Document ID: SEC-2011-1249-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2011-08-19T04:00Z

[Federal Register Volume 76, Number 161 (Friday, August 19, 2011)]
[Notices]
[Pages 52030-52032]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-21174]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65135; File No. SR-Phlx-2011-111]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing of Proposed Rule Change Requesting Permanent Approval of Pilot 
Program to Permit NASDAQ OMX PHLX to Receive Inbound Routes by Nasdaq 
Options Services

August 15, 2011.
    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 August 8, 2011, NASDAQ OMX PHLX LLC (``Phlx'' or the ``Exchange'') 
filed with the Securities and Exchange Commission (q``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 request permanent approval of the 
Exchange's pilot program allowing Phlx to accept inbound routes by 
NASDAQ Options Services, LLC (``NOS'') of 1) NASDAQ Options Market 
(``NOM'') Exchange Direct Orders without checking the NOM book and 2) 
NOM non-system

[[Page 52031]]

securities, including Exchange Direct Orders.\3\
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    \3\ Pursuant to Chapter VI, Section 1(b) of the NOM Rules, 
``System Securities'' are all options that are currently trading on 
NOM pursuant to Chapter IV of the NOM rules. All other options are 
``Non-System Securities.'' Pursuant to Chapter VI, Section (1)(e)(7) 
of the NOM Rules, Exchange Direct Orders are orders that are 
directed to an exchange other than NOM as directed by the entering 
party on an immediate-or-cancel basis without first checking the NOM 
book for liquidity.
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    The text of the proposed rule change is available from the 
principle office of the Exchange, at the Exchange's Web site at http://nasdaqomxphlx.cchwallstreet.com/NASDAQOMXPHLX/Filings/, 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, Phlx 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. Phlx 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
    Currently, NOS is the approved outbound routing facility of The 
NASDAQ Stock Market (the ``NASDAQ Exchange'') for NOM, providing 
outbound routing from NOM to other market centers.\4\ Phlx and the 
NASDAQ Exchange have previously adopted rules to permit Phlx to receive 
inbound routes of certain option orders, specifically (1) Exchange 
Direct Orders without checking the NOM book prior to routing, and (2) 
NOM non-system securities, from NOS on a pilot basis.\5\ Phlx 
specifically has adopted a rule to prevent potential information 
advantages resulting from the affiliation between Phlx and NOS, as 
related to NOS's authority to route orders from NOM to Phlx.\6\ NOS's 
authority to route these orders to Phlx is subject to a pilot period 
ending on August 25, 2011.\7\ The Exchange hereby seeks permanent 
approval to permit Phlx to accept inbound routes of (1) Exchange Direct 
Orders without checking the NOM book prior to routing, and (2) NOM non-
system securities orders, including Exchange Direct Orders that NOS 
routes from NOM.\8\
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    \4\ NOM Rule Chapter VI, Section 11(e). Under NOM Rule Chapter 
VI, Section 11(e): (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 self-regulatory 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) when routing orders in 
options that are not listed and open for trading on NOM, NOS is not 
a facility of NASDAQ and is not regulated as a facility of NASDAQ 
but as a broker-dealer regulated by its designated examining 
authority; (6) use of NOS to route order to other market centers is 
optional; (7) 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 (8) the books, records, premises, officers, 
directors, agents, and employees 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.
    \5\ See Securities Exchange Act Release Nos. 58179 (July 17, 
2008), 73 FR 42874 (July 23, 2008)(SR-Phlx-2008-31); 61667 (March 5, 
2010), 75 FR 11964 (March 12, 2010) (SR-Phlx-2010-36); 61668 (March 
5, 2010), 75 FR 12323 (March 15, 2010)(SR-NASDAQ-2010-028). See also 
Securities Exchange Act Release No. 63873 (February 9, 2011), 76 FR 
8798 (February 15, 2011)(SR-Phlx-2011-16).
    \6\ See NASDAQ OMX PHLX Rule 985(c)(1).
    \7\ See Securities Exchange Act Release No. 63873 (February 9, 
2011), 76 FR 8798 (February 15, 2011)(SR-Phlx-2011-16). The Exchange 
intends to seek an extension of the pilot period while the proposed 
rule change seeking permanent approval of the pilot program is 
pending.
    \8\ NASDAQ OMX BX, Inc. also recently filed a similar proposed 
rule change to request permanent approval of BX's pilot program 
permitting Boston Options Exchange to accept inbound routes by NOS 
of (1) NOM Exchange Direct Orders without checking the NOM book 
prior to routing, and (2) NOM non-system securities orders, 
including Exchange Direct Orders that NOS routes from NOM. See 
Securities Exchange Act Release No. 64896 (July 15, 2011), 76 FR 
43740 (July 21, 2011)(SR-BX-2011-045).
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    Pursuant to prior rule filings with the Commission, the Phlx and 
NOS inbound routing relationship has operated on a pilot basis. In 
connection with this pilot program Phlx committed to the following:
    1. The Exchange and FINRA would enter into a regulatory services 
agreement (``Regulatory Contract'') pursuant to which FINRA has been 
allocated regulatory responsibilities to review NOS's compliance with 
the Exchange's rules through FINRA's examination program.\9\ The 
Exchange, however, retained 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 is allocated to FINRA as provided in Rule 
17d-2(d).
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    \9\ The Exchange also states that NOS is subject to independent 
oversight by FINRA, its Designated Examining Authority, for 
compliance with financial responsibility requirements. See 
Securities Exchange Act Release No. 61667 (March 5, 2010), 75 FR 
11964 (March 12, 2010) (SR-Phlx-2010-36).
    \10\ 17 CFR 240.17d-2.
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    2. FINRA and the Exchange would monitor NOS for compliance with 
Phlx's trading rules, and collect and maintain certain related 
information; \11\
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    \11\ Pursuant to the Regulatory Contract, both the Exchange and 
FINRA will collect and maintain all alerts, complaints, 
investigations and enforcement actions in which NOS (in 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 
Securities Exchange Act Release No. 61667 (March 5, 2010), 75 FR 
11964 (March 12, 2010) (SR-Phlx-2010-36).
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    3. FINRA has agreed to provide a report to the Exchange's Chief 
Regulatory Officer, on at least a quarterly basis, that: (i) Quantifies 
all alerts (of which the Exchange and FINRA become aware) that identify 
NOS as a participant that has potentially violated Commission or 
Exchange rules and (ii) quantifies the number of investigations that 
identify NOS as a participant that has potentially violated Exchange or 
Commission Rules; \12\
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    \12\ The 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. Id.
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    4. The Exchange adopted Rule 985(c), which requires The NASDAQ OMX 
Group, Inc., as the holding company owning NOS and the Exchange, to 
establish and maintain procedures and internal controls reasonably 
designed to ensure that NOS does not develop or implement changes to 
its system on the basis of non-public information regarding planned 
changes to the Exchange's systems, obtained 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 routing to the Exchange; \13\ and
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    \13\ See NASDAQ OMX PHLX Rule 985(c)(1).
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    5. The Exchange proposed that NOS be authorized to route (1) 
Exchange Direct Orders without checking the NOM book and (2) orders in 
NOM non-system securities inbound to the Exchange from NOM for a pilot 
period of twelve months, as further extended to August 25, 2011.\14\
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    \14\ See supra note 7.
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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

[[Page 52032]]

NOS, as well as demonstrated that NOS cannot use any information 
advantage it may have because of its affiliation with the Exchange. 
Since the Exchange has met all the above-listed conditions, it now 
seeks permanent approval of the Phlx and NOS 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,\15\ in general, and with 
Section 6(b)(5) of the Act,\16\ 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. Specifically, 
the proposed rule change will allow the Exchange to continue receiving 
inbound routes of certain orders from NOS in a manner consistent with 
prior approvals and established protections. The Exchange believes that 
having met the commitments established during the pilot program 
demonstrates that the Exchange has 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.
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    \15\ 15 U.S.C. 78f.
    \16\ 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, 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

    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 will:
    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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2011-111 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-2011-111. 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 publicly available. All 
submissions should refer to File Number SR-Phlx-2011-111 and should be 
submitted on or before September 9, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-21174 Filed 8-18-11; 8:45 am]
BILLING CODE 8011-01-P