[Federal Register Volume 76, Number 145 (Thursday, July 28, 2011)]
[Notices]
[Pages 45308-45309]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-19051]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64948; File No. SR-NASDAQ-2011-077]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Granting Approval of Proposed Rule Change To Adopt a Risk Monitor 
Mechanism

July 22, 2011.

I. Introduction

    On June 1, 2011, The NASDAQ Stock Market LLC (``Exchange'' or 
``NASDAQ'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to adopt a new risk monitor mechanism. The 
proposed rule change was published for comment in the Federal Register 
on June 13, 2011.\3\ The Commission received no comment letters on the 
proposed rule change. This order approves the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 64616 (June 7, 
2011), 76 FR 34281 (``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    NASDAQ proposes to adopt new Chapter VI, Section 19, Risk Monitor 
Mechanism \4\ to provide protection from the risk of multiple 
executions across multiple series of an option. The Exchange proposes 
to offer the Risk Monitor Mechanism functionality to all Participant 
types to help liquidity providers generally, Market Makers and other 
participants alike, in managing risk and providing deep and liquid 
markets to investors. The Exchange believes that the Risk Monitor 
Mechanism will be most useful for Market Makers,\5\ who are required to 
continuously quote in assigned options. Quoting across many series in 
an option creates the possibility of ``rapid fire'' executions that can 
create large, unintended principal positions that expose the Market 
Maker to unnecessary market risk. The Risk Monitor Mechanism is 
intended to assist such Participants in managing their market risk. The 
Exchange also believes that firms that trade on a proprietary basis and 
provide liquidity to the Exchange could potentially benefit, similarly 
to Market Makers, from the Risk Monitor Mechanism.
---------------------------------------------------------------------------

    \4\ The proposal is very similar to NASDAQ OMX PHLX (``PHLX'') 
Rule 1093 and is intended to bring this aspect of PHLX's 
technological functionality to NOM.
    \5\ Unlike the PHLX Risk Monitor Mechanism, the NOM Risk Monitor 
Mechanism will be available to all Participants, not just Market 
Makers.
---------------------------------------------------------------------------

    Pursuant to proposed Section 19(a), the Risk Monitor Mechanism 
operates by the System maintaining a counting program for each 
Participant, which counts the number of contracts traded in an option 
by each Participant within a specified time period, not to exceed 15 
seconds, established by each Participant (the ``specified time 
period''). The specified time period will commence for an option when a 
transaction occurs in any series in such option. Furthermore, the 
System engages the Risk Monitor Mechanism in a particular option when 
the counting program has determined that a Participant has traded a 
Specified Engagement Size (as defined below) established by such 
Participant during the specified time period. When such Participant has 
traded the Specified Engagement Size during the specified time period, 
the Risk Monitor Mechanism automatically removes such Participant's 
orders in all series of the particular option.
    As provided in proposed subparagraph (b)(ii), the Specified 
Engagement Size is determined by the following: (A) For each series in 
an option, the counting program will determine the percentage that the 
number of contracts executed in that series represents relative to the 
Participant's total size at all price levels in that series (``series 
percentage''); (B) The counting program will determine the sum of the 
series percentages in the option issue (``issue percentage''); (C) Once 
the counting program determines that the issue percentage equals or 
exceeds a percentage established by the Participant (``Specified 
Percentage''), the

[[Page 45309]]

number of executed contracts in the option issue equals the Specified 
Engagement Size.
    While the Risk Monitor Mechanism serves an important risk 
management purpose, the Exchange states that it operates consistent 
with the firm quote obligations of a broker-dealer pursuant to Rule 602 
of Regulation NMS. Specifically, proposed paragraph (c) provides that 
any marketable orders or quotes that are executable against a 
Participant's quotation that are received prior to the time the Risk 
Monitor Mechanism is engaged will be automatically executed at the 
price up to the Participant's size, regardless of whether such an 
execution results in executions in excess of the Participant's 
Specified Engagement Size. Accordingly, the Risk Monitor Mechanism 
cannot be used to circumvent a Participant's firm quote obligation.
    Proposed Section 19(d) further provides that the system will 
automatically reset the counting program and commence a new specified 
time period when: (i) A previous counting period has expired and a 
transaction occurs in any series in such option; or (ii) the 
Participant refreshes his/her quotation, in a series for which an order 
has been executed (thus commencing the specified time period) prior to 
the expiration of the specified time period.

III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6 of the Act \6\ 
and the rules and regulations thereunder applicable to a national 
securities exchange.\7\ In particular, the Commission finds that the 
proposed rule change is consistent with Section 6(b)(5) of the Act,\8\ 
which requires, among other things, that the Exchange's rules 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 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 Commission believes that 
the proposed rule change should provide NOM Participants assistance in 
effectively managing their quotations.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78f.
    \7\ 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).
    \8\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

IV. Conclusion

    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\9\ that the proposed rule change (SR-NASDAQ-2011-077) be, and 
hereby is, approved.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
---------------------------------------------------------------------------

    \10\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-19051 Filed 7-27-11; 8:45 am]
BILLING CODE 8011-01-P