Document ID: SEC-2009-0295-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Alternext US LLC
Posted Date: 2009-03-06T05:00Z

[Federal Register: March 6, 2009 (Volume 74, Number 43)]
[Notices]               
[Page 9853-9856]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06mr09-66]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59473; File No. SR-NYSEALTR-2009-18]

 
Self-Regulatory Organizations; NYSE Alternext U.S. LLC; Notice of 
Filing and Order Granting Accelerated Approval of Proposed Rule Change 
To Use Its Broker Dealer Affiliate, Archipelago Securities, LLC, as Its 
Routing Broker for Options Orders

February 27, 2009.
    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 February 25, 2009, NYSE Alternext U.S. LLC (``NYSE Alternext'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I and II below, which Items have been substantially prepared by 
the Exchange. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons, and is 
granting accelerated approval to the proposed rule change.
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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 use its broker dealer affiliate,\3\ 
Archipelago Securities LLC (``ArcaSec''), as its Routing Broker to 
route options orders \4\ to away market centers when that market center 
is displaying the national best bid and offer, in accordance with 
Exchange Rules. A copy of this filing is available on the Exchange's 
Web site at http://www.nyse.com, at the Exchange's principal office and 
at the Commission's Public Reference Room.
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    \3\ On September 29, 2008, the Commission approved the 
Exchange'sbusiness combination with NYSE Euronext, Inc. 
(``Merger''). See Securities Exchange Act Release No. 58673 
(September 29, 2008), 73 FR 57707 (October 3, 2008) (order approving 
SR-NYSE-2008-60 and SR-Amex-2008-62). Pursuant to the Merger, NYSE 
Euronext became the overall parent company of the Exchange. NYSE 
Euronext now operates three self-regulatory entities: The Exchange, 
the NYSE, and NYSE Arca, Inc. ArcaSec is also a wholly owned 
subsidiary of NYSE Euronext, and is therefore an affiliate of the 
Exchange.
    \4\ ArcaSec acts as the outbound order routing facility of the 
NYSE andNYSE Arca. See Securities Exchange Act Release No. 52497 
(September 22, 2005), 70 FR 56949 (September 29, 2005) (SR-PCX-2005-
90). See also Securities Exchange Act Release Nos. 44983 (October 
25, 2001), 66 FR 55225 (November 1, 2001) (SR-PCX-00-25); 58681 
(September 29, 2008), 73 FR 58285 (October 6, 2008) (order approving 
SR-NYSEArca-2008-90); 55590 (April 5, 2007), 72 FR 18707 (April 13, 
2007) (notice of immediate effectiveness of SR-NYSE-2007-29); and 
58680 (September 29, 2008), 73 FR 58283 (October 6, 2008) (order 
approving SR-NYSE-2008-76).
    On November 24, 2008, the Commission also approved ArcaSec to 
act as the outbound order routing facility for NYSE Alternext for 
the purpose of routing equities orders to away market centers. 
Securities Exchange Act Release No. 59009 (November 24, 2008), 73 FR 
73363 (December 2, 2008) (SR-NYSEALTR-2008-07).
    Currently, FINRA is the examining authority for the Routing 
Broker designated by the Commission pursuant to Rule 17d-1 of the 
Act. As such, FINRA is responsible for the oversight and enforcement 
of the Routing Broker for compliance with the applicable financial 
responsibility rules.
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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 those statements may be examined at 
the places specified in Item III below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

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

1. Purpose
    The Exchange is proposing to use ArcaSec as its Routing Broker to 
route options orders to away market centers when that market center is 
displaying

[[Page 9854]]

the national best bid and offer in accordance with Exchange Rules. The 
Exchange intends to use ArcaSec as its Routing Broker, pending 
approval, as of the date that the Exchange implements its new 
electronic trading system in conjunction with the opening of its new 
options trading floor at 11 Wall Street in New York, New York.
    Rule 2B--NYSE Alternext Equities provides, in pertinent part, that: 
without prior SEC approval, the Exchange or any entity with which it is 
affiliated shall not, directly or indirectly, acquire or maintain an 
ownership interest in a member organization.
    In its Order approving the acquisition of the American Stock 
Exchange LLC by NYSE Euronext, the SEC, among other things, approved 
the affiliation between NYSE Alternext and ArcaSec, subject to certain 
conditions.\5\ The SEC also approved revisions to Rule 2B--NYSE 
Alternext Equities, in order to address inbound routing by affiliated 
members.\6\ The Exchange also recently received approval to implement 
Rule 17--NYSE Alternext Equities, which defines the term Routing Broker 
and establishes the conditions under which the Exchange's Routing 
Broker operates.\7\
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    \5\ See Securities Exchange Act Release No. 58673, supra note 3.
    \6\ Id. See also Securities Exchange Act Release No. 59009, 
supra note 4.
    \7\ See Securities Exchange Act Release No. 58705 (October 1, 
2008), 73 FR 58995 (October 8, 2008) (order approving SR-Amex-2008-
63).
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    NYSE Alternext Rule 900.1NY--Applicability, Definitions, and 
References states that, unless otherwise specified or unless the 
context otherwise requires, the Rules and Policies of the Board of 
Directors shall be applicable to the trading of option contracts. As a 
result, Rules 2B and 17, as described above, encompass and apply to the 
trading of options contracts.
    Pursuant to Rule 2B--NYSE Alternext Equities, the Exchange now 
seeks authorization to use ArcaSec, an affiliated broker-dealer, to 
operate as its Routing Broker for the purpose of routing options orders 
to away market centers.\8\
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    \8\ Presently, ArcaSec does not route options orders directly to 
awaymarket centers and, as such, will not route options orders 
directly from NYSE Alternext to any affiliated markets, including 
NYSE Arca, Inc. Should ArcaSec route orders directly from NYSE 
Alternext to an affiliated market, it would do so only after the 
affiliated market has rules approved that authorize it to receive 
such routed options orders from its broker-dealer affiliate.
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    Pursuant to the proposal, the Exchange systems will provide the 
Routing Broker with routing instructions, to route orders to other 
market centers and report such executions back to the Exchange. The 
Routing Broker cannot change the terms of an order or the routing 
instructions, nor does the Routing Broker have any discretion about 
where to route an order.
    The Routing Broker will operate as a ``facility'' \9\ of the 
Exchange in that it will serve as a ``system of communication to or 
from'' \10\ the Exchange. When an order must be routed to an away 
market center for execution, the Exchange systems will affix all order 
handling information to the order. Exchange systems will automatically 
transmit the order and the relevant order handling information to the 
Routing Broker. In turn, the Routing Broker will facilitate the 
delivery of the received order to the destination away market. The 
Routing Broker will obtain receipts of executions and deliver those 
receipts of executions back to Exchange systems.\11\ The Routing 
Broker, as merely a conduit or system of communication between the 
Exchange and away market centers, cannot change the terms of an order, 
systemically reject an order, or otherwise perform data validation 
prior to delivery of the order to an away market center or after return 
receipt and delivery of the execution to the Exchange.
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    \9\ The term ``facility'' as defined in Section 3(a)(2) of the 
Securities Exchange Act of 1934, as amended provides, when used with 
respect to an exchange includes its premises, tangible or intangible 
property whether on the premises or not, any right to the use of 
such premises or property or any service thereof for the purpose of 
effecting or reporting a transaction on an exchange (including, 
among other things, any system of communication to or from the 
exchange, by ticker or otherwise, maintained by or with the consent 
of the exchange), and any right of the exchange to the use of any 
property or service. See 15 U.S.C. 78c.
    \10\ Id.
    \11\ Comparable to the operation of ArcaSec in its capacity as a 
facility ofthe NYSE and NYSE Arca, the use of ArcaSec by the 
Exchange is only available to members of NYSE Alternext.
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    In particular, and without limitation, under the Act, the Exchange 
will be responsible for filing with the Commission rule changes and 
fees relating to the functions performed by the Routing Broker for the 
Exchange and will be subject to exchange non-discrimination 
requirements.
    Furthermore, the books, records, premises, officers, agents, 
directors, and employees of the Routing Broker, as a facility of the 
Exchange, shall be deemed to be the books, records, premises, officers, 
agents, directors, and employees of the Exchange for purposes of, and 
subject to oversight pursuant to, the Act. The books and records of the 
Routing Broker as a facility of the Exchange shall be subject at all 
times to inspection and copying by the Exchange and the Commission.
    The use of the Routing Broker to route orders to another market 
center will be optional. In the event a member organization does not 
want to use the Routing Broker, it must enter an immediate-or-cancel 
order or any such other order type available on the Exchange that is 
not eligible for routing. All bids and offers entered on the Exchange 
that are routed to other market centers via the Routing Broker which 
result in an execution shall be binding on the member organization that 
entered such bid and offer.
    The Routing Broker will not engage in any business for the Exchange 
other than its outbound router and facilitation functions as described 
above. In the event the Exchange seeks to have the Routing Broker 
engage in any other activities, it understands that the ability of the 
Routing Broker to engage in such new business activity would require 
Commission approval.
    The Exchange believes that the above described operation of the 
Routing Broker will serve as the most economically efficient execution 
of transactions in options contracts. Furthermore, the Routing Broker 
is necessary for the Exchange to comply with its Rules and best 
execution obligations.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the requirement under Section 6(b)(5) of the Act \12\ that an 
Exchange have rules that are designed to promote just and equitable 
principles of trade, 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. The proposed 
rule change also is designed to support the principles of Section 
11A(a)(1) \13\ in that it seeks to assure economically efficient 
execution of securities transactions. Specifically, the proposed rule 
change will allow the Exchange to establish and implement mechanisms to 
remain fully compliant with Exchange rules and its best execution 
obligations.
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    \12\ 15 U.S.C. 78f(b)(5).
    \13\ 15 U.S.C. 78k-1(a)(1).
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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 that is not necessary or appropriate 
in furtherance of the purposes of the Act.

[[Page 9855]]

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

    No written comments were solicited or received with respect to the 
proposed rule change.

III. 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-NYSEALTR-2009-18 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-NYSEALTR-2009-18. 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 inspection 
and copying in the Commission's Public Reference Room, on official 
business days between the hours of 10 a.m. and 3 p.m. Copies of the 
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-NYSEALTR-2009-18 and should be submitted on or before 
March 27, 2009.

IV. Commission's Findings and Order Granting Accelerated Approval of a 
Proposed Rule Change

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\14\ In 
particular, it is consistent with Section 6(b)(5) of the Act,\15\ which 
requires, among other things, that the rules of a national securities 
exchange be 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; 
and are not designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers.
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    \14\ In approving this proposed rule change, the Commission 
hasconsidered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \15\ 15 U.S.C. 78f(b)(5).
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    On September 29, 2008, the Commission approved the Exchange's 
business combination with NYSE Euronext.\16\ In conjunction with the 
Merger, the Exchange proposed to transfer trading from the American 
Stock Exchange LLC system to a new system based on NYSE's existing 
system. Accordingly, the Exchange proposed new rules that would govern 
trading on the Exchange once trading was transferred to the new 
electronic system.\17\ Included in those recently approved rules were 
NYSE Alternext Equities Rules 13 and 17, which define the term Routing 
Broker and establish the conditions under which the Exchange's Routing 
Broker shall operate.\18\ The Exchange also proposed, and the 
Commission approved, the Exchange's use of ArcaSec, an affiliated 
broker-dealer, as its Routing Broker for the trading of equity orders 
on its new system.\19\ The Exchange recently proposed, and the 
Commission approved, new rules for the trading of options on its new 
trading system.\20\ In the instant filing, the Exchange proposes to use 
ArcaSec as its Routing Broker to route options orders to away market 
centers, in accordance with Exchange rules, as of the date that the 
Exchange implements its new system.\21\
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    \16\ See supra note 3.
    \17\ See Securities Exchange Act Release No. 58705, supra note 
7.
    \18\ Id.
    \19\ See Securities Exchange Act Release No. 59009, supra note 
4.
    \20\ See Securities Exchange Act Release No. 59472 (February 27, 
2009) (order approving SR-NYSEALTR-2008-14).
    \21\ The Commission notes that the Exchange intends to transfer 
optionstrading to its new system on March 2, 2009. See e-mail from 
Andrew Stevens, Chief Counsel--U.S. Equities & Derivatives, NYSE 
Euronext, to Jennifer Dodd, Special Counsel, Division of Trading and 
Markets, Commission, dated February 26, 2009.
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    In the past, the Commission has expressed concern that the 
affiliation of an exchange with one of its members raises potential 
conflicts of interest, and the potential for unfair competitive 
advantage.\22\ Although the Commission continues to be concerned about 
potential unfair competition and conflicts of interest between an 
exchange's self-regulatory obligations and its commercial interests 
when the exchange is affiliated with one of its members, the Commission 
believes that it is consistent with the Act to permit ArcaSec to also 
provide outbound routing services for options orders to NYSE Alternext, 
subject to the same conditions that currently apply to ArcaSec 
providing outbound routing services to the Exchange for equities 
orders.
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    \22\ See, e.g., Securities Exchange Act Release Nos.58673, supra 
note 3; 54170 (July 18, 2006), 71 FR 42149 (July 25, 2006) (SR-
NASDAQ-2006-006) (order approving Nasdaq's proposal to adopt Nasdaq 
Rule 2140, restricting affiliations between Nasdaq and its members); 
and 53382 (February 27, 2006), 71 FR 11251 (March 6, 2006) (SR-NYSE-
2005-77) (order approving the combination of the New York Stock 
Exchange, Inc. and Archipelago Holdings) at 11255.
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    NYSE Alternext Equities Rule 17 imposes certain conditions on an 
Exchange Routing Broker, which would apply to ArcaSec as the Exchange's 
outbound options order router as they do now in ArcaSec's capacity as 
the Exchange's outbound equities order router. For example, ArcaSec 
must: (1) Be a member of a self-regulatory organization unaffiliated 
with NYSE Alternext that is its designated examining authority; (2) 
establish and maintain procedures and internal controls reasonably 
designed to restrict the flow of confidential and proprietary 
information between NYSE Alternext and its facilities, including 
ArcaSec, and any other entity; (3) be regulated as a facility of the 
Exchange; \23\ and (4) not engage in any business other than its 
outbound router function unless

[[Page 9856]]

otherwise approved by the Commission. Also, the books, records, 
premises, officers, agents, directors and employees of ArcaSec, as a 
facility of NYSE Alternext, will be deemed to be those of the Exchange 
for purposes of and subject to oversight pursuant to the Act.\24\ In 
addition, use of ArcaSec to route options orders from NYSE Alternext to 
away market centers is optional, and a NYSE Alternext member is free to 
route orders to other market centers through alternative means. The 
Commission also notes that ArcaSec will not route options orders to any 
affiliated market, unless such market has in place rules that authorize 
it to receive such routed options orders from its broker-dealer 
affiliate.\25\
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    \23\ The Commission notes that, as a facility of the Exchange, 
ArcaSec will be subject to Exchange oversight, as well as Commission 
oversight. Further, the Exchange will be responsible for filing with 
the Commission proposed rule changes and fees relating to ArcaSec's 
outbound router function and ArcaSec's outbound router function will 
be subject to exchange non-discrimination requirements.
    \24\ See NYSE Alternext Equities Rule 17(b). In addition, the 
books and records of ArcaSec, as a facility of the Exchange, will be 
subject at all times to inspection and copying by the Exchange and 
the Commission. Id.
    \25\ See supra note 8.
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    In light of the protections discussed above and contained in NYSE 
Alternext Equities Rule 17, the Commission believes that it is 
consistent with the Act to permit NYSE Alternext to use its affiliate, 
ArcaSec, as its Routing Broker, as proposed.
    NYSE Alternext has asked the Commission to accelerate approval of 
the proposed rule change. NYSE Alternext states that accelerated 
approval ``will permit the Exchange to establish and implement 
mechanisms to remain fully compliant with its best execution 
obligations and other Exchange rules immediately upon implementation of 
its new electronic trading system and in conjunction with the opening 
of its new trading floor at 11 Wall Street.'' \26\ NYSE Alternext notes 
that it ``intends to implement its new trading system and open its new 
trading floor on February 9, 2009.'' \27\ The Commission finds good 
cause for approving the proposed rule change before the thirtieth day 
after the date of publication of notice of filing thereof in the 
Federal Register. The Commission notes that NYSE Alternext's proposal 
to use ArcaSec as its outbound order routing facility is consistent 
with prior Commission action.\28\ Accordingly, the Commission finds 
good cause, consistent with Section 19(b)(2) of the Act,\29\ to approve 
the proposed rule change on an accelerated basis.
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    \26\ See SR-NYSEALTR-2009-18, Item 7.
    \27\ Id.
    \28\ See, e.g., Securities Exchange Act Release Nos.52497, 
55590, and 59009, supra note 4.
    \29\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-NYSEALTR-2009-18) is hereby approved 
on an accelerated basis.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E9-4779 Filed 3-5-09; 8:45 am]

BILLING CODE 8011-01-P