[Federal Register Volume 79, Number 22 (Monday, February 3, 2014)]
[Notices]
[Pages 6247-6249]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-02135]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71419; File No. SR-NASDAQ-2014-007]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change to 
Outbound Routing

January 28, 2014
    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 January 15, 2014, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange'') 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

    The Exchange proposes to use Nasdaq Execution Services, LLC 
(``NES'') as opposed to Nasdaq Options Services LLC (``NOS'') for 
outbound order routing from The NASDAQ Options Market (``NOM''), as 
explained further below. The Exchange also proposes to permit the 
Exchange to route equities and options orders through NES either 
directly or through a third party routing broker-dealer, as explained 
further below.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaq.cchwallstreet.com, at the principal office of 
the Exchange, 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
    The purpose of the proposal is to update the Exchange's rules to 
reflect the ability to route orders to other exchanges using either the 
Exchange's affiliated broker-dealer or a third party unaffiliated 
broker-dealer, which the Exchange may choose to use for efficiency and 
potential cost savings.
    Today, the relevant Exchange rules provide that the Exchange shall 
route orders in options via NOS and in equities via NES. Both NOS and 
NES are affiliates and members of Nasdaq. As a result, certain 
conditions have been imposed on the existing routing arrangements.\3\
---------------------------------------------------------------------------

    \3\ See, e.g., Securities Exchange Act Release No. 57478 (March 
12, 2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-2007-04 and SR-
NASDAQ-2007-080) at 14533.
---------------------------------------------------------------------------

Replacing NOS With NES
    The Exchange proposes to amend its rules to provide that it shall 
use NES for routing orders in options rather than NOS. The Exchange has 
determined to use NES for outbound routing in options, in addition to 
equities. The Exchange originally set up its affiliated broker-dealers 
as two separate entities. Now, the Exchange believes that this is 
unnecessary and costly. Accordingly, pursuant to NOM Rules, Chapter VI, 
Section 11, NES will now be the outbound routing broker for NOM. As the 
new Routing Facility for options, NES will operate the same way as NOS 
currently does, in terms of routing options orders to destination 
options exchanges. This is substantially similar to NYSEArca's use of 
its affiliate Archipelago Securities LLC for order routing in both 
equities and options.
Third-Party Routing Broker
    The Exchange also proposes to codify in its rules the ability to 
use a third-party routing broker to route to away exchanges, rather 
than routing directly through NES, for both equities and options. To 
date, the Exchange has used a third-party routing broker in equities 
and is amending Rule 4758 to clarify this and incorporate the use of a 
third-party routing broker expressly into that rule. Specifically, 
today, the Exchange routes equities orders to away markets through NES, 
which, in turn, sometimes routes directly to away markets; in addition, 
sometimes when the Exchange routes equities orders through NES today, 
NES routes those orders through a third-party routing broker.
    In options, the Exchange currently routes options orders to NOS, 
which routes directly to away markets. The Exchange proposes to use 
NES, rather than NOS, as explained above, and to have NES route either 
directly to other options exchanges or to a third-party routing broker 
(which will, in turn, route to other options exchanges). The Exchange 
proposes to amend Chapter VI, Section 11 of NOM's rules accordingly.
    Regardless of whether a third-party routing broker is used in 
either equities or options, all routing will go through NES, but the 
Exchange could determine to direct NES to route orders to certain 
exchanges using a routing broker rather than routing an order directly.
    The Exchange previously stated that from time to time, it may use 
non-affiliate third-party broker-dealers to provide outbound routing 
services (i.e., third-party Routing Brokers).\4\ In those cases, orders 
are submitted to the third-party Routing Broker through the affiliated 
routing broker, and the third-party Routing Broker routes the orders to 
the routing destination in its name.
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release Nos. 67281 (June 27, 
2012), 77 FR 39543 (July 3, 2012) (SR-NASDAQ-2012-057) at note 6; 
and 68395 (December 10, 2012), 77 FR 74530 (December 14, 2012) (SR-
NASDAQ-2012-134) at note 4.
---------------------------------------------------------------------------

    Under this proposal, the relevant rules would now expressly provide 
that the Exchange could use one or more third-party unaffiliated 
routing broker-dealers (``routing brokers''). Specifically, the 
Exchange proposes to amend NOM Rules, Chapter VI, Section 11, which 
applies to options, to refer to such routing brokers. The Exchange 
proposes to similarly amend Rule 4758(b) respecting equities. The 
Exchange proposes to further amend its rules with respect to certain 
policies and procedures. Specifically, NOM Rules, Chapter VI, Section 
11(e) and Nasdaq Rule 4758 currently provide that the Exchange shall 
establish and maintain procedures and internal controls reasonably 
designed to adequately restrict the flow of confidential and 
proprietary information between the Exchange and the Routing Facility, 
and any other entity, including any affiliate of the Routing Facility. 
The Exchange

[[Page 6248]]

proposes to amend those rules to provide that, where there is a routing 
broker, the Exchange shall establish and maintain procedures and 
internal controls reasonably designed to adequately restrict the flow 
of confidential and proprietary information between the Exchange, the 
Routing Facility and any routing broker, and any other entity, 
including any affiliate of the routing broker (and if the routing 
broker or any of its affiliates engages in any other business 
activities other than providing routing services to the Exchange, 
between the segment of the routing broker or affiliate that provides 
the other business activities and the segment of the routing broker 
that provides the routing services).\5\ This way, this provision 
extends to the routing broker, if one is used.
---------------------------------------------------------------------------

    \5\ This is substantially similar to NYSEArca Rule 6.96(a)(8).
---------------------------------------------------------------------------

    In both the proposed equities and options rules, the Exchange 
proposes to provide that the Exchange may not use a routing broker for 
which the Exchange or any affiliate of the Exchange is the designated 
examining authority. This is similar to the existing provisions that do 
not permit the Exchange to be the designated examining authority for 
its affiliated routing brokers.\6\
---------------------------------------------------------------------------

    \6\ See NOM Chapter VI, Section 11(e) (which currently provides 
that NOS is a broker-dealer that is a member of an unaffiliated SRO 
which is the designated examining authority for the broker-dealer) 
and Rule 4758(b)(4) (which currently provides that the designated 
examining authority of NES shall be a self-regulatory organization 
unaffiliated with the Nasdaq Stock Market LLC or any of its 
affiliates). This is also substantially similar to NYSEArca Rule 
6.96(a)(7).
---------------------------------------------------------------------------

    The Exchange also proposes to expressly state in Rule 4758(b)(1) 
and NOM Rules, Chapter VI, Section 11(e) that the Exchange will 
determine the logic that provides when, how, and where orders are 
routed away to other exchanges. In addition, the routing broker(s) 
cannot change the terms of an order or the routing instructions, nor 
does the routing broker have any discretion about where to route an 
order. This is consistent with, but more specific than, the current 
language that states that routing is performed under the direction of 
the Exchange.\7\
---------------------------------------------------------------------------

    \7\ This is based on NYSEArca Rule 6.96(a)(1)(A).
---------------------------------------------------------------------------

    The Exchange may determine to use a different routing broker by 
product or by destination exchange, depending upon the costs and 
technological efficiencies involved. The proposal is intended to allow 
the Exchange to structure its routing arrangements accordingly. At a 
minimum, the Exchange anticipates using a routing broker to access 
certain markets where the Exchange finds that the costs of maintaining 
a membership (for NES) and/or the costs of connectivity and execution 
do not make sense in light of the number or types of orders the 
Exchange typically routes to that particular market. These costs 
necessarily determine the ultimate costs to the Exchange of routing to 
a market, and, in turn, affect how the Exchange chooses to recoup those 
costs through its own transaction fees.\8\ Sometimes, it will not make 
economic sense for NES to access an exchange directly. Accordingly, the 
Exchange intends to use a routing broker where the Exchange determines 
that it is appropriate. In addition to costs, the Exchange will also 
consider ease of connectivity and execution as well as general 
reliability in selecting a routing broker.
---------------------------------------------------------------------------

    \8\ For these reasons, today, transaction fees for orders vary 
depending on the market where an order is ultimately executed. See 
e.g., NASDAQ Rule 7000 series and NOM Rules, Chapter XV.
---------------------------------------------------------------------------

    For several weeks, the Exchange has been working with the Financial 
Regulatory Authority (``FINRA'') and The Options Clearing Corporation 
(``OCC'') to secure the necessary approvals for NES to perform these 
functions. The Exchange has now secured those approvals. The Exchange 
seeks to complete this process and implement this proposal in January 
or early February.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \9\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \10\ in particular, in that it is designed to 
promote just and equitable principles of trade, 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, by providing an alternative routing arrangement. The proposal 
should remove impediments to and perfect the mechanism of a free and 
open market and a national market system by providing customer order 
protection and by facilitating trading at away exchanges so customer 
orders trade at the best market price. The proposal should also protect 
investors and the public interest by fostering compliance with the 
Options Order Protection and Locked/Crossed Market Plan. The Exchange 
also believes that the proposal to use NES rather than NOS for options 
routing is designed to promote just and equitable principles of trade 
and to protect investors and the public interest, by eliminating the 
costs and inefficiencies associated with operating a separate broker-
dealer for options routing. In addition, the Exchange believes that the 
proposal is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers, because there are specific 
protections pertaining to the routing broker in light of the potential 
conflict of interest where the member routing broker could have access 
to information regarding other members' orders or the routing of those 
orders. These protections include the Exchange's control over all 
routing logic as well as the confidentiality of routing 
information.\11\
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ See proposed Rules 4758(b)(1) and (8) and NOM Rules, 
Chapter VI, Section 11(e).
---------------------------------------------------------------------------

(B) Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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. The proposal is pro-competitive 
because it enables broker-dealers other than NOS and NES to provide 
routing services to the Exchange, which has the potential to reduce the 
Exchange's costs of routing orders and, potentially, the fees the 
Exchange charges for routed orders. The proposal does not raise issues 
of intra-market competition, because the Exchange's decision to route 
through a particular routing broker would impact all participants 
equally.

(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 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)(ii) of the Act \12\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\13\
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78s(b)(3)(a)(ii).
    \13\ 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.

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

[[Page 6249]]

    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: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of 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 email to [email protected]. Please include 
File Number SR-NASDAQ-2014-007 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-2014-007. 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, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 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-NASDAQ-2014-007 and should 
be submitted on or before February 24, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-02135 Filed 1-31-14; 8:45 am]
BILLING CODE 8011-01-P