Document ID: SEC-2013-0327-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The NASDAQ Stock Market LLC
Posted Date: 2013-02-14T05:00Z

[Federal Register Volume 78, Number 31 (Thursday, February 14, 2013)]
[Notices]
[Pages 10670-10671]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-03411]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68891; File No. SR-NASDAQ-2013-028]

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

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, The NASDAQ Stock Market LLC 
(``Exchange'' or ``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 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 proposes a rule change for the permanent approval of 
its pilot program to permit inbound orders routed by Nasdaq Execution 
Services LLC (``NES'') from the NASDAQ OMX BX Equities Market of NASDAQ 
OMX BX, Inc. (``BX'') and the NASDAQ OMX PSX facility of NASDAQ OMX 
PHLX LLC (``PHLX'').

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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    In conjunction with BX and PHLX providing outbound routing services 
to all markets using their affiliated routing broker, NES,\4\ NASDAQ 
proposed that NES be permitted to route orders from BX and PHLX, 
respectively, to the Exchange on a pilot basis, subject to certain 
conditions and limitations, as described below.\5\ The current pilot 
program expires March 30, 2013.\6\
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    \4\ See Securities Exchange Act Release Nos. 65470 (October 3, 
2011), 76 FR 62489 (October 7, 2011) (SR-BX-2011-048); and 65469 
(October 3, 2011), 76 FR 62486 (October 7, 2011) (SR-Phlx-2011-108).
    \5\ See Securities Exchange Act Release No. 65554 (October 13, 
2011), 76 FR 65311 (October 20, 2011) (SR-NASDAQ-2011-142).
    \6\ See Securities Exchange Act Release No. 67997 (October 5, 
2012), 77 FR 62293 (October 12, 2012) (SR-NASDAQ-2012-112).
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    NES is a broker-dealer and member of NASDAQ, PHLX and BX. NES 
provides all routing functions for NASDAQ, BX and PHLX. BX, NASDAQ, 
PHLX and NES are affiliates. Accordingly, the affiliate relationship 
between NASDAQ 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\ The Exchange 
now proposes to permit NASDAQ to accept inbound orders that NES routes 
in its capacity as a facility of BX and PHLX on a permanent basis, 
subject to the imitations [sic] and conditions of this pilot:
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    \8\ 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'').\9\ Pursuant to the Regulatory Contract and the 
17d-2 Agreement, FINRA is allocated regulatory responsibilities to 
review NES's compliance with certain Exchange rules.\10\ Pursuant to 
the Regulatory Contract, however, NASDAQ retains ultimate 
responsibility for enforcing its rules with respect to NES.
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    \9\ 17 CFR 240.17d-2.
    \10\ 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.\11\
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    \11\ 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 and PHLX routing orders to NASDAQ) 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.

[[Page 10671]]

     Fourth, the Exchange has in place NASDAQ Rule 2160(c), 
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,\12\ in general, and with 
Sections 6(b)(5) of the Act,\13\ 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 and 
PHLX, 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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    \12\ 15 U.S.C. 78f.
    \13\ 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.

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

    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-NASDAQ-2013-028 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-2013-028. 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-NASDAQ-2013-028 and should 
be submitted on or before March 7, 2013.
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    \14\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-03411 Filed 2-13-13; 8:45 am]
BILLING CODE 8011-01-P