[Federal Register Volume 76, Number 203 (Thursday, October 20, 2011)]
[Notices]
[Pages 65311-65313]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-27133]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65554; File No. SR-NASDAQ-2011-142]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Accept Inbound Orders Routed From Its Affiliates

October 13, 2011.
    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 October 6, 2011, 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 NASDAQ. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASDAQ is filing with the Securities and Exchange Commission 
(``Commission'') a proposed rule change to accept inbound orders routed 
by Nasdaq Execution Services LLC (``NES'') from both the NASDAQ OMX PSX 
facility (``PSX'') of NASDAQ OMX PHLX (``PHLX'') as well as from the 
NASDAQ OMX BX Equities Market of NASDAQ OMX BX, Inc. (``BX''), as 
described further below, on a one year pilot basis.
    The text of the proposed rule change is available at http://nasdaq.cchwallstreet.com, at NASDAQ'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, NASDAQ 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. NASDAQ 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
    NES provides all routing functions for The NASDAQ Stock Market 
(``NASDAQ'') as well as, pursuant to recent proposed rule changes, for 
BX and PHLX.\3\ Accordingly, NASDAQ now proposes that NES be permitted 
to route orders from BX and PSX to the Exchange on a one year pilot 
basis.
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    \3\ See Securities Exchange Act Release Nos. 65470 (October 3, 
2011) (SR-BX-2011-048); and 65469 (October 3, 2011) (SR-Phlx-2011-
108).
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    NES is a broker-dealer and member of NASDAQ, PHLX and BX. BX, 
NASDAQ, PHLX and NES are affiliates. This 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-

[[Page 65312]]

regulatory obligations and its commercial interests.\4\
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    \4\ 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).
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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 NASDAQ.\5\ The Commission 
has also 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.\6\ To address the Commission's 
concerns, NASDAQ proposes to accept inbound orders that NES routes from 
PHLX and BX, respectively, in its capacity as a facility of PHLX and 
BX, subject to certain limitations and conditions:
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    \5\ Id.
    \6\ See Securities Exchange Act Release No. 62877 (September 9, 
2010), 75 FR 56633 (September 16, 2010) (SR-PHLX-2010-79).
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     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'').\7\ 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.\8\ Pursuant to the 
Regulatory Contract, however, NASDAQ retains ultimate responsibility 
for enforcing its rules with respect to NES.
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    \7\ 17 CFR 240.17d-2.
    \8\ 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 will monitor NES for compliance with the 
Exchange's trading rules, and will collect and maintain certain related 
information.\9\
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    \9\ Pursuant to 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 or BX routing orders to the Exchange) is 
identified as a participant that has potentially violated applicable 
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.
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     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 will adopt Rule 2160(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 as 
well as BX, 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,\10\ in general, and with 
Sections 6(b)(5) of the Act,\11\ 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 or BX, 
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.
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    \10\ 15 U.S.C. 78f.
    \11\ 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 result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

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

    Because the foregoing proposed rule change does not significantly 
affect the protection of investors or the public interest, does not 
impose any significant burden on competition, and, by its terms, does 
not become operative for 30 days from the date on which it was filed, 
or such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \12\ and Rule 19b-
4(f)(6) thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires the Exchange to give the Commission written notice of the 
Exchange's 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. The 
Exchange has satisfied this requirement.
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    The Exchange has requested that the Commission waive the 30-day 
operative delay. The Exchange believes that the waiver of the 30-day 
operative delay is consistent with the protection of investors and the 
public interest because it would benefit users by offering more 
opportunities for their orders to be executed.\14\ The Commission notes 
that the proposed rule change is consistent with rules of other 
national securities exchanges, and does not raise any new substantive 
issues.\15\ For these reasons, the Commission believes that waiving the 
30-day operative delay is consistent with the protection of investors 
and the public interest, and designates the proposal to be operative 
upon filing with the Commission.\16\
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    \14\ See SR-NASDAQ-2011-142, Item 7.
    \15\ See, e.g., Securities Exchange Act Release Nos. 62901 
(September 13, 2010), 75 FR 57097 (September 17, 2010) (SR-BATS-
2010-024); and 64729 (June 23, 2011), 76 FR 38232 (June 29, 2011) 
(SR-NYSE-2011-24).
    \16\ 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).

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[[Page 65313]]

    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 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 [email protected]. Please include 
File Number SR-NASDAQ-2011-142 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-2011-142. 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 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-2011-142 and should be submitted on or before November 10, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-27133 Filed 10-19-11; 8:45 am]
BILLING CODE 8011-01-P