Document ID: SEC-2009-1089-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Modify Its Optional Anti-Internalization Functionality
Posted Date: 2009-07-31T04:00Z

[Federal Register: July 31, 2009 (Volume 74, Number 146)]
[Notices]               
[Page 38247-38249]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31jy09-114]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60384; File No. SR-NASDAQ-2009-071]

 
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change to 
Modify Its Optional Anti-Internalization Functionality

July 24, 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 July 22, 2009, The NASDAQ Stock Market LLC (the ``Exchange'' or 
``Nasdaq'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. The Exchange 
has designated the proposed rule change as effecting a change described 
under Rule 19b-4(f)(6) under the Act,\3\ which renders the proposal 
effective upon filing with the Commission. 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.
    \3\ 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

    The Exchange is filing with the Commission a proposed rule change 
to modify its optional anti-internalization functionality.
    The text of the proposed rule change is below. Proposed new 
language is underlined and proposed deletions are in brackets.
* * * * *
4757. Book Processing
    (a) System orders shall be executed through the Nasdaq Book Process 
set forth below:
    (1)-(3) No Change.
    (4) Exception: Anti-Internalization--Market participants may direct 
that quotes/orders entered into the System not execute against quotes/
orders entered under the same MPID. [In such a case, the later entered 
of the quote/orders will be cancelled back to the entering party.] In 
such a case, if the interacting orders from the same MPID are 
equivalent in size, both orders will be cancelled back to their 
entering parties. If the interacting orders from the same MPID are not 
equivalent in size, share amounts equal to size of the smaller of the 
two orders will be cancelled back to their originating parties with the 
remainder of the larger order being retained by the System for 
potential execution.
* * * * *
    (b) and (c) Not applicable. [sic]

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
    Nasdaq is proposing to modify its voluntary anti-internalization 
functionality. Under the proposal, market participants entering quotes/
orders under a specific market participant identifier (``MPID'') may 
voluntarily direct that they not execute against other quotes/orders 
entered into the System under the same MPID. In such a case, if the 
orders from the same MPID are equivalent in size, both orders will be 
cancelled back to their entering parties. If the orders from the same 
MPID are not equivalent in size, share amounts equal to [sic] size of 
the smaller of the two orders will be cancelled back to their 
respective originating parties with the remainder of the larger order 
being retained by the System for potential execution.
    The above replaces Nasdaq's currently approved, but not yet 
operational, anti-internalization functionality that would

[[Page 38248]]

cancel the later entered of interacting orders from the same MPID. 
Nasdaq is modifying its anti-internalization functionality based on 
additional input from system users as well as the Commission's recent 
approval of various versions of anti-internalization functionality for 
the BATS and NYSE Arca exchanges.\4\
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    \4\ See SR-BATS-2009-022 and SR-NYSEArca-2009-058. Nasdaq's 
proposed anti-internalization functionality is similar to BAT's MMTP 
Decrement and Cancel and NYSE Arca's STP Decrement and Cancel.
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    Anti-internalization functionality is designed to assist market 
participants in complying with certain rules and regulations of the 
Employee Retirement Income Security Act (``ERISA'') that preclude and/
or limit managing broker-dealers of such accounts from trading as 
principal with orders generated for those accounts. It can also assist 
market participants in reducing execution fees potentially resulting 
from the interaction of executable buy and sell trading interest from 
the same firm. Nasdaq notes that use of the functionality does not 
relieve or otherwise modify the duty of best execution owed to orders 
received from public customers. As such, market participants using 
anti-internalization functionality will need to take appropriate steps 
to ensure that public customer orders that do not execute because of 
the use of anti-internalization functionality ultimately receive the 
same execution price (or better) they would have originally obtained if 
execution of the order was not inhibited by the functionality.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\5\ in general, and with 
Sections [sic] 6(b)(5) of the Act,\6\ 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. 
Nasdaq notes that similar functionality has previously [sic] approved 
for other markets.\7\
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    \5\ 15 U.S.C. 78f.
    \6\ 15 U.S.C. 78f(b)(5).
    \7\ See SR-BATS-2009-022 and SR-NYSEArca-2009-058.
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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.

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

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change: (1) Does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) by its terms does not become operative for 30 days after the 
date of this filing, or such shorter time as the Commission may 
designate if consistent with the protection of investors and the public 
interest, the proposed rule change has become effective pursuant to 
Section 19(b)(3)(A) of the Act \8\ and Rule 19b-4(f)(6) thereunder.\9\
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    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative for 30 days after the date of filing. In addition, 
Rule 19b-4(f)(6)(iii) requires a self-regulatory organization to 
provide the Commission with written notice of its intent to file the 
proposed rule change, along with a brief description and text of 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. However, Rule 19b-4(f)(6)(iii) permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
requests that the Commission waive the 30-day operative delay as well 
as the five business-day pre-filing requirement so that the benefits of 
this functionality to Nasdaq market participants expected from the rule 
change can be implemented on August 3, 2009, when the Exchange expects 
to have the technological changes in place to support the proposed rule 
change. The Commission believes that waiving the 30-day operative delay 
\10\ to make this functionality available without delay is consistent 
with the protection of investors and the public interest.\11\ The 
Commission notes that the proposal is similar to rules of other 
exchanges and thus does not raise any novel regulatory issues.\12\ The 
Commission designates the proposal operative upon filing to allow the 
Exchange to implement the functionality without delay.
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    \10\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \11\ The Commission is also waiving the five business-day pre-
filing requirement.
    \12\ See BATS Exchange Rule 11.9(f) and NYSE Arca Equities Rule 
7.31(qq).
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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.

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-2009-071 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-2009-071. 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

[[Page 38249]]

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 such filing also will be available for 
inspection and copying at the principal office of the 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-2009-071 and should 
be submitted on or before August 21, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-18274 Filed 7-30-09; 8:45 am]

BILLING CODE 8010-01-P