Federal Register / Vol. 74, No. 142 / Monday, July 27, 2009 / Notices 37071 

6 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3 17 CFR 240.19b–4(f)(6). 

4Because only NASDAQ Exchange members who 

are Options Participants may enter orders into 

NOM, it also follows that routing by NOS is 

available only to NASDAQ Exchange members who 

are Options Participants. Pursuant to Chapter I, 

Section 1(a)(40) of the NOM Rules, the term 

‘‘Options Participant’’ means a firm, or organization 

that is registered with the NASDAQ Exchange for 

Continued 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.6

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–17763 Filed 7–24–09; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–60349; File No. SR–BX– 

2009–035] 

Self-Regulatory Organizations; 

NASDAQ OMX BX, Inc.; Notice of Filing 

and Immediate Effectiveness of 

Proposed Rule Change To Establish 

Procedures To Prevent Information 

Advantages Resulting From the 

Affiliation Between BOX and NOS 

July 20, 2009. 

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 July 17, 

2009, NASDAQ OMX BX, Inc. (the 

‘‘Exchange’’) 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 

prepared by the Exchange. The 

Exchange has designated the proposed 

rule change as constituting a noncontroversial rule change under Rule 

19b–4(f)(6) under the Act,3 which 

renders the proposal effective upon 

filing with the Commission. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange proposes a rule change 

to establish procedures designed to 

prevent potential informational 

advantages resulting from the affiliation 

between the Boston Options Exchange 

(‘‘BOX’’), a facility of the Exchange, and 

NASDAQ Options Services, LLC 

(‘‘NOS’’), a registered broker-dealer and 

a BOX market participant. The text of 

the proposed rule change is available 

from the principal office of the 

Exchange, at the Commission’s Public 

Reference Room and also on the 

Exchange’s Internet Web site at http:// 

nasdaqomxbx.cchwallstreet.com/ 

NASDAQOMXBX/Filings/. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, the 

Exchange included statements 

concerning the purpose of and basis for 

the proposed rule change and discussed 

any comments it received on the 

proposed rule change. The text of these 

statements may be examined at the 

places specified in Item IV below. The 

Exchange has prepared summaries, set 

forth in Sections A, B, and C below, of 

the most significant aspects of such 

statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

The NASDAQ OMX Group, Inc. 

(‘‘NASDAQ OMX’’) acquired the 

Exchange in August 2008. Prior to the 

acquisition, the Exchange owned a 

21.87% interest in Boston Options 

Exchange Group, LLC (‘‘BOX LLC’’), the 

operator of BOX, a facility of the 

Exchange. Boston Options Exchange 

Regulation, LLC (‘‘BOXR’’) is a whollyowned subsidiary of the Exchange, to 

which the Exchange has delegated, 

pursuant to a delegation plan, certain 

self-regulatory responsibilities related to 

BOX. 

At the closing of the acquisition by 

NASDAQ OMX, the Exchange 

transferred its interest in BOX LLC to 

MX US, a wholly-owned subsidiary of 

the Montreal Exchange Inc. Although 

the Exchange no longer holds an 

ownership interest in BOX LLC, it 

continues to hold self-regulatory 

obligations with respect to BOX. The 

Exchange, together with BOXR, retains 

regulatory control over BOX and the 

Exchange, as the SRO, remains 

responsible for ensuring compliance 

with the federal securities laws and all 

applicable rules and regulations. 

NASDAQ OMX also currently 

indirectly owns NASDAQ Options 

Services, LLC (‘‘NOS’’), a registered 

broker-dealer and a BOX market 

participant. Thus, NOS is deemed an 

affiliate of the Exchange, BOX and 

BOXR. 

The Exchange is proposing that NOS 

be permitted to route certain orders 

from The NASDAQ Option Market 

(‘‘NOM’’) to BOX without checking the 

NOM book prior to routing. NOM is an 

options market operated by The 

NASDAQ Stock Market (the ‘‘NASDAQ 

Exchange’’) and NOS is the approved 

outbound routing facility of the 

NASDAQ Exchange for NOM. With the 

exception of Exchange Direct Orders, all 

routable orders for options that are 

trading on NOM check the NOM book 

prior to routing. In addition, NOS also 

routes orders in options that are not 

trading on NOM (referred to in the NOM 

Rules as ‘‘Non-System Securities’’). 

When routing orders in options that are 

not listed and open for trading on NOM, 

NOS is not regulated as a facility of the 

NASDAQ Exchange but rather as a 

broker-dealer regulated by its designated 

examining authority. As provided by 

Chapter IV, Section 5 of the NOM Rules, 

all orders routed by NOS under these 

circumstances are routed to away 

markets that are at the best price, and 

solely on an immediate-or-cancel basis. 

Under NOM Rule Chapter VI, Section 

11: (1) NOM routes orders in options via 

NOS, which serves as the sole ‘‘routing 

facility’’ of NOM; (2) the sole function 

of the routing facility is to route orders 

in options to away markets pursuant to 

NOM rules, solely on behalf of NOM; (3) 

NOS is a member of an unaffiliated selfregulatory organization, which is the 

designated examining authority for the 

broker-dealer; (4) the routing facility is 

subject to regulation as a facility of the 

NASDAQ Exchange, including the 

requirement to file proposed rule 

changes under Section 19 of the Act; (5) 

NOM must establish and maintain 

procedures and internal controls 

reasonably designed to adequately 

restrict the flow of confidential and 

proprietary information between the 

NASDAQ Exchange and its facilities 

(including the routing facility), and any 

other entity; and (6) the books, records, 

premises, officers, directors, agents, and 

employees of the routing facility, as a 

facility of the NASDAQ Exchange, shall 

be deemed to be the books, records, 

premises, officers, directors, agents, and 

employees of the NASDAQ Exchange 

for purposes of and subject to oversight 

pursuant to the Act, and the books and 

records of the routing facility, as a 

facility of the NASDAQ Exchange, shall 

be subject at all times to inspection and 

copying by the NASDAQ Exchange and 

the Commission. 

The Commission has approved NOS’s 

affiliation with the Exchange subject to 

the conditions that: (1) NOS is a facility 

of the NASDAQ Exchange; (2) use of 

NOS’s routing function by NASDAQ 

Exchange members is optional 4 and (3) 


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37072 Federal Register / Vol. 74, No. 142 / Monday, July 27, 2009 / Notices 

purposes of participating in options trading on 

NOM as a ‘‘Nasdaq Options Order Entry Firm’’ or 

‘‘Nasdaq Options Market Maker’’. 

5See Securities Exchange Act Release No. 58324 

(August 7, 2008), 73 FR 46936 (August 12, 2008) 

(SR–BSE–2008–02; SR–BSE–2008–23; SR–BSE– 

2008–25; SR–BSECC–2008–01). 

6SR–NASDAQ–2009–065. 

7NOM Rule Chapter VI, Section (1)(e)(7). 

8See Securities Exchange Act Release Nos. 59154 

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

2008) (SR–BSE–2008–48); 59010 (November 24, 

2008), 73 FR 73373 (December 2, 2008) (SR– 

NYSEArca–2008–130); 58681 (September 29, 2008), 

73 FR 58285 (October 6, 2008) (SR–NYSEArca– 

2008–90); 58680 (September 29, 2008), 73 FR 58283 

(October 6, 2008) (SR–NYSE–2008–76); 58673 

(September 29, 2008), 73 FR 57707 (October 3, 

2008) (SR–Amex–2008–62) (collectively, the 

‘‘Affiliation Orders’’). 

9See Securities Exchange Act Release Nos. 59153 

(December 23, 2008), 73 FR 80485 (December 31, 

2008) (SR–NASDAQ–2008–098); 59154 (December 

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

BSE–2008–48). 

10 17 CFR 240.17d–2. 

11The Exchange, FINRA and SEC staff may agree 

going forward to reduce the number of applicable 

or relevant surveillances that form the scope of the 

agreed upon report. 

NOS does not provide routing of orders 

in options from NOM to the Exchange 

or any trading facilities thereof, unless 

such orders first attempt to access any 

liquidity on the NOM book.5

The NASDAQ Exchange has filed a 

proposed rule change to modify the last 

of these conditions to permit NOS to 

route Exchange Direct Orders in NOM 

system securities to BOX without 

checking the NOM book prior to 

routing.6 Exchange Direct Orders are 

orders that route directly to other 

options markets on an immediate-orcancel basis without first checking the 

NOM book for liquidity.7 In addition, 

the proposed rule change would permit 

the routing by NOS of orders (including 

Exchange Direct Orders) in NOM nonsystem securities from NOM to BOX. 

The principles that govern the routing 

of orders to an exchange by an affiliated 

broker-dealer are well-established. The 

Exchange and other exchanges 

previously have adopted rules that 

permit exchanges to accept routing of 

inbound orders from affiliates, subject to 

certain limitations and conditions 

intended to address the Commission’s 

concerns regarding affiliation.8 In the 

orders approving these rule changes, the 

Commission noted its concerns about 

potential informational advantages 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, but determined that the 

limitations and conditions proposed in 

the rule changes were sufficient to 

mitigate its concerns. 

To appropriately address the concerns 

raised by the Commission regarding the 

potential for conflicts of interest and 

informational advantages, the Exchange 

is proposing certain restrictions and 

undertakings. These commitments are 

consistent with the undertakings made 

by the NASDAQ Exchange and the 

Exchange in adopting rule changes to 

permit the Exchange’s equity market to 

accept routing of inbound orders from 

NASDAQ Execution Services, Inc. in its 

operation as the routing facility of the 

NASDAQ Exchange.9

In order to manage the concerns 

raised by the Commission regarding 

conflicts of interest in instances where 

a broker-dealer is affiliated with an 

exchange to which it is routing orders, 

the Exchange notes that, with respect to 

orders routed to BOX by NOS, NOS is 

subject to independent oversight and 

enforcement by FINRA, an unaffiliated 

SRO that is NOS’s designated examining 

authority. In this capacity, FINRA is 

responsible for examining NOS with 

respect to its books and records and 

capital obligations and also has the 

responsibility for reviewing NOS’s 

compliance with applicable trading 

rules. In addition, the Exchange has 

entered into a regulatory services 

agreement with FINRA under which 

FINRA staff will review NOS’s 

compliance with BOX’s rules through 

FINRA’s examination program. FINRA 

and the Exchange will also monitor 

NOS for compliance with BOX’s trading 

rules, subject, of course, to Commission 

oversight of the regulatory program of 

the Exchange and FINRA. The Exchange 

will, however, retain ultimate 

responsibility for enforcing its rules 

with respect to NOS except to the extent 

that they are covered by an agreement 

with FINRA pursuant to Rule 17d–2,10

in which case regulatory responsibility 

will be allocated to FINRA as provided 

in Rule 17d–2(d). 

Furthermore, in order to minimize the 

potential for conflicts of interest, the 

Exchange and FINRA will collect and 

maintain all alerts, complaints, 

investigations and enforcement actions 

in which NOS (in routing orders to 

BOX) 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. FINRA will then provide 

a report to BOXR’s Chief Regulatory 

Officer, on at least a quarterly basis, 

which (i) quantifies all alerts (of which 

the Exchange and FINRA become aware) 

that identify NOS as a participant that 

has potentially violated an Exchange or 

Commission rule and (ii) quantifies the 

number of all investigations that 

identify NOS as a participant that has 

potentially violated an Exchange or 

Commission rule.11

In order to address the Commission’s 

concerns about potential for information 

advantages that could place an affiliated 

broker-dealer at a competitive advantage 

vis-a`-vis other non-affiliated brokerdealers, the Exchange is proposing to 

amend Chapter XXXIX, Section 2 of the 

Grandfathered Rules of the Exchange. 

New Chapter XXXIX, Section 2(c) of the 

Grandfathered Rules as it applies to 

BOX will require the implementation of 

policies and procedures that are 

reasonably designed to prevent NOS 

from acting on non-public information 

regarding BOX’s systems prior to the 

time that such information is made 

available generally to all market 

participants of such entity performing 

inbound routing functions. These 

policies and procedures would include 

systems development protocols to 

facilitate an audit of the efficacy of these 

policies and procedures. 

Specifically, Chapter XXXIX, Section 

2(c) shall provide as follows: 

The NASDAQ OMX Group, Inc., which 

owns NASDAQ Options Services, LLC and is 

affiliated with BOX through its ownership of 

the Exchange, of which BOX is a facility, 

shall establish and maintain procedures and 

internal controls reasonably designed to 

ensure that NASDAQ Options Services, LLC 

does not develop or implement changes to its 

system on the basis of non-public 

information regarding planned changes to 

BOX systems, obtained as a result of its 

affiliation with BOX, until such information 

is available generally to similarly situated 

BOX participants in connection with the 

provision of inbound routing to BOX. 

In addition, existing NOM Rule 

Chapter VI, Section 11(e) requires NOS 

to establish and maintain procedures 

and internal controls reasonably 

designed to adequately restrict the flow 

of confidential and proprietary 

information between the NASDAQ 

Exchange and its facilities (including 

NOS) and any other entity. 

The Exchange believes these measures 

will effectively address the concerns 

identified by the Commission regarding 

the potential for informational 

advantages favoring NOS vis-a`-vis other 

BOX participants. 

b. Pilot Period 

The Exchange is proposing that NOS 

route Exchange Direct Orders and orders 

in NOM non-system securities inbound 

to the Exchange from NOM for a pilot 

period of 12 months from the operative 

date of this filing. The Exchange 


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Federal Register / Vol. 74, No. 142 / Monday, July 27, 2009 / Notices 37073 

12 15 U.S.C. 78f. 

13 15 U.S.C. 78f(b)(5). 

14 15 U.S.C. 78s(b)(3)(A). 

15 17 CFR 240.19b–4(f)(6). 

16Securities Exchange Act Release No. 58092 

(July 3, 2008), 73 FR 40144 (July 11, 2008). 

17 Id. at 40149. 

18See the Affiliation Orders, supra note 8. 19 17 CFR 200.30–3(a)(12). 

believes that this pilot period is of 

sufficient length to permit both the 

Exchange and the Commission to assess 

the impact of the rule change described 

herein. 

2. Statutory Basis 

The Exchange believes that the 

proposed rule change is consistent with 

the provisions of Section 6 of the Act,12

in general, and with Section 6(b)(5) of 

the Act,13 in particular, in that the 

proposal is 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, 

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. The 

proposed rule change would permit 

inbound routing of orders from NOM to 

BOX through NOS while minimizing 

the potential for conflicts of interest and 

informational advantages involved 

where a broker-dealer is affiliated with 

an exchange facility to which it is 

routing orders. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

The Exchange 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, as amended. 

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 

The foregoing rule change has become 

effective pursuant to Section 19(b)(3)(A) 

of the Act 14 and Rule 19b–4(f)(6) 15

thereunder in that it effects a change 

that: (i) Does not significantly affect the 

protection of investors or the public 

interest; (ii) does not impose any 

significant burden on competition; and 

(iii) by its terms, does not become 

operative for 30 days after the date of 

the filing, or such shorter time as the 

Commission may designate if consistent 

with the protection of investors and the 

public interest. 

In its recent guidance on the proposed 

rules of Self-Regulatory Organizations 

(‘‘SROs’’),16 the Commission concluded 

that filings based on the rules of another 

SRO already approved by the 

Commission are eligible for immediate 

effectiveness under Rule 19b–4(f)(6). 

The Commission noted that ‘‘a proposed 

rule change appropriately may be filed 

as an immediately effective rule so long 

as it is based on and similar to another 

SRO’s rule and each policy issue raised 

by the proposed rule (i) has been 

considered previously by the 

Commission when the Commission 

approved another exchange’s rule (that 

was subject to notice and comment), 

and (ii) the rule change resolves such 

policy issue in a manner consistent with 

such prior approval.’’ 17 The Exchange 

believes the proposed rule change is 

‘‘based on and similar to’’ the rule 

changes recently approved in the 

Affiliation Orders and furthers efforts to 

effectively address the concerns 

previously identified by the 

Commission regarding the potential for 

conflicts of interest and informational 

advantages when an exchange is 

affiliated with one of its market 

participants.18 This rule proposal, 

which is effective upon filing with the 

Commission, shall become operative 30 

days after the date of the filing. 

At any time within 60 days of the 

filing of the proposed rule change, the 

Commission may summarily abrogate 

such rule change if it appears to the 

Commission that such action is 

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–BX–2009–035 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–BX–2009–035. 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, 100 F Street, NE., Washington, 

DC 20549 on official business days 

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

Copies of the filing also will be available 

for inspection and copying at the 

principal office of the Exchange. 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–BX–2009–035 and should 

be submitted on or before August 17, 

2009. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.19

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–17765 Filed 7–24–09; 8:45 am] 

BILLING CODE 8010–01–P 


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