Document ID: SEC-2009-1035-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; the NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change, as Modified by Amendment Nos. 1 and 2 Thereto, To Modify Routing of Orders From NASDAQ Options Market to an Affiliate Exchange
Posted Date: 2009-07-27T04:00Z

[Federal Register: July 27, 2009 (Volume 74, Number 142)]
[Notices]               
[Page 37074-37076]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27jy09-89]                         

[[Page 37074]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60354; File No. SR-NASDAQ-2009-065]

 
Self-Regulatory Organizations; the NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change, 
as Modified by Amendment Nos. 1 and 2 Thereto, To Modify Routing of 
Orders From NASDAQ Options Market to an Affiliate Exchange

July 21, 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 June 29, 2009, The NASDAQ Stock Market LLC (``Nasdaq'') 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 Nasdaq. On July 17, 2009, Nasdaq filed Amendment 
No. 1 to the proposed rule change. On July 17, 2009, Nasdaq filed 
Amendment No. 2 to the proposed rule change.\3\ Nasdaq has designated 
the proposed rule change as constituting a non-controversial rule 
change under Rule 19b-4(f)(6) under the Act,\4\ which renders the 
proposal effective upon filing with the Commission. The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment Nos. 1 and 2, Nasdaq made minor non-substantive 
corrections to the rule text.
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to amend Chapter VI, Sections 1(e)(7) and 11(b) of 
the Rules of the NASDAQ Options Market (``NOM'') to modify the 
restriction on routing of certain orders to a facility of an exchange 
that is an affiliate of NOM.
    The text of the proposed rule change is below. Proposed new 
language is italicized; proposed deletions are in brackets.
Options Rules
Chapter VI Trading System
* * * * *
Sec. 1 Definitions
    The following definitions apply to Chapter VI for the trading of 
options listed on NOM.
    (a)-(d) No change.
    (e) The term ``Order Type'' shall mean the unique processing 
prescribed for designated orders that are eligible for entry into the 
System, and shall include:
    (1)-(6) No change.
    (7) ``Exchange Direct Orders'' are orders that are directed to an 
exchange other than NOM as directed by the entering party without 
checking the NOM book. If unexecuted, the order (or unexecuted portion 
thereof) shall be returned to the entering party. This order type may 
only be used for orders with time-in-force parameters of IOC.
    Directed Orders may not be directed to a facility of an exchange 
that is an affiliate of Nasdaq other than the Boston Options Exchange.
    (f)-(h) No change.
Sec. 11 Order Routing
    (a) No change.
    (b) For Non-System securities, the order routing process shall be 
available to Participants from 9:30 a.m. Eastern Time until market 
close and shall route orders based on the participant's instructions. 
Notwithstanding the foregoing, the order routing process will not be 
available to route Non-System Securities to a facility of an exchange 
that is an affiliate of Nasdaq other than the Boston Options Exchange.
    (c)-(e) No change.
* * * * *

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 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. Nasdaq 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
a. Background
    The NASDAQ OMX Group, Inc. (``NASDAQ OMX''), a Delaware 
corporation, acquired the Boston Stock Exchange (``BSE'') in August 
2008. Prior to the acquisition, BSE owned a 21.87% interest in Boston 
Options Exchange Group, LLC, the operator of the Boston Options 
Exchange facility (``BOX''). Boston Options Exchange Regulation, LLC 
(``BOXR'') was a wholly-owned subsidiary of BSE, to which BSE was 
delegated, pursuant to a delegation plan, certain self-regulatory 
responsibilities related to BOX.
    In connection with the closing of the acquisition by NASDAQ OMX, 
BSE transferred its interest in Boston Options Exchange Group to MX US, 
a wholly-owned subsidiary of the Montreal Exchange Inc. NASDAQ OMX 
renamed BSE as NASDAQ OMX BX, Inc. (``BX'') and relaunched its equity 
trading market as the NASDAQ OMX BX Equities Market in January 2009. 
Although BX no longer holds an ownership interest in Boston Options 
Exchange Group, it continues to hold self-regulatory obligations with 
respect to BOX, a facility of BX. BX, together with BOXR, retains 
regulatory control over BOX and BX, as the SRO, remains responsible for 
ensuring compliance with the federal securities laws and all applicable 
rules and regulations.
    NASDAQ OMX also currently indirectly owns NASDAQ Options Services, 
LLC (``NOS'' or the ``Routing Facility''), a registered broker-dealer 
and a BOX market participant. Thus, NOS is deemed an affiliate of BX, 
BOX and BOXR.
b. Affiliation and Order Routing
    Nasdaq is proposing that NOS be permitted to route Exchange Direct 
Orders in System Securities \5\ to BOX without checking the NOM book 
prior to routing. Exchange Direct Orders are orders that route directly 
to other options markets on an immediate-or cancel basis without first 
checking the NOM book for liquidity.\6\ In addition, the proposed rule 
change would permit the routing by NOS of orders (including Exchange 
Direct Orders) in Non-System Securities from NOM to BOX.
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    \5\ Pursuant to Chapter VI, Section 1(b), ``System Securities'' 
are all options that are currently trading on NOM pursuant to 
Chapter IV of the NOM rules. All other options are ``Non-System 
Securities.''
    \6\ Chapter VI, Section (1)(e)(7) of the NOM Rules.
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    NOS is the approved outbound routing facility of Nasdaq for NOM. 
Under NOM Rule Chapter VI, Section 11: (1) NOM routes orders in options 
via NOS, which serves as the sole ``Routing Facility'' of NOM; (2) the 
sole function of the Routing Facility is to route orders in options to 
away markets pursuant to NOM rules, solely on behalf of NOM; (3) NOS is 
a member of an unaffiliated self-regulatory organization, which is the 
designated examining authority for the broker-dealer; (4) the Routing 
Facility is subject to regulation as a facility of Nasdaq, including 
the requirement to file proposed rule changes under Section 19 of the 
Act; (5) NOM must establish and maintain procedures and

[[Page 37075]]

internal controls reasonably designed to adequately restrict the flow 
of confidential and proprietary information between Nasdaq and its 
facilities (including the Routing Facility), and any other entity; and 
(6) the books, records, premises, officers, directors, agents, and 
employees of the Routing Facility, as a facility of Nasdaq, shall be 
deemed to be the books, records, premises, officers, directors, agents, 
and employees of Nasdaq for purposes of and subject to oversight 
pursuant to the Act, and the books and records of the Routing Facility, 
as a facility of Nasdaq, shall be subject at all times to inspection 
and copying by Nasdaq and the Commission.
    The Commission has approved NOS's affiliation with BX subject to 
the conditions that: (1) NOS remains a facility of Nasdaq; (2) use of 
NOS's routing function by Nasdaq members continues to be optional \7\ 
and (3) NOS does not provide routing of orders in options from NOM to 
BX or any trading facilities thereof, unless such orders first attempt 
to access any liquidity on the NOM book.\8\
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    \7\ Because only Nasdaq members who are Options Participants may 
enter orders into NOM, it also follows that routing by NOS is 
available only to Nasdaq members who are Options Participants. 
Pursuant to Chapter I, Section 1(a)(40) of the NOM Rules, the term 
``Options Participant'' means a firm, or organization that is 
registered with Nasdaq for purposes of participating in options 
trading on NOM as a ``Nasdaq Options Order Entry Firm'' or ``Nasdaq 
Options Market Maker''.
    \8\ See Securities Exchange Act Release No. 58324 (August 7, 
2008), 73 FR 46936 (August 12, 2008) (SR-BSE-2008-02; SR-BSE-2008-
23; SR-BSE-2008-25; SR-BSECC-2008-01).
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    In order to modify the conditions noted above regarding the 
operation of NOS and allow NOS to route Exchange Direct Orders directly 
to BOX, Nasdaq is proposing to amend the restriction in Chapter VI, 
Section (1)(e)(7) of the NOM Rules that prohibit the routing of 
Exchange Direct Orders to a facility of an exchange that is an 
affiliate of Nasdaq. Under the proposed rule change, an Options 
Participant could enter an order into NOM designated as an ``Exchange 
Direct Order'' with instructions to route that order directly to BOX 
without first checking the NOM book.
    In addition, Nasdaq is proposing to amend Chapter VI, Section 11(b) 
of the NOM Rules to permit the routing of orders in Non-System 
Securities via NOS from NOM to BOX. As a result, orders in Non-System 
Securities that are routed to away markets under normal procedures 
could be routed to BOX, as well as those that are entered as Exchange 
Direct Orders with instructions to route directly to BOX.
    Other exchanges previously have adopted rules that permit exchanges 
to accept routing of inbound orders from affiliates, subject to certain 
limitations and conditions intended to address the Commission's 
concerns regarding affiliation.\9\ In the orders approving these rule 
changes, the Commission noted its 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, but determined that 
the proposed limitations and conditions were sufficient to mitigate its 
concerns.
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    \9\ See Securities Exchange Act Release Nos. 59153 (December 23, 
2008), 73 FR 80485 (December 31, 2008) (SR-NASDAQ-2008-098); 59154 
(December 23, 2008), 73 FR 80468 (December 31, 2008) (SR-BSE-2008-
48); 59010 (November 24, 2008), 73 FR 73373 (December 2, 2008) (SR-
NYSEArca-2008-130); 58681 (September 29, 2008), 73 FR 58285 (October 
6, 2008) (SR-NYSEArca-2008-90); 58680 (September 29, 2008), 73 FR 
58283 (October 6, 2008) (SR-NYSE-2008-76); 58673 (September 29, 
2008), 73 FR 57707 (October 3, 2008) (SR-Amex-2008-62) 
(collectively, the ``Affiliation Orders'').
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    With respect to concerns identified by the Commission regarding the 
potential for informational advantages favoring NOS vis-[agrave]-vis 
other non-affiliated BOX market participants, these concerns are 
addressed by existing NOM Rule Chapter VI, Section 11(e) which requires 
NOS to 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 
NOS) and any other entity.
    In addition, BX is proposing a rule change and certain undertakings 
intended to manage the flow of confidential and proprietary information 
between NOS and BOX and to minimize potential conflicts of 
interest.\10\
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    \10\ See SR-BX-2009-35.
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2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\11\ in general, and with 
Section 6(b)(5) of the Act,\12\ 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 routing of Exchange Direct Orders from NOM to 
BOX through NOS while minimizing the potential for conflicts of 
interest and informational advantages involved where a broker-dealer is 
affiliated with an exchange facility to which it is routing orders.
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    \11\ 15 U.S.C. 78f.
    \12\ 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 result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \13\ and Rule 19b-4(f)(6) \14\ thereunder in 
that it effects a change that: (i) Does not significantly affect the 
protection of investors or the public interest; (ii) does not impose 
any significant burden on competition; and (iii) by its terms, does not 
become operative for 30 days after the date of the filing, or such 
shorter time as the Commission may designate if consistent with the 
protection of investors and the public interest.
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6).
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    In its recent guidance on the proposed rules of Self-Regulatory 
Organizations (``SROs''),\15\ the Commission concluded that filings 
based on the rules of another SRO already approved by the Commission 
are eligible for immediate effectiveness under Rule 19b-4(f)(6). The 
Commission noted that ``a proposed rule change appropriately may be 
filed as an immediately effective rule so long as it is based on and 
similar to another SRO's rule and each policy issue raised by the 
proposed rule (i) has been considered previously by the Commission when 
the Commission approved another exchange's rule (that was subject to 
notice and comment), and (ii) the rule change resolves such policy 
issue in a manner consistent with

[[Page 37076]]

such prior approval.'' \16\ Nasdaq believes the proposed rule change is 
``based on and similar to'' the rule changes recently approved in the 
Affiliation Orders and furthers efforts to effectively address the 
concerns previously identified by the Commission regarding the 
potential for conflicts of interest and informational advantages when 
an exchange is affiliated with one of its market participants.\17\
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    \15\ Securities Exchange Act Release No. 58092 (July 3, 2008), 
73 FR 40144 (July 11, 2008).
    \16\ Id. at 40149.
    \17\ See the Affiliation Orders, supra note 8.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate 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.\18\
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    \18\ For purposes of calculating the 60-day period within which 
the Commission may summarily abrogate the proposed rule change under 
Section 19(b)(3)(C) of the Act, the Commission considers the period 
to commence on July 17, 2009, the date on which Nasdaq submitted 
Amendment No. 2. See 15 U.S.C. 78s(b)(3)(C).
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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-2009-065 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-2009-065. 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, 100 F Street, 
NE., Washington, DC 20549 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 Nasdaq. 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-2009-065 and should 
be submitted on or before August 17, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-17767 Filed 7-24-09; 8:45 am]

BILLING CODE 8010-01-P