not registered 

solely under Section 6(g) of the Act.6 It 

is Nasdaq’s intent not to serve as a 

Designated Options Examining 

Authority, and Nasdaq will work with 

the Commission and the other registered 

options exchanges to ensure that each 

Options Participant will have as its 

DOEA a registered options exchange 

other than Nasdaq. Options Participants 

that transact business with customers 

must at all times be members of the 

National Association of Securities 

Dealers (‘‘NASD’’). 

There will be two types of Options 

Participants, Options Order Entry Firms 

(‘‘OEFs’’) and Options Market Makers. 

OEFs will be those Options Participants 

representing customer orders as agent 

on NOM and non-market maker 

participants conducting proprietary 

trading as principal. NOM will not list 

an options series for trading unless at 

least one Options Market Maker is 

registered in that options series. In 

addition, before NOM opens trading for 

any additional series of an options class, 

it would require at least one Options 

Market Maker to be registered for 

trading in that particular series. NOM 

may suspend or terminate any 

registration of an Options Market Maker 

when, in NOM’s judgment, the interests 

of a fair and orderly market are best 

served by such action. 

Options Market Makers are Options 

Participants registered with Nasdaq as 

Options Market Makers and registered 

with NOM in one or more series of 

options listed on NOM. Nasdaq is 

proposing to permit Options Market 

Makers to register on a series-by-series 

basis. Nasdaq does not view NOM as a 

‘‘one-stop-shop’’ for trading all options. 

Nasdaq believes that permitting Options 


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23870 Federal Register / Vol. 72, No. 83 / Tuesday, May 1, 2007 / Notices 

7 12 CFR part 220. 

8 Nasdaq has determined that its proposed 

execution system can execute accommodation 

trades and, therefore, Nasdaq does not propose to 

offer a Cabinet Trading System as other exchanges 

have chosen to do. 

9 Nasdaq Execution Services will maintain its 

OCC membership as it will maintain the ability to 

route orders to the options exchanges as Nasdaq’s 

broker-dealer subsidiary. 10 See supra note 5. 

Market Makers to limit their registration 

to series in which they are eager to 

provide liquidity is an efficient way to 

identify options that will be actively 

traded on NOM. This will also allow 

Nasdaq to mitigate its use of excessive 

quote message capacity of the national 

market system and of vendors. To 

encourage Options Market Makers to 

provide liquidity in the greatest number 

of options series, Nasdaq is proposing to 

require Options Market Makers to 

execute at least 75% of their total 

options contracts executed on NOM in 

options series in which they are 

registered as Options Market Makers. 

To become an Options Market Maker, 

an Options Participant is required to 

register by filing a written application. 

NOM will not place any limit on the 

number of entities that may become 

Options Market Makers. NOM Options 

Market Makers will be required to 

electronically engage in a course of 

dealing to enhance liquidity available 

on NOM and to assist in the 

maintenance of fair and orderly markets. 

Among other things, Options Market 

Makers would have to satisfy the 

following responsibilities and duties 

during trading: (i) Maintain a two-sided 

market for at least 10 contracts in at 

least seventy-five percent (75%) of the 

options series to which the Options 

Market Maker is registered; (ii) 

participate in the opening; and (iii) 

maintain minimum net capital in 

accordance with Commission and 

Nasdaq Rules. Substantial or continued 

failure by an Options Market Maker to 

meet any of its obligations and duties 

will subject the Options Market Maker 

to disciplinary action, suspension, or 

revocation of the Options Market 

Maker’s registration in one or more 

options series. 

Options Market Makers receive 

certain benefits for carrying out their 

duties. For example, a lender may 

extend credit to a broker-dealer without 

regard to the restrictions in Regulation 

T of the Board of Governors of the 

Federal Reserve System 7 if the credit is 

to be used to finance the broker-dealer’s 

activities as a market maker on a 

national securities exchange. Thus, an 

Options Market Maker has a 

corresponding obligation to hold itself 

out as willing to buy and sell options for 

its own account on a regular or 

continuous basis to justify this favorable 

treatment. This goal will be supported 

by Nasdaq’s proposal to require Options 

Market Makers to execute at least 75% 

of their total contracts in series in which 

they are registered Options Market 

Makers. 

Nasdaq is proposing an Order 

Exposure requirement comparable to 

that which currently applies on other 

registered options exchanges. 

Specifically, as set forth in Chapter VII, 

Section 14, with respect to orders routed 

to NOM, Options Participants may not 

execute as principal orders they 

represent as agent unless (i) Agency 

orders are first exposed on NOM for at 

least three (3) seconds, or (ii) the 

Options Participant has been bidding or 

offering on NOM for at least three (3) 

seconds prior to receiving an agency 

order that is executable against such bid 

or offer. 

Execution System 

Nasdaq’s options trading system will 

leverage Nasdaq’s current state of the art 

technology, including its customer 

connectivity, messaging protocols, 

quotation and execution engine, order 

router, data feeds, and network 

infrastructure. This approach minimizes 

the technical effort required for existing 

Nasdaq members to begin trading 

options on NOM. As a result, NOM will 

closely resemble Nasdaq’s equities 

market, but will differ from most 

existing options exchanges by, most 

prominently, offering true price/time 

priority across all orders and 

participants rather than differentiating 

between Participant/trading interest 

classes.8

Like the Nasdaq system for equities, 

all trading interest entered into the 

Options Trading System will be 

automatically executable. Orders 

entered into the system will be 

displayed anonymously or with 

attribution or non-displayed. For 

Participants seeking to trade 

anonymously, the NOM execution 

system will offer fully anonymous 

trading, however, options trades are not 

currently anonymous through 

settlement. NOM will become an 

exchange member of the Options 

Clearing Corporation (‘‘OCC’’).9 The 

System will be linked to OCC for 

Nasdaq to transmit locked-in trades for 

clearance and settlement. 

Hours of Operation. The options 

trading system will operate between the 

hours of 8 a.m. ET and market close, 

with all orders being available for 

execution from 9:30 a.m. to market 

close. 

Minimum Quotation and Trading 

Increments. Nasdaq is proposing to 

apply the following quotation 

increments: (1) If the options series is 

trading at less than $3.00, five (5) cents; 

(2) if the options series is trading at 

$3.00 or higher, ten (10) cents; and (3) 

if the options series is trading pursuant 

to the Penny Pilot program10 one (1) 

cent if the options series is trading at 

less than $3.00, five (5) cents if the 

options series is trading at $3.00 or 

higher, except for the QQQQs, where 

the minimum quoting increment will be 

one cent for all series. In addition, 

Nasdaq is proposing that the minimum 

trading increment for options contracts 

traded on NOM will be one (1) cent for 

all series. 

NASDAQ Opening/Halt and Closing 

Crosses. The NOM system will support 

a single price opening or re-opening via 

an electronic cross. The NOM crosses at 

the opening and at the resumption of 

trading following a halt are modeled on 

the highly-acclaimed crosses that 

Nasdaq developed for the trading of 

equities, as set forth in Nasdaq Rules 

4753 (Halt Cross) and 4754 (Closing 

Cross). 

At the opening of trading and also at 

any resumption following a halt, NOM 

will execute a cross modeled on the 

Nasdaq Halt Cross. The Halt Cross will 

be used, rather than the Nasdaq 

Opening Cross, because the Opening 

Cross is designed to operate in the midst 

of a continuous market such as exists for 

equities prior to 9:30 a.m., whereas the 

Halt Cross is designed to operate in the 

absence of a continuous market such as 

exists for equities that are halted and 

also exists for options trading at 9:30 

a.m. Registered Options Market Makers 

will be required to participate in the 

opening of the market by, at a 

minimum, opening their quotations. 

Orders may be submitted, modified, and 

cancelled throughout a brief preopening phase preceding the 

commencement of trading on the 

market. During this pre-opening phase, 

NOM will calculate and disseminate a 

theoretical opening price, order 

imbalance, and the size and direction of 

any imbalance. Thereafter, NOM will 

determine via algorithm a single price at 

which a particular options series will 

open and will match via algorithm the 

maximum number of available orders. 

At the close of trading, NOM will 

conduct a single price cross based upon 

the Nasdaq Closing Cross for equities. 

The NOM Closing Cross will utilize the 

same elements as the opening/halt 


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Federal Register / Vol. 72, No. 83 / Tuesday, May 1, 2007 / Notices 23871 

crosses, including the dissemination of 

potential closing prices and imbalance 

information as well as algorithms to 

determine the closing cross price and to 

pair available orders. The closing cross 

differs from the opening/halt crosses in 

that NOM will offer special market-onclose and limit-on-close orders that only 

participate in the closing cross and not 

in the continuous market. 

Order Types. The proposed System 

will make available to Participants Limit 

Orders, Discretionary Orders, Reserve 

Orders, Minimum Quantity Orders, 

Market Orders, and Price Improving 

Orders with characteristics and 

functionality similar to what is 

currently approved for use in the 

Nasdaq’s equities trading facility. 

Nasdaq does not propose to adopt 

‘‘complex’’ orders at this time, but may 

propose them for separate consideration 

in the future. 

‘‘Limit Orders’’ are orders to buy or 

sell options at a specified price or better. 

A limit order is marketable when, for a 

limit order to buy, at the time it is 

entered into the System, the order is 

priced at the current inside offer or 

higher, or for a limit order to sell, at the 

time it is entered into the System, the 

order is priced at the inside bid or 

lower. 

‘‘Discretionary Orders’’ are orders that 

have a displayed price and size, as well 

as a non-displayed discretionary price 

range, at which the entering party, if 

necessary, is also willing to buy or sell. 

The non-displayed trading interest is 

not entered into the System book but is, 

along with the displayed size, converted 

to an Immediate or Cancel (‘‘IOC’’) buy 

(sell) order priced at the highest (lowest) 

price in the discretionary price range 

when displayed contracts become 

available on the opposite side of the 

market or an execution takes place at 

any price within the discretionary price 

range. The generation of this IOC order 

is triggered by the automatic 

cancellation of the displayed contracts 

portion of the Discretionary Order. If 

more than one Discretionary Order is 

available for conversion to an IOC order, 

the system will convert and process all 

such orders in the same priority in 

which such Discretionary Orders were 

entered. If an IOC order is not executed 

in full, the unexecuted portion of the 

order is automatically re-posted and 

displayed in the System book with a 

new time stamp, at its original 

displayed price, and with its nondisplayed discretionary price range. 

‘‘Reserve Orders’’ are limit orders that 

have both a displayed size as well as an 

additional non-displayed amount. Both 

the displayed and non-displayed 

portions of the Reserve Order are 

available for potential execution against 

incoming orders. If the displayed 

portion of a Reserve Order is fully 

executed, the System will replenish the 

display portion from reserve. A new 

timestamp is created for the replenished 

portion of the order each time it is 

replenished from reserve, while the 

reserve portion retains the time-stamp of 

its original entry. 

‘‘Minimum Quantity Orders’’ are 

orders that require that a specified 

minimum quantity of contracts be 

obtained, or the order is cancelled. 

Minimum Quantity Orders may only be 

entered with a time-in-force designation 

of IOC. Minimum Quantity Orders with 

an IOC time in force received prior to 

the opening cross will be rejected. 

‘‘Market Orders’’ are orders to buy or 

sell at the best price available at the time 

of execution. 

‘‘Price Improving Orders’’ are orders 

to buy or sell an option at a specified 

price at an increment smaller than the 

minimum price variation in the 

security. Price Improving Orders may be 

entered in increments as small as one 

cent. Price improving orders that are 

available for display will be displayed at 

the appropriate minimum quotation 

increment (rounding down to the proper 

increment for buys, up to the proper 

increment for sells). 

Time in Force Designations. 

Participants entering orders into the 

System may designate such orders to 

remain in force and available for display 

and/or potential execution for varying 

periods of time. Unless cancelled 

earlier, once these time periods expire, 

the order (or the unexecuted portion 

thereof) is returned to the entering 

party. 

‘‘Expire Time’’ or ‘‘EXPR’’ are orders 

that, if after entry into the System, the 

order is not fully executed, the order (or 

the unexecuted portion thereof) shall 

remain available for potential display 

and/or execution for the amount of time 

specified by the entering Participant 

unless canceled by the entering party. 

EXPR Orders will be available for entry 

from 8 a.m. until market close and for 

execution from 9:30 a.m. until market 

close. 

‘‘Immediate Or Cancel’’ or ‘‘IOC’’ 

orders are orders that if, after entry into 

the System, a marketable limit order (or 

unexecuted portion thereof) becomes 

non-marketable, the order (or 

unexecuted portion thereof) will be 

canceled and returned to the entering 

participant. IOC Orders will be available 

for entry from 8 a.m. until market close 

and for potential execution from 9:30 

a.m. until market close. IOC Orders 

entered between 8 a.m. and 9:30 a.m. 

Eastern Time will be held within the 

System until 9:30 a.m. at which time the 

System shall determine whether such 

orders are marketable. 

‘‘DAY’’ orders are orders that if, after 

entry into the System, the order is not 

fully executed, the order (or unexecuted 

portion thereof) will remain available 

for potential display and/or execution 

until market close, unless canceled by 

the entering party, after which it shall 

be returned to the entering party. DAY 

Orders will be available for entry from 

8 a.m. until market close and for 

potential execution from 9:30 a.m. until 

market close. 

‘‘Good Til Cancelled’’ or ‘‘GTC’’ 

orders are orders that if, after entry into 

System, the order is not fully executed, 

the order (or unexecuted portion 

thereof) will remain available for 

potential display and/or execution 

unless cancelled by the entering party, 

or until the option expires, whichever 

comes first. GTC Orders will be 

available for entry from 8 a.m. until 

market close and for potential execution 

from 9:30 a.m. until market close. 

Order Display/Matching System. The 

System will be based upon functionality 

currently approved for use in Nasdaq’s 

equities trading system. Specifically, the 

System will allow participants to enter 

priced limit orders to buy and sell 

NOM-listed options as attributed, nonattributed, or non-displayed orders. 

Attributable Orders are designated for 

display (price and size) next to the 

Participant’s MPID. Non-Attributable 

Orders are entered by a Participant and 

designated for display (price and size) 

on an anonymous basis in the order 

display service of the System. NonDisplayed Orders are not displayed in 

the System, but nevertheless remain 

available for potential execution against 

all incoming orders until executed in 

full or cancelled. 

Options Participants will be permitted 

to enter multiple orders at single or 

multiple price levels and will have the 

option to have a portion of their order 

held in reserve and not displayed to the 

marketplace. 

Routing. NOM will support orders 

that are designated to be routed to the 

National Best Bid and Offer (‘‘NBBO’’) 

as well as orders that will execute only 

within NOM. Orders that are designated 

to execute at the NBBO will be routed 

to other options markets to be executed 

when Nasdaq is not at the NBBO, 

consistent with the Options InterMarket 

Linkage. The system will ensure that 

orders designated to only execute 

within the system will not create a trade 

through or locked or crossed market 

violation. 

Book Processing. The System, like the 

equities facility, will have a single 


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23872 Federal Register / Vol. 72, No. 83 / Tuesday, May 1, 2007 / Notices 

11 The ILM will perform the same functions that 

the BOX InterMarket Linkage Market Maker 

performs on the Boston Options Exchange facility 

of the Boston Stock Exchange (‘‘BOX’’). See BOX 

Rules, Chapter VI, Section 5(a)(ix) and Chapter XII. 12 See, e.g., BOX Rules, Chapters IV and XIV. 

13 See BOX Rules, Chapter III. 

14 15 U.S.C. 78k–1. 

15 15 U.S.C. 78f. 

16 15 U.S.C. 78q(d). 

execution algorithm based on price/time 

priority. For each order, among equallypriced or better-priced trading interest, 

the System executes against available 

contra-side displayed contract amounts 

in full, in price/time priority, before 

then moving to any non-displayed 

contracts which are likewise executed 

in price/time priority. 

Data Feed. The System will create a 

proprietary data feed which will include 

all displayed orders, both attributable 

and non-attributable. Initially, in order 

to save capacity, the proprietary data 

will not include the market participant 

identifiers for attributable orders. 

Linkage Plan Rules 

NOM will participate in the Linkage 

Plan to receive orders from options 

exchanges that use the Options 

Intermarket Linkage (‘‘Linkage’’) to 

route orders. Nasdaq plans to use its 

proprietary order router to send orders 

to other options exchanges. 

Nonetheless, in order to participate and 

to receive orders, NOM is proposing to 

adopt rules relating to the Linkage that 

are substantially similar to the rules in 

place on all of the options exchanges 

that are Participants to the Linkage Plan. 

In general, the proposed rules contain 

relevant definitions, establish the 

conditions pursuant to which Market 

Makers may enter Linkage orders, 

impose obligations on NOM regarding 

how it must process incoming Linkage 

orders, and establish a general standard 

that Options Participants should avoid 

trade-throughs. The proposed NOM 

Rules establish potential regulatory 

liability for Options Participants who 

engage in a pattern or practice of trading 

through other exchanges, establish 

obligations with respect to locked and 

crossed markets, and restrict a market 

maker on NOM from sending principal 

orders (other than principal acting as 

agent [‘‘P/A’’] orders), which reflect 

unexecuted customer orders through the 

Linkage if the market maker affects less 

than 80% of specified order flow on 

NOM. 

For those limited instances where 

Nasdaq does use the Linkage to send 

orders, Nasdaq is proposing to designate 

one Market Maker per eligible class as 

the ‘‘InterMarket Linkage Market 

Maker’’ or ‘‘ILM’’ to be responsible for 

settling P/A and Satisfaction orders that 

would be sent to away markets through 

the Linkage for a given class of options 

trading on NOM.11 The ILM responsible 

for such orders will be specifically 

designated in each Eligible Class traded 

on NOM and will be required to adhere 

to the responsibilities of an Eligible 

Market Maker, as set forth in the 

Linkage Plan. 

The ILM also will be required to act 

with due diligence with regard to the 

interests of orders entrusted to it and 

fulfill other duties of an agent, 

including, but not limited to, ensuring 

that such orders, regardless of their size 

or source, receive proper representation 

and timely execution in accordance 

with the terms of the orders and the 

rules of NOM. NOM will immediately 

route all P/A orders on behalf of the ILM 

according to these instructions. The 

order would be generated automatically 

by NOM and routed to the away 

exchange with the required clearing 

information included. Each execution 

received from an away exchange would 

result in the automatic generation of a 

trade execution on NOM between the 

original order and the ILM. This 

designation of ILM will ensure that P/ 

A and Satisfaction orders will be 

handled in accordance with the Linkage 

Plan. 

Securities Traded on NOM 

Nasdaq proposes to adopt listing 

standards for Options traded on NOM 

(Chapter IV of the proposed rules) as 

well as for Index Options (Chapter VIX) 

that are identical to the approved rules 

of other options exchanges.12 Nasdaq 

will join the Options Listings 

Procedures Plan and will list and trade 

options already listed on other options 

exchanges. Nasdaq will gradually phasein its trading of options, beginning with 

a selection of actively traded options. At 

least initially, Nasdaq does not plan to 

develop new options products or listing 

standards. Nasdaq is aware that, in the 

event Nasdaq determines to trade an 

options class not listed on another 

registered options exchange or within 

Nasdaq’s existing listing standards, 

Nasdaq will be required to submit a 

proposed rule change to establish listing 

standards. 

Conduct and Operational Rules for 

Options Participants 

Nasdaq proposes to adopt rules that 

are substantially similar to the approved 

rules of other options exchanges. Thus, 

Nasdaq proposes to adopt rules that are 

substantially similar to the rules of BOX 

regarding: exercises and deliveries 

(NOM proposed rules, Chapter VIII); 

records, reports, and audits (Chapter 

IX); summaries and suspensions and 

minor rule violations (Chapter X); doing 

business with the public (Chapter XI); 

and margin (Chapter XIII). 

Nasdaq proposes to adopt Business 

Conduct Rules (Chapter III) that are 

consistent with the BOX Business 

Conduct Rules, with certain 

exceptions.13 Specifically, with respect 

to Position Limits (Section 7), 

Exceptions from Position Limits 

(Section 8), Exercise Limits (Section 9), 

and Reports Related to Position Limits 

(Section 10), Nasdaq is proposing to 

apply the limits established pursuant to 

the rules of the Chicago Board Options 

Exchange (‘‘CBOE’’), although NOM will 

establish such limits for products not 

traded on the CBOE. By expressly 

incorporating an already-approved 

limit, Nasdaq will ensure that an 

appropriate limit is in place at all times 

without the need to continually adjust 

its rules or to disrupt the operations of 

its participants. With respect to 

financial and operational rules, Nasdaq 

proposes to adopt rules similar to those 

of existing options exchanges regarding 

exercises and deliveries, margin, net 

capital, and books and records. 

National Market System 

NOM will operate as a full and equal 

participant in the national market 

system for options trading established 

under Section 11A of the Act,14 just as 

its equities market participates today. 

NOM will become a member of the 

Options Price Reporting Authority, the 

Options Linkage Authority, the Options 

Regulatory Surveillance Authority, and 

the Options Listing Procedures Plan. 

NOM expects to participate in those 

plans on the same terms currently 

applicable to current members of those 

plans, and it expects little or no plan 

impact due to the fact that NOM’s 

market will operate on price/time 

priority. Nasdaq has contacted the 

leadership of each options-related 

national market system plan to begin the 

membership process. 

Regulation 

NOM will leverage many of the 

structures that Nasdaq established to 

operate a national securities exchange in 

compliance with Section 6 of the Act.15

As described in more detail below, there 

will be three elements of that regulation: 

(1) Nasdaq will join the existing options 

industry agreements pursuant to Section 

17(d) of the Act,16 as it did with respect 

to equities; (2) Nasdaq’s Regulatory 

Services Agreement with NASD will 

govern many aspects of the regulation 


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Federal Register / Vol. 72, No. 83 / Tuesday, May 1, 2007 / Notices 23873 

17 17 CFR 240.17d–1. 

18 17 CFR 240.17d–2. 

19 Nasdaq’s proposed Obvious Error guidelines 

and procedures closely resemble the rules of the 

Philadelphia Stock Exchange, particularly with 

respect to the establishment of a Theoretical Price 

against which to measure for obvious errors. 

20 See BOX Rules, Chapter V. 

21 15 U.S.C. 78f. 

22 15 U.S.C. 78f(b)(5). 

and discipline of members that 

participate in options trading, just as it 

does for equities regulation; and (3) 

Nasdaq will perform options listing 

regulation as well as real-time 

regulation of options trading as it does 

today for equities. The principle here, 

again, is that Nasdaq will regulate its 

options market much as it does the 

equities market today. 

Section 17(d) of the Act and the 

related Exchange Act rules permit selfregulatory organizations (‘‘SROs’’) to 

allocate certain regulatory 

responsibilities to avoid duplicative 

oversight and regulation. Under 

Exchange Act Rule 17d–1,17 the 

Commission designates one SRO to be 

the Designated Examining Authority 

(‘‘DEA’’) for each broker-dealer that is a 

member of more than one SRO. The 

DEA is responsible for the financial 

aspects of that broker-dealer’s regulatory 

oversight. Because Nasdaq members 

also must be members of at least one 

other SRO, Nasdaq would generally not 

be designated as the DEA for any of its 

members. 

Rule 17d–2 under the Act 18 permits 

SROs to file with the Commission plans 

under which the SROs allocate among 

each other the responsibility to receive 

regulatory reports from, and examine 

and enforce compliance with, specified 

provisions of the Act and rules 

thereunder and SRO rules by firms that 

are members of more than one SRO 

(‘‘common members’’). If such a plan is 

declared effective by the Commission, 

an SRO that is a party to the plan is 

relieved of regulatory responsibility as 

to any common member for whom 

responsibility is allocated under the 

plan to another SRO. 

All of the options exchanges, NASD, 

and the New York Stock Exchange have 

entered into the Options Sales Practices 

Agreement, a Rule 17d–2 agreement. 

Under this Agreement, the examining 

SROs will examine firms that are 

common members of Nasdaq and the 

particular examining SRO for 

compliance with certain provisions of 

the Act, certain of the rules and 

regulations adopted thereunder, certain 

examining SRO rules, and certain NOM 

Rules. In addition, NOM Rules 

contemplate participation in this 

Agreement by requiring that any 

Options Participant also be a member of 

at least one of the examining SROs. 

For those regulatory responsibilities 

that fall outside the scope of any Rule 

17d–2 agreements, Nasdaq will retain 

full regulatory responsibility under the 

Exchange Act. However, Nasdaq has 

entered into a Regulatory Services 

Agreement with NASD, pursuant to 

which NASD personnel operate as 

agents for Nasdaq in performing certain 

of these functions. As is the case with 

Nasdaq’s equities market, Nasdaq will 

supervise NASD Regulation and 

continue to bear ultimate regulatory 

responsibility. 

Finally, as it does with equities, 

Nasdaq Regulation will perform realtime surveillance of NOM for the 

purpose of maintaining a fair and 

orderly market at all times. As it does 

with Nasdaq’s equities trading, Nasdaq 

Regulation will monitor Nasdaq’s 

options trading market on a real-time 

basis to identify unusual trading 

patterns and determine whether 

particular trading activity requires 

further regulatory investigation by 

NASD. 

In addition, Nasdaq Regulation will 

oversee the process for determining and 

implementing trade halts, identifying 

and responding to unusual market 

conditions, and administering Nasdaq’s 

process for identifying and remediating 

‘‘obvious errors’’ by and among its 

Options Participants.19 Nasdaq 

proposed rules (Chapter V) regarding 

halts, unusual market conditions, 

extraordinary market volatility, and 

audit trail are closely modeled on the 

approved rules of the BOX.20

2. Statutory Basis 

Nasdaq believes that the proposed 

rule change is consistent with Section 6 

of the Act,21 in general, and with 

Section 6(b)(5) of the Act,22 in 

particular, in that it is designed to 

promote just and equitable principles of 

trade, to foster cooperation and 

coordination with persons engaged in 

regulating, clearing, settling, 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 national market system, and in 

general, to protect investors and the 

public interest; and are not designed to 

permit unfair discrimination between 

customers, issuers, brokers, or dealers, 

or to regulate by virtue of any authority 

conferred by this title matters not 

related to the purposes of this title or to 

the administration of the exchange. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

Nasdaq does not believe that the 

proposed rule change will result in any 

burden on competition that is not 

necessary or appropriate in furtherance 

of the purposes of the Act. Nasdaq 

operates in an intensely competitive 

global marketplace for listings, financial 

products, transaction services, and 

market data. Relying on its array of 

services and benefits, Nasdaq competes 

for the privilege of providing market 

and listing services to broker-dealers 

and issuers. Nasdaq’s ability to compete 

in this environment is based in large 

part on the quality of its trading 

systems, the overall quality of its market 

and its attractiveness to the largest 

number of investors, as measured by 

speed, likelihood and cost of 

executions, as well as spreads, fairness, 

and transparency. 

With these aspects of competition as 

a guide, Nasdaq designed its current 

proposal to create the fastest, fairest, 

most transparent, most efficient, and 

least expensive trading venue available 

for the trading of options. The proposed 

system will incorporate the best 

functional elements from Nasdaq’s 

equity trading system. The resulting 

system will reduce overall trading costs 

and increase price competition, both 

pro-competitive developments. Nasdaq 

believes that the resulting system will 

have the pro-competitive effect of 

spurring further initiative and 

innovation among market centers and 

market participants. Market participants 

that disagree and do not view these 

developments as pro-competitive, will 

have the flexibility to use only those 

functions that improve their trading or 

to not use the system at all; 

participation in the system in whole or 

in part is completely voluntary. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

Written comments were neither 

solicited nor received. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Within 35 days of the date of 

publication of this notice in the Federal 

Register or within such longer period (i) 

As the Commission may designate up to 

90 days of such date if it finds such 

longer period to be appropriate and 

publishes its reasons for so finding, or 

(ii) as to which Nasdaq consents, the 

Commission will: 

(A) By order approve such proposed 

rule change; or 


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23874 Federal Register / Vol. 72, No. 83 / Tuesday, May 1, 2007 / Notices 

23 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3 Amendment No. 1 replaced and superseded the 

original filing in its entirety. 

4 Amendment No. 2 was filed and withdrawn on 

April 3, 2007. 

5 17 CFR 230.144A. 

6 See Securities Exchange Act Release No. 27956 

(April 27, 1990), 55 FR 18781 (May 4, 1990) (SR– 

NASD–88–23). The PORTAL Rules were 

subsequently amended. See Securities Exchange 

Act Release Nos. 28678 (December 6, 1990), 55 FR 

51194 (December 12, 1990) (SR–NASD–90–50); 

33326 (December 13, 1993), 58 FR 66388 (December 

20, 1993) (SR–NASD–91–5); 34562 (August 19, 

1994), 59 FR 44210 (August 26, 1994) (SR–NASD– 

94–39); 35083 (December 12, 1994), 59 FR 65104 

(December 16, 1994) (SR–NASD–94–65); 40424 

(September 10, 1998), 63 FR 49623 (September 16, 

1998) (SR–NASD–98–68); 43873 (January 23, 2001), 

66 FR 8131 (January 29, 2001) (SR–NASD–99–65); 

44042 (March 6, 2001), 66 FR 14969 (March 14, 

2001) (SR–NASD–99–66); NASD Notice to Members 

01–19 (March 2001) (the ‘‘2001 PORTAL rule 

filing’’). 

7 See Securities Exchange Act Release No. 27928 

(April 23, 1990), 55 FR 17933 (April 30, 1990). 

8 15 U.S.C. 77e. 

9 17 CFR 230.144A(a)(1). 

(B) Institute proceedings to determine 

whether the proposed rule change 

should be disapproved. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the proposed rule 

change, as amended, is consistent with 

the Act. Comments may be submitted by 

any of the following methods: 

Electronic Comments 

<bullet≤ Use the Commission’s 

Internet comment form (http:// 

www.sec.gov/rules/sro.shtml); or 

<bullet≤ Send an e-mail to rulecomments@sec.gov. Please include File 

Number SR–NASDAQ–2007–004 on the 

subject line. 

Paper Comments 

<bullet≤ Send paper comments in 

triplicate to Nancy M. Morris, Secretary, 

Securities and Exchange Commission, 

Station Place, 100 F Street, NE., 

Washington, DC 20549–1090. 

All submissions should refer to File 

Number SR–NASDAQ–2007–004. This 

file number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for inspection and copying in 

the Commission’s Public Reference 

Room. Copies of such filing also will be 

available for inspection and copying at 

the principal office of Nasdaq. 

All comments received will be posted 

without change; the Commission does 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make publicly available. All 

submissions should refer to File 

Number SR–NASDAQ–2007–004 and 

should be submitted on or before May 

22, 2007. 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.23

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E7–8244 Filed 4–30–07; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–55669; File No. SR– 

NASDAQ–2006–065] 

Self-Regulatory Organizations; The 

NASDAQ Stock Market LLC; Notice of 

Filing of Proposed Rule Change and 

Amendments Nos. 1, 2, and 3 Thereto 

To Reestablish a Quotation and 

Trading System for Securities That Are 

Designated by The PORTAL[supreg] 

Market as PORTAL Securities 

April 25, 2007. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on December 

22, 2006, The NASDAQ Stock Market 

LLC (‘‘Nasdaq’’), filed with the 

Securities and Exchange Commission 

(‘‘SEC’’ or ‘‘Commission’’) the proposed 

rule change as described in Items I, II, 

and III below, which Items have been 

substantially prepared by Nasdaq. On 

March 6, 2007, Nasdaq filed 

Amendment No. 1 to the proposed rule 

change.3 On April 3, 2007, Nasdaq filed 

Amendment No. 3 to the proposed rule 

change.4 The Commission is publishing 

this notice to solicit comments on the 

proposed rule change, as amended, from 

interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of the Substance 

of the Proposed Rule Change 

Nasdaq proposes to reestablish a 

quotation and trading system for 

securities that are designated by The 

PORTAL[supreg] Market (‘‘PORTAL’’ or 

the ‘‘PORTAL[supreg] Market’’) as 

PORTAL securities. 

The text of the proposed rule change 

is available on Nasdaq’s Web site at 

http://www.nasdaq.com, at Nasdaq’s 

principal office, 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, 

Nasdaq 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. Nasdaq 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 

Background 

Nasdaq currently operates the 

PORTAL Market for securities that were 

sold in private placements and are 

eligible for resale under SEC Rule 144A 

5 adopted under the Securities Act of 

1933 (‘‘Securities Act’’). The National 

Association of Securities Dealers, Inc. 

(‘‘NASD’’) created the PORTAL Market 

in 1990,6 simultaneously with the SEC’s 

adoption of Rule 144A,7 for the 

purposes of quotation, trading, and 

trade reporting in securities deemed 

eligible by the NASD for resale under 

Rule 144A. Rule 144A provides an 

exemption from registration under 

Section 5 of the Securities Act 8 for 

resales of privately placed securities to 

investors that meet the eligibility 

requirements of being a qualified 

institutional buyer (‘‘QIB’’) under Rule 

144A(a)(1),9 i.e., institutional investors 

that in the aggregate own or invest on 

a discretionary basis at least $100 

million in securities and broker/dealers 

that in the aggregate own or invest on 

a discretionary basis at least $10 million 


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