Document ID: SEC-2010-1294-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2010-08-23T04:00Z

[Federal Register: August 23, 2010 (Volume 75, Number 162)]
[Notices]               
[Page 51861-51863]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23au10-132]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62736; File No. SR-NASDAQ-2010-100]

 
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change Regarding Routing to an 
Affiliated Exchange

August 17, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on August 6, 2010, The NASDAQ Stock Market LLC (``NASDAQ'' or the 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I and II 
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

    NASDAQ is proposing a rule change to amend Rule 4751 to modify the 
restriction on routing of Directed Orders to a facility of an exchange 
that is an affiliate of NASDAQ. The text of the proposed rule change is 
available from NASDAQ's Web site at http://nasdaq.cchwallstreet.com, at 
NASDAQ'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, NASDAQ included statements 
concerning the purpose of, and basis for, the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III below, and is set forth in Sections A, B, and C below.

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

1. Purpose
    The NASDAQ OMX Group, Inc. (``NASDAQ OMX''), a Delaware 
corporation, owns three U.S. registered securities exchanges--NASDAQ, 
NASDAQ OMX PHLX, Inc. (``PHLX'') and NASDAQ OMX BX, Inc. (``BX''). In 
addition, NASDAQ OMX currently indirectly owns Nasdaq Execution 
Services, LLC (``NES''), a registered broker-dealer and a member of 
PHLX. Thus, NES is an affiliate of each of NASDAQ, PHLX and BX.
    PHLX has proposed to launch NASDAQ OMX PSX (``PSX'') \3\ as a new 
platform for trading NMS stocks (as defined in Rule 600 under 
Regulation NMS).\4\ Although PSX will not route to other market 
centers, PSX will receive orders routed to it by other market centers, 
including NASDAQ. In this respect, PSX will be similar to the NASDAQ 
OMX BX Equities System, which does not currently route orders to other 
venues.
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    \3\ Securities Exchange Act Release No. 62519 (July 16, 2010), 
75 FR 43497 (July 26, 2010) (SR-PHLX-2010-79) (``PSX Proposal'').
    \4\ 17 CFR 242.600.
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    NES is the approved outbound routing facility of NASDAQ for cash 
equities, providing outbound routing from NASDAQ to other market 
centers. NES does not provide inbound routing to NASDAQ. The 
acquisition of NES by NASDAQ OMX was approved by the Commission in 2004 
and 2005 \5\ and the rules under which NES currently routes orders from 
NASDAQ to other market centers were approved initially by the 
Commission in 2006 and have been amended on numerous occasions since 
then.\6\ Rules 4751 and 4758 establish the conditions under which 
NASDAQ is permitted to own and operate NES in its

[[Page 51862]]

capacity as a facility of NASDAQ that routes orders from NASDAQ to 
other market centers. The conditions include requirements that: (1) NES 
is operated as a facility of NASDAQ; (2) NES will not engage in any 
business other than: (i) as an outbound router for NASDAQ and (ii) any 
other activities it may engage in as approved by the Commission; (3) 
for purposes of Commission Rule 17d-1, the designated examining 
authority of NES is a self-regulatory organization unaffiliated with 
NASDAQ; (4) use of NES to route orders to other market centers is 
optional; \7\ and (5) NASDAQ will not route orders to an affiliated 
exchange, such as PHLX, unless they check the NASDAQ book prior to 
routing.
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    \5\ See Securities Exchange Act Release Nos. 50311 (September 3, 
2004), 69 FR 54818 (September 10, 2004) (Order Granting Application 
for a Temporary Conditional Exemption Pursuant To Section 36(a) of 
the Exchange Act by the National Association of Securities Dealers, 
Inc. Relating to the Acquisition of an ECN by The Nasdaq Stock 
Market, Inc.) and 52902 (December 7, 2005), 70 FR 73810 (December 
13, 2005) (SR-NASD-2005-128) (Order Approving a Proposed Rule Change 
To Establish Rules Governing the Operation of the INET System).
    \6\ See Securities Exchange Act Release Nos. 61682 (March 10, 
2010), 75 FR 12592 (March 16, 2010) (SR-NASDAQ-2010-030); 61460 
(February 1, 2010, 75 FR 6077 (February 5, 2010) (SR-NASDAQ-2010-
018); 60570 (August 26, 2009), 74 FR 45504 (September 2, 2009) (SR-
NASDAQ-2009-079); 60039 (June 3, 2009), 74 FR 27365 (June 9, 2009) 
(SR-NASDAQ-2009-050); 59875 (May 6, 2009), 74 FR 22794 (May 14, 
2009) (SR-NASDAQ-2009-043); 59807 (April 21, 2009), 74 FR 19251 
(April 28, 2009) (SR-NASDAQ-2009-036); 59153 (December 23, 2008), 73 
FR 80485 (December 31, 2008) (SR-NASDAQ-2008-098); 58752 (October 8, 
2008), 73 FR 61181 (October 15, 2008) (SR-NASDAQ-2008-079); 58135 
(July 10, 2008), 73 FR 40898 (July 16, 2008) (SR-NASDAQ-2008-061); 
58069 (June 30, 2008), 73 FR 39360 (July 9, 2008) (SR-NASDAQ-2008-
054); 56708 (October 26, 2007), 72 FR 61925 (November 1, 2007) (SR-
NASDAQ-2007-078); 56867 (November 29, 2007), 72 FR 69263 (December 
7, 2007) (SR-NASDAQ-2007-065); 55335 (February 23, 2007), 72 FR 9369 
(March 1, 2007) (SR-NASDAQ-2007-005); 54613 (October 17, 2006), 71 
FR 62325 (October 24, 2006) (SR-NASDAQ 2006-043); 54271 (August 3, 
2006), 71 FR 45876 (August 10, 2006) (SR-NASDAQ-2006-027); and 54155 
(July 14, 2006), 71 FR 41291 (July 20, 2006) (SR-NASDAQ-2006-001).
    \7\ Because only NASDAQ members may enter orders into NASDAQ, it 
also follows that routing by NES is available only to NASDAQ 
members.
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    The Commission has approved NES's affiliation with PHLX subject to 
the conditions that: (1) NES remains a facility of NASDAQ; (2) use of 
NES's routing function by NASDAQ members continues to be optional; (3) 
NES does not provide routing of orders to PHLX or any trading 
facilities thereof, unless such orders first attempt to access any 
liquidity on the NASDAQ book; and (4) for purposes of Commission Rule 
17d-1, the designated examining authority of NES is a self-regulatory 
organization unaffiliated with NASDAQ.\8\
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    \8\ See Securities Exchange Act Release No. 58179 (July 17, 
2008), 73 FR 42874 (July 23, 2008) (SR-Phlx-2008-31).
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    NASDAQ is proposing that, upon the resumption of cash equity 
trading by PHLX, NES, in its operation as a facility of NASDAQ, be 
permitted to route all orders, including Directed Orders, to PSX 
without checking the NASDAQ book prior to routing. Directed Orders are 
orders that route directly to other exchanges on an immediate-or-cancel 
basis without first checking the NASDAQ book for liquidity.\9\ In order 
to modify the conditions regarding the operation of NES and allow NES 
to route Directed Orders to PSX, NASDAQ is proposing to modify the 
restriction in Rule 4751(f)(9) that prohibits the routing of Directed 
Orders to a facility of an exchange that is an affiliate of NASDAQ. 
Under the proposed rule change, inbound routing of Directed Orders to 
the NASDAQ OMX PSX facility of PHLX would be permitted.
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    \9\ Rules 4751 and 4755 provide for routing of ``directed 
orders'' to automated market centers other than NASDAQ on an 
``immediate-or-cancel'' basis. Such directed orders may be 
designated as intermarket sweep orders (``ISOs''), which may be 
executed by the receiving venue based on the representation of the 
market participant that it has routed to all superior protected 
quotations, or not so designated, in which case the orders will 
execute only if their execution would not result in a trade-through.
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    The Commission has previously noted concerns about potential 
informational advantages and conflicts of interest between an 
exchange's self-regulatory obligations and its commercial interest when 
the exchange is affiliated with one of its members.\10\ In order to 
address the concerns identified by the Commission regarding the 
potential for informational advantages favoring NES vis-[agrave]-vis 
other non-affiliated members of BX, NASDAQ previously adopted Rule 
4758(b)(8) to provide that NES shall establish and maintain procedures 
and internal controls reasonably designed to adequately restrict the 
flow of confidential and proprietary information between NASDAQ and its 
facilities (including NES) and any other entity (including PHLX).\11\
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    \10\ See, e.g., Securities Exchange Act Release Nos. 59153 
(December 23, 2008), 73 FR 80485 (December 31, 2008) (SR-NASDAQ-
2008-098) (``BX Order''); 58681 (September 29, 2008), 73 FR 58285 
(October 6, 2008) (SR-NYSEArca-2008-90) (``NYSE Arca Order''); 58680 
(September 29, 2008), 73 FR 58283 (October 6, 2008) (SR-NYSE-2008-
76) (``NYSE Order''); 58673 (September 29, 2008), 73 FR 57707 
(October 3, 2008) (SR-Amex-2008-62) (``NYSE Alternext US Order'').
    \11\ BX Order, supra n. 10.
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    In connection with the proposed launch of PSX, PHLX has proposed a 
new rule and made certain undertakings intended to manage the flow of 
confidential and proprietary information between NES and PHLX and to 
minimize potential conflicts of interest.\12\ PHLX's proposed Rule 
985(c)(2) will provide:
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    \12\ PSX Proposal, supra n. 3.

    The NASDAQ OMX Group, Inc., which owns Nasdaq Execution 
Services, LLC and the Exchange, shall establish and maintain 
procedures and internal controls reasonably designed to ensure that 
Nasdaq Execution Services, LLC 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 
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connection with the provision of inbound routing to the Exchange.

    Pursuant to the new rule, PHLX has proposed to allow PSX to receive 
inbound routed orders for a twelve-month pilot period.
2. Statutory Basis
    NASDAQ believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\13\ in general, and with 
Section 6(b)(5) of the Act,\14\ 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. The proposed 
rule change would permit inbound routing of Directed Orders and other 
orders to PHLX from its affiliate NES while minimizing the potential 
for conflicts of interest and informational advantages involved where a 
member firm is affiliated with an exchange to which it is routing 
orders.
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    \13\ 15 U.S.C. 78f.
    \14\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASDAQ 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.

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

    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 from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \15\ and Rule 19b-
4(f)(6) thereunder.\16\
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 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 the 60-day period beginning on the date 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.

[[Page 51863]]

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-NASDAQ-2010-100 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-NASDAQ-2010-100. 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, 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-NASDAQ-2010-100 and should be submitted on or before 
September 13, 2010.

    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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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-20820 Filed 8-20-10; 8:45 am]
BILLING CODE 8010-01-P