Document ID: SEC-2011-1041-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX BX, Inc.
Posted Date: 2011-07-21T04:00Z

[Federal Register Volume 76, Number 140 (Thursday, July 21, 2011)]
[Notices]
[Pages 43740-43742]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-18345]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64896; File No. SR-BX-2011-045]

Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of 
Filing of Proposed Rule Change Requesting Permanent Approval of Pilot 
Program To Permit BOX To Accept Inbound Routes by NOS

 July 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 July 13, 2011, NASDAQ OMX BX, Inc. (``BX'' or the ``Exchange'') 
filed with the Securities and Exchange Commission (``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 to permit the Boston Options Exchange 
(``BOX'') to accept inbound routes by NASDAQ Options Services, LLC 
(``NOS'') of Nasdaq Options Market (``NOM'') Exchange Direct Orders 
without checking the NOM book and 2) NOM non-System 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.'' [sic] Chapter VI, Section (1)(e)(7) of 
the NOM Rules, Exchange Direct Orders are orders that route directly 
to other Options Markets on an immediate-or-cancel basis without 
checking the NOM book for liquidity.
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    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqomxphlx.cchwallstreet.com/NASDAQOMXPHLX/Filings/, 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 self-regulatory organization 
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 self-regulatory organization 
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\ The Exchange and 
the NASDAQ Exchange have previously adopted rules to permit BOX 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, by NOS on a pilot basis.\5\ The 
Exchange specifically has adopted a rule to prevent potential 
information advantages resulting from the affiliation between BOX and 
NOS, as related to NOS's authority to route orders from NOM to BOX.\6\ 
NOS's authority to route these orders to BOX is subject to a pilot 
period ending on August 16, 2011.\7\ The Exchange hereby seeks 
permanent approval to permit BOX to accept inbound routes of (1) 
Exchange Direct Orders without checking the NOM book and (2) NOM non-
System securities, including Exchange Direct Orders that NOS routes 
from NOM.
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    \4\ NOM Rule Chapter VI, Section 11(c). Under NOM Rule Chapter 
VI, Section 11(c): (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) use of NOS to route order 
to other market centers is optional; (6) 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 (7) 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. 60349 (July 20, 
2009), 74 FR 37071 (July 27, 2009) (SR-BX-2009-035); 60354 (July 21, 
2009), 74 FR 37074 (July 27, 2009) (SR-NASDAQ-2009-065); 62555 (July 
22, 2010), 75 FR 44835 (July 29, 2010) (SR-BX-2010-051); 63364 
(November 23, 2010), 75 FR 74121 (November 30, 2010) (SR-BX-2010-
078); 64530 (May 20, 2011), 76 FR 30746 (May 26, 2011) (SR-BX-2011-
027).
    \6\ See Chapter XXXIX, Section 2(c) of the Grandfathered Rules 
of the Exchange.
    \7\ See Securities Exchange Act Release No. 64530 (May 20, 
2011), 76 FR 30746 (May 26, 2011) (SR-BX-2011-027).
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    Pursuant to prior rule filings with the Commission, BOX and NOS 
inbound routing relationship with respect to certain orders has 
operated on a pilot basis. In connection with this pilot program, BX 
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 
BOX's rules through FINRA's examination program.\8\ 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 \9\ under the Act (``17d-2 
Agreement''), in which case the regulatory responsibility is allocated 
to FINRA as provided in Rule 17d-2(d).
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    \8\ 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. 60349 (July 20, 2009), 74 FR 
37071 (July 27, 2009) (SR-BX-2009-035).
    \9\ 17 CFR 240.17d-2.
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    2. The Exchange and FINRA would monitor NOS for compliance with the

[[Page 43741]]

BOX's trading rules, and collect and maintain certain related 
information; \10\
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    \10\ Pursuant to the Regulatory Contract, both FINRA and the 
Exchange will collect and maintain all alerts, complaints, 
investigations and enforcement actions in which NOS (in routing 
orders to BOX) 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.
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    3. FINRA has agreed to provide a report to the BOXR'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 Commission 
or Exchange rules; \11\
    4. BX adopted Chapter XXXIX, Section 2(c) of the Grandfathered 
Rules of the Exchange, which requires NASDAQ OMX, as the holding 
company owning NOS and affiliated with BOX through the ownership of 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 BOX's systems, obtained as a result of its 
affiliation with BOX, until such information is available generally to 
similarly situated BOX participants, in connection with the provision 
of inbound order routing to BOX; \12\ and
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    \11\ Id.
    \12\ See Chapter XXXIX, Section 2(c) of the Grandfathered Rules 
of the Exchange.
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    5. The Exchange proposed that NOS be authorized to route Exchange 
Direct Orders without checking the NOM book; and orders in NOM non-
system securities inbound to the Exchange from NOM for a pilot period 
of twelve months, as further extended to August 16, 2011.\13\
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    \13\ 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 NOS, as well as demonstrate that NOS cannot use any 
information advantage it may have because of its affiliation with the 
Exchange and BOX. Since the Exchange has met all the above-listed 
conditions, it now seeks permanent approval of the BOX 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,\14\ in general, and with 
Section 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. Specifically, 
the proposed rule change would permit inbound routing of orders from 
NOM to BOX through 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 and BOX.
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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 
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

    The Exchange has neither solicited nor received comments on the 
proposed rule change.

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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-BX-2011-045 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-2011-045. 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-BX-2011-045 and 
should be submitted on or before August 11, 2011.

[[Page 43742]]

    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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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-18345 Filed 7-20-11; 8:45 am]
BILLING CODE 8011-01-P