Document ID: SEC-2014-0198-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2014-02-03T05:00Z

[Federal Register Volume 79, Number 22 (Monday, February 3, 2014)]
[Notices]
[Pages 6253-6256]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-02133]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71417; File No. SR-Phlx-2014-04]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change to Outbound 
Routing

January 28, 2014.
    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 January 15, 2014, NASDAQ OMX PHLX LLC (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``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 use Nasdaq Execution Services, LLC 
(``NES'') as opposed to Nasdaq Options Services LLC (``NOS'') for 
outbound order routing, as explained further below. The Exchange also 
proposes to use NES as opposed to NOS to handle the stock component of 
a Complex Order, including Complex Orders submitted into the Price 
Improvement XL (``PIXL'') System. In addition, the Exchange proposes to 
route equities and options orders through NES either directly or 
through a third party routing broker-dealer, as explained further 
below.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqomxphlx.cchwallstreet.com/, 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 Exchange 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 Exchange 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
    The purpose of the proposal is to update the Exchange's rules to 
reflect the ability to route orders to other exchanges using either the 
Exchange's affiliated broker-dealer or a third party unaffiliated 
broker-dealer, which the Exchange may choose to use for efficiency and 
potential cost savings.
    Today, the relevant Exchange rules provide that the Exchange shall 
route orders in options via Nasdaq Options Services LLC (``NOS'') and 
in equities \3\ via Nasdaq Execution Services LLC (``NES''). Both NOS 
and NES are affiliates and member organizations of Phlx. As a result, 
certain conditions

[[Page 6254]]

have been imposed on the existing routing arrangements.\4\
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    \3\ The Exchange operates an equities market known as PSX.
    \4\ See, e.g., Securities Exchange Act Release No. 59995 (May 
28, 2009), 74 FR 26751 (June 3, 2009) (SR-Phlx-2009-32) at 26756.
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Replacing NOS With NES
    The Exchange proposes to amend its rules to provide that it shall 
use NES for routing orders in options rather than NOS. The Exchange has 
determined to use NES for outbound routing in options, in addition to 
equities. The Exchange originally set up its affiliated broker-dealers 
as two separate entities. Now, the Exchange believes that this is 
unnecessary and costly. Accordingly, pursuant to Rule 1080(m)(iii), NES 
will now be the outbound routing broker for Phlx options. As the new 
Routing Facility for options, NES will operate the same way as NOS 
currently does, in terms of routing options orders to destination 
options exchanges pursuant to Rule 1080(m). This is substantially 
similar to NYSEArca's use of its affiliate Archipelago Securities LLC 
for order routing in both equities and options.
    In addition to outbound order routing, NOS also, with Commission 
approval,\5\ currently executes and reports the underlying security 
component of a Complex Order, pursuant to Rule 1080.08(h). A Complex 
Order is an order involving the simultaneous purchase and/or sale of 
two or more different options series in the same underlying security, 
priced as a net debit or credit based on the relative prices of the 
individual components, for the same account, for the purpose of 
executing a particular investment strategy.\6\ A Complex Order can also 
be a stock-option order, which is an order to buy or sell a stated 
number of units of an underlying security (stock or Exchange Traded 
Fund Share (``ETF'')) coupled with the purchase or sale of options 
contract(s).\7\ Members of FINRA or the NASDAQ Stock Market 
(``NASDAQ'') are required to have a Uniform Service Bureau/Executing 
Broker Agreement (``AGU'') with NOS in order to trade Complex Orders 
containing a stock/ETF component; firms that are not members of FINRA 
or NASDAQ are required to have a Qualified Special Representative 
(``QSR'') arrangement with NOS in order to trade Complex Orders 
containing a stock/ETF component. Under this proposal, members will now 
be required to have an AGU or QSR with NES. In terms of NOS' role in 
the execution of such Complex Orders, the Exchange electronically 
communicates the underlying security component of a Complex Order to 
NOS, its designated broker-dealer, for immediate execution. The 
execution cannot occur on PHLX along with the option component, because 
the PHLX options market does not trade equities like stocks or ETFs. 
Such execution and reporting occurs otherwise than on the Exchange and 
is handled by NOS pursuant to applicable rules regarding equity 
trading. NES will now perform this function and this paragraph will be 
amended accordingly.
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    \5\ Securities Exchange Act Release No. 63777 (January 26, 
2011), 76 FR 5630 (February 1, 2011) (SR-Phlx-2010-157).
    \6\ See Rule 1080.08(a)(i).
    \7\ Id.
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    Rule 1080(n)(ii)(J) will be amended in a similar fashion. This 
subparagraph covers Complex Orders with a stock/ETF component entered 
into PIXL, which is a process whereby members electronically submit 
orders they represent as agent against principal interest or other 
interest that they represent as agent. The submitted orders are stopped 
at a price and are subsequently entered into an auction seeking price 
improvement. In 2013, the Exchange began accepting Complex Orders into 
PIXL, including those with a stock/ETF component.\8\ NOS' role is the 
same as for Complex Orders not entered into PIXL, in that NOS executes 
the stock/ETF component. NES will now perform this function and this 
paragraph will be amended accordingly. Additionally, the Exchange 
represents that its prior representations in connection with the 
performance of executing the stock/ETF component of both PIXL and non-
PIXL Complex Orders by NOS will apply to NES, including the 
representations relating to compliance with Regulation SHO.\9\
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    \8\ Securities Exchange Act Release No. 69845 (June 25, 2013), 
78 FR 39429 (July 1, 2013) (SR-Phlx-2013-46).
    \9\ Id. See also Securities Exchange Act Release Nos. 63777 
(January 26, 2011), 76 FR 5630 (February 1, 2011) (SR-Phlx-2010-
157); and 63967 (February 25, 2011), 76 FR 12206 (March 4, 2011) 
(SR-Phlx-2011-27).
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Third-Party Routing Broker
    The Exchange also proposes to codify in its rules the ability to 
use a third-party routing broker to route to away exchanges, rather 
than routing directly through NES, for both equities and options. To 
date, the Exchange has used a third-party routing broker in equities 
and is amending Rule 3315 to clarify this and incorporate the use of a 
third-party routing broker expressly into that rule. Specifically, 
today, the Exchange routes equities orders to away markets through NES, 
which, in turn, sometimes routes directly to away markets; in addition, 
sometimes when the Exchange routes equities orders through NES today, 
NES routes those orders through a third-party routing broker.
    In options, the Exchange currently routes options orders to NOS, 
which routes directly to away markets. The Exchange proposes to use 
NES, rather than NOS, as explained above, and to have NES route either 
directly to other options exchanges or to a third-party routing broker 
(which will, in turn, route to other options exchanges). The Exchange 
proposes to amend Rule 1080(m) accordingly.
    Regardless of whether a third-party routing broker is used in 
either equities or options, all routing will go through NES, but the 
Exchange could determine to direct NES to route orders to certain 
exchanges through a routing broker rather than routing an order 
directly.
    The Exchange previously stated that from time to time, it may use 
non-affiliate third-party broker-dealers to provide outbound routing 
services (i.e., third-party Routing Brokers).\10\ In those cases, 
orders are submitted to the third-party Routing Broker through the 
affiliated routing broker, and the third-party Routing Broker routes 
the orders to the routing destination in its name.
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    \10\ See Securities Exchange Act Release Nos. 68393 (December 
10, 2012), 77 FR 74520 (December 14, 2012) (SR-Phlx-2012-134) at 
note 4; and 67654 (August 14, 2012), 77 FR 50187 (August 20, 2012) 
(SR-Phlx-2012-81) at note 6.
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    Under this proposal, the relevant rules would now expressly provide 
that the Exchange could use one or more third-party unaffiliated 
routing broker-dealers (``routing brokers''). Specifically, the 
Exchange proposes to amend Rule 1080(m)(iii)(A), which applies to 
options, to refer to such routing brokers. The Exchange proposes to 
similarly amend Rule 3315(b)(1) respecting equities. The Exchange 
proposes to further amend its rules with respect to certain policies 
and procedures. Specifically, Rules 1080(m)(iii)(C) and 3315(b)(8) 
currently provide that the Exchange shall establish and maintain 
procedures and internal controls reasonably designed to adequately 
restrict the flow of confidential and proprietary information between 
the Exchange and the Routing Facility, and any other entity, including 
any affiliate of the Routing Facility. The Exchange proposes to amend 
those rules to provide that, where there is a routing broker, the 
Exchange shall establish and maintain procedures and internal controls 
reasonably designed to adequately restrict the flow of confidential and 
proprietary information between the Exchange, the Routing Facility and 
any routing broker, and any other entity, including any affiliate of 
the routing broker (and if the

[[Page 6255]]

routing broker or any of its affiliates engages in any other business 
activities other than providing routing services to the Exchange, 
between the segment of the routing broker or affiliate that provides 
the other business activities and the segment of the routing broker 
that provides the routing services).\11\ This way, this provision 
extends to the routing broker, if one is used.
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    \11\ This is substantially similar to NYSEArca Rule 6.96(a)(8).
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    In both the proposed equities and options rules, the Exchange 
proposes to provide that the Exchange may not use a routing broker for 
which the Exchange or any affiliate of the Exchange is the designated 
examining authority. This is similar to the existing provisions that do 
not permit the Exchange to be the designated examining authority for 
its affiliated routing brokers.\12\
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    \12\ See Phlx Rule 1080(m)(iii)(A) (which currently provides 
that NOS is a broker-dealer that is a member of an unaffiliated 
self-regulatory organization which is the designated examining 
authority for the broker-dealer) and Rule 3315(b)(4) (which 
currently provides that the designated examining authority for NES 
shall be a self-regulatory organization unaffiliated with the 
exchange or any of its affiliates). This is also substantially 
similar to NYSEArca Rule 6.96(a)(7).
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    The Exchange also proposes to expressly state in Rule 
1080(m)(iii)(G) and Rule 3315(b)(1) that the Exchange will determine 
the logic that provides when, how, and where orders are routed away to 
other exchanges. In addition, the routing broker(s) 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. This is 
consistent with, but more specific than, the current language that 
states that routing is performed under the direction of the 
Exchange.\13\
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    \13\ This is based on NYSEArca Rule 6.96(a)(1)(A).
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    The Exchange may determine to use a different routing broker by 
product or by destination exchange, depending upon the costs and 
technological efficiencies involved. The proposal is intended to allow 
the Exchange to structure its routing arrangements accordingly. At a 
minimum, the Exchange anticipates using a routing broker to access 
certain markets where the Exchange finds that the costs of maintaining 
a membership (for NES) and/or the costs of connectivity and execution 
do not make sense in light of the number or types of orders the 
Exchange typically routes to that particular market. These costs 
necessarily determine the ultimate costs to the Exchange of routing to 
a market, and, in turn, affect how the Exchange chooses to recoup those 
costs through its own transaction fees.\14\ Sometimes, it will not make 
economic sense for NES to access an exchange directly. Accordingly, the 
Exchange intends to use a routing broker where the Exchange determines 
that it is appropriate. In addition to costs, the Exchange will also 
consider ease of connectivity and execution as well as general 
reliability in selecting a routing broker.
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    \14\ For these reasons, today, transaction fees for orders vary 
depending on the market where an order is ultimately executed. See 
e.g., Section V of the NASDAQ OMX PHLX Pricing Schedule.
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    For several weeks, the Exchange has been working with the Financial 
Regulatory Authority (``FINRA'') and The Options Clearing Corporation 
(``OCC'') to secure the necessary approvals for NES to perform these 
functions. The Exchange has now secured those approvals. The Exchange 
seeks to complete this process and implement this proposal in January 
or February.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \15\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \16\ in particular, in that it is 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, by providing an alternative routing arrangement. The proposal 
should remove impediments to and perfect the mechanism of a free and 
open market and a national market system by providing customer order 
protection and by facilitating trading at away exchanges so customer 
orders trade at the best market price. The proposal should also protect 
investors and the public interest by fostering compliance with the 
Options Order Protection and Locked/Crossed Market Plan. The Exchange 
also believes that the proposal to use NES rather than NOS for options 
routing is designed to promote just and equitable principles of trade 
and to protect investors and the public interest, by eliminating the 
costs and inefficiencies associated with operating a separate broker-
dealer for options routing. In addition, the Exchange believes that the 
proposal is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers, because there are specific 
protections pertaining to the routing broker in light of the potential 
conflict of interest where the member routing broker could have access 
to information regarding other members' orders or the routing of those 
orders. These protections include the Exchange's control over all 
routing logic as well as the confidentiality of routing 
information.\17\ The proposal to use NES rather than NOS for Complex 
Order-related functions is consistent with promoting just and equitable 
principles of trade and protecting investors and the public interest, 
because it merely substitutes one affiliated broker-dealer for another. 
For the same reason, compliance with Regulation SHO will not be 
affected.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
    \17\ See proposed Rules 1080(m)(iii)(G) and 3315(b)(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 not necessary or appropriate in 
furtherance of the purposes of the Act. The proposal is pro-competitive 
because it enables broker-dealers other than NOS and NES to provide 
routing services to the Exchange, which has the potential to reduce the 
Exchange's costs of routing orders and, potentially, the fees the 
Exchange charges for routed orders. The proposal does not raise issues 
of intra-market competition, because the Exchange's decision to route 
through a particular routing broker would impact all participants 
equally.

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

    No written comments were either solicited or 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)(ii) of the Act \18\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\19\
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    \18\ 15 U.S.C. 78s(b)(3)(a)(ii).
    \19\ 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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[[Page 6256]]

    At any time within 60 days 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: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or 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 email to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2014-04 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-2014-04. This file 
number should be included on the subject line if email 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 
10:00 a.m. and 3:00 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-Phlx-2014-04 and should be 
submitted on or before February 24, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-02133 Filed 1-31-14; 8:45 am]
BILLING CODE 8011-01-P