Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Notices 56633 

16 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 62519 

(July 16, 2010), 75 FR 43597 (‘‘Notice’’). 

4Amendment No. 1 clarifies that the proposal to 

accept orders routed by Nasdaq Execution Services, 

LLC to the Exchange on a one-year pilot basis is 

made by the Exchange, rather than by The 

NASDAQ Stock Market, LLC (‘‘Nasdaq’’). This is a 

technical amendment and is not subject to notice 

and comment. 

5The Exchange previously operated an electronic 

trading facility, XLE, for the trading of cash equity 

securities. XLE ceased its operations in October 

2008 following the acquisition of the Exchange by 

The NASDAQ OMX Group, Inc. (‘‘NASDAQ OMX’’), 

the parent corporation of Nasdaq. See Securities 

Exchange Act Release No. 58613 (September 22, 

2008), 73 FR 57181 (October 1, 2008) (SR–Phlx2008–65). Since ceasing operations of XLE, the 

Exchange has solely operated an options market. 

6Unlike Nasdaq, PSX will not route orders to 

other exchanges and will not have market makers. 

As a result, the PSX rules do not contain provisions 

related to outbound routing or market makers that 

are found in Nasdaq’s rules. 

7The Exchange also proposes to delete two 

existing PHLX Rules relating to XLE, PHLX Rule 

160 (NMS Stock Execution on the Exchange) and 

PHLX Rule 188 (Trade Execution and Reporting), 

and to move their content to the proposed rules 

governing PSX. See proposed PHLX Rules 3301(a), 

3305(a)(1) and 3309). 

necessary or appropriate in the public 

interest, for the protection of investors, 

or otherwise in furtherance of the 

purposes of the Act. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the Act. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml) or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number SR–OCC–2010–15 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number SR–OCC–2010–15. 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 

changes 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 

Section, 100 F Street, NE., Washington, 

DC 20549, on official business days 

between the hours of 10 a.m. and 3 p.m. 

Copies of such filings also will be 

available for inspection and copying at 

the principal office of OCC and on 

OCC’s Web site at http:// 

www.theocc.com. All comments 

received will be posted without change; 

the Commission does not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. All submissions 

should refer to File Number SR–OCC– 

2010–15 and should be submitted on or 

before October 7, 2010. 

For the Commission by the Division of 

Trading and Markets, pursuant to delegated 

authority.16

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. 2010–23106 Filed 9–15–10; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–62877; File No. SR–PHLX– 

2010–79] 

Self-Regulatory Organizations; 

NASDAQ OMX PHLX, Inc.; Order 

Approving a Proposed Rule Change, 

as Modified by Amendment No. 1, 

Relating to the Establishment of 

NASDAQ OMX PSX as a Platform for 

Trading NMS Stocks 

September 9, 2010. 

I. Introduction 

On June 8, 2010, NASDAQ OMX 

PHLX, Inc. (‘‘PHLX’’ or ‘‘Exchange’’), 

filed with the Securities and Exchange 

Commission (‘‘Commission’’), pursuant 

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

Exchange Act of 1934 (‘‘Act’’),1 and Rule 

19b–4 thereunder,2 a proposed rule 

change to establish NASDAQ OMX PSX 

as a new electronic platform for trading 

NMS stocks. The proposed rule change 

was published for comment in the 

Federal Register on July 26, 2010.3 On 

August 5, 2010, the Exchange filed 

Amendment No. 1 to the proposed rule 

change.4 The Commission received no 

comment letters regarding the proposed 

rule change. This order approves the 

proposed rule change, as modified by 

Amendment No. 1. 

II. Background 

The Exchange proposes to establish a 

new cash equities trading platform, to 

be called NASDAQ OMX PSX (‘‘PSX or 

‘‘System’’).5 The System will be an openaccess fully electronic integrated order 

display and execution system for NMS 

stocks. PSX will not list securities, but 

rather will trade NMS stocks listed on 

other exchanges on an unlisted trading 

privileges basis. 

The System will allow PSX 

participants to enter orders at multiple 

price levels. Orders will be integrated 

and displayed via data feeds to 

participants and other data subscribers. 

PSX participants will be able to access 

the aggregated trading interest of all 

other PSX participants in accordance 

with non-discretionary order execution 

algorithms. The System will not route 

orders to other market centers. 

In contrast with most markets, which 

employ a price/time execution priority 

system (where the displayed order on 

the book that is first in time at the best 

price is satisfied fully, then the next in 

time at that price, and so on), PSX will 

use a price/pro rata execution priority 

system,with displayed orders receiving 

priority over non-displayed orders. 

Specifically, multiple orders displayed 

on the PSX book at the best price would 

be allocated shares of an incoming order 

pro rata based on the proportion of the 

size of the displayed order to the total 

size of all displayed orders at that price. 

Once all displayed size at any price 

level is exhausted, the same pro rata 

logic would apply to non-displayed 

orders at that price level. 

The Exchange proposes to adopt new 

rules governing trading on the System. 

The proposed new rules are based to a 

substantial extent on the rules of 

Nasdaq 6 and NASDAQ OMX BX, Inc. 

(‘‘BX’’). In addition, the Exchanges 

proposes to apply the PHLX rules listed 

in proposed PHLX Rule 3202, including 

certain rules that governed XLE when it 

was operational, to PHLX members with 

respect to their activities on the 

System.7 The Exchange also proposes to 

amend PHLX Rule 803 (Criteria For 

Listing—Tier I) to support unlisted 

trading privileges for NMS stocks on 

PSX and PHLX Rule 985 (Affiliate and 

Ownership Restrictions) to address 

potential competitive advantage and 

conflict of interest concerns regarding 

mstockstill on DSKH9S0YB1PROD with NOTICES

56634 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Notices 

8See proposed PHLX Rules 763 and 764. 

9Each of Nasdaq and BX is a self-regulatory 

organization (‘‘SRO’’) owned by NASDAQ OMX 

and, therefore, an affiliate of the Exchange. 

10 In approving this proposed rule change, the 

Commission has considered the proposed rule’s 

impact on efficiency, competition and capital 

formation. 15 U.S.C. 78c(f). 

11 15 U.S.C. 78f(b)(5). 

12See Notice, supra note 3, 75 FR at 43598. 

13See proposed Rule 3223. The ATS or ECN must 

be a PHLX member organization, enter into and 

comply with applicable agreements, agree that 

PHLX may disseminate the ECN’s or ATS’s best 

priced orders, demonstrate that it is in compliance 

with applicable regulatory requirements, and accept 

automated executions against orders that it enters 

into the System. 

14See proposed Rule 3211(d). The Exchange has 

represented that upon implementation by Nasdaq of 

recently approved changes to its rule governing 

Sponsored Participants, the Exchange will adopt 

and implement identical rules to govern sponsored 

access on PSX. See Securities Exchange Act Release 

No. 61345 (January 13, 2010), 75 FR 32631 (January 

20, 2010) (SR–NASDAQ–2008–104). If NASDAQ’s 

rules are superseded by rules adopted by the 

Commission, the Exchange has represented that 

PSX will operate sponsored participant access in 

accordance with such rules. See Notice, supra note 

3, 75 FR at 43598. 

15As discussed above, proposed PHLX Rule 3202 

sets forth the current PHLX Rules applicable to 

market participants trading on PSX, and includes, 

among others, PHLX Rule 600 (Registration) and 

PHLX Rule 604 (Registration and Termination of 

Registered Persons). In a separate order, the 

Commission approved the amendment of PHLX 

Rule 604 to require all members trading on PSX to 

register representatives and principals in 

accordance with rules similar to those governing 

registration of associated persons of members of 

Nasdaq. See Securities Exchange Act Release No. 

62776 (August 26, 2010), 75 FR 53727 (September 

1, 2010) (SR–Phlx–2010–91). 

16 In addition to proposed rules specific to the 

operation of PSX, members must comply with 

existing PHLX rules governing member conduct, to 

the extent that they are relevant to trading on PSX. 

The PHLX Rules applicable to activities of members 

on PSX are listed in proposed PHLX Rule 3202. 

17See proposed PHLX Rule 3211(a). 

18See proposed PHLX Rule 3211(b). 

19See proposed PHLX Rule 3228(a). 

20See proposed PHLX Rule 3222. 

21 15 U.S.C. 78f(b)(5). 

inbound routing from Nasdaq to PSX. 

Finally, the Exchange proposes to adopt 

rules governing Recommendations to 

Customers (Suitability) and Best 

Execution and Interpositioning,8 and 

commentaries relating thereto, which 

rules shall be applicable to all members 

of the Exchange, including those trading 

on PSX. 

Pursuant to the terms of a regulatory 

services agreement (the ‘‘FINRA RSA’’) 

between PHLX and Financial Industry 

Regulatory Authority, Inc. (‘‘FINRA’’), 

administration and enforcement of 

many of the new rules applicable to the 

System will be supported by FINRA. In 

addition, certain regulatory 

responsibilities of PHLX relating to PSX 

may be administered by personnel 

employed by Nasdaq or ‘‘BX’’ 9 pursuant 

to a regulatory services agreement (the 

‘‘Intercompany RSA’’). 

III. Discussion and Commission 

Findings 

After careful review of the proposed 

rule change, the Commission finds that 

the proposed rule change is consistent 

with the requirements of the Act and the 

rules and regulations thereunder 

applicable to a national securities 

exchange.10 Specifically, the 

Commission finds that the proposed 

rule change is consistent with Section 

6(b)(5) of the Act,11 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) of the Act also requires 

that the rules of an exchange not be 

designed to permit unfair 

discrimination among customers, 

issuers, brokers, or dealers. 

Overall, the Commission believes that 

approving the Exchange’s proposed rule 

change could benefit the public and 

market participants. Approval of the 

proposal would establish rules for the 

operation of a new electronic facility for 

the trading of cash equity securities that 

is designed to encourage displayed 

orders of larger size, which could foster 

best execution, price discovery, 

competition and innovation. The 

discussion below does not review every 

detail of the proposed rule change, but 

rather focuses on the most significant 

rules and policy issues considered in 

review of the proposals. 

A. Proposed New Rules for PSX 

1. Access and Participation 

The System will only have one class 

of membership and, unlike Nasdaq, will 

not have a separate class of market 

makers.12 In addition, PSX will make its 

facilities available to electronic 

communications networks (‘‘ECN’’) and 

alternative trading systems (‘‘ATS’’) that 

meet certain requirements, to allow 

such ECNs and/or ATSs to display best 

prices and size of orders on PSX and 

members to access such orders.13 PSX 

will provide authorized access for 

Sponsored Participants on terms 

identical to those set forth in Nasdaq 

Rule 4211(d) (Sponsored Participants).14

The System will be accessible to all 

PHLX members that meet the 

registration, qualification and other 

membership requirements set forth in 

the PHLX rules.15 In addition, in order 

to trade on PSX, a member must comply 

with certain additional requirements set 

forth in proposed PHLX Rule 3211 (PSX 

Participant Registration). Such 

requirements are substantially similar to 

the requirements set forth in Nasdaq 

Rule 4611 (Nasdaq Market Center 

Participant Registration), and include, 

among others, the execution of 

applicable agreements with the 

Exchange, membership in or access to a 

registered clearing agency through 

which PSX-compared trades may be 

settled, compliance with all applicable 

rules and operating procedures of 

PHLX 16 and the Commission in the use 

of PSX, and maintenance of equipment 

to prevent the improper use of and 

access to PHLX systems.17

Each PSX participant will be under a 

continuing obligation to inform PHLX of 

any noncompliance with any of the 

registration requirements.18 Failure by a 

PSX participant to comply with any 

registration requirements, including 

failure to comply with any PHLX rules 

applicable to PSX, shall subject such 

participant to censure, fine, suspension 

or revocation of its registration as a PSX 

participant, or any other appropriate 

penalty under the rules of the 

Exchange.19 The Exchange may 

terminate access to the System if a 

participant fails to meet the participant 

eligibility qualifications.20

The Commission finds that the 

Exchange’s access and participation 

requirements for the System are 

consistent with Section 6(b)(5) of the 

Act, 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.21 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. The 

Commission notes that the access and 

participation requirements applicable to 

PSX are substantially similar to rules of 

mstockstill on DSKH9S0YB1PROD with NOTICES

Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Notices 56635 

22See Securities Exchange Act Release No. 53128 

(January 13, 2006), 71 FR 3550 (January 23, 2006) 

(order approving Nasdaq’s application to register as 

a national securities exchange) (‘‘Nasdaq 

Registration Approval Order’’). 

23See proposed PHLX Rules 3217 and 3306(a)(3). 

24See proposed PHLX Rule 3302. 

25See proposed PHLX Rule 3306. 

26 Id. 

27See proposed PHLX Rule 3301(a). 

28See proposed PHLX Rule 3301(e). 

29See proposed PHLX Rule 3306(c)(1) and (2). 

30See proposed PHLX Rule 3306(c)(3). 

31See proposed PHLX Rule 3307(a)(2). 

32See proposed PHLX Rule 3301(h). 

33See proposed PHLX Rule 3307(a)(3). 

34See proposed PHLX Rule 3310. 

35See proposed PHLX Rule 3307(a)(1). 

36See id. 

37For example, if Displayed Orders to buy at 10 

reside on the PSX book with sizes of 6,000 

(Participant A) and 4,000 (Participant B), and an 

incoming order to sell 1,100 at 10 comes into the 

System, the System will allocate 600 shares of the 

incoming order to Participant A and 400 shares of 

the incoming order to Participant B. The remaining 

100 shares of the incoming order will be allocated 

on the basis of a random function that assigns a 

60% probability of executing the 100 shares to 

Participant A and a 40% probability to Participant 

B. 

38Thus, a resting displayed order with a size of 

90 shares would get filled in full before a displayed 

order with size of 50 shares. 

39See proposed PHLX Rule 3306(c)(4). As defined 

in PHLX Rule 600(b) of Regulation NMS under the 

Act, 17 CFR 242.600(b), the term ‘‘quotation’’ 

includes the ‘‘bid price or the offer price 

communicated by a member of a national securities 

exchange * * * to any broker or dealer, or to any 

Continued 

Nasdaq previously approved by the 

Commission.22 The Commission also 

notes that all PSX participants will 

participate on consistent terms when 

entering orders into PSX for posting and 

accessing liquidity. In addition, the 

Commission notes that the membership 

and registration requirements applicable 

to PSX are set forth in the current rules 

of the Exchange, which have been 

previously approved by the 

Commission. 

2. Trading System and Regulation NMS 

Compliance 

a. PSX Order Entry, Display and 

Execution 

The System will operate, and orders 

can be entered into the System, from 9 

a.m. to 5 p.m., Eastern Time, on each 

business day.23 PSX will not have any 

specialized opening or closing 

processes, and will begin to process all 

eligible orders at 9 a.m.24

Participants may submit multiple 

orders at multiple price levels, which 

PSX will manage and display, 

consistent with the parameters of each 

order.25 PSX will time-stamp each order 

upon receipt, although, as discussed 

below, the time stamp will not 

determine the order’s ranking for 

execution purposes.26 The System will 

not display orders on an attributable 

basis.27 Orders may be entered either as 

Displayed Orders or Non-Displayed 

Orders.28

Displayed Orders will be displayed 

anonymously to participants through 

the System book feed and the aggregate 

size of all best-priced Displayed Orders 

to buy and sell on the System will be 

transmitted for display to the 

appropriate network processor (unless 

the aggregate size is less than one round 

lot).29 Non-Displayed Orders and 

Reserve Size will not be displayed, but 

will nevertheless remain available for 

potential execution against incoming 

orders.30

Incoming marketable orders 

automatically execute against resting 

orders on the PSX book, and the posted 

orders are decremented accordingly.31

Incoming orders that are not marketable 

against posted interest in the System 

book will be cancelled or posted to the 

book, depending on the time-in-force for 

the order.32 An incoming order with a 

price that crosses the price of an order 

posted on the book will execute at the 

price of the posted order. Thus, any 

potential price improvement resulting 

from an execution in the System will 

accrue to the taker of liquidity.33

As provided by PHLX Rule 3309, 

executions occurring as a result of 

orders matched on PSX shall be 

reported by PHLX to an appropriate 

consolidated transaction reporting 

system. As transactions executed in the 

System will be cleared and settled 

anonymously, the transaction reports 

produced by the System will indicate 

the price and size of the transaction, but 

will not reveal contra party identities.34

To determine the allocation of 

incoming marketable orders against 

orders on the book, the System uses a 

price/pro-rata algorithm, with Displayed 

Orders receiving priority over Nondisplayed Orders and round lot orders 

receiving priority over odd lot orders.35

The algorithm executes trading interest 

in the System as follows: 

• Better priced trading interest will be 

executed ahead of inferior-priced 

trading interest; 

• Displayed Orders at a particular 

price with a size of at least one round 

lot will be executed ahead of NonDisplayed Orders and the reserve 

portion of Reserve Orders (collectively, 

‘‘non-displayed interest’’) at the same 

price; 

• Displayed Orders at a particular 

price with a size of at least one round 

lot will be executed ahead of odd lot at 

the same price; however, odd-lot 

Displayed Orders will execute ahead of 

non-displayed interest of one round lot 

at the same price, as Displayed Orders 

will always execute ahead of NonDisplayed Orders at the same price; 36

• As among equally priced Displayed 

Orders with a size of at least one round 

lot, the System will allocate round lot 

portions of incoming executable orders 

to displayed trading interest within the 

System pro rata based on the size of the 

Displayed Orders. Portions of an order 

that would be executed in a size other 

than a round lot if they were allocated 

on a pro rata basis will be allocated for 

execution against available displayed 

trading interest on the basis of a random 

function that assigns probability of 

execution based on the size of displayed 

interest.37 As among equally priced 

Displayed Orders with a size of less 

than one round lot, the System will 

allocate incoming orders based on the 

size of the Displayed Orders, but not in 

pro rata fashion.38 If there are two or 

more odd lot orders of equal size, the 

System will determine the order of 

execution on the basis of a random 

function that assigns each order an 

equal probability of execution. This 

same allocation methodology applies to 

equally-priced non-displayed interest 

with a size of at least one round lot or 

with a size of less than one round lot, 

as the case may be. 

The Commission finds that the 

Exchange’s trading rules for the System, 

including PSX’s execution priority 

rules, are consistent with the Act. The 

Commission notes that, other than with 

respect to the price/pro rata execution 

priority system, the Exchange’ market 

model for the trading of cash equity 

securities is substantially similar to each 

of Nasdaq’s and BX’s equity market 

models and does not raise novel issues. 

The Commission believes that PSX’s 

price/pro rata execution priority system 

may encourage participants, particularly 

those who wish to execute orders of 

large size, to display liquidity on the 

System. This in turn could facilitate the 

efficient execution of large orders, and 

foster best execution and price 

discovery. A novel exchange priority 

system that is designed to achieve these 

goals also may foster competition and 

innovation. Accordingly, the 

Commission finds that the price/pro rata 

execution priority system proposed by 

PHLX is consistent with the Act. 

b. Regulation NMS 

The Exchange will implement such 

systems, procedures, and rules in 

connection with the operation of PSX as 

are necessary to render it capable of 

meeting the requirements for automated 

quotations.39

mstockstill on DSKH9S0YB1PROD with NOTICES

56636 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Notices 

customer, at which it is willing to buy or sell one 

or more round lots of an NMS security, either as 

principal or agent.’’ Thus, the term ‘‘quotation’’ 

includes orders entered into the System by PSX 

participants, notwithstanding the fact that PSX will 

not have market makers with obligations to 

maintain continuous two-sided quotations. Under 

Rule 602 of Regulation NMS, brokers and dealers 

are required to communicate to a national securities 

exchange or national securities association their 

best bids, best offers, and quotation sizes. By 

displaying orders communicated to it by its 

members and complying with the requirements for 

automation described in Rule 600(b)(3), PSX will 

display ‘‘automated quotations’’ within the meaning 

of that rule, and therefore its best bid and best offer 

will constitute ‘‘protected quotations’’ entitled to 

trade-through protection under Regulation NMS. 

40 17 CFR 242.611. 

41See discussion of protected quotations supra 

note 39. 

42See proposed PHLX Rules 3305(b) and 3213(c). 

43As is the case with Nasdaq, different order 

designations can be combined. Thus, for example, 

a Price to Comply Order could be entered with 

reserve size or as a Non-displayed Order. 

44A ‘‘System Hours Immediate or Cancel’’ order 

is an immediate or cancel order that may be entered 

between 9 a.m. and 5 p.m. Eastern Time, PSX’s 

hours of operation. If a System Hours Immediate or 

Cancel order (or a portion thereof) is not 

marketable, the order (or unexecuted portion 

thereof) is canceled and returned to the entering 

participant. See proposed PHLX Rule 3301(h)(1). 

45See proposed PHLX Rule 3305(b). 

46See proposed PHLX Rule 3213(c). In addition, 

members may enter orders that are re-priced if they 

would lock or cross so as to avoid executing. 

47See Notice, supra note 3, 75 FR at 43603; 

proposed PHLX Rule 3301(h). 

48See Notice, supra note 3, 75 FR at 43603; 

proposed PHLX Rule 3301(f)(4). 

49See proposed PHLX Rule 3301(f)(6). 

50See Notice, supra note 3, 75 FR at 43603. The 

Exchange has represented that members will be 

responsible for ensuring that their use of 

Intermarket Sweep Orders complies with 

Regulation NMS, and the Exchange’s T+1 

surveillance program will monitor members’ use of 

Intermarket Sweep Orders. 

51See Notice, supra note 3, 75 FR at 43603. 

52See proposed PHLX Rule 3301(f)(8). 

53For example, if the national best bid and best 

offer is $9.97×$10.00, and a participant enters a 

price to comply order to buy 10,000 shares at 

$10.01, the order will display at $9.99, but will 

reside on the System book at $10.00. If a seller then 

enters an order at $9.99, it will execute at $10.00, 

up to the full 10,000 shares of the order. 

54See proposed PHLX Rule 3301(f)(10). For 

example, if the System best bid and best offer is 

$9.97×$10.00, and a participant enters a Post-Only 

Order to buy at $10.01, the order will be repriced 

and displayed at $9.99. If a seller enters an order 

at $9.96, the order will be repriced and displayed 

at $9.98. 

55See Notice, supra note 3, 75 FR at 43603–42604 

56 15 U.S.C. 78k(a)(1). 

57 17 CFR 240.11a2–2(T). 

58The member may, however, participate in 

clearing and settling the transaction. 

59See Letter from Charles Rogers, Chief 

Regulatory Officer, PHLX, to Elizabeth M. Murphy, 

The Exchange has designed PSX’s 

rules relating to orders, modifiers, and 

order execution to comply with the 

requirements of Regulation NMS. The 

proposed Rules are consistent with 

Regulation NMS 40 by requiring that all 

orders be processed in a manner that 

avoids trading through protected 

quotations 41 and avoids locked and 

crossed markets.42 PSX will not route 

orders to other market centers. Proposed 

PHLX Rule 3305(b) provides that in 

addition to such other designations as 

may be chosen by a market 

participant,43 all orders that are not 

entered with a time in force of ‘‘System 

Hours Immediate or Cancel’’ 44 must be 

designated as an Intermarket Sweep 

Order, a Pegged Order, a Price to 

Comply Order, or a Post-Only Order.45

Any orders that are entered into the 

System that would lock or cross another 

order in the System will be execute d to 

avoid a lock or cross.46

As described in the Notice, a System 

Hours Immediate or Cancel Order is 

compliant with Regulation NMS 

because by its terms it would not 

execute or post at a price that would 

result in a trade-through of a protected 

quotation or lock or cross another 

market.47 A Pegged Order similarly is 

compliant with Regulation NMS 

because it continually re-prices to avoid 

locking or crossing.48

The proposed rules also permit PSX 

participants to submit Intermarket 

Sweep Orders to comply with 

Regulation NMS. Orders so designated 

will be automatically matched and 

executed within the System.49 As 

described in the Notice, when a 

participant enters an Intermarket Sweep 

Order it is representing that it is also 

simultaneously routing one or more 

additional limit orders (also marked as 

Intermarket Sweep Orders), as 

necessary, to execute against the full 

displayed size of any protected bid or 

offer (as defined in Rule 600(b) of 

Regulation NMS) in the case of a limit 

order to sell or buy with a price that is 

superior to the limit price of the order 

identified as an Intermarket Sweep 

Order.50

Both a Price to Comply and a PostOnly Order are also designed to comply 

with the Regulation NMS.51

Specifically, if at the time of entry, a 

Price to Comply Order will lock or cross 

the quotation of an external market, the 

order will be priced to the current best 

offer (for bids) or to the current best bid 

(for offers) but displayed at a price one 

minimum price increment lower than 

the offer (for bids) or higher than the bid 

(for offers).52 Thus, an incoming order 

priced to execute against the displayed 

price will receive the superior 

undisplayed price.53 If, at the time of 

entry, a Post-Only Order will lock an 

order on the System, the order will be 

re-priced and displayed on the System 

to one minimum price increment (i.e., 

$0.01 or $0.0001) below the current best 

offer (for bids) or above the current best 

bid (for offers).54

The Commission believes that by 

requiring all orders to be entered with 

one of the designations described above, 

all PSX orders should either be priced 

or cancelled in a manner consistent 

with the avoidance of trade-throughs 

and locked and crossed markets. The 

Commission also notes that, because 

PSX will not route orders to other 

market centers, the Exchange’s 

Regulation NMS policies and 

procedures under Rule 611(a) will rely 

on information provided by Nasdaq for 

purposes of determining whether 

another trading center is experiencing a 

failure, material delay, or malfunction of 

its systems or equipment within the 

meaning of Rule 611(b)(1).55

The Commission finds that the rules 

relating to orders, modifiers, and order 

execution that are designed to comply 

with Regulation NMS are consistent 

with the Act. 

2. Section 11 of the Act 

Section 11(a)(1) of the Act 56 prohibits 

a member of a national securities 

exchange from effecting transactions on 

that exchange for its own account, the 

account of an associated person, or an 

account over which it or its associated 

person exercises discretion (collectively, 

‘‘covered accounts’’) unless an exception 

applies. Rule 11a2–2(T) under the Act,57

known as the ‘‘effect versus execute’’ 

rule, provides exchange members with 

an exemption from the Section 11(a)(1) 

prohibition. Rule 11a2–2(T) permits an 

exchange member, subject to certain 

conditions, to effect transactions for 

covered accounts by arranging for an 

unaffiliated member to execute 

transactions on the exchange. To 

comply with Rule 11a2–2(T)’s 

conditions, a member: (i) Must transmit 

the order from off the exchange floor; 

(ii) may not participate in the execution 

of the transaction once it has been 

transmitted to the member performing 

the execution; 58 (iii) may not be 

affiliated with the executing member; 

and (iv) with respect to an account over 

which the member has investment 

discretion, may not, nor may its 

associated person, retain any 

compensation in connection with 

effecting the transaction except as 

provided in the Rule. 

In a letter to the Commission, the 

Exchange requests that the Commission 

concur with PHLX’s conclusion that 

members who enter orders into the 

System satisfy the requirements of Rule 

11a2–2(T).59 For the reasons set forth 

mstockstill on DSKH9S0YB1PROD with NOTICES

Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Notices 56637 

Secretary, Commission, dated August 18, 2010 

(‘‘PHLX 11(a) Letter’’). 

60See, e.g., Securities Exchange Act Release Nos. 

61419 (January 26, 2010), 75 FR 5157 (February 1, 

2010) (SR–BATS–2009–031) (approving BATS 

options trading); 59154 (December 23, 2008), 73 FR 

80468 (December 31, 2008) (SR–BSE–2008–48) 

(approving equity securities listing and trading on 

BSE); 57478 (March 12, 2008), 73 FR 14521 (March 

18, 2008) (SR–NASDAQ–2007–004 and SR– 

NASDAQ–2007–080) (approving NOM options 

trading) ; 53128 (January 13, 2006), 71 FR 3550 

(January 23, 2006) (File No. 10–131) (approving The 

Nasdaq Stock Market LLC); 44983 (October 25, 

2001), 66 FR 55225 (November 1, 2001) (SR–PCX– 

00–25) (approving Archipelago Exchange); 29237 

(May 24, 1991), 56 FR 24853 (May 31, 1991) (SR– 

NYSE–90–52 and SR–NYSE–90–53) (approving 

NYSE’s Off-Hours Trading Facility); and 15533 

(January 29, 1979), 44 FR 6084 (January 31, 1979) 

(‘‘1979 Release’’). 

61See PHLX 11(a) Letter, supra note 59. 

62See id. A member may cancel or modify the 

order, or modify the instruction for executing the 

order, but only from off the floor. The Commission 

has stated that the non-participation requirement is 

satisfied under such circumstances, so long as such 

modifications or cancellations are also transmitted 

from off the floor. See Securities Exchange Act 

Release No. 14713 (April 27, 1978), 43 FR 18557 

(May 1, 1978) (‘‘1978 Release’’) (stating that the 

‘‘non-participation requirement does not prevent 

initiating members from canceling or modifying 

orders (or the instructions pursuant to which the 

initiating member wishes orders to be executed) 

after the orders have been transmitted to the 

executing member, provided that any such 

instructions are also transmitted from off the floor’’). 

63 In considering the operation of automated 

execution systems operated by an exchange, the 

Commission noted that, while there is not an 

independent executing exchange member, the 

execution of an order is automatic once it has been 

transmitted into the system. Because the design of 

these systems ensures that members do not possess 

any special or unique trading advantages in 

handling their orders after transmitting them to the 

exchange, the Commission has stated that 

executions obtained through these systems satisfy 

the independent execution requirement of Rule 

11a2–2(T). See 1979 Release, supra note 60. 

64See PHLX 11(a) Letter, supra note 59. 

65See 17 CFR 240.11a2–2(T)(a)(2)(iv). In addition, 

Rule 11a2–2(T)(d) requires a member or associated 

person authorized by written contract to retain 

compensation, in connection with effecting 

transactions for covered accounts over which such 

member or associated persons thereof exercises 

investment discretion, to furnish at least annually 

to the person authorized to transact business for the 

account a statement setting forth the total amount 

of compensation retained by the member in 

connection with effecting transactions for the 

account during the period covered by the statement. 

See 17 CFR 240.11a2–2(T)(d). See also 1978 

Release, supra note 62 (stating ‘‘[t]he contractual 

and disclosure requirements are designed to assure 

that accounts electing to permit transaction-related 

compensation do so only after deciding that such 

arrangements are suitable to their interests’’). 

66See PHLX 11(a) Letter, supra note 59. 

67See Notice, supra note 3, 75 FR at 43604. 

68See Securities Exchange Act Release No. 58179 

(July 17, 2008), 73 FR 42874 (July 23, 2008) (order 

approving NASDAQ OMX’s acquisition of PHLX). 

69Nasdaq Rule 4758. 

70Nasdaq Rule 4751(f)(9) defines Directed Orders 

as immediate-or-cancel orders that are directed to 

an exchange other than Nasdaq without checking 

the Nasdaq book. 

71Nasdaq Rule 4751(f)(9). 

72See Securities Exchange Act Release No. 62736 

(August 17, 2010) (SR–Nasdaq–2010–100). 

73The Exchange also states that NES is subject to 

independent oversight by FINRA, its Designated 

Examining Authority, for compliance with financial 

responsibility requirements. See Notice, supra note 

3, 75 FR at 43605. 

below, the Commission believes that 

Exchange members entering orders into 

the System would satisfy the conditions 

of the Rule. 

The Rule’s first condition is that 

orders for covered accounts be 

transmitted from off the exchange floor. 

The System receives orders 

electronically through remote terminals 

or computer-to-computer interfaces. In 

the context of other automated trading 

systems, the Commission has found that 

the off-floor transmission requirement is 

met if a covered account order is 

transmitted from a remote location 

directly to an exchange’s floor by 

electronic means.60 Because PSX 

receives orders electronically through 

remote terminals or computer-tocomputer interfaces, the Commission 

believes that the System satisfies the offfloor transmission requirement. 

Second, the Rule requires that the 

member not participate in the execution 

of its order. PHLX has represented that 

at no time following the submission of 

an order is a member organization able 

to acquire control or influence over the 

result or timing of an order’s 

execution.61 According to the Exchange, 

the execution of a member’s order is 

determined by what other orders are 

present in the System and the priority 

of those orders.62 Accordingly, the 

Commission believes that a member 

does not participate in the execution of 

an order submitted to the System. 

Third, Rule 11a2–2(T) requires that 

the order be executed by an exchange 

member who is unaffiliated with the 

member initiating the order. The 

Commission has stated that this 

requirement is satisfied when 

automated exchange facilities, such as 

PSX, are used, as long as the design of 

these systems ensures that members do 

not possess any special or unique 

trading advantages in handling their 

orders after transmitting them to the 

exchange.63 PHLX has represented that 

the design of the System ensures that no 

member organization has any special or 

unique trading advantage in the 

handling of its orders after transmitting 

its orders to the System.64 Based on the 

Exchange’s representation, the 

Commission believes that PSX satisfies 

this requirement. 

Fourth, in the case of a transaction 

effected for an account with respect to 

which the initiating member or an 

associated person thereof exercises 

investment discretion, neither the 

initiating member nor any associated 

person thereof may retain any 

compensation in connection with 

effecting the transaction, unless the 

person authorized to transact business 

for the account has expressly provided 

otherwise by written contract referring 

to Section 11(a) of the Act and Rule 

11a2–2(T).65 PHLX represents that 

member organizations relying on Rule 

11a2–2(T) for transactions effected 

through the System must comply with 

this condition of the Rule.66

B. Exception to Limitation on Affiliation 

Between PSX and Its Members 

Although the Exchange will not route 

orders to other market centers, it 

proposes to receive orders routed to it 

by other market centers, including 

orders routed from Nasdaq.67 Nasdaq 

Execution Services, LLC (‘‘NES’’) is the 

approved outbound routing facility of 

Nasdaq for cash equities. NES is owned 

by NASDAQ OMX, which also owns the 

Exchange.68 Thus, NES is an affiliate of 

the Exchange. 

Nasdaq is permitted to operate NES as 

a facility providing outbound routing 

services from Nasdaq to other market 

centers, subject to the conditions that: 

(1) NES is operated and regulated as a 

facility of Nasdaq; (2) NES only 

provides outbound routing services 

unless otherwise approved by the 

Commission; (3) the designated 

examining authority of NES is a SRO 

unaffiliated with Nasdaq; and (4) the 

use of NES for outbound routing is 

available only to Nasdaq members and 

the use of NES remains optional.69

Currently, NES may not route Directed 

Orders 70 to a facility of an exchange 

that is an affiliate of Nasdaq, other than 

BX.71 In connection with PHLX’s 

resumption of equity trading on PSX 

pursuant to this filing, Nasdaq has 

proposed a rule change to permit NES 

to route all forms of orders, including 

Directed Orders, to PSX.72

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, the Exchange proposes 

the following limitations and conditions 

to NES’s affiliation with the Exchange to 

permit the Exchange to accept inbound 

orders that NES routes in its capacity as 

a facility of Nasdaq: 

• First, the Exchange states that 

pursuant to the FINRA RSA, FINRA will 

review NES’s compliance with the 

Exchange’s rules through FINRA’s 

examination program.73 Pursuant to the 

mstockstill on DSKH9S0YB1PROD with NOTICES

56638 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Notices 

74The Exchange represents that personnel 

performing real-time oversight of equity trading on 

Nasdaq will also perform similar functions with 

respect to PSX pursuant to the Intercompany RSA, 

under the direction, authority, and oversight of 

PHLX’s Chief Regulatory Officer (‘‘CRO’’) and the 

Regulatory Oversight Committee (‘‘ROC’’) of its 

Board of Governors. 

75The Exchange represents that both FINRA and 

the Exchange will collect and maintain all alerts, 

complaints, investigations and enforcement actions 

in which NES (in its capacity as a facility of Nasdaq 

routing orders to the PSX) is identified as a 

participant that has potentially violated applicable 

Commission or Exchange rules. The Exchange and 

FINRA will retain these records in an easily 

accessible manner in order to facilitate any 

potential review conducted by the Commission’s 

Office of Compliance Inspections and 

Examinations. See Notice, supra note 3, 75 FR at 

43605. 

76See id. 

77See proposed PHLX Rule 985(c)(2); Notice, 

supra note 3, 75 FR at 43605. 

78See Amendment No. 1, supra note 4. In 

Amendment No. 1, the Exchange clarified that its 

proposal, as opposed to Nasdaq’s corresponding 

proposal, be approved on a one year pilot basis. 

79See, 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.); and 

58673 (September 29, 2008), 73 FR 57707 (October 

8, 2008) (SR–Amex–2008–62) (order approving the 

combination of NYSE Euronext and the American 

Stock Exchange LLC). 

80This oversight will be accomplished through 

the 17d–2 Agreement between FINRA and the 

FINRA RSA. 

81See Securities Exchange Act Release No. 59154 

(December 23, 2008), 73 FR 80468, (December 31, 

2008) (SR–BSE–2008–48) (‘‘BX Equities Market 

Approval Order’’). 

82 15 U.S.C. 78l(f). 

83 17 CFR 240.12f–5. See Notice, supra note 3, 75 

FR at 43599. 

84 17 CFR 240.12f–5. See also Securities Exchange 

Act Release No. 35737 (April 21, 1995), 60 FR 

20891 (April 28, 1995) (adopting Rule 12f–5). 

85Proposed PHLX Rule 803(o) defines ‘‘NMS 

Stocks’’ for purposes of the rule as having the 

meaning given such term by Rule 600 under 

Regulation NMS, including, but not limited to, 

common stock, preferred stock and similar issues, 

shares or certificates of beneficial interest of trusts, 

notes, limited partnership interests, warrants, 

certificates of deposit for common stock, 

convertible debt securities, American Depositary 

Receipts, contingent value rights, Trust Shares, 

Trust Issued Receipts, Index Fund Shares, Equity 

Index-Linked Securities, Commodity-Linked 

Securities, Equity-Linked Notes, and Managed Fund 

Shares. 

86 17 CFR 240.10A–3. 

87 17 CFR 240.19b–4(e) 

FINRA RSA, however, PHLX retains 

ultimate responsibility for enforcing its 

rules with respect to NES. 

• Second, FINRA and the Exchange 74

will monitor NES for compliance with 

the Exchange’s trading rules, and will 

collect and maintain certain related 

information.75

• Third, the Exchange states that 

FINRA will provide a report to the 

Exchange’s CRO, on at least a quarterly 

basis, that: (i) Quantifies all alerts (of 

which the Exchange and FINRA are 

aware) that identify NES as a participant 

that has potentially violated 

Commission or Exchange rules, and (ii) 

quantifies the number of all 

investigations that identify NES as a 

participant that has potentially violated 

Commission or Exchange rules.76

• Fourth, the Exchange proposes Rule 

985(c)(2), which will require NASDAQ 

OMX, 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 nonpublic information regarding planned 

changes to the Exchange’s systems 

obtained as a result of its affiliation with 

the Exchange, until such information is 

available generally to similarly situated 

Exchange members, in connection with 

the provision of inbound order routing 

to the Exchange.77

• Fifth, the Exchange proposes that 

routing of orders from NES to the 

Exchange, in NES’s capacity as a facility 

of Nasdaq, be authorized for a pilot 

period of one year.78

The operation of NES as a facility of 

Nasdaq providing outbound routing 

services from that exchange will be 

subject to Nasdaq oversight, as well as 

Commission oversight. Nasdaq will be 

responsible for ensuring that NES’s 

outbound routing function is operated 

consistent with Section 6 of the Act and 

Nasdaq rules. In addition, Nasdaq must 

file with the Commission rule changes 

and fees relating to NES’s outbound 

routing function. 

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.79 Although the Commission 

continues to be concerned about 

potential unfair competition and 

conflicts of interest between an 

exchange’s self-regulatory obligations 

and its commercial interest when the 

exchange is affiliated with one of its 

members, for the reasons discussed 

below, the Commission believes that it 

is consistent with the Act to permit NES 

to provide inbound routing to the 

Exchange on a pilot basis, subject to the 

conditions described above. 

The Exchange has proposed five 

conditions applicable to NES’s routing 

activities, which are enumerated above. 

The Commission believes that these 

conditions mitigate its concerns about 

potential conflicts of interest and unfair 

competitive advantage. In particular, the 

Commission believes that FINRA’s 

oversight of NES,80 combined with 

FINRA’s monitoring of NES’s 

compliance with the equity trading 

rules and quarterly reporting to the 

Exchange’s CRO, will help to protect the 

independence of the Exchange’s 

regulatory responsibilities with respect 

to NES. The Commission also believes 

that the proposed addition of Rule 

985(c) is designed to ensure that NES 

cannot use any information advantage it 

may have because of its affiliation with 

the Exchange. Furthermore, the 

Commission believes that the 

Exchange’s proposal to allow NES to 

route orders inbound to the Exchange 

from Nasdaq, on a pilot basis, will 

provide the Exchange and the 

Commission an opportunity to assess 

the impact of any conflicts of interest of 

allowing an affiliated member of the 

Exchange to route orders inbound to the 

Exchange and whether such affiliation 

provides an unfair competitive 

advantage. The Commission notes that it 

previously approved inbound routing by 

NES to an affiliate under substantially 

similar conditions.81

C. Listing Standards/Unlisted Trading 

Privileges 

The Exchange has represented that it 

will not resume its listings business, 

and instead will trade all NMS stocks on 

the System pursuant to unlisted trading 

privileges (‘‘UTP’’), consistent with 

Section 12(f) of the Act 82 and Rule 12f– 

5 thereunder.83 Rule 12f–5 requires an 

exchange that extends unlisted trading 

privileges to securities to have in effect 

a rule or rules providing for transactions 

in the class or type of security to which 

the exchange extends unlisted trading 

privileges.84

In connection with its proposal to 

trade NMS stocks 85 on PSX on an 

unlisted trading privileges basis, the 

Exchange proposes several amendments 

to PHLX Rule 803, including amending 

PHLX Rule 803(o) (Unlisted Trading 

Privileges) to, among other things, (1) 

clearly state that the Exchange will not 

list any securities, and that any 

provisions of PHLX Rules 800 through 

868 that permit listing of securities will 

not be effective until the Exchange 

amends its rules to make any changes 

needed to comply with Rule 10A–3 

under the Act 86 and to incorporate 

additional qualitative listing standards, 

and (2) enhance the listing requirements 

for new derivative securities products 

(as defined in Rule 19b–4(e) under the 

Act 87) trading on the Exchange. In 

addition, the Exchange proposes to 

adopt new listing standards for 

securities linked to the performance of 

mstockstill on DSKH9S0YB1PROD with NOTICES

Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Notices 56639 

88See proposed PHLX Rules 803(m) and (n). As 

with other standards, PHLX represented that it will 

not list these securities until the filing and approval 

of a proposed rule change to authorize such listing. 

In connection with adopting these new standards, 

the Exchange also proposed to (1) delete current 

PHLX Rules 803(m) and (n), which contain listing 

standards for products that are covered by the new 

listing standards and (2) amend PHLX Rule 803(f) 

(Other Securities) to adopt continued listing 

requirement provisions that are complementary to 

the new standards for securities linked to 

commodities. 

89 17 CFR 240.10A–3. 

90As proposed to be amended, the requirements 

of PHLX Rule 803(o) are substantially similar to the 

requirements set forth in Rule 14.1 (Unlisted 

Trading Privileges) of EDGX Exchange, Inc. (‘‘Direct 

Edge’’). Proposed PHLX Rule 3230 substantially 

mirrors the requirements of Nasdaq Rule 4630 

(Trading in Commodity-Related Securities). 

Proposed Rules 803(m) and (n) are substantially 

similar to those set forth in Nasdaq Rules 5710 

(Securities Linked to Performance of Indexes and 

Commodities (Including Currencies)) and 5735 

(Managed Fund Shares). 

91See proposed PHLX Rule 3202. 

92See PHLX Rule 960.10 and proposed PHLX 

Rule 3221. 

93See proposed PHLX Rule 3400 Series. 

94As is the case for Nasdaq members under the 

Nasdaq rules, PHLX members that are not FINRA 

members must compile and maintain audit trail 

information for securities listed on Nasdaq, but are 

required to transmit this information to FINRA only 

if requested. See proposed PHLX Rule 3405. If 

PHLX resumes operations as a listing market in the 

future, all members will be required to maintain 

audit trail information for securities listed on 

PHLX, and to transmit the information to FINRA 

upon request, but daily OATS reporting for such 

securities would not be required. Id. 

95See Securities Exchange Act Release No. 53128 

(January 13, 2006); 71 FR 3350 (January 23, 2006) 

(File No. 10–131). 

96See proposed PHLX Rule 3100. 

97See proposed PHLX Rule 3100(a)(4). See also 

Securities Exchange Act Release No. 62252 (June 

10, 2010), 75 FR 34186 (June 16, 2010) (order 

approving rules relating to the circuit breaker pilot 

program adopted by other national securities 

exchanges). Nasdaq and the other equities 

exchanges have proposed to expand the circuit 

breaker pilot program to include securities in the 

Russell 1000 Index and certain exchange traded 

products. See, e.g., Securities Exchange Act Release 

Nos. 62414 (June 30, 2010), 75 FR 39081 (July 7, 

2010) and 62415 (June 30, 2010), 75 FR 39086 (July 

7, 2010). The Exchange has represented that it will 

promptly submit a proposed rule change in 

accordance with Section 19(b) of the Act and Rule 

19b–4(f)(6) thereunder to adopt corresponding 

changes to the rules governing PSX if and when the 

Commission approves the corresponding Nasdaq 

rule. See Letter from John Yetter, Vice President 

and Deputy General Counsel, The NASDAQ OMX 

Group, to David Shillman, Associate Director, 

Division of Trading and Markets, Commission, 

dated September 8, 2010 (‘‘Yetter Letter’’). 

98See proposed PHLX Rule 3202. 

99See proposed PHLX Rule 3312. As a result of 

precipitous declines in the prices of certain 

securities on May 6, 2010, however, the 

Commission and the national securities exchanges 

are currently evaluating the advisability of further 

changes to clearly erroneous rules. As a result of 

this evaluation, Nasdaq and the other equities 

exchanges have proposed to amend their clearly 

erroneous execution rules to set forth clearer 

standards and curtail their discretion with respect 

to breaking erroneous trades. See, e.g., Securities 

Exchange Act Release Nos. 62334 (June 21, 2010), 

75 FR 36732 (June 28, 2010) and 62342 (June 21, 

2010), 75 FR 36752 (June 28, 2010). The Exchange 

has represented that it will promptly file a proposed 

rule change to amend its clearly erroneous rule in 

a manner consistent with Nasdaq’s clearly 

erroneous rule, in accordance with Section 19(b) of 

the Act and Rule 19b–4(f)(6) thereunder, if and 

when the Commission approves the corresponding 

Nasdaq rule. See Yetter Letter, supra note 97. 

100See Section 10–10 of the PHLX By-Laws, 

which requires that 20% of the members of the 

committee represent PHLX members, and prohibits 

more than 50% of the committee’s members from 

being employed by firms that are market makers or 

that derive more than 10% of their revenues from 

market making. 

101By-Laws of Nasdaq, Article III, Section 6. 

102See Nasdaq Registration Approval Order, 

supra note 22. 

103See Notice, supra note 3, 75 FR at 43604. 

indexes and commodities (including 

currencies) and managed fund shares, to 

allow such securities to trade on PSX 

pursuant to unlisted trading 

privileges.88 The Exchange also 

proposes PHLX Rule 3230 to establish 

additional rules to govern trading of 

Commodity-Related Securities on PSX 

pursuant to unlisted trading privileges, 

including a requirement that members 

provide all purchasers of a newly issued 

Commodity-Related Securities with a 

prospectus. 

The Commission finds that these rules 

are consistent with the Act. The 

Commission notes that the Exchange 

will not list any securities for trading on 

PSX until it amends its rules to make 

any changes needed to comply with 

Rule 10A–3 under the Act 89 and to 

incorporate additional qualitative listing 

standards. The Commission also notes 

that these rules are similar to the rules 

of other Exchanges.90

D. Regulation of the Exchange and its 

Members 

As a facility of the Exchange, PSX will 

be subject to the Exchange’s SRO 

functions and the Exchange will have 

regulatory responsibility for the 

activities of the System. 

Notwithstanding the delegation of such 

responsibilities via contract, the 

Exchange retains ultimate legal 

responsibility for the regulation of its 

members and its market activities, 

including activities on PSX. 

1. Disciplinary Rules 

Trading on PSX is subject to the 

Exchange’s disciplinary rules set forth 

in PHLX Rules 960.1 through 960.12.91

Such rules provide the Exchange with 

disciplinary jurisdiction over its 

members so that it can enforce 

members’ compliance with its rules and 

the Act and the rules and regulations 

thereunder. The Exchange’s rules also 

permit it to sanction members for 

violations of its rules and violations of 

the Act by, among other things, 

expelling or suspending members, 

limiting or terminating members’ 

activities, functions, or operations, 

fining or censuring members, or 

suspending or barring a person from 

being associated with a member.92

2. Order Audit Trail System 

PHLX proposes rules requiring FINRA 

members trading on PSX to comply with 

FINRA’s Order Audit Trail System 

(‘‘OATS’’) requirements,93 which rules 

are substantially similar to Nasdaq 

Rules Series 6950 (‘‘Order Audit Trail 

System).94 Like Nasdaq, OATS data will 

be used by PHLX for regulatory 

purposes only.95

3. Trading Halts; Clearly Erroneous 

Transactions 

PSX’s proposed rule relating to 

trading halts is substantially similar to 

Nasdaq Rule 4120 (Trading Halts), 

except that the PSX rule includes only 

those provisions relevant to securities 

traded on an unlisted trading privileges 

basis.96 Proposed PHLX Rule 3100 

provides that PSX will participate in the 

circuit breaker pilot program for stocks 

included in the S&P 500® Index, which 

ends on December 10, 2010.97 Current 

PHLX Rule 133 (Trading Halts Due to 

Extraordinary Market Volatility) will 

also apply to trading on PSX.98

PHLX has proposed a rule which is 

substantially similar to Nasdaq Rule 

11890 (Clearly Erroneous Transactions) 

to govern the breaking of clearly 

erroneous transactions.99 Appeals from 

determinations regarding trades made 

by PHLX staff will be made to a 

committee of industry and non-industry 

experts established under the PHLX ByLaws, which committee is subject to 

identical compositional 

requirements 100 as NASDAQ’s Market 

Operations Review Committee, which 

performs a comparable function under 

NASDAQ rules.101

The Commission finds that the 

Exchange’s proposed rules relating to 

the regulation of PSX and its members 

are consistent with the requirements of 

the Act. The Commission notes that the 

proposed rules relating to the regulation 

of PSX are substantially similar to rules 

of Nasdaq previously approved by the 

Commission.102 In addition, the 

disciplinary rules applicable to PSX are 

set forth in the current rules of the 

Exchange, which have been previously 

approved by the Commission. 

4. Regulatory Contracts 

The Exchange represents that it is a 

party to two regulatory services 

agreements (the ‘‘Regulatory 

Contracts’’).103 Pursuant to the FINRA 

mstockstill on DSKH9S0YB1PROD with NOTICES

56640 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Notices 

104 Id. 

105 Id. 

106 Id. 

107 Id. 

108 Id. 

109 Id. 

110 Id. 

111See, e.g., Securities Exchange Act Release No. 

40760 (December 8, 1998), 63 FR 70844 (December 

22, 1998). See also Securities Exchange Act Release 

Nos. 57478 (March 12, 2008) 73 FR 14521, (March 

18, 2008) (order approving rules governing the 

trading of options on the NASDAQ Options Market) 

(‘‘NOM Approval Order’’); 50122 (July 29, 2004), 69 

FR 47962 (August 6, 2004) (order approving File 

No. SR–Amex–2004–32) (‘‘Amex Approval Order’’); 

42455 (February 24, 2000), 65 FR 11388 (March 2, 

2000) (File No. 10–127) (order approving ISE’s 

registration as a national securities exchange) (‘‘ISE 

Registration Approval Order’’); Nasdaq Registration 

Approval Order, supra note 22. 

112See Nasdaq Registration Approval Order, 

supra note 22; BX Equities Market Approval Order, 

supra note 81. 

113See Section 17(d)(1) of the Act and Rule 17d2 thereunder. 15 U.S.C. 78q(d)(1); and 17 CFR 

240.17d–2. The Commission notes that it is not 

approving or declaring effective the FINRA RSA or 

the Intercompany RSA. 

114See NOM Approval Order, supra note 111; 

Nasdaq Registration Approval Order, supra note 22; 

Amex Approval Order, supra note 111; and ISE 

Registration Approval Order, supra note 111. 

115 Id. 

116 Id. 

117See proposed PHLX Rules 763 and 764. 

118See Notice, supra note 3, 75 FR at 43604. 

119 15 U.S.C. 78s(b)(2). 

RSA, FINRA will provide a range of 

regulatory services to the Exchange and 

its facilities, including PSX, including 

T+1 surveillance, investigation, and 

enforcement with respect to the 

Exchange’s rules, arbitration services, 

and membership services.104 Under the 

FINRA RSA, FINRA will conduct T+1 

market surveillance and examine 

members to monitor compliance with 

applicable PHLX rules and securities 

laws and regulations.105 The 

Intercompany RSA provides that 

employees and contractors of each party 

may perform regulatory services for the 

Exchange.106 All regulatory services 

performed for the Exchange under the 

Intercompany RSA, including those 

performed with respect to the System, 

are subject to the direction, authority, 

and oversight of the Exchange’s CRO 

and the ROC, and all personnel 

performing services for the Exchange 

under the Intercompany RSA are subject 

to the jurisdiction, authority and 

oversight of the Exchange’s CRO and 

ROC.107 The Exchange represents that 

any personnel performing real-time 

oversight of equity trading on Nasdaq 

will also perform similar functions with 

respect to PSX, under the direction, 

authority, and oversight of the 

Exchange’s CRO and the ROC.108 The 

Exchange represents that the Exchange 

retains ultimate legal responsibility for, 

and control of, functions performed for 

PHLX under the Regulatory 

Contracts.109

The Exchange has represented that 

many aspects of compliance with PSX 

rules, such as avoidance of locked and 

crossed markets and trade throughs, will 

be enforced by the System itself, and the 

Exchange will periodically test 

operations of PSX to determine that the 

System is operating in accordance with 

applicable rules.110

The Commission notes that the 

Exchange will continue to bear ultimate 

regulatory responsibility for functions 

performed on its behalf under the 

Regulatory Contracts. Further, the 

Exchange retains ultimate legal 

responsibility for the regulation of its 

members and its markets (including 

PSX). 

The Commission believes that it is 

consistent with the Act and the public 

interest to allow the Exchange to 

contract with FINRA to perform 

surveillance, disciplinary, and 

enforcement functions.111 Surveillance, 

discipline, and enforcement are 

fundamental elements to a regulatory 

program, and constitute core selfregulatory functions. It is essential to 

the public interest and the protection of 

investors that these functions are carried 

out in an exemplary manner. With 

respect to certain regulatory functions 

contracted to FINRA by the Exchange, 

including surveillance, disciplinary and 

enforcement functions, the Commission 

previously noted its belief that FINRA 

has the expertise and experience to 

perform such functions on behalf of an 

exchange, and that the contracting of 

such functions to FINRA is consistent 

with the Act and the public interest.112

The Commission continues to believe 

that this is true with respect to FINRA’s 

regulation of the Exchange and the 

conduct of its members pursuant to the 

FINRA RSA. 

The Commission believes that it is 

consistent with the Act and the public 

interest to allow the Exchange to enter 

into the Intercompany RSA. Nasdaq and 

BX have self-regulatory obligations 

similar to those of the Exchange, and it 

is beneficial to the public interest and 

the protection of investors that these 

functions are carried out in an 

exemplary manner. The Commission 

notes that the Exchange has represented 

that all regulatory services performed 

for the Exchange under the 

Intercompany RSA are subject to the 

direction, authority, and oversight of the 

Exchange’s CRO and ROC, and any 

personnel performing such services for 

the Exchange are subject to the 

jurisdiction, authority and oversight of 

the Exchange’s CRO and ROC. In this 

way, the Exchange will maintain control 

over the performance of regulatory 

services with respect to the Exchange. 

The Exchange, unless relieved by the 

Commission of its responsibility,113

shall bear the responsibility for selfregulatory conduct and primary liability 

for self-regulatory failures, not the SRO 

retained to perform regulatory functions 

on the Exchange’s behalf.114 In 

performing these functions, however, an 

SRO may nonetheless bear liability for 

causing or aiding and abetting the 

failure of the Exchange to perform its 

regulatory functions.115 Accordingly, 

although FINRA, Nasdaq and BX will 

not act on their own behalf under their 

respective SRO responsibilities in 

carrying out regulatory services for the 

Exchange pursuant to the FINRA RSA or 

Intercompany RSA, as applicable, such 

SROs may have secondary liability if, 

for example, the Commission finds that 

the contracted functions are being 

performed so inadequately as to cause a 

violation of the federal securities laws 

by the Exchange.116

E. Additional Proposed Rules for the 

Exchange 

PHLX proposes to adopt rules 

addressing recommendations to 

customers (or suitability) and best 

execution and interpositioning,117

which mirror the requirements of NASD 

Rules 2310 and 2320. Although 

members would become subject to these 

rules by virtue of being members of 

FINRA, PHLX believes that the 

requirements set forth in these rules are 

sufficiently important that they should 

be explicitly set forth in the PHLX 

rulebook.118

The Commission finds that the 

proposed rules regarding suitability and 

best execution and interpositioning are 

consistent with the Act. The 

Commission notes that rules are 

substantially similar to the requirements 

of NASD Rules 2310 and 2320. 

V. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,119 that the 

proposed rule change (SR–PHLX–2010– 

79), as modified by Amendment No. 1, 

be, and it hereby is, approved, except 

for (1) the circuit breaker pilot program, 

which is approved on a pilot basis 

through December 10, 2010, and (2) the 

inbound routing of orders from NES to 

PSX, which is approved on a pilot basis 

through September 9, 2011. 

Although the Commission’s approval 

of the rule proposal, as amended, is 

final and the proposed rules are 

therefore effective, it is further ordered 

mstockstill on DSKH9S0YB1PROD with NOTICES

Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Notices 56641 

120On November 16, 1989, the Commission 

published its first Automation Review Policy (‘‘ARP 

I’’), in which it created a voluntary framework for 

self-regulatory organizations to establish 

comprehensive planning and assessment programs 

to determine systems capacity and vulnerability. On 

May 9, 1991, the Commission published its second 

Automation Review Policy (‘‘ARP II’’) to clarify the 

types of review and reports that were expected from 

self-regulatory organizations. See Securities 

Exchange Act Release Nos. 27445 (November 16, 

1989), 54 FR 48703 (November 24, 1989); and 29185 

(May 9, 1991), 56 FR 22490 (May 15, 1991). 

121 17 CFR 200.30–3(a)(12). 

1Also, on June 17, 2010, each of BATS Exchange, 

Inc. (‘‘BATS’’), NASDAQ OMX BX, Inc. (‘‘BX’’), 

Chicago Board Options Exchange, Incorporated 

(‘‘CBOE’’), Chicago Stock Exchange, Inc. (‘‘CHX’’), 

EDGA Exchange, Inc. (‘‘EDGA’’), EDGX Exchange, 

Inc. (‘‘EDGX’’), International Securities Exchange 

LLC (‘‘ISE’’), The NASDAQ Stock Market LLC 

(‘‘Nasdaq’’), National Stock Exchange, Inc. (‘‘NSX’’), 

New York Stock Exchange LLC (‘‘NYSE’’), NYSE 

Amex LLC (‘‘NYSE Amex’’), NYSE Arca, Inc. 

(‘‘NYSE Arca’’) (collectively, the ‘‘Exchanges’’) filed 

similar proposed rule changes with respect to 

breaking erroneous trades. See Securities Exchange 

Act Release Nos. 62330 (June 21, 2010), 75 FR 

36725; 62331 (June 21, 2010), 75 FR 36746; 62332 

(June 21, 2010), 75 FR 36749; 62333 (June 21, 2010), 

75 FR 36759; 62334 (June 21, 2010), 75 FR 36732; 

62335 (June 21, 2010), 75 FR 37494; 62336 (June 21, 

2010), 75 FR 36743; 62337 (June 21, 2010), 75 FR 

36739; 62338 (June 21, 2010), 75 FR 36762; 62339 

(June 21, 2010), 75 FR 36765; 62340 (June 21, 2010), 

75 FR 36768; and 62342 (June 21, 2010), 75 FR 

36752. These proposals also were approved today. 

See Securities Exchange Act Release No. 62886 

(Sept. 10, 2010). 

2See Securities Exchange Act Release No. 62341 

(June 21, 2010), 75 FR 36756. 

3See letter from Peter Ianello, Partner, CSS, LLC, 

to Elizabeth Murphy, Secretary, Commission, dated 

July 15, 2010 (‘‘CSS Letter’’); letter from Gary 

DeWaal, Senior Managing Director and Group 

General Counsel, Newedge USA, LLC, to Elizabeth 

M. Murphy, Secretary, Commission, dated July 19, 

2010 (‘‘Newedge Letter’’); letter from Karrie 

McMillan, General Counsel, Investment Company 

Institute, to Elizabeth M. Murphy, Secretary, 

Commission, dated July 19, 2010 (‘‘ICI Letter’’); 

David C. Cushing, Director of Global Equity 

Trading, Wellington Management Company, LLP, to 

Elizabeth M. Murphy, Secretary, Commission, dated 

July 19, 2010 (‘‘Wellington Letter’’); letter from John 

A. McCarthy, General Counsel, GETCO, to Elizabeth 

Murphy, Secretary, Commission, dated July 20, 

2010 (‘‘GETCO Letter’’); letter from Ira P. Shapiro, 

Managing Director, BlackRock, Inc., to Elizabeth M. 

Murphy, Secretary, Commission, dated July 20, 

2010 (‘‘BlackRock Letter’’); and letter from Manisha 

Kimmel, Executive Director, Financial Information 

Forum, On behalf of the FIF Front Office 

Committee, to Elizabeth M. Murphy, Secretary, 

Commission, dated July 21, 2010 (‘‘FIF Letter’’); 

letter from Ann Vlcek, Managing Director and 

Associate General Counsel, Securities Industry and 

Financial Markets Association, to Elizabeth M. 

Murphy, Secretary, Commission, dated July 26, 

2010 (‘‘SIFMA Letter’’); and letter from Leonard J. 

Amoruso, General Counsel, Knight Capital Group, 

Inc., to Elizabeth M. Murphy, Secretary, 

Commission, dated July 27, 2010 (‘‘Knight Letter’’). 

4See letter from Eric J. Swanson, SVP and 

General Counsel, BATS, to Elizabeth M. Murphy, 

Secretary, Commission, dated August 16, 2010 

(‘‘BATS Letter’’). 

5The events of May 6 are described more fully 

in the report of the staffs of the Commodity Futures 

Trading Commission (‘‘CFTC’’) and the Commission, 

titled Report of the CFTC and SEC to the Joint 

Advisory Committee on Emerging Regulatory Issues, 

‘‘Preliminary Findings Regarding the Market Events 

of May 6, 2010,’’ dated May 18, 2010. 

6See, e.g., Written Statement of Leonard J. 

Amoruso, Senior Managing Director and General 

Counsel, Knight Capital Group, Inc., Submitted 

before the CFTC–SEC Advisory Committee on 

Emerging Regulatory Issues, Panel Discussion, ‘‘The 

events of May 6—views and observations regarding 

liquidity, trading and the apparent breakdown of an 

orderly market,’’ dated June 22, 2010. 

7See Securities Exchange Act Release Nos. 62251; 

75 FR 34183 (June 10, 2010); and 62252, 75 FR 

34186 (June 16, 2010). 

that the operation of PSX is conditioned 

on the satisfaction of the following 

requirements: 

A. Examination by the Commission. 

The Exchange must have, and must 

represent in a letter to the staff in the 

Commission’s Office of Compliance 

Inspections and Examinations that it has 

adequate surveillance procedures and 

programs in place to effectively regulate 

PSX. 

B. Trade Processing and Exchange 

Systems. The Exchange must have, and 

must represent in a letter to the staff in 

the Commission’s Division of Trading 

and Markets that it has adequate 

procedures and programs in place, as 

noted in Commission Automation 

Review Policy guidelines,120 to 

effectively process trades and maintain 

the confidentiality, integrity, and 

availability of the Exchange’s systems. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.121

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. 2010–23104 Filed 9–15–10; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–62885; File No. SR–FINRA– 

2010–032] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Order Granting 

Approval of Proposed Rule Change 

Relating to Clearly Erroneous 

Transactions 

I. Introduction 

September 10, 2010. 

On June 17, 2010, the Financial 

Industry Regulatory Authority, Inc. 

(‘‘FINRA’’) filed with the Securities and 

Exchange Commission (‘‘Commission’’), 

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

Securities Exchange Act of 1934 (‘‘Act’’), 

and Rule 19b–4 thereunder, a proposed 

rule change to amend its rules to set 

forth clearer standards and curtail its 

discretion with respect to breaking 

erroneous trades.1 The proposed rule 

change was published for comment in 

the Federal Register on June 28, 2010.2

The Commission received nine 

comment letters on the proposal.3 BATS 

responded to the comments in a letter 

dated August 16, 2010.4 This order 

approves the proposed rule change. 

II. Background and Description of the 

Proposal 

On May 6, 2010, the U.S. equity 

markets experienced a severe 

disruption.5 Among other things, the 

prices of a large number of individual 

securities suddenly declined by 

significant amounts in a very short time 

period, before suddenly reversing to 

prices consistent with their pre-decline 

levels. This severe price volatility led to 

a large number of trades being executed 

at temporarily depressed prices, 

including many that occurred at prices 

dramatically away from pre-decline 

levels. In response, the Exchanges and 

FINRA exercised their authority under 

their clearly erroneous execution rules 

to break trades that were effected at 

prices 60% or more away from predecline prices, using a process that was 

not sufficiently clear or transparent to 

market participants. There are reports 

that the lack of clear guidelines for 

dealing with clearly erroneous 

transactions under circumstances such 

as occurred on May 6, and the lack of 

transparency surrounding the 

Exchanges’ and FINRA’s decision to 

break only trades at least 60% away 

from the market, added to the confusion 

and uncertainty faced by investors on 

May 6.6

The Commission is concerned that 

events such as those that occurred on 

May 6 can undermine the integrity of 

the U.S. securities markets. 

Accordingly, it is working on a variety 

of fronts to assess the causes and 

contributing factors of the May 6 market 

disruption and to fashion policy 

responses that will help prevent a 

recurrence. The Commission also 

recognizes the importance of moving 

quickly to implement steps that could 

help limit potential harm from extreme 

price volatility. On June 10, 2010, the 

Commission approved rules, on a pilot 

basis, that require the Exchanges to 

pause trading in securities included in 

the S&P 500 Index if the price moves 

10% or more in a five-minute period.7

By establishing circuit breakers that 

uniformly pause trading in these 

securities across all markets, the new 

rules are designed to facilitate 

coordinated price discovery and provide 

time for investors to trade at rational 

prices. In addition to the individual 

stock trading pause rules, FINRA 

mstockstill on DSKH9S0YB1PROD with NOTICES