Document ID: SEC-2013-0335-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX PHLX LLC
Posted Date: 2013-02-14T05:00Z

[Federal Register Volume 78, Number 31 (Thursday, February 14, 2013)]
[Notices]
[Pages 10666-10668]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-03396]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68889; File No. SR-Phlx-2013-15]

Self-Regulatory Organizations; NASDAQ OMX PHLX LLC; Notice of 
Filing of Proposed Rule Change for the Permanent Approval of a Pilot 
Program To Permit PSX To Accept Inbound Orders Routed by Nasdaq 
Execution Services LLC From the BX Equities Market

February 8, 2013.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on February 6, 2013, NASDAQ OMX PHLX, LLC (``Exchange'' or 
``Phlx'') 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 self-regulatory 
organization. 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\ 15 U.S.C. 78a.
    \3\ 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 is filing with the Commission a proposed rule change 
for the permanent approval of its pilot program to permit the NASDAQ 
OMX PSX facility of PHLX (``System'') to accept inbound orders routed 
by Nasdaq Execution Services LLC (``NES'') from the NASDAQ OMX BX 
Equities Market of NASDAQ OMX BX, Inc. (``BX'').

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.

[[Page 10667]]

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

1. Purpose
    In conjunction with BX providing outbound routing services to all 
markets using its affiliated routing broker, NES,\4\ PHLX proposed that 
NES be permitted to route orders from BX to the Exchange on a pilot 
basis, subject to certain limitations and conditions, as described 
below.\5\ The current pilot program expires March 30, 2013.\6\
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    \4\ See Securities Exchange Act Release No. 65470 (October 3, 
2011), 76 FR 62489 (October 7, 2011) (SR-BX-2011-048).
    \5\ See Securities Exchange Act Release No. 65553 (October 13, 
2011), 76 FR 64987 (October 19, 2011) (SR-Phlx-2011-138).
    \6\ See Securities Exchange Act Release No. 67996 (October 5, 
2012), 77 FR 62282 (October 12, 2012) (SR-Phlx-2012-118).
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    NES is a broker-dealer and member of NASDAQ, PHLX and BX. NES 
provides all routing functions for The NASDAQ Stock Market 
(``NASDAQ''), BX and PHLX. BX, NASDAQ, PHLX and NES are affiliates. 
Accordingly, the affiliate relationship between PHLX and NES, its 
member, raises the issue of an exchange's affiliation with a member of 
such exchange. Specifically, in connection with prior filings, the 
Commission has expressed concern that the affiliation of an exchange 
with one of its members raises the potential for unfair competitive 
advantage and potential conflicts of interest between an exchange's 
self-regulatory obligations and its commercial interests.\7\
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    \7\ See Securities Exchange Act Release Nos. 59153 (December 23, 
2008), 73 FR 80485 (December 31, 2008) (SR-NASDAQ-2008-098); and 
62736 (August 17, 2010), 75 FR 51861 (August 23, 2010) (SR-NASDAQ-
2010-100).
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    Recognizing that the Commission has previously expressed concern 
regarding the potential for conflicts of interest in instances where a 
member firm is affiliated with an exchange of which it is a member, the 
Exchange previously proposed, and the Commission approved, limitations 
and conditions on NES's affiliation with the Exchange.\8\ Also 
recognizing that the Commission has expressed concern regarding the 
potential for conflicts of interest in instances where a member firm is 
affiliated with an exchange to which it is routing orders, the Exchange 
previously proposed, and the Commission approved,\9\ NES's affiliation 
with the Exchange to permit the Exchange to accept inbound orders that 
NES routes in its capacity as a facility of NASDAQ, subject to the 
certain limitations and conditions. The Exchange now proposes to permit 
PHLX to accept inbound orders that NES routes in its capacity as a 
facility of BX on a permanent basis, subject to the limitations and 
conditions of this pilot:
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    \8\ See Securities Exchange Act Release No. 62877 (September 9, 
2010), 75 FR 56633 (September 16, 2010) (SR-PHLX-2010-79).
    \9\ Id.
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     First, the Exchange and FINRA maintain a Regulatory 
Contract, as well as an agreement pursuant to Rule 17d-2 under the Act 
(``17d-2 Agreement'').\10\ Pursuant to the Regulatory Contract and the 
17d-2 Agreement, FINRA is allocated regulatory responsibilities to 
review NES's compliance with certain Exchange rules.\11\ Pursuant to 
the Regulatory Contract, however, PHLX retains ultimate responsibility 
for enforcing its rules with respect to NES.
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    \10\ 17 CFR 240.17d-2.
    \11\ NES is also subject to independent oversight by FINRA, its 
designated examining authority, for compliance with financial 
responsibility requirements.
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     Second, FINRA monitors NES for compliance with the 
Exchange's trading rules, and collects and maintains certain related 
information.\12\
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    \12\ Pursuant to the Regulatory Contract, both FINRA and the 
Exchange collect and maintain all alerts, complaints, investigations 
and enforcement actions in which NES (in its capacity as a facility 
of BX routing orders to PHLX) is identified as a participant that 
has potentially violated applicable Commission or Exchange rules. 
The Exchange and FINRA 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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     Third, FINRA provides a report to the Exchange's chief 
regulatory officer (``CRO''), on a quarterly basis, that: (i) 
Quantifies all alerts (of which FINRA is aware) that identify NES as a 
participant that has potentially violated Commission or Exchange rules, 
and (ii) lists all investigations that identify NES as a participant 
that has potentially violated Commission or Exchange rules.
     Fourth, the Exchange has in place PHLX Rule 985, which 
requires The NASDAQ OMX Group, Inc., as the holding company owning both 
the Exchange and NES, to establish and maintain procedures and internal 
controls reasonably designed to ensure that NES does not develop or 
implement changes to its system, based on non-public information 
obtained regarding planned changes to the Exchange's systems as a 
result of its affiliation with the Exchange, until such information is 
available generally to similarly situated Exchange members, in 
connection with the provision of inbound order routing to the Exchange.
    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 NES, as well as demonstrate that NES cannot use any 
information advantage it may have because of its affiliation with the 
Exchange. Because the Exchange has met all the above-listed conditions, 
it now seeks permanent approval of this 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,\13\ in general, and with 
Sections 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, because the 
proposed rule change will allow the Exchange to continue to receive 
inbound orders from NES, acting in its capacity as a facility of BX, in 
a manner consistent with prior approvals and established protections. 
The Exchange believes that these conditions establish mechanisms that 
protect the independence of the Exchange's regulatory responsibility 
with respect to NES, as well as ensure that NES cannot use any 
information it may have because of its affiliation with the Exchange to 
its advantage.
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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

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as amended. 
Permanent approval of the current pilot program does not raise any 
issues of intramarket competition because it involves inbound routing 
from an affiliated exchange. Nor does it result in a burden on 
competition among exchanges, because there are many competing exchanges 
that provide routing services, including through an affiliate.

[[Page 10668]]

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

    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 email to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2013-15 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-2013-15. 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, on business days 
between the hours of 10 a.m. and 3 p.m., located at 100 F Street NE., 
Washington, DC 20549-1090. Copies of the filing will also 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-2013-15 and should be 
submitted on or before March 7, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-03396 Filed 2-13-13; 8:45 am]
BILLING CODE 8011-01-P