Document ID: SEC-2011-1529-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2011-10-07T04:00Z

[Federal Register Volume 76, Number 195 (Friday, October 7, 2011)]
[Notices]
[Pages 62486-62488]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-25958]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65469; File No. SR-Phlx-2011-108]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
Routing Functionality on NASDAQ OMX PSX

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 PHLX LLC (``PHLX'' or 
``Exchange'') 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

    The Exchange proposes to add routing functionality to the NASDAQ 
OMX PSX facility of NASDAQ OMX PHLX (``System''). Specifically, the 
Exchange proposes to adopt new Rule 3315, Order Routing, and amend Rule 
3301, Definitions, and Rule 3305, 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 on the Exchange's 
Web site at http://www.nasdaqtrader.com/micro.aspx?id=PHLXRulefilings, 
at the principal office of the Exchange, 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 PSX 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 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 PSX routing services as well. Specifically, the 
Exchange proposes to permit Nasdaq Execution Services LLC to route 
orders from PSX to all market centers, as it does for NASDAQ, including 
to NASDAQ and NASDAQ OMX BX (``BX'').\4\
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    \3\ See e.g., NASDAQ Rule 4758.
    \4\ PHLX's other affiliate, BX, has also proposed to provide 
outbound routing services using NES as its routing broker. See SR-
BX-2011-048.
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    First, PHLX proposes to amend two existing rules to accommodate 
routing. Specifically, PHLX proposes to amend subparagraph (f)(6) of 
Rule 3301, 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 PHLX Rule 3307. 
PHLX proposes to add that ISOs are not eligible for routing as set out 
in new Rule 3315.\5\
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    \5\ This is the same as NASDAQ Rule 4751(f)(6).
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    In addition, PHLX proposes to amend Rule 3305, Order Entry 
Parameters, to add a paragraph on routing. 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 3315. 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

[[Page 62487]]

Regulation NMS. This paragraph is intended to add routing to the rule 
that governs order types generally.
    Second, PHLX proposes to adopt new Rule 3315, 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 PSTG, PSKN, PSCN, PSKP, PTFY, PMOP and PCRT, 
which are spelled out in proposed Rule 4758(a)(1)(A)(iii)-(vii).\6\
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    \6\ These correspond to the following routing strategies on 
NASDAQ, respectively: STGY, SKNY, SCAN, SKIP, TFTY, MOPP and CART.
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    PSTG is a routing option under which orders would check the PSX 
book, check destinations on the PSTG System routing table,\7\ and then 
return to the PSX book if shares remain unexecuted. After returning to 
the PSX book, a PSTG order will subsequently route out to another 
market center if it posts a bid or offer that locks or crosses the PSTG 
order.\8\ PSKN is a form of PSTG in which the entering party instructs 
the System to bypass any market centers included in the PSTG System 
routing table that are not posting Protected Quotations within the 
meaning of Regulation NMS.\9\
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    \7\ Routing tables are explained in proposed Rule 3315(a)(1)(A).
    \8\ See proposed Rule 3315(a)(1)(A)(iii).
    \9\ See proposed Rule 3315(a)(1)(A)(iii).
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    PSCN is a routing option under which orders check the PSX book, 
check destinations on the PSCN System routing table, and then return to 
the BX book. After returning to the PSX book, a PSCN order will not 
subsequently route out to another market center if it posts a bid or 
offer that locks or crosses the PSCN order.\10\ PSKP is a form of PSCN 
in which the entering party instructs the System to bypass any market 
centers included in the PSCN System routing table that are not posting 
Protected Quotations within the meaning of Regulation NMS.\11\
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    \10\ See proposed Rule 3315(a)(1)(A)(iv).
    \11\ See proposed Rule 3315(a)(1)(A)(iv).
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    PTFY is a routing option under which orders check the PSX book for 
available shares only if instructed by the entering firm prior to 
routing to destinations on the PTFY System routing table. Thereafter, 
they return to the PSX book and, like PSCN orders, do not route out 
again.\12\
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    \12\ See proposed Rule 3315(a)(1)(A)(v).
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    PMOP 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 PSX book and do not route out 
again.\13\
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    \13\ See proposed Rule 3315(a)(1)(A)(vi).
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    PCRT is a routing option that will route to NASDAQ OMX BX, check 
the System for available shares and then route to 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.\14\ This routing option is 
similar to CART on NASDAQ, which also routes among the three exchanges 
in the same order: BX, PSX, NASDAQ.\15\ PCRT, like all of the proposed 
routing strategies is designed to comply with SEC Rule 611 and the 
other provisions of Regulation NMS.\16\
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    \14\ See proposed Rule 3315(a)(1)(A)(vii).
    \15\ See Securities Exchange Act Release No. 63900 (February 14, 
2011), 76 FR 9397 (February 17, 2011) (SR-NASDAQ-2011-026).
    \16\ 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, PHLX proposes to use NES as its outbound routing facility 
for cash equities, providing outbound routing from PSX to other market 
centers, including their affiliates, NASDAQ and BX.\17\
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    \17\ In order for PHLX to provide outbound routing services, BX 
and NASDAQ each must file a proposed rule change to receive inbound 
orders from their affiliate exchange, PHLX.
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    The Exchange, NASDAQ, BX and NES are affiliates. NES is a broker-
dealer and member of NASDAQ, BX and the Exchange. Accordingly, the 
affiliate relationship between PHLX 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.\18\
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    \18\ See Securities Exchange Act Release Nos. 59153 (December 
23, 2008), 73 FR 80485 (SE-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, PHLX 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 
PHLX;
    (2) NES will not engage in any business other than: (a) As an 
outbound router for PHLX and (b) any other activities it may engage in 
as approved by the Commission.\19\
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    \19\ Separately, BX has also filed a proposed rule change 
seeking approval to have NES operate as the routing broker. See SR-
BX-2011-048.
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    (3) NES shall operate as a facility, as defined in Section 3(a)(2) 
of the Act, of PHLX.
    (4) For purposes of SEC Rule 17d-1, the designated examining 
authority of NES shall be a self-regulatory organization unaffiliated 
with PHLX or any of its affiliates.
    (5) PHLX 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 PHLX shall be deemed to be the books, 
records, premises, officers, agents, directors and employees of PHLX 
for purposes of, and subject to oversight pursuant to, the Act. The 
books and records of NES as a facility of PHLX 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 
PHLX as immediate-or-cancel orders or any other order-type available 
through PHLX 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 PHLX 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, PHLX Rule 985(b)(1)(A) 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 Exchange Act. Because NES is an Exchange member and PHLX 
now proposes to engage in the business venture of outbound routing 
using NES as its routing broker, the Exchange has

[[Page 62488]]

filed this proposed rule change under Section 19(b) of the Act.
    The Exchange also proposes to adopt Rule 3315(c) to address the 
recently adopted Market Access Rule.\20\ In order to comply with Rule 
15c3-5,\21\ 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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    \20\ See Securities Exchange Act Release No. 63241 (November 3, 
2010), 75 FR 69792 (November 15, 2010).
    \21\ 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,\22\ in general, and with 
Sections 6(b)(5) of the Act,\23\ 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 PSX 
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 
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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    \22\ 15 U.S.C. 78f.
    \23\ 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 
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 \24\ and Rule 19b-4(f)(6) \25\ 
thereunder.
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    \24\ 15 U.S.C. 78s(b)(3)(A).
    \25\ 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-Phlx-2011-108 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-Phlx-2011-108. 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-Phlx-2011-108 and should be 
submitted on or before October 28, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-25958 Filed 10-6-11; 8:45 am]
BILLING CODE 8011-01-P