Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing of Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To Permit Phlx To Accept Inbound Options Orders Routed by Nasdaq Execution Services LLC
Federal Register, Volume 81 Issue 250 (Thursday, December 29, 2016)
Federal Register Volume 81, Number 250 (Thursday, December 29, 2016)
Notices
Pages 96060-96062
From the Federal Register Online via the Government Publishing Office www.gpo.gov
FR Doc No: 2016-31475
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SECURITIES AND EXCHANGE COMMISSION
Release No. 34-79660; File No. SR-Phlx-2016-120
Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing of Proposed Rule Change, as Modified by Amendment No. 1 Thereto, To Permit Phlx To Accept Inbound Options Orders Routed by Nasdaq Execution Services LLC
December 22, 2016.
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 9, 2016, NASDAQ PHLX LLC (``Phlx'' or the ``Exchange'') filed with the Securities and Exchange Commission (``Commission'') the proposed rule change. On December 20, 2016, the Exchange filed Amendment No. 1 to the proposed rule change, which amended and replaced the original filing in its entirety. The proposed rule change, as modified by Amendment No. 1, is 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, as modified by Amendment No. 1 thereto, 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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Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The Exchange proposes to permit Phlx to accept inbound options orders routed by Nasdaq Execution Services LLC (``NES'') from the International Securities Exchange, LLC (``ISE'') ISE Gemini, LLC (``ISE Gemini'') and ISE Mercury, LLC (``ISE Mercury'') (collectively ``ISE Exchanges'').
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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.
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Self-Regulatory Organization's Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change
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Purpose
In conjunction with the ISE Exchanges seeking approval to provide outbound routing services to all options markets using an affiliated routing broker, NES,\3\ Phlx proposes that NES be permitted to route orders from the ISE Exchanges to Phlx, subject to certain limitations and conditions, as described below.
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\3\ See SR-ISE-2016-27, SR-ISEGemini-2016-16 and SR-ISE-Mercury-
2016-22 (not yet published).
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NES is a broker-dealer and member of The Nasdaq Options Market LLC (``NOM''), Nasdaq BX, Inc. (``BX'') and Phlx (collectively ``Nasdaq Exchanges''). NES provides all routing functions for the Nasdaq Exchanges. The Nasdaq Exchanges and NES are permitted affiliates.\4\ Accordingly, the affiliate relationship between Phlx 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\
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\4\ See Phlx Rule 985, Nasdaq Rule 2160 and BX Rule 2140.
\5\ See Securities Exchange Act Release Nos. 59153 (December 23, 2008), 73 FR 80485 (December 31, 2008) (SR-NASDAQ-2008-098); and 62736 (August 17, 2010), 75 FR 51861 (August 23, 2010) (SR-NASDAQ-
2010-100). See also Securities Exchange Act Release No. 58135 (July 10, 2008), 73 FR 40898 (July 16, 2008) (SR-NASDAQ-2008-061) (Permitting NOS to be affiliated with Phlx).
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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.\6\ The Nasdaq Exchanges received approval from the Commission to permit NES to become a member of these three markets subject to certain limitations and conditions in order to perform certain routing and other functions, respectively.\7\ 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 Nasdaq Exchanges previously proposed, and the Commission approved,\8\ NES's affiliation with the Nasdaq Exchanges to permit the Exchange to accept inbound orders that NES routes in its capacity as a facility from other Nasdaq Exchanges, subject to the certain limitations and conditions. Phlx now proposes to permit Phlx to accept inbound options orders that NES routes in its capacity as a facility of the ISE Exchanges, subject to the following limitations and conditions: \9\
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\6\ Securities Exchange Act Release Nos. 71416 (January 28, 2014), 79 FR 6244 (February 3, 2014) (SR-Phlx-2014-05); 71419 (January 28, 2014), 79 FR 6247 (February 3, 2014) (SR-NASDAQ-2014-
007); and 714121 (January 28, 2014), 79 FR 6264 (February 3, 2014) (SR-BX-2014-003).
\7\ See Securities Exchange Act Release Nos. 59721 (April 7, 2009), 74 FR 17245 (April 14, 2009) (SR-Phlx-2009-32); 59779 (April 16, 2009) 74 FR 18600 (April 23, 2009) (SR-Phlx-2009-32, Amendment No. 1) notice of filing of proposed rule change relating to enhanced electronic trading platform for options); 61667 (March 5, 2010), 75 FR 11964 (March 12, 2016) (SR-Phlx-2010-36) (notice of filing and immediate effectiveness of proposed rule changes to establish procedures to prevent information advantages resulting from the affiliation between Phlx and NES); and 71416 (January 28, 2014), 79 FR 6244 (February 3, 2014) (SR-Phlx-2014-05) (notice of filing and immediate effectiveness of proposed rule change to inbound routing of options orders). Nasdaq Options Services was the affiliated broker-dealer prior to a rule change to utilize NES, another affiliated broker-dealer of Nasdaq. See also Securities Exchange Act Release Nos. 63769 (January 25, 2011), 76 FR 5423 (January 31, 2011) (SR-BX-2011-003); 63859 (February 7, 2011), 76 FR 8391 (February 14, 2011) (SR-BX-2011-007) (notice of filing of proposed rule change relating to permanent approval of the BX and NES inbound routing relationship); 71420 (January 28, 2014), 79 FR 6256 (February 3, 2014) (SR-BX-2014-004) (notice of filing and immediate effectiveness of proposed rule change to inbound routing). See also Securities Exchange Act Release Nos. 65554 (October 13, 2011), 76 FR 65311 (October 20, 2011) (SR-NASDAQ-2011-142); 71418 (January 28, 2014), 79 FR 6262 (February 3, 2014) (SR-NASDAQ-2014-008) (notice of filing and immediate effectiveness of proposed rule change to inbound routing).
\8\ Id.
\9\ The Exchange notes that similar filings are proposed for the Nasdaq and BX markets. See SR-Nasdaq-2016-169 and SR-BX-2016-068 (not published).
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First, the Exchange and FINRA maintain a Regulatory Services Agreement (``RSA''), as well as an agreement pursuant to Rule 17d-2 under the Act (``17d-2 Agreement'').\10\ Pursuant to the RSA and the 17d-2 Agreement, FINRA is allocated regulatory responsibilities to review NES's compliance with certain Exchange rules.\11\ Pursuant to the RSA, however, Phlx retains ultimate responsibility for enforcing its rules with respect to NES.
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\10\ 17 CFR 240.17d-2. FINRA reviews NES' compliance for certain common rules. The RSA with FINRA specifies the types of business activities that NES may undertake and it also indicates the obligations to which NES is subject under the RSA. Among other things, NES must maintain a certain amount of net capital pursuant to SEC Rule 15c3-1(a)(1)(ii) and operate pursuant to SEC Rule 15c3-
3(k)(2)(ii). NES is permitted to route orders in options to the appropriate market center for execution in accordance with member order and requirements.
\11\ 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 monitors NES for compliance with the Exchange's trading rules, and collects and maintains certain related information.\12\
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\12\ Pursuant to the RSA, both FINRA and Phlx collect and maintain all alerts, complaints, investigations and enforcement actions in which NES (in its capacity as a facility of BX and NOM routing orders to Phlx) is identified as a participant that has potentially violated applicable Commission or Exchange rules. The Exchange and FINRA 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. Pursuant to the RSA, the Exchange and FINRA would be required to perform these activities with respect to NES acting in its capacity as a facility of each of the affiliated entities routing orders to Phlx.
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Third, FINRA provides a report to the Exchange's chief regulatory officer (``CRO''), on a quarterly basis, that: (i) Quantifies all alerts (of which the Exchange or 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, Phlx has in place Phlx Rule 985(c)(2) which requires Nasdaq, Inc., 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.\13\
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\13\ See Securities Exchange Act Release Nos. 59721 (April 7, 2009), 74 FR 17245 (April 14, 2009) (SR-Phlx-2009-32); 59779 (April 16, 2009), 74 FR 18600 (April 23, 2009) (SR-Phlx-2009-32, Amendment No. 1) notice of filing of proposed rule change relating to enhanced electronic trading platform for options); 61667 (March 5, 2010), 75 FR 11964 (March 12, 2016) (SR-Phlx-2010-36) (notice of filing and immediate effectiveness of proposed rule changes to establish procedures to prevent information advantages resulting from the affiliation between Phlx and NES); and 71416 (January 28, 2014), 79 FR 6244 (February 3, 2014) (SR-Phlx-2014-05) (notice of filing and immediate effectiveness of proposed rule change to inbound routing of options orders). Nasdaq Options Services was the affiliated broker-dealer prior to a rule change to utilize NES, another affiliated broker-dealer of Nasdaq.
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The Exchange has met all the above-listed conditions in connection with
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NES routing in its capacity as a facility of BX and NOM. By meeting the above conditions, the Exchange has set up mechanisms that protect the independence of the Exchange's regulatory responsibility with respect to NES, as well as demonstrate that NES cannot use any information advantage it may have because of its affiliation with the Exchange. Because the Exchange has met all the above-listed conditions, it now seeks to permit an inbound routing relationship with the ISE Exchanges pursuant to the same conditions. The Exchange will continue to comply with the four conditions stated above.
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Statutory Basis
The Exchange believes that the proposed rule change is consistent with the provisions of Section 6 of the Act,\14\ in general, and with Sections 6(b)(5) of the Act,\15\ 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 continue to receive inbound orders from NES, acting in its capacity as a facility of BX and NOM, in a manner consistent with prior approvals and established protections and will further be permitted to receive inbound orders from the ISE Exchanges, for which NES will also act in its capacity as a facility of those markets. 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, or affiliation with other Nasdaq Exchanges or ISE Exchanges, to its advantage.
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\14\ 15 U.S.C. 78f.
\15\ 15 U.S.C. 78f(b)(5).
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Self-Regulatory Organization's Statement on Burden on Competition
The Exchange 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. Permitting Phlx to receive inbound orders from the ISE Exchanges does not create any issues of intra-market competition because it involves inbound routing from affiliated markets. Nor does it result in a burden on competition among exchanges, because there are many competing options exchanges that provide routing services, including through an affiliate.
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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.
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Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the Exchange consents, the Commission shall: (a) By order approve or disapprove such proposed rule change, or (b) institute proceedings to determine whether the proposed rule change should be disapproved.
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Solicitation of Comments
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change, as modified by Amendment No. 1, 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 rule-comments@sec.gov. Please include File Number SR-Phlx-2016-120 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2016-120. 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 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-Phlx-2016-120, and should be submitted on or before January 19, 2017.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
FR Doc. 2016-31475 Filed 12-28-16; 8:45 am
BILLING CODE 8011-01-P
