[Federal Register Volume 73, Number 251 (Wednesday, December 31, 2008)]
[Notices]
[Pages 80485-80488]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-31130]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59153; File No. SR-Nasdaq-2008-098]


 Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Order Granting Accelerated Approval of Proposed 
Rule Change Regarding Routing to an Affiliated Exchange

December 23, 2008.
    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 December 15, 2008, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange'') 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 substantially by Nasdaq. The 
Commission is publishing this notice and order to solicit comments on 
the proposed rule change from interested persons, and is approving the 
proposal on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 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

    Nasdaq is proposing a rule change to amend: (i) Nasdaq Rule 4751 to 
modify the restriction on routing of Directed Orders to a facility of 
an exchange that is an affiliate of Nasdaq and (ii) Nasdaq Rule 4758 to 
provide for the establishment of procedures designed to manage the flow 
of confidential information between Nasdaq and its facilities 
(including its routing facility Nasdaq Execution Services, LLC) and 
other entities.
    The text of the proposed rule change is available from Nasdaq's Web 
site at http://nasdaq.cchwallstreet.com, at Nasdaq's principal office, 
and at the Commission's Public Reference Room.
    Proposed new language is in italics.\3\
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    \3\ Changes are marked to the rule text that appears in the 
electronic manual of Nasdaq found at http://nasdaq.cchwallstreet.com.
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* * * * *

Nasdaq Rules

Equity Rules

4751. Definitions

    (a)-(e) No change.
    (f) 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)-(8) No change.
    (9) ``Directed Orders'' are orders that are directed to an exchange 
other than Nasdaq as directed by the entering party without checking 
the Nasdaq book. If unexecuted, the order (or unexecuted portion 
thereof) shall be returned to the entering party. This option may only 
be used for orders with time-in-force parameters of IOC. Directed 
Orders may be designated as inter-market sweep orders by the entering 
party to execute against the full displayed size of any protected bid 
or offer (as defined in Rule 600(b) of Regulation NMS under the Act). A 
broker-dealer that designates an order as an intermarket sweep order 
has the responsibility of complying with Rules 610 and 611 of 
Regulation NMS.
    Directed Orders may not be directed to a facility of an exchange 
that is an affiliate of Nasdaq except for Directed Orders directed to 
the NASDAQ OMX BX Equities Market.
    (g)-(i) No change.

4758. Order Routing

    (a) No change.
    (b) Routing Broker
    (1)-(7) No change.
    (8) Nasdaq Execution Services LLC shall establish and maintain 
procedures and internal controls reasonably designed to adequately 
restrict the flow of confidential and proprietary information between 
the NASDAQ Stock Market LLC and its facilities (including Nasdaq 
Execution Services LLC as its routing facility) and any other entity.
* * * * *

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. The 
text of these statements may be examined at the places specified in 
Item III below, and is set forth in Sections A, B, and C below.

[[Page 80486]]

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

1. Purpose
    a. Affiliation and Order Routing
    The NASDAQ OMX Group, Inc. (``NASDAQ OMX''), a Delaware 
corporation, owns three U.S. registered securities exchanges--Nasdaq, 
NASDAQ OMX PHLX, Inc. (``PHLX'') and The Boston Stock Exchange, 
Incorporated, to be renamed NASDAQ OMX BX, Inc. (``BX'').\4\ In 
addition, NASDAQ OMX currently indirectly owns Nasdaq Execution 
Services, LLC (``NES''), a registered broker-dealer and a member of BX. 
Thus, NES is an affiliate of each of Nasdaq, PHLX and BX.
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    \4\ See Securities Exchange Act Release No. 58927 (November 10, 
2008), 73 FR 69685 (November 19, 2008) (SR-BSE-2008-48). This filing 
also proposes a new rule book for cash equities trading (``BX 
Rulebook Proposal'') on a facility of BX, to be named the NASDAQ OMX 
BX Equities Market.
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    Although BX does not currently have any equity trading operations, 
BX has proposed a new rulebook for BX to support the resumption of 
these operations.\5\ Although BX will not route to other market 
centers, BX will receive orders routed to it by other market centers, 
including Nasdaq.\6\
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    \5\ Id.
    \6\ PHLX does not currently trade cash equities, and therefore 
this filing does not apply to it. Nasdaq is not at this time 
proposing to modify limits on routing options to affiliated 
exchanges.
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    NES is the approved outbound routing facility of Nasdaq for cash 
equities, providing outbound routing from Nasdaq to other market 
centers. NES does not provide inbound routing to Nasdaq. The 
acquisition of NES by NASDAQ OMX was approved by the Commission in 2004 
and 2005 \7\ and the rules under which NES currently routes orders from 
Nasdaq to other market centers were approved initially by the 
Commission in 2006 and have been amended on several occasions.\8\ 
Nasdaq Rules 4751 and 4758 establish the conditions under which Nasdaq 
is permitted to own and operate NES in its capacity as a facility of 
Nasdaq that routes orders from Nasdaq to other market centers. The 
conditions include requirements that: (1) NES is operated as a facility 
of Nasdaq; (2) NES will not engage in any business other than: (i) As 
an outbound router for Nasdaq and (ii) any other activities it may 
engage in as approved by the Commission; (3) for purposes of Commission 
Rule 17d-1 under the Act,\9\ the designated examining authority of NES 
is a self-regulatory organization unaffiliated with Nasdaq; (4) use of 
NES to route orders to other market centers is optional; \10\ and (5) 
Nasdaq will not route orders to an affiliated exchange, such as BX, 
unless they check the Nasdaq book prior to routing.
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    \7\ See Securities Exchange Act Release Nos. 50311 (September 3, 
2004), 69 FR 54818 (September 10, 2004) (Order Granting Application 
for a Temporary Conditional Exemption Pursuant To Section 36(a) of 
the Exchange Act by the National Association of Securities Dealers, 
Inc. Relating to the Acquisition of an ECN by The Nasdaq Stock 
Market, Inc.) and 52902 (December 7, 2005), 70 FR 73810 (December 
13, 2005) (SR-NASD-2005-128) (Order Approving a Proposed Rule Change 
To Establish Rules Governing the Operation of the INET System).
    \8\ See Securities Exchange Act Release Nos. 58752 (October 8, 
2008), 73 FR 61181 (October 15, 2008) (SR-NASDAQ-2008-079); 58135 
(July 10, 2008), 73 FR 40898 (July 16, 2008) (SR-NASDAQ-2008-061); 
58069 (June 30, 2008), 73 FR 39360 (July 9, 2008) (SR-NASDAQ-2008-
054); 56708 (October 26, 2007), 72 FR 61925 (November 1, 2007) (SR-
NASDAQ-2007-078); 56867 (November 29, 2007), 72 FR 69263 (December 
7, 2007) (SR-NASDAQ-2007-065); 55335 (February 23, 2007), 72 FR 9369 
(March 1, 2007) (SR-NASDAQ-2007-005); 54613 (October 17, 2006), 71 
FR 62325 (October 24, 2006) (SR-NASDAQ 2006-043); 54271 (August 3, 
2006), 71 FR 45876 (August 10, 2006) (SR-NASDAQ-2006-027); and 54155 
(July 14, 2006), 71 FR 41291 (July 20, 2006) (SR-NASDAQ-2006-001).
    \9\ 17 CFR 240.17d-1.
    \10\ Because only Nasdaq members may enter orders into Nasdaq, 
it also follows that routing by NES is available only to Nasdaq 
members.
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    The Commission has approved NES's affiliation with BX subject to 
the conditions that: (1) NES remains a facility of Nasdaq; (2) use of 
NES's routing function by Nasdaq members continues to be optional and 
(3) NES does not provide routing of Directed Orders to BX or any 
trading facilities thereof, unless such orders first attempt to access 
any liquidity on the Nasdaq book.\11\
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    \11\ See Securities Exchange Act Release No. 58324 (August 7, 
2008), 73 FR 46936 (August 12, 2008) (SR-BSE-2008-23).
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    Nasdaq proposes that, upon the resumption of cash equity trading by 
BX, NES, in its operation as a facility of Nasdaq, be permitted to 
route all orders, including Directed Orders, to BX's equity market 
without checking the Nasdaq book prior to routing. Directed Orders are 
orders that route directly to other exchanges on an immediate-or-cancel 
basis without first checking the Nasdaq book for liquidity.\12\ In 
order to modify the conditions regarding the operation of NES and allow 
NES to route Directed Orders to BX, Nasdaq proposes to modify the 
restriction in Nasdaq Rule 4751(f)(9) that prohibits the routing of 
Directed Orders to a facility of an exchange that is an affiliate of 
Nasdaq. Under the proposed rule change, inbound routing of Directed 
Orders to the NASDAQ OMX BX Equities Market would be permitted.
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    \12\ Rules 4751 and 4755 provide for routing of ``directed 
orders'' to automated market centers other than Nasdaq on an 
``immediate-or-cancel'' basis. Such directed orders may be 
designated as intermarket sweep orders (``ISOs''), which may be 
executed by the receiving venue based on the representation of the 
market participant that it has routed to all superior protected 
quotations, or not so designated, in which case the orders will 
execute only if their execution would not result in a trade-through.
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    On September 29, 2008, the Commission approved rule changes to 
permit the NYSE, NYSE Arca and NYSE Alternext US to accept inbound 
orders that their affiliate Arca Securities routes in its capacity as a 
facility of NYSE or NYSE Arca, subject to certain limitations and 
conditions intended to address the Commission's concerns regarding 
affiliation.\13\ 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.\14\
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    \13\ See Securities Exchange Act Release Nos. 58681 (September 
29, 2008), 73 FR 58285 (October 6, 2008) (SR-NYSEArca-2008-90) 
(``NYSE Arca Order''); 58680 (September 29, 2008), 73 FR 58283 
(October 6, 2008) (SR-NYSE-2008-76) (``NYSE Order''); 58673 
(September 29, 2008), 73 FR 57707 (October 3, 2008) (SR-Amex-2008-
62) (``NYSE Alternext US Order'').
    \14\ The Commission also set forth these concerns in its order 
abrogating NYSE Arca Rule 7.31(x). See Securities Exchange Act 
Release No. 57648 (April 11, 2008), 73 FR 20981 (April 17, 2008).
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    Nasdaq proposes to amend Nasdaq Rule 4758 to provide that NES will 
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 
NES) and any other entity.\15\
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    \15\ This sentence was modified at the request of the Exchange 
from the text contained in the proposed rule change. Telephone 
conversation between John Yetter, Vice President and Deputy General 
Counsel, NASDAQ OMX, and Nancy Burke-Sanow, Assistant Director, 
Division of Trading and Markets, Commission on December 22, 2008.
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    In addition, in the BX Rulebook Proposal, BX is proposing a rule 
change and certain undertakings intended to manage the flow of 
confidential and proprietary information between NES and BX and to 
minimize potential conflicts of interest.\16\
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    \16\ See BX Rulebook Proposal, supra note 4.
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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,\17\ in

[[Page 80487]]

general, and with Section 6(b)(5) of the Act,\18\ 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 inbound routing of 
Directed Orders and other orders to BX from its affiliate NES while 
minimizing the potential for conflicts of interest and informational 
advantages involved where a member firm is affiliated with an exchange 
to which it is routing orders.
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    \17\ 15 U.S.C. 78f.
    \18\ 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 impose 
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 were neither solicited nor received.

III. 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 [email protected]. Please include 
File No. SR-Nasdaq-2008-098 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-Nasdaq-2008-098. 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 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 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-2008-098 and should be submitted on or before 
January 21, 2009.

IV. Commission's Findings and Order Granting Accelerated Approval of a 
Proposed Rule Change

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\19\ In 
particular, the proposed rule change is consistent with Section 6(b)(5) 
of the Act,\20\ which requires, among other things, that the rules of a 
national securities exchange be 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; and are not designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers.
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    \19\ 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).
    \20\ 15 U.S.C. 78f(b)(5).
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    On August 7, 2008, the Commission approved the acquisition of BX 
(formerly The Boston Stock Exchange, Incorporated) by NASDAQ OMX.\21\ 
In conjunction with that transaction, the Exchange amended its rules to 
prohibit the routing of Directed Orders \22\ to any facility of an 
exchange that is an affiliate of Nasdaq.\23\ This limitation 
corresponds to one of the conditions proposed by BX at the time it was 
acquired by NASDAQ OMX to permit its affiliation with NES.\24\ NES, a 
broker-dealer that will become a member of BX, currently provides to 
Nasdaq members optional routing services to other market centers. NES 
is owned by NASDAQ OMX, which also owns three registered securities 
exchanges--Nasdaq, BX, and the PHLX.\25\ Thus, NES is an affiliate of 
each of these exchanges.
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    \21\ See supra note 11.
    \22\ Nasdaq Rule 4751(f)(9) defines Directed Orders as 
immediate-or-cancel orders that are directed to an exchange other 
than Nasdaq without checking the Nasdaq book.
    \23\ See Nasdaq Rule 4751(f)(9). See also Securities Exchange 
Act Release No. 58135, supra note 8.
    \24\ See Securities Exchange Act Release No. 58324, supra note 
11, at notes 117-123 and accompanying text. See also Securities 
Exchange Act Release No. 58135, supra note 8.
    \25\ See Securities Exchange Act Release Nos. Release No. 58324, 
supra note 11; and 58179 (July 17, 2008), 73 FR 42874 (July 23, 
2008) (order approving NASDAQ OMX's acquisition of the PHLX.)
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    BX previously proposed as a condition to its affiliation with NES, 
that NES would only route orders to BSE that first attempt to access 
liquidity on Nasdaq. In connection with the resumption of equities 
trading on BX, BX is now proposing to accept orders routed to it by NES 
in its capacity as a facility of Nasdaq, including orders that do not 
first attempt to access liquidity on Nasdaq.\26\ In the instant filing, 
the Exchange proposes to amend Nasdaq Rule 4751 to allow the routing of 
Directed Orders \27\ from Nasdaq to the NASDAQ OMX BX Equities Market. 
The Exchange is also proposing to amend Nasdaq Rule 4758 to add a 
requirement that NES 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 NES, and any other entity.
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    \26\ See Securities Exchange Act Release No. 59154 (December 23, 
2008) (SR-BSE-2008-48) (order approving the BX Rulebook Filing) 
(``BX Rulebook Approval Order'').
    \27\ Pursuant to Nasdaq Rule 4751(f)(9), Nasdaq currently may 
not route Directed Orders to a facility of an exchange that is an 
affiliate of Nasdaq.
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    In the past, the Commission has expressed concern that the 
affiliation of an exchange with one of its members raises potential 
conflicts of interest, and the potential for unfair competitive

[[Page 80488]]

advantage.\28\ Although the Commission continues to be concerned about 
potential unfair competition and conflicts of interest between an 
exchange's self-regulatory obligations and its commercial interests 
when the exchange is affiliated with one of its members, the Commission 
believes that it is consistent with the Act to permit NES to expand the 
outbound routing services it provides to Nasdaq, subject to certain 
conditions.
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    \28\ See, e.g., Securities Exchange Act Release Nos. 58324, 
supra note 11; 58673, (September 29, 2008), 73 FR 57707 (October 3, 
2008) (SR-NYSE-2008-60 and SR-Amex-2008-62) (order approving the 
business combination between NYSE Euronext and NYSE Alternext US 
LLC); 54170 (July 18, 2006), 71 FR 42149 (July 25, 2006) (SR-NASDAQ-
2006-006) (order approving Nasdaq's proposal to adopt Nasdaq Rule 
2140, restricting affiliations between Nasdaq and its members); and 
53382 (February 27, 2006, 71 FR 11251) (March 6, 2006) (SR-NYSE-
2005-77) (order approving the combination of the New York Stock 
Exchange, Inc. and Archipelago Holdings).
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    Nasdaq Rule 4758 imposes certain conditions on NES as the 
Exchange's outbound order router. For example, NES must: (1) Be a 
member of a self-regulatory organization unaffiliated with Nasdaq that 
is its designated examining authority; (2) be regulated as a facility 
of the Exchange; \29\ and (3) not engage in any business other than its 
outbound router function unless otherwise approved by the Commission. 
Also, the books, records, premises, officers, agents, directors and 
employees of NES, as a facility of Nasdaq are deemed to be those of the 
Exchange for purposes of and subject to oversight pursuant to the 
Act.\30\ In addition, use of NES to route orders from Nasdaq to away 
market centers is optional,\31\ and a Nasdaq member is free to route 
orders to other market centers through alternative means. Pursuant to 
the proposal, NES will also establish and maintain procedures and 
internal controls reasonably designed to restrict the flow of 
confidential and proprietary information between Nasdaq and its 
facilities, including NES, and any other entity.\32\
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    \29\ The Commission notes that, as a facility of the Exchange, 
NES is subject to Exchange oversight, as well as Commission 
oversight. Further, the Exchange is responsible for filing with the 
Commission proposed rule changes and fees relating to NES's outbound 
router function and NES's outbound router function is subject to 
exchange non-discrimination requirements.
    \30\ See Nasdaq Rule 4758(b)(6). In addition, the books and 
records of NES, as a facility of the Exchange, are subject at all 
times to inspection and copying by the Exchange and the Commission. 
Id.
    \31\ Nasdaq Rule 4758(b)(7).
    \32\ See proposed Nasdaq Rule 4758(b)(8). The Commission notes 
that this proposed requirement is consistent with the rules for 
Nasdaq Options Services LLC, which provides outbound routing 
services for the Nasdaq Options Market, that were previously 
approved by the Commission. See Nasdaq Options Rule Section 11(e). 
See also Securities Exchange Act Release No. 57478 (March 12, 2008), 
73 FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-
080) (order approving a proposed rule change relating to the 
establishment and operation of the NASDAQ Options Market).
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    In light of the protections discussed above and contained in Nasdaq 
Rule 4758, the Commission believes that it is consistent with the Act 
to permit Nasdaq to expand the availability of the outbound routing 
services provided by its affiliate, NES.
    Nasdaq has asked the Commission to accelerate approval of the 
proposed rule change concurrent with approval of the BX Rulebook 
Proposal which establishes protections against possible conflicts of 
interest as a result of routing by NES to BX.\33\ The Commission finds 
good cause for approving the proposed rule change before the thirtieth 
day after the date of publication of notice of filing thereof in the 
Federal Register. The Commission notes that Nasdaq's proposal to expand 
the use of NES as its outbound order routing facility is consistent 
with prior Commission action.\34\ Accordingly, the Commission finds 
good cause, consistent with Section 19(b)(2) of the Act,\35\ to approve 
the proposed rule change on an accelerated basis.
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    \33\ See SR-Nasdaq-2008-098, Item 7. The Commission is also 
approving today the BX Rulebook Proposal. See BX Rulebook Approval 
Order, supra note 26.
    \34\ See, e.g., Securities Exchange Act Release Nos. 59009 
(November 24, 2008), 73 FR 73363 (December 2, 2008) (SR-NYSEALTR-
2008-07); 58681, supra note 13; and 58680 supra note 13.
    \35\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-NASDAQ-2008-098) is hereby approved 
on an accelerated basis.
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    \36\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\36\
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-31130 Filed 12-30-08; 8:45 am]
BILLING CODE 8011-01-P