Document ID: SEC-2012-1043-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX BX, Inc.
Posted Date: 2012-07-03T04:00Z

[Federal Register Volume 77, Number 128 (Tuesday, July 3, 2012)]
[Notices]
[Pages 39552-39554]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-16219]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67280; File No. SR-BX-2012-034]

Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Order 
Approving a Proposed Rule Change With Respect to the Authority of the 
Exchange or NASDAQ Execution Services To Cancel Orders When a Technical 
or Systems Issue Occurs and To Describe the Operation of an Error 
Account

June 27, 2012.

I. Introduction

    On May 11, 2012, NASDAQ OMX BX, Inc. (``Exchange'' or ``BX'') filed 
with the Securities and Exchange Commission (``Commission''), pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') 
\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to amend BX 
Equity Rule 4758 by adding a new paragraph (d) that addresses the 
authority of BX or NASDAQ Execution Services (``NES'') to cancel orders 
when a technical or systems issue occurs and to describe the operation 
of an error account for NES. The proposed rule change was published for 
comment in the Federal Register on May 23, 2012.\3\ The Commission 
received no comment letters regarding the proposed rule change. This 
order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 67014 (May 17, 2012), 77 
FR 30576 (May 23, 2012) (SR-BX-2012-034) (``Notice'').
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II. Description of the Proposal

    NES, a broker-dealer that is a facility and an affiliate of BX, 
provides outbound routing services from BX to other market centers 
pursuant to BX rules.\4\ In its proposal, BX states that a technical or 
systems issue may occur at BX, NES, or a routing destination that 
causes BX or NES to cancel orders, if BX or NES determines that such 
action is necessary to maintain a fair and orderly market.\5\ BX also 
states that a technical

[[Page 39553]]

or systems issue that occurs at BX, NES, a routing destination, or a 
non-affiliate third-party Routing Broker \6\ may result in NES 
acquiring an error position that it must resolve.\7\
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    \4\ See Notice, 77 FR at 30576, n.3 and accompanying text, and 
text accompanying n.4. See also BX Equity Rule 4758.
    BX also has authority to receive equities orders routed inbound 
to BX by NES from The NASDAQ Stock Market and, on a pilot basis, 
from the NASDAQ OMX PSX of NASDAQ OMX PHLX. See Notice, 77 FR at 
30576, n.4. See also Securities Exchange Act Release Nos. 64090 
(March 17, 2011), 76 FR 16462 (March 23, 2011) (SR-BX-2011-007); 
65514 (October 7, 2011), 76 FR 63969 (October 14, 2011) (SR-BX-2011-
066).
    \5\ See Notice, 77 FR at 30576. For examples of some of the 
circumstances in which BX or NES may decide to cancel orders, see 
Notice, 77 FR at 30576-77.
    \6\ BX states that, from time to time, it also uses non-
affiliate third-party broker-dealers to provide outbound routing 
services. In its proposal, the Exchange refers to these broker-
dealers as ``third party Routing Brokers.'' See Notice, 77 FR at 
30576, n.3.
    \7\ See Notice, 77 FR at 30577. Specifically, BX Equity Rule 
4758(d)(2) defines ``error positions'' as ``positions that result 
from a technical or systems issue at Nasdaq Execution Services, the 
Exchange, a routing destination, or a non-affiliate third-party 
Routing Broker that affects one or more orders.''
    For examples of some of the circumstances that may lead to error 
positions, see Notice, 77 FR at 30577.
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    New paragraph (d) to BX Equity Rule 4758 provides BX or NES with 
general authority to cancel orders to maintain fair and orderly markets 
when a technical or systems issue occurs at BX, NES, or a routing 
destination. It also provides authority for NES to maintain an error 
account for the purpose of addressing, and sets forth the procedures 
for resolving, error positions. Specifically, paragraph (d)(1) of BX 
Equity Rule 4758 authorizes BX or NES to cancel orders as either deems 
necessary to maintain fair and orderly markets if a technical or 
systems issue occurs at BX, NES, or a routing destination. BX or NES 
will be required to provide notice of the cancellation to all affected 
members as soon as practicable.\8\
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    \8\ See BX Equity Rule 4758(d)(1).
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    Paragraph (d)(2) of BX Equity Rule 4758 will allow NES to maintain 
an error account for the purpose of addressing error positions that 
result from a technical or systems issue at BX, NES, a routing 
destination, or a non-affiliate third-party Routing Broker.
    For purposes of BX Equity Rule 4758(d), an error position will not 
include any position that results from an order submitted by a member 
to the Exchange that is executed on the Exchange and automatically 
processed for clearance and settlement on a locked-in basis.\9\ NES 
will not be permitted to (i) accept any positions in its error account 
from a member's account or (ii) permit any member to transfer any 
positions from the member's account to NES's error account.\10\ In 
other words, NES may not accept from a member positions that are 
delivered to the member through the clearance and settlement process, 
even if those positions may have been related to a technical or systems 
issue at BX, NES, a routing destination, or a non-affiliate third-party 
Routing Broker.\11\ If a member receives locked-in positions in 
connection with a technical or systems issue and experiences a loss in 
unwinding those positions, that member may seek to rely on BX Equity 
Rule 4626, which provides members with the ability to file claims 
against BX ``for losses directly resulting from the [NASDAQ OMX BX 
Equities Market] Systems' actual failure to correctly process an order, 
Quote/Order, message, or other data, provided the NASDAQ OMX BX 
Equities Market has acknowledged receipt of the order, Quote/Order, 
message, or data.'' \12\ If, however, a technical or systems issue 
results in BX not having valid clearing instructions for a member to a 
trade, NES may assume that member's side of the trade so that the trade 
can be automatically processed for clearance and settlement on a 
locked-in basis.\13\
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    \9\ See BX Equity Rule 4758(d)(2)(A).
    \10\ See BX Equity Rule 4758(d)(2)(B).
    \11\ See Notice, 77 FR at 30578, n.11. This provision would not 
apply if NES incurred a short position to settle a member's 
purchase, as the member would not have had a position in its account 
as a result of the purchase at the time of NES's action. Similarly, 
if a systems issue occurs that causes one member to receive an 
execution for which there is not an available counterparty, action 
by NES would be required for the positions to settle into that 
member's account. See id.
    If error positions result in connection with BX's use of a 
third-party Routing Broker for outbound routing and those positions 
are delivered to NES through the clearance and settlement process, 
NES would be permitted to resolve those positions. If, however, such 
positions were not delivered to NES through the clearance and 
settlement process, then the third-party Routing Broker would 
resolve the error positions itself, and NES would not be permitted 
to accept the positions. See Notice, 77 FR at 30576, n.3.
    \12\ See Notice, 77 FR at 30578, n.11.
    \13\ See BX Equity Rule 4758(d)(2)(C).
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    Paragraph (d)(3) of BX Equity Rule 4758 permits BX or NES, in 
connection with a particular technical or systems issue, to either (i) 
assign all resulting error positions to members or (ii) have all 
resulting error positions liquidated. Any determination to assign or 
liquidate error positions, as well as any resulting assignments, will 
be made in a nondiscriminatory fashion.\14\
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    \14\ See BX Equity Rule 4758(d)(3).
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    BX and NES will be required to assign all error positions resulting 
from a particular technical or systems issue to the members affected by 
that technical or systems issue if BX or NES:
    (i) Determines that it has accurate and sufficient information 
(including valid clearing information) to assign the positions to all 
of the members affected by that technical or systems issue;
    (ii) Determines that it has sufficient time pursuant to normal 
clearance and settlement deadlines to evaluate the information 
necessary to assign the positions to all of the members affected by 
that technical or systems issue; and
    (iii) Has not determined to cancel all orders affected by that 
technical or systems issue in accordance with BX Equity Rule 
4758(d)(1).\15\
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    \15\ See BX Equity Rule 4758(d)(3)(A)(i)-(iii).
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    If BX or NES is unable to assign all error positions resulting from 
a particular technical or systems issue to all of the affected members, 
or if BX or NES determines to cancel all orders affected by the 
technical or systems issue, then NES will be required to liquidate the 
error positions as soon as practicable.\16\ NES will be required to 
provide complete time and price discretion for the trading to liquidate 
the error positions to a third-party broker-dealer, and would be 
prohibited from attempting to exercise any influence or control over 
the timing or methods of such trading.\17\ Further, NES will be 
required to establish and enforce policies and procedures that are 
reasonably designed to restrict the flow of confidential and 
proprietary information between the third-party broker-dealer, on one 
hand, and BX and NES, on the other, associated with the liquidation of 
the error positions.\18\
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    \16\ See BX Equity Rule 4758(d)(3)(B).
    \17\ See BX Equity Rule 4758(d)(3)(B)(i).
    \18\ See BX Equity Rule 4758(d)(3)(B)(ii).
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    Finally, paragraph (d)(4) of BX Equity Rule 4758 requires BX and 
NES to make and keep records to document all determinations to treat 
positions as error positions; all determinations to assign error 
positions to members or to liquidate error positions; and the 
liquidation of error positions through the third-party broker-dealer.

III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6(b) of the Act 
\19\ and the rules and regulations thereunder applicable to a national 
securities exchange.\20\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Act,\21\ 
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

[[Page 39554]]

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. In addition, the Commission believes the proposed rule change 
is consistent with Section 11A(a)(1)(C) of the Act \22\ in that it 
seeks to assure economically efficient execution of securities 
transactions.
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    \19\ 15 U.S.C. 78f(b).
    \20\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \21\ 15 U.S.C. 78f(b)(5).
    \22\ 15 U.S.C. 78k-1(a)(1)(C).
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    The Commission recognizes that technical or systems issues may 
occur, and believes that BX Equity Rule 4758, in allowing BX or NES to 
cancel orders affected by technical or systems issues, should provide a 
reasonably efficient means for BX to handle such orders, and appears 
reasonably designed to permit BX to maintain fair and orderly 
markets.\23\
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    \23\ The Commission notes that BX states that the proposed 
amendments to BX Equity Rule 4758 are designed to maintain fair and 
orderly markets, ensure full trade certainty for market 
participants, and avoid disrupting the clearance and settlement 
process. See Notice, 77 FR at 30579. The Commission also notes that 
BX states that a decision to cancel orders due to a technical or 
systems issue is not equivalent to the Exchange declaring self-help 
against a routing destination pursuant to Rule 611 of Regulation 
NMS. See 17 CFR 242.611(b). See also Notice, 77 FR at 30577-78, 
n.10.
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    The Commission also believes that allowing the Exchange to resolve 
error positions through the use of an error account maintained by NES 
pursuant to the procedures set forth in the rule, and as described 
above, is consistent with the Act. The Commission notes that the rule 
establishes criteria for determining which positions are error 
positions,\24\ and that BX or NES, in connection with a particular 
technical or systems issue, will be required to either (i) assign all 
resulting error positions to members or (ii) have all resulting error 
positions liquidated.\25\ Also, BX or NES will assign error positions 
that result from a particular technical or systems issue to members 
only if all such error positions can be assigned to all of the members 
affected by that technical or systems issue.\26\ If BX or NES cannot 
assign all error positions to all members, NES will liquidate all of 
those error positions.\27\ In this regard, the Commission believes that 
the new rule appears reasonably designed to further just and equitable 
principles of trade and the protection of investors and the public 
interest, and to help prevent unfair discrimination, in that it should 
help assure the handling of error positions will be based on clear and 
objective criteria, and that the resolution of those positions will 
occur promptly through a transparent process.
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    \24\ See BX Equity Rule 4758(d)(2).
    \25\ See BX Equity Rule 4758(d)(3).
    \26\ See BX Equity Rule 4758(d)(3)(A).
    \27\ See BX Equity Rule 4758(d)(3)(B).
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    Additionally, the Commission notes that it has previously expressed 
concern about the potential for unfair competition 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.\28\ The Commission is also concerned about the potential for 
misuse of confidential and proprietary information. The Commission 
believes that the requirement that NES provide complete time and price 
discretion for the liquidation of error positions to a third-party 
broker-dealer, including that NES not attempt to exercise any influence 
or control over the timing or methods of such trading, combined with 
the requirement that BX establish and enforce policies and procedures 
that are reasonably designed to restrict the flow of confidential and 
proprietary information to the third-party broker-dealer liquidating 
such positions, should help mitigate the Commission's concerns. In 
particular, the Commission believes that these requirements should help 
assure that none of BX, NES, or the third-party broker-dealer is able 
to misuse confidential or proprietary information obtained in 
connection with the liquidation of error positions for its own benefit. 
The Commission also notes that BX and NES would be required to make and 
keep records to document all determinations to treat positions as error 
positions; all determinations to assign error positions to members or 
liquidate error positions; and the liquidation of error positions 
through the third-party broker-dealer.\29\
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    \28\ See, e.g., Securities Exchange Act Release No. 65455 
(September 30, 2011), 76 FR 62119 (October 6, 2011) (SR-NYSEArca-
2011-61) at 62120, n.16 and accompanying text.
    \29\ See BX Equity Rule 4758(d)(4).
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    Finally, the Commission notes that the proposed procedures for 
canceling orders and the handling of error positions are consistent 
with procedures the Commission has approved for other exchanges.\30\
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    \30\ See, e.g., Securities Exchange Act Release Nos. 66963 (May 
10, 2012), 77 FR 28919 (May 16, 2012) (SR-NYSEArca-2012-22); 67010 
(May 17, 2012), 77 FR 30564 (May 23, 2012) (SR-EDGX-2012-08); and 
67011 (May 17, 2012), 77 FR 30562 (May 23, 2012) (SR-EDGA-2012-09).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\31\ that the proposed rule change (SR-BX-2012-034) be, and it 
hereby is, approved.
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    \31\ 15 U.S.C. 78s(b)(2).
    \32\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-16219 Filed 7-2-12; 8:45 am]
BILLING CODE 8011-01-P