Document ID: SEC-2013-0944-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX BX, Inc.
Posted Date: 2013-05-21T04:00Z

[Federal Register Volume 78, Number 98 (Tuesday, May 21, 2013)]
[Notices]
[Pages 29795-29797]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-12035]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69576; File No. SR-BX-2013-036]

Self-Regulatory Organizations; NASDAQ OMX BX, Inc ; Notice of 
Filing of 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 Services LLC

May 15, 2013.
    Pursuant to Section 19(b)C(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on May 7, 2013, NASDAQ OMX BX, Inc. (the ``Exchange'' or 
``BX'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II 
and III below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange has submitted a proposal for the permanent approval of 
the Exchange's pilot program to permit the BX Options System to accept 
inbound options orders routed by Nasdaq Options Services LLC (``NOS'') 
from NASDAQ OMX PHLX LLC (``Phlx'') and The NASDAQ Stock Market LLC's 
NASDAQ Options Market (``NOM'').

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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    In conjunction with PHLX and NOM providing outbound routing 
services to all options markets using its affiliated routing broker, 
NOS,\4\ BX proposed that NOS be permitted to route orders from PHLX and 
NOM to BX Options on a pilot basis, subject to certain limitations and 
conditions, as described below.\5\ The current pilot program expires 
June 26, 2013.
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    \4\ See Securities Exchange Act Release Nos. 59995 (May 28, 
2009), 74 FR 26750 (June 3, 2009) (SR-Phlx-2009-32); and 57478 
(March 12, 2008), 73 FR 14521 (March 18, 2008) (order approving File 
Nos. SR-NASDAQ-2007-004 and SR-NASDAQ-2007-080).
    \5\ Securities Exchange Act Release No. 67256 (June 26, 2012), 
77 FR 39277 (July 2, 2012) (SR-BX-2012-030).
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    NOS is a broker-dealer and member of NASDAQ, PHLX and BX. NOS 
provides all routing functions for NOM, BX Options and PHLX. BX, 
NASDAQ, NOM, PHLX and NOS are affiliates.\6\ Accordingly, the affiliate 
relationship between BX and NOS, its member, raises the issue of an 
exchange's affiliation with a member of such exchange. Specifically, in 
connection with prior filings, the Commission has expressed concern 
that the affiliation of an exchange with one of its members raises the 
potential for unfair competitive advantage and potential conflicts of 
interest between an exchange's self-regulatory obligations and its 
commercial interests.\7\
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    \6\ See Securities Exchange Act Release Nos. 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); and 58179 (July 17, 2008), 73 FR 42874 (July 23, 
2008) (SR-Phlx-2008-31) (order approving NASDAQ OMX's acquisition of 
PHLX).
    \7\ See Securities Exchange Act Release Nos. 59153 (December 23, 
2008), 73 FR 80485 (December 31, 2008) (SR-NASDAQ-2008-098); and 
62736 (August 17, 2010), 75 FR 51861 (August 23, 2010) (SR-NASDAQ-
2010-100). See also Securities Exchange Act Release No. 58135 (July 
10, 2008), 73 FR 40898 (July 16, 2008)(SR-NASDAQ-2008-
061)(Permitting NOS to be affiliated with PHLX).
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    Recognizing that the Commission has previously expressed concern 
regarding the potential for conflicts of interest in instances where a 
member firm is affiliated with an exchange of which it is a member, the 
Exchange previously proposed, and the Commission approved, limitations 
and conditions on

[[Page 29796]]

NOS's affiliation with the Exchange.\8\ Also 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 
proposed, and the Commission approved,\9\ NOS's affiliation with the 
Exchange to permit the Exchange to accept inbound orders that NOS 
routes in its capacity as a facility of PHLX and NOM, subject to the 
certain limitations and conditions. The Exchange now proposes to permit 
BX to accept inbound options orders that NOS routes in its capacity as 
a facility of PHLX and NOM on a permanent basis, subject to the 
limitations and conditions of this pilot:
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    \8\ Securities Exchange Act Release No. 67256 (June 26, 2012), 
77 FR 39277 (July 2, 2012) (SR-BX-2012-030).
    \9\ Id.
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     First, the Exchange and FINRA maintain a Regulatory 
Contract, as well as an agreement pursuant to Rule 17d-2 under the Act 
(``17d-2 Agreement'').\10\ Pursuant to the Regulatory Contract and the 
17d-2 Agreement, FINRA is allocated regulatory responsibilities to 
review NOS's compliance with certain Exchange rules.\11\ Pursuant to 
the Regulatory Contract, however, BX retains ultimate responsibility 
for enforcing its rules with respect to NOS.
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    \10\ 17 CFR 240.17d-2.
    \11\ NOS is also subject to independent oversight by FINRA, its 
designated examining authority, for compliance with financial 
responsibility requirements.
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     Second, FINRA monitors NOS for compliance with the 
Exchange's trading rules, and collects and maintains certain related 
information.\12\
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    \12\ 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 PHLX and NOM routing orders to BX) is identified as a participant 
that has potentially violated applicable Commission or Exchange 
rules. The Exchange and FINRA 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.
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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 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 The NASDAQ OMX Group, Inc., 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.\13\
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    \13\ See SR-BX-2013-035.
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    The Exchange has met all the above-listed conditions. By meeting 
the above conditions, the Exchange has set up mechanisms that protect 
the independence of the Exchange's regulatory responsibility with 
respect to NOS, as well as demonstrate that NOS cannot use any 
information advantage it may have because of its affiliation with the 
Exchange. Because the Exchange has met all the above-listed conditions, 
it now seeks permanent approval of this inbound routing relationship. 
The Exchange will continue to comply with the conditions 1-4 stated 
above.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\14\ in general, and with 
Sections 6(b)(5) of the Act,\15\ 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, because the 
proposed rule change will allow the Exchange to continue to receive 
inbound orders from NOS, acting in its capacity as a facility of PHLX 
and NOM, in a manner consistent with prior approvals and established 
protections. The Exchange believes that these conditions establish 
mechanisms that protect the independence of the Exchange's regulatory 
responsibility with respect to NOS, as well as ensure that NOS cannot 
use any information it may have because of its affiliation with the 
Exchange to its advantage.
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    \14\ 15 U.S.C. 78f.
    \15\ 15 U.S.C. 78f(b)(5).
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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. 
Permanent approval of the current pilot program does not raise any 
issues of intra-market competition because it involves inbound routing 
from an affiliated exchange. Nor does it result in a burden on 
competition among exchanges, because there are many competing options 
exchanges that provide routing services, including through an 
affiliate.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) By order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change 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 email to rule-comments@sec.gov. Please include 
File Number SR-BX-2013-036 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-2013-036. This file 
number should be included on the

[[Page 29797]]

subject line if email 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 Web site viewing and printing in the Commission's Public 
Reference Room, 100 F Street NE., Washington, DC 20549, on official 
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of 
the filing will also 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-2013-036 and should be submitted on or before June 
11, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-12035 Filed 5-20-13; 8:45 am]
BILLING CODE 8011-01-P