Document ID: SEC-2013-1171-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX BX, Inc.
Posted Date: 2013-06-28T04:00Z

[Federal Register Volume 78, Number 125 (Friday, June 28, 2013)]
[Notices]
[Pages 39046-39048]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-15497]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69837; File No. SR-BX-2013-036]

Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Order 
Approving a Proposed Rule Change for Permanent Approval of a Pilot To 
Permit BX Options To Accept Inbound Options Orders From NASDAQ OMX PHLX 
LLC and NASDAQ Options Market

June 24, 2013.

I. Introduction

    On May 7, 2013, NASDAQ OMX BX, Inc. (``Exchange'' or ``BX'') 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 requesting 
permanent approval of the Exchange's pilot program that permits the BX 
Options System to accept inbound orders routed by Nasdaq Options 
Services LLC (``NOS'') from the NASDAQ OMX PHLX LLC (``PHLX'') and The 
NASDAQ Stock Market LLC's NASDAQ Options Market (``NOM''). The proposed 
rule change was published for comment in the Federal Register on May 
21, 2013.\3\ The Commission received no comment letters regarding the 
proposed rule change. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 69576 (May 15, 
2013), 78 FR 29795 (``Notice'').
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II. Background

    BX Rule 2140(a) prohibits the Exchange or any entity with which it 
is affiliated from, directly or indirectly, acquiring or maintaining an 
ownership interest in, or engaging in a business venture with, an 
Exchange member or an affiliate of an Exchange member in the absence of 
an effective filing under Section 19(b) of the Act.\4\ NOS is a 
registered broker-dealer that is a member of the Exchange, and 
currently provides to members of NASDAQ Stock Market LLC (``NASDAQ'') 
and PHLX optional routing services to other markets.\5\ NOS is owned by 
NASDAQ OMX Group, Inc. (``NASDAQ OMX''), which also owns three 
registered securities exchanges--the Exchange, the NASDAQ and PHLX.\6\ 
Thus, NOS is an affiliate of these exchanges.\7\ Absent an effective 
filing, BX Rule 2140(a) would prohibit NOS from being a member of the 
Exchange. The Commission initially approved NOS's affiliation with BX 
in connection with NASDAQ OMX's acquisition of BX,\8\ and NOS currently 
performs certain limited activities for the Exchange.\9\
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    \4\ 15 U.S.C. 78s(b). BX Rule 2140(a) also prohibits a BX member 
from being or becoming an affiliate of BX, or an affiliate of an 
entity affiliated with BX, in the absence of an effective filing 
under Section 19(b). See BX Rule 2140(a)(2).
    \5\ NOS operates as a facility of both Phlx and NASDAQ that 
provides outbound routing from Phlx and NOM to other market centers, 
subject to certain conditions. See Phlx Rule 1080(m) and NASDAQ 
Options Rules, Chapter VI, Sec. 11 (Order Routing).
    \6\ See 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) (order approving NASDAQ OMX's 
acquisition of BX) (``BX Acquisition Order''). See also Securities 
Exchange Act Release 58179 (July 17, 2008), 73 FR 42874 (July 23, 
2008) (SR-Phlx-2008-31) (order approving NASDAQ OMX's acquisition of 
PHLX).
    \7\ See id. See also Notice, 78 FR 29795.
    \8\ See BX Acquisition Order, 73 FR 46944.
    \9\ See, e.g., BX Options Rules, Chapter VI, Sec. 11 (Order 
Routing). See also Securities Exchange Act Release No. 67256 (June 
26, 2012), 77 FR 39277 (July 2, 2012) (SR-BX-2012-030) (``BX Options 
Order'').
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    On May 1, 2012, BX filed a proposed rule change to permit the 
Exchange to accept inbound orders that NOS routes in its capacity as a 
facility of NASDAQ and PHLX on a pilot basis subject to certain 
limitations and conditions.\10\ On May 7, 2013, the Exchange filed the 
instant proposal to allow the Exchange to accept such orders routed 
inbound by NOS from NASDAQ and PHLX on a permanent basis subject to 
certain limitations and conditions.\11\
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    \10\ See Securities Exchange Act Release No. 66983 (May 14, 
2012), 77 FR 29730 (May 18, 2012 (notice of proposed rule change to 
establish BX Options market and allow, among other things, BX to 
accept inbound orders from NASDAQ and PHLX on a one-year pilot 
basis).
    \11\ See Notice, 78 FR 29795-29796.
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III. Discussion and Commission Findings

    After careful review, 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

[[Page 39047]]

securities exchange.\12\ Specifically, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(1) of the Act,\13\ 
which requires, among other things, that a national securities exchange 
be so organized and have the capacity to carry out the purposes of the 
Act, and to comply and enforce compliance by its members and persons 
associated with its members, with the provisions of the Act, the rules 
and regulation thereunder, and the rules of the Exchange. Further, the 
Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\14\ which requires, among other things, 
that the rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices; to promote just and 
equitable principles of trade; to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, and processing 
information with respect to, and facilitating transactions in 
securities; to remove impediments to and perfect the mechanism of a 
free and open market and a national market system; and, in general, to 
protect investors and the public interest. Section 6(b)(5) also 
requires that the rules of an exchange not be designed to permit unfair 
discrimination among customers, issuers, brokers, or dealers.
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    \12\ 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).
    \13\ 15 U.S.C. 78f(b)(1).
    \14\ 15 U.S.C. 78f(b)(5).
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    Recognizing that the Commission has expressed concern regarding the 
potential for conflicts of interest in instances where a member firm is 
affiliated with an exchange to which it is routing orders, the Exchange 
previously implemented limitations and conditions to NOS's affiliation 
with the Exchange to permit the Exchange to accept inbound orders that 
NOS routes in its capacity as a facility of NASDAQ and PHLX on a pilot 
basis.\15\ The Exchange has now proposed to permit BX to accept inbound 
orders that NOS routes in its capacity as a facility of NASDAQ and PHLX 
on a permanent basis, subject to the same limitations and conditions of 
this pilot:\16\
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    \15\ See BX Options Order, 77 FR 39280-39281 (order approving, 
among other things, BX's proposal to accept inbound orders from 
NASDAQ and PHLX on a one-year pilot basis).
    \16\ See Notice, 78 FR 29796.
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     First, the Exchange and the Financial Industry Regulatory 
Authority (``FINRA'') maintain a Regulatory Contract, as well as an 
agreement pursuant to Rule 17d-2 under the Act (``17d-2 
Agreement'').\17\ Pursuant to the Regulatory Contract and the 17d-2 
Agreement, FINRA is allocated regulatory responsibilities to review 
NOS's compliance with certain Exchange rules.\18\ Pursuant to the 
Regulatory Contract, however, the Exchange retains ultimate 
responsibility for enforcing its rules with respect to NOS.
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    \17\ 17 CFR 240.17d-2.
    \18\ NOS is also subject to independent oversight by FINRA, its 
designated examining authority, for compliance with financial 
responsibility requirements. See Notice, 78 FR 29796 n.11.
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     Second, FINRA monitors NOS for compliance with the 
Exchange's trading rules, and collects and maintains certain related 
information.\19\
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    \19\ Pursuant to the Regulatory Contract, both FINRA and the 
Exchange collect and maintain all alerts, complaints, investigations 
and enforcement actions in which NOS (in its capacity as a facility 
of NASDAQ and PHLX routing orders to the Exchange) 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, 78 FR 29796 n.12.
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     Third, FINRA provides a report to the Exchange's chief 
regulatory officer (``CRO''), on a quarterly basis, that: (i) 
quantifies all alerts (of which the Exchange or FINRA is aware) that 
identify NOS as a participant that has potentially violated Commission 
or Exchange rules, and (ii) lists all investigations that identify NOS 
as a participant that has potentially violated Commission or Exchange 
rules.
     Fourth, the Exchange has in place BX Rule 2140(c), which 
requires NASDAQ OMX, as the holding company owning both the Exchange 
and NOS, to establish and maintain procedures and internal controls 
reasonably designed to ensure that NOS does not develop or implement 
changes to its system, based on non-public information obtained 
regarding planned changes to the Exchange's systems as a result of its 
affiliation with the Exchange, until such information is available 
generally to similarly situated Exchange members, in connection with 
the provision of inbound order routing to the Exchange.
    The Exchange stated that it has met all the above-listed 
conditions. By meeting such conditions, the Exchange believes that it 
has set up mechanisms that protect the independence of the Exchange's 
regulatory responsibility with respect to NOS, and has demonstrated 
that NOS cannot use any information advantage it may have because of 
its affiliation with the Exchange.\20\
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    \20\ See Notice, 78 FR 29796.
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    In the past, the Commission has expressed concern that the 
affiliation of an exchange with one of its members raises potential 
conflicts of interest, and the potential for unfair competitive 
advantage.\21\ 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 NOS, in its capacity as a facility of NASDAQ and PHLX, to 
route orders inbound to the Exchange on a permanent basis instead of a 
pilot basis, subject to the limitations and conditions described 
above.\22\
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    \21\ See, e.g., Securities Exchange Act Release Nos. 54170 (July 
18, 2006), 71 FR 42149 (July 25, 2006) (SR-NASDAQ-2006-006) (order 
approving NASDAQ's proposal to adopt NASDAQ Rule 2140, restricting 
affiliations between NASDAQ and its members); 53382 (February 27, 
2006), 71 FR 11251 (March 6, 2006) (SR-NYSE-2005-77) (order 
approving the combination of the New York Stock Exchange, Inc. and 
Archipelago Holdings, Inc.); 58673 (September 29, 2008), 73 FR 57707 
(October 3, 2008) (SR-Amex-2008-62 and SR-NYSE-2008-60) (order 
approving the combination of NYSE Euronext and the American Stock 
Exchange LLC); 59135 (December 22, 2008), 73 FR 79954 (December 30, 
2008) (SR-ISE-2009-85) (order approving the purchase by ISE Holdings 
of an ownership interest in Direct Edge Holdings LLC); 59281 
(January 22, 2009), 74 FR 5014 (January 28, 2009) (SR-NYSE-2008-120) 
(order approving a joint venture between NYSE and BIDS Holdings 
L.P.); 58375 (August 18, 2008), 73 FR 49498 (August 21, 2008) (File 
No. 10-182) (order granting the exchange registration of BATS 
Exchange, Inc.); 61698 (March 12, 2010), 75 FR 13151 (March 18, 
2010) (File Nos. 10-194 and 10-196) (order granting the exchange 
registration of EDGX Exchange, Inc. and EDGA Exchange, Inc.); and 
62716 (August 13, 2010), 75 FR 51295 (August 19, 2010) (File No. 10-
198) (order granting the exchange registration of BATS-Y Exchange, 
Inc.).
    \22\ The Commission notes that these limitations and conditions 
are consistent with those previously approved by the Commission for 
the Exchange. See, e.g., Securities Exchange Act Release Nos. 69233 
(March 25, 2013), 78 FR 19352 (March 29, 2013) (SR-NASDAQ-2013-028); 
69232 (March 25, 2013), 78 FR 19342 (March 29, 2013) (SR-BX-2013-
013); 69229 (March 25, 2013), 78 FR 19337 (March 29, 2013) (SR-Phlx-
2013-15); 67256 (June 26, 2012) 77 FR 39277 (July 2, 2012) (SR-BX-
2012-030); and 64090 (March 17, 2011), 76 FR 16462 (March 23, 2011) 
(SR-BX-2011-007).
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    The Exchange has proposed four ongoing conditions applicable to 
NOS's routing activities, which are enumerated above. The Commission 
believes that these conditions will mitigate its concerns about 
potential conflicts of interest and unfair competitive advantage. In 
particular, the Commission believes that FINRA's

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oversight of NOS,\23\ combined with FINRA's monitoring of NOS's 
compliance with the Exchange's rules and quarterly reporting to the 
Exchange, will help to protect the independence of the Exchange's 
regulatory responsibilities with respect to NOS. The Commission also 
believes that the Exchange's Rule 2140(c) is designed to ensure that 
NOS cannot use any information advantage it may have because of its 
affiliation with the Exchange.
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    \23\ This oversight will be accomplished through the 17d-2 
Agreement between FINRA and the Exchange and the Regulatory 
Contract. See Notice, 78 FR 29796 n.10 and accompanying text.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\24\ that the proposed rule change (SR-BX-2013-036) be, and hereby 
is, approved.
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    \24\ 15 U.S.C. 78s(b)(2).
    \25\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-15497 Filed 6-27-13; 8:45 am]
BILLING CODE 8011-01-P