[Federal Register Volume 76, Number 199 (Friday, October 14, 2011)]
[Notices]
[Pages 63969-63971]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-26528]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65514; File No. SR-BX-2011-066]


Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
Inbound Routing from an Affiliated Exchange

October 7, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on September 30, 2011, NASDAQ OMX BX, Inc. (``Exchange'' or 
``BX'') filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I, II, 
and III, below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    BX is filing with the Commission a proposed rule change to permit 
it to accept inbound orders routed by Nasdaq Execution Services LLC 
(``NES'') from the NASDAQ OMX PSX facility (``PSX'') of NASDAQ OMX PHLX 
(``PHLX'') (with the attendant obligations and conditions), as 
described further below, on a one year pilot basis.
    The text of the proposed rule change is available at http://nasdaqomxbx.cchwallstreet.com/, at BX's principal office, and at the 
Commission's Public Reference Room.

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
    In conjunction with a proposal by PHLX to provide outbound routing 
services to all markets using its affiliated routing broker, NES,\3\ 
the Exchange proposes that NES be permitted to route orders from PSX to 
the Exchange on a one year pilot basis.
---------------------------------------------------------------------------

    \3\ See SR-Phlx-2011-108.
---------------------------------------------------------------------------

    NES is a broker-dealer and member of NASDAQ, PHLX and the Exchange. 
NES provides all routing functions for The NASDAQ Stock Market 
(``NASDAQ'') as well as, pursuant to recent proposed rule changes, BX 
and PHLX.\4\ The

[[Page 63970]]

Exchange, NASDAQ, PHLX and NES are affiliates. Accordingly, the 
affiliate relationship between BX 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.\5\
---------------------------------------------------------------------------

    \4\ See SR-BX-2011-048 and SR-Phlx-2011-108.
    \5\ See Securities Exchange Act Release Nos. 59153 (December 23, 
2008), 73 FR 80485 (SR-NASDAQ-2008-098); and 62736 (August 17, 
2010), 75 FR 51861 (August 23, 2010) (SR-NASDAQ-2010-100).
---------------------------------------------------------------------------

    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.\6\ Also 
recognizing that the Commission has expressed concern regarding the 
potential for conflicts of interest in instances where a member firm is 
affiliated with an exchange to which it is routing orders, the Exchange 
previously proposed, and the Commission approved,\7\ NES's affiliation 
with the Exchange to permit the Exchange to accept inbound orders that 
NES routes in its capacity as a facility of Nasdaq, subject to the 
certain limitations and conditions. The Exchange now proposes to permit 
BX to accept inbound orders that NES routes in its capacity as a 
facility of PHLX, subject to these same limitations and conditions:
---------------------------------------------------------------------------

    \6\ See Securities Exchange Act Release Nos. 58324, 73 FR 4936 
(August 12, 2008) (SR-BSE-2008-02; SR-BSE-2008-23; SR-BSE-2008-25; 
SR-BSECC-2008-01; (``BSE Approval Order'').
    \7\ See Securities Exchange Act Release Nos. 59154 (December 23, 
2008), 73 FR 80468 (December 31, 2008) (SR-BSE-2008-048); and 64090 
(March 17, 2011), 76 FR 16462 (SR-BX-2011-007).
---------------------------------------------------------------------------

    First, the Exchange and the Financial Industry Regulatory Authority 
(``FINRA'') will maintain a Regulatory Contract, as well as an 
agreement pursuant to Rule 17d-2 under the Act (``17d-2 
Agreement'').\8\ Pursuant to the Regulatory Contract and the 17d-2 
Agreement, FINRA will be allocated regulatory responsibilities to 
review NES's compliance with certain Exchange rules.\9\ Pursuant to the 
Regulatory Contract, however, BX retains ultimate responsibility for 
enforcing its rules with respect to NES.
---------------------------------------------------------------------------

    \8\ 17 CFR 240.17d-2.
    \9\ NES is also subject to independent oversight by FINRA, its 
designated examiniing authority, for compliance with financial 
responsibility requirements.
---------------------------------------------------------------------------

    Second, FINRA will monitor NES for compliance with the Exchange's 
trading rules, and will collect and maintain certain related 
information.\10\
---------------------------------------------------------------------------

    \10\ Pursuant ot the Regulatory Contract, both FINRA and the 
Exchange will collect and maintain all alerts, complaints, 
investigations and enforcement actions in which NES (in its capacity 
as a facility of PHLX routing orders to the Exchange) is identified 
as a participant that has potentially violated applciable Commission 
or Exchange rules. The Exchange and FINRA will 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.
---------------------------------------------------------------------------

    Third, FINRA will provide 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.
    Fourth, the Exchange has in place BX Rule 2140(c), which requires 
NASDAQ OMX, 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.
    Fifth, the Exchange proposes that the routing of orders from NES to 
the Exchange, in NES's capacity as a facility of PHLX, be authorized 
for a pilot period of one year.
    The Exchange believes that the above-listed conditions protect the 
independence of the Exchange's regulatory responsibility with respect 
to NES, and that these mitigate the aforementioned concerns about 
potential conflicts of interest and unfair competitive advantage.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\11\ in general, and with 
Sections 6(b)(5) of the Act,\12\ 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 receive inbound routes 
of orders from NES, acting in its capacity as a facility of PHLX, in a 
manner consistent with prior approvals and established protections. The 
Exchange believes that the proposed 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.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78f.
    \12\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    BX does not believe that the proposed rule change will impose any 
burden on competition 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

    No written comments were either solicited or received.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days after the date of the filing, or such 
shorter time as the Commission may designate, it has become effective 
pursuant to 19(b)(3)(A) of the Act \13\ and Rule 19b-4(f)(6) \14\ 
thereunder.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file 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. 
The Exchange has satisfied this requirement.
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend 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

[[Page 63971]]

the purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or 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 e-mail to [email protected]. Please include 
File Number SR-BX-2011-066 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-BX-2011-066. 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 Web site viewing and 
printing 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 the 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-BX-2011-066 and should be 
submitted on or before November 4, 2011.
---------------------------------------------------------------------------

    \15\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-26528 Filed 10-13-11; 8:45 am]
BILLING CODE 8011-01-P