Document ID: SEC-2011-1531-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX BX, Inc.
Posted Date: 2011-10-07T04:00Z

[Federal Register Volume 76, Number 195 (Friday, October 7, 2011)]
[Notices]
[Pages 62489-62491]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-25959]

[[Page 62489]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65470; File No. SR-BX-2011-048]

 Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
Routing Functionality on the NASDAQ OMX BX Equities Market

October 3, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on September 21, 2011, NASDAQ OMX BX, Inc. (``Exchange'' or 
``BX'') filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I, II, 
and III, below, which Items have been prepared by the Exchange. 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\ 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

    BX is filing with the Commission a proposed rule change to add 
routing functionality to the NASDAQ OMX BX Equities Market 
(``System''). Specifically, the Exchange proposes to adopt new Rule 
4758, Order Routing, and amend Rule 4751, Definitions, and Rule 4755, 
Order Entry Parameters, as described below. The Exchange intends to 
implement the proposal upon notice to its membership.
    The text of the proposed rule change is available at http://nasdaqomxbx.cchwallstreet.com/, at BX's principal office, and at the 
Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, 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 purpose of the proposed rule change is to attract additional 
business to and enhance the functionality offered by the Exchange's 
NASDAQ OMX BX Equities Market by providing optional outbound routing 
services. Most equities exchanges today provide routing services. The 
Exchange intends to offer routing strategies materially identical to 
several currently offered by its affiliate, The NASDAQ Stock Market, 
LLC (``NASDAQ'').\3\ Nasdaq Execution Services LLC is NASDAQ's routing 
broker and provides all routing functions for NASDAQ. As described in 
detail below, the Exchange proposes to use Nasdaq Execution Services 
LLC as its routing broker to provide all of its routing services as 
well. Specifically, the Exchange proposes to permit Nasdaq Execution 
Services LLC to route orders from BX to all market centers, as it does 
for NASDAQ, including to NASDAQ and the NASDAQ OMX PSX facility of 
NASDAQ OMX PHLX (``PHLX'').\4\
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    \3\ See e.g., NASDAQ Rule 4758.
    \4\ BX's other affiliate, PHLX, has also proposed to provide 
outbound routing services using NES as its routing broker. See SR-
Phlx-2011-108.
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    First, BX proposes to amend two existing rules to accommodate 
routing. Specifically, BX proposes to amend subparagraph (f)(6) of Rule 
4751, Definitions, which pertains to Intermarket Sweep Orders 
(``ISOs''). These are currently defined as limit orders that are 
designated as ISOs in the manner prescribed by the Exchange and are 
executed within the System by Participants at multiple price levels 
without respect to Protected Quotations of other market centers within 
the meaning of Rule 600(b) of Regulation NMS under the Act. ISOs are 
immediately executable within the System pursuant to BX Rule 4757. BX 
proposes to add that ISOs are not eligible for routing as set out in 
new Rule 4758.\5\
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    \5\ This is the same as NASDAQ Rule 4751(f)(6).
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    In addition, BX proposes to amend Rule 4755, Order Entry 
Parameters, to add a paragraph on routing and renumber the rule to more 
closely track NASDAQ's rule.\6\ The new routing paragraph will state 
that all System orders entered by Participants directing or permitting 
routing to other market centers shall be routed for potential display 
and/or execution as set forth in new Rule 4758. In connection with the 
trading of securities governed by Regulation NMS, System orders shall 
be routed for potential display and/or execution in compliance with 
Regulation NMS. This paragraph is intended to add routing to the rule 
that governs order types generally.
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    \6\ Specifically, the introductory paragraph in BX Rule 4755(a) 
will now be subparagraph (a)(1), subparagraph (a)(1)(A), 
subparagraph (a)(2) will now be subparagraph (a)(1)(B) and 
subparagraph (a)(3) will now be subparagraph (a)(1)(C), all to track 
NASDAQ Rule 4755(a).
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    Second, BX proposes to adopt new Rule 4758, Order Routing, to fully 
spell out how routing will work and to generally track the language of 
NASDAQ Rule 4758. Paragraph (a) describes the order routing process and 
states that all routing shall be in compliance with Rule 610 of 
Regulation NMS under the Act. Specifically, the Exchange proposes to 
introduce several routing strategies, all of which operate on NASDAQ 
today. These are BSTG, BSKN, BSCN, BSKP, BTFY, BMOP and BCRT, which are 
spelled out in proposed Rule 4758(a)(1)(A)(iii)-(vii).\7\
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    \7\ These correspond to the following routing strategies on 
NASDAQ, respectively: STGY, SKNY, SCAN, SKIP, TFTY, MOPP and CART.
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    BSTG is a routing option under which orders would check the System, 
check destinations on the BSTG System routing table,\8\ and then return 
to the System if shares remain unexecuted. After returning to the 
System, a BSTG order will subsequently route out to another market 
center if it posts a bid or offer that locks or crosses the BSTG 
order.\9\ BSKN is a form of BSTG in which the entering party instructs 
the System to bypass any market centers included in the BSTG System 
routing table that are not posting Protected Quotations within the 
meaning of Regulation NMS.\10\
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    \8\ Routing tables are explained in proposed Rule 4758(a)(1)(A).
    \9\ See proposed Rule 4758(a)(1)(A)(iii).
    \10\ See proposed Rule 4758(a)(1)(A)(iii).
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    BSCN is a routing option under which orders check the System, check 
destinations on the BSCN System routing table, and then return to the 
System. After returning to the System, a BSCN order will not 
subsequently route out to another market center if it posts a bid or 
offer that locks or crosses the BSCN order.\11\ BSKP is a form of BSCN 
in which the entering party instructs the System to bypass any market 
centers included in the BSCN System routing table that are not posting 
Protected Quotations within the meaning of Regulation NMS.\12\
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    \11\ See proposed Rule 4758(a)(1)(A)(iv).
    \12\ See proposed Rule 4758(a)(1)(A)(iv).
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    BTFY is a routing option under which orders check the System for 
available shares only if instructed by the entering firm prior to 
routing to destinations on

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the BTFY System routing table. Thereafter, they return to the System 
and, like BSCN orders, do not route out again.\13\
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    \13\ See proposed Rule 4758(a)(1)(A)(v).
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    BMOP is a routing option under which orders route only to Protected 
Quotes, but only for displayed size. If shares remain unexecuted after 
routing, they are posted to the System and do not route out again.\14\
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    \14\ See proposed Rule 4758(a)(1)(A)(vi).
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    BCRT is a routing option that will check the Exchange's System and 
then route an order to PSX and NASDAQ, with any unexecuted shares 
posting to the Exchange's book or cancelling, depending upon the time-
in-force of the order. Shares posted on the Exchange's book are not 
routed out again.\15\ This routing option is similar to CART on NASDAQ, 
which also routes among the three exchanges in the same order: BX, PSX, 
NASDAQ.\16\ BCRT, like all of the proposed routing strategies is 
designed to comply with SEC Rule 611 and the other provisions of 
Regulation NMS.\17\
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    \15\ See proposed Rule 4758(a)(1)(A)(vii).
    \16\ See Securities Exchange Act Release no. 63900 (February 14, 
2011), 76 FR 9397 (February 17, 2011) (SR-NASDAQ-2011-026).
    \17\ 17 CFR 242.611.
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    Paragraph (b) describes the routing broker, Nasdaq Execution 
Services LLC (``NES'') and the conditions under which NES would 
operate. Currently, NES does not provide inbound routing to NASDAQ. At 
this time, BX proposes to use NES as its outbound routing facility for 
cash equities, providing outbound routing from BX to other market 
centers, including their affiliates, NASDAQ and PHLX.\18\
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    \18\ In order for BX to provide outbound routing services, PHLX 
and NASDAQ each must file a proposed rule change to receive inbound 
orders from their affiliate exchange, BX.
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    The Exchange, NASDAQ, NASDAQ OMX PHLX and NES are affiliates. NES 
is a broker-dealer and member of NASDAQ, NASDAQ OMX PHLX and the 
Exchange. Accordingly, the affiliate relationship between BX and NES, 
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.\19\
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    \19\ See Securities Exchange Act Release Nos. 59153 (December 
23, 2008), 73 FR 80485 (SR-NASDAQ-2008-098); and 62736 (August 17, 
2010), 75 FR 51861 (August 23, 2010) (SR-NASDAQ-2010-100).
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    Accordingly, in this proposed rule change, BX proposes to permit 
NES to operate as its routing broker, providing outbound routing to its 
affiliates, under the following conditions, which are the same as those 
found in NASDAQ rules:
    (1) NES shall route orders to other market centers as directed by 
BX;
    (2) NES will not engage in any business other than: (a) As an 
outbound router for BX and (b) any other activities it may engage in as 
approved by the Commission.\20\
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    \20\ PHLX has also filed a proposed rule change seeking approval 
to have NES operate as the outbound routing broker for its PSX 
facility. See SR-Phlx-2011-108.
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    (3) NES shall operate as a facility, as defined in Section 3(a)(2) 
of the Act, of BX.
    (4) For purposes of SEC Rule 17d-1, the designated examining 
authority of NES shall be a self-regulatory organization unaffiliated 
with BX or any of its affiliates.
    (5) BX shall be responsible for filing with the Commission proposed 
rule changes related to the operation of, and fees for services 
provided by, NES and NES shall be subject to exchange non-
discrimination requirements.
    (6) The books, records, premises, officers, agents, directors and 
employees of NES as a facility of BX shall be deemed to be the books, 
records, premises, officers, agents, directors and employees of BX for 
purposes of, and subject to oversight pursuant to, the Act. The books 
and records of NES as a facility of BX shall be subject at all times to 
inspection and copying by the Commission.
    (7) Use of NES to route orders to other market centers will be 
optional. Parties that do not desire to use NES must enter orders into 
BX as immediate-or-cancel orders or any other order-type available 
through BX that is ineligible for routing.
    (8) NES shall establish and maintain procedures and internal 
controls reasonably designed to adequately restrict the flow of 
confidential and proprietary information between BX and its facilities 
(including NES as its routing facility) and any other entity.
    These conditions are intended to address the Commission's concerns 
regarding potential conflicts of interest in instances where a member 
firm is affiliated with an exchange.
    Furthermore, BX Rule 2140(a)(1) currently provides that the 
Exchange or any entity with which it is affiliated shall not, directly 
or indirectly, acquire or maintain an ownership interest in, or engage 
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. Because NES is an Exchange member and BX now proposes 
to engage in the business venture of outbound routing using NES as its 
routing broker, the Exchange has filed this proposed rule change under 
Section 19(b) of the Act.
    The Exchange also proposes to adopt Rule 4758(c) to address the 
recently adopted Market Access Rule.\21\ In order to comply with Rule 
15c3-5,\22\ NES proposes to implement, as part of its procedures, 
certain tests, on both an order-by-order basis and over a short period 
of time, that are designed to limit the financial exposure that could 
arise as a result of market access and to ensure compliance with all 
regulatory requirements that are applicable in connection with market 
access. Consistent with the requirements of the Market Access Rule, 
these tests are designed to reject orders that NES deems to be 
erroneous or duplicative, would cause the entering member's credit 
exposure to exceed a preset credit threshold, or are noncompliant with 
pre-trade regulatory requirements (as defined in the Market Access 
Rule). To the extent NES determines, based on these procedures, that an 
order should be rejected, NES may also seek to cancel orders that have 
already been routed away.
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    \21\ See Securities Exchange Act Release No. 63241 (November 3, 
2010), 75 FR 69792 (November 15, 2010.
    \22\ 17 CFR 240.15c3-5.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\23\ in general, and with 
Sections 6(b)(5) of the Act,\24\ 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 BX 
will be better able to serve its customers and compete with other 
markets by offering optional routing services. The Exchange believes 
that these services are useful to its participants seeking efficient 
access to the best markets, consistent with removing impediments to and

[[Page 62491]]

perfecting the mechanism of a free and open market and a national 
market system. The Exchange also believes that its rules applicable to 
the routing broker should promote just and equitable principles of 
trade and prevent fraudulent and manipulative acts and practices by 
establishing conditions that are intended to address potential 
conflicts of interest between the Exchange and it affiliated member, 
consistent with the framework in place at other exchanges using an 
affiliated routing broker.
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    \23\ 15 U.S.C. 78f.
    \24\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    BX does not believe that the proposed rule change will impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days after the date of the filing, or such 
shorter time as the Commission may designate, it has become effective 
pursuant to 19(b)(3)(A) of the Act \25\ and Rule 19b-4(f)(6) \26\ 
thereunder.
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    \25\ 15 U.S.C. 78s(b)(3)(A).
    \26\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend 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. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or 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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-BX-2011-048 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-2011-048. 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 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 
a.m. and 3 p.m. Copies of such 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-2011-048 and should be 
submitted on or before October 28, 2011.
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    \27\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-25959 Filed 10-6-11; 8:45 am]
BILLING CODE 8011-01-P