Document ID: SEC-2007-1150-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: NASDAQ Stock Market LLC
Posted Date: 2007-08-16T04:00Z

[Federal Register: August 16, 2007 (Volume 72, Number 158)]
[Notices]               
[Page 46118-46119]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16au07-128]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56237; File No. SR-NASDAQ-2007-043]

 
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Approving a Proposed Rule Change, as Modified by Amendments No. 1 and 
2, To Remove Provisions Governing the Operation of the ACES System

August 9, 2007.

I. Introduction

    On April 25, 2007, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposal to remove its rule provisions governing the 
operation of the ACES system. The Exchange filed Amendments No. 1 and 2 
to the proposed rule change on May 29, 2007, and June 5, 2007, 
respectively. The proposal was published for comment in the Federal 
Register on June 18, 2007.\3\ The Commission received no comments on 
the proposal. This order approves the proposed rule change, as modified 
by Amendments No. 1 and 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 55892 (June 11, 
2007), 72 FR 33550 (``Notice'').
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II. Description of the Proposal

    The Exchange proposes to delete the Rule 6200 Series and Rule 7026, 
which govern the operations of the ACES system. The Exchange's rule 
book contains rules pertaining to ``facilities'' of the exchange, and 
the Exchange believes that ACES is not a ``facility'' within the 
meaning of the Act.
    The ACES system is a neutral communications service that allows 
Nasdaq members and non-members to route orders to one another. Market 
participants may execute orders received through ACES in any manner 
that they deem consistent with duties of best execution and other 
applicable industry obligations. ACES does not effect trade executions 
or report executed trades to the consolidated tape. Because ACES merely 
allows market participants to route orders to one another for execution 
and does not effect trade executions or report executed trades to the 
consolidated tape, the Exchange does not believe that ACES constitutes 
a facility of a national securities exchange within the meaning of the 
Act, nor does it believe it is required to file or maintain rules 
regarding the operation of ACES.
    In the past, when Nasdaq's parent entity, The Nasdaq Stock Market, 
Inc., was a subsidiary of the National Association of Securities 
Dealers, Inc. (``NASD''), ACES rules were not included in the NASD 
Manual, based on Nasdaq's and NASD's understanding that ACES is not a 
facility of the NASD. These rules were, nevertheless, approved as 
Nasdaq rules in connection with Nasdaq's registration as a national 
securities exchange. Nasdaq now proposes the deletion of these rules 
based on its conclusion that ACES is not a Nasdaq facility and that 
therefore these rules are not required under the Act. However, Nasdaq 
represented that it would file a proposed rule change if

[[Page 46119]]

ACES were modified in a manner that caused it to be deemed an exchange 
facility or if ACES fees were tied to fees for, or usage of, exchange 
services.

III. Discussion

    After careful consideration, the Commission finds that the proposed 
rule change, as amended, is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to a national 
securities exchange.\4\ In particular, the Commission finds that the 
proposal is consistent with Section 6(b) of the Act,\5\ because the 
ACES system is not a ``facility'' of the Exchange as that term is 
defined in section 3 of the Act.\6\
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    \4\ 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).
    \5\ 15 U.S.C. 78f(b).
    \6\ See 15 U.S.C. 78c(a)(2).
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    Sections 6(b) \7\ and 19(b)(1) \8\ of the Act and Rule 19b-4 
thereunder \9\ require a national securities exchange to file its rules 
with the Commission. Section 3(a)(27) of the Act \10\ and Rule 19b-4 
define the ``rules'' of an exchange with reference to its 
``facilities.'' In particular, a rule of an exchange includes ``any 
material aspect of the operation of the facilities'' of the exchange or 
any statement with respect to ``the rights, obligations or privileges'' 
of exchange members or persons having or seeking access to the 
facilities of the exchange.\11\ Section 3(a)(2) of the Act defines 
``facility,'' when used with respect to an exchange, to include:
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78s(b)(1).
    \9\ 17 CFR 240.19b-4.
    \10\ 15 U.S.C. 78c(a)(27).
    \11\ 17 CFR 240.19b-4.

    Its premises, tangible or intangible property whether on the 
premises or not, any right to the use of such premises or property 
or any services thereof for the purpose of effecting or reporting a 
transaction on an exchange (including, among other things, any 
system of communication to or from the exchange, by ticker or 
otherwise, maintained by or with the consent of the exchange), and 
any right of the exchange to the use of any property or service.\12\
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    \12\ 15 U.S.C. 78c(a)(2).

    The Commission agrees with the Exchange's conclusion that ACES, as 
currently operated, is not a facility of the Exchange. The Exchange has 
represented that ACES is a ``pure router'' that allows one subscriber 
(the ``routing subscriber'') to send an order from a Nasdaq workstation 
directly to the order management system of another ACES subscriber (the 
``receiving subscriber''). Moreover, the Exchange has represented that 
the ACES system is not linked with the Exchange's core systems, 
including the Nasdaq Market Center, the Exchange's automated system for 
order execution and trade reporting. It is not possible for an order to 
be routed to the Nasdaq Market Center via the ACES system.
    Once an order has been routed through ACES, the receiving 
subscriber may execute the order in any manner it determines to be 
consistent with its duty of best execution and other applicable 
regulatory obligations. The receiving subscriber is not required to 
route the order to, or execute the order on, the Nasdaq Market Center. 
Because the ACES system does not route orders to the Exchange, the 
Commission agrees with the Exchange's conclusion that ACES does not 
have the ``purpose of effecting * * * a transaction on an exchange.'' 
\13\
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    \13\ See 15 U.S.C. 78c(a)(2).
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    The Exchange has also represented that ACES does not report 
executed trades. Rather, the receiving subscriber is responsible for 
ensuring that the execution of each order sent through ACES is reported 
in accordance with the applicable rules of the market center where the 
order was executed.\14\ Thus, the Commission similarly agrees with the 
Exchange's conclusion that ACES does not have the ``purpose of * * * 
reporting a transaction on an exchange.'' \15\
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    \14\ The ACES rules require the receiving subscriber to send an 
execution message to ACES so that ACES may notify the routing 
subscriber of the terms of the execution, see Nasdaq Rule 6250, but 
this does not constitute the ``reporting'' of the transaction.
    \15\ See 15 U.S.C. 78c(a)(2).
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    A consequence of deleting the ACES rules from the Exchange's rule 
book is that the Exchange will be able to change its ACES rules without 
providing public notice via filing of proposed changes with the 
Commission under section 19(b) of the Act. However, the Commission 
notes that if the Exchange seeks to modify the operations of the ACES 
system in a manner that would cause the system to fit within the 
definition of an exchange facility, the Exchange would be required to 
file a proposed rule change with the Commission pursuant to section 
19(b) of the Act. For example, if the Exchange were to tie ACES fees in 
any way to fees for, or usage of, any Exchange services (for example, 
by offering a discount in ACES fees as an incentive for use of Exchange 
services, or vice versa), the Commission would consider such fees to be 
Exchange fees that must be filed with the Commission pursuant to 
section 19(b) of the Act.

IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\16\ that the proposed rule change (File No. SR-NASDAQ-2007-043), 
as modified by Amendments No. 1 and 2, be, and it hereby is, approved.
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    \16\ Id.
    \17\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-16090 Filed 8-15-07; 8:45 am]

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