81 FR 1238 - Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the Retail Price Improvement Program

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 6 (January 11, 2016)

[Federal Register Volume 81, Number 6 (Monday, January 11, 2016)]
[Notices]
[Pages 1238-1240]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-00253]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76829; File No. SR-BX-2015-086]


Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change To Amend 
the Retail Price Improvement Program

January 5, 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 22, 2015, NASDAQ OMX BX, Inc. (``BX'' 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.
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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

    BX is proposing change to amend BX Rule 4780, which governs the 
Exchange's Retail Price Improvement Program (``Retail Program''), to 
distinguish between retail orders routed on behalf of other broker-
dealers and retail orders that are routed on behalf of introduced 
retail accounts that are carried on a fully disclosed basis, as further 
described below.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqomxbx.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 Exchange proposes to amend BX Rule 4780, which governs the 
Exchange's Retail Program,\3\ to distinguish between orders routed on 
behalf of other broker-dealers and orders routed on behalf of 
introduced retail accounts that are carried on a fully disclosed basis, 
as further described below.
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    \3\ The Exchange adopted the Retail Program as BX Rule 4780 in 
2014. See Securities Exchange Act Release No. 73702 (November 28, 
2014), 79 FR 72049 (December 4, 2014) (SR-BX-2014-048).
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    The Exchange established the Retail Program in an attempt to 
attract retail order flow to the Exchange, primarily by offering 
pricing incentives. Under the Retail Program, Retail Member

[[Page 1239]]

Organizations \4\ are permitted to submit Retail Orders,\5\ and receive 
rebates for added liquidity that are higher than the exchanges [sic] 
standard rebates for added liquidity.\6\ In addition, RMOs may 
optionally designate Retail Orders to be identified as Retail on the 
Exchange's proprietary data feeds.\7\
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    \4\ A Retail Member Organization is a Member (or a division 
thereof) that has been approved by the Exchange under BX Rule 4780 
to submit Retail Orders.
    \5\ A Retail Order is an agency order, or riskless principal 
order that satisfies the criteria of FINRA Rule 5320.03. The Retail 
Order must reflect trading interest of a natural person with no 
change made to the terms of the underlying order of the natural 
person with respect to price (except in the case of a market order 
that is changed to a marketable limit order) or side of market and 
that does not originate from a trading algorithm or any other 
computerized methodology.
    \6\ See BX Rule 7018.
    \7\ See BX Rule 4780(f).
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    Exchange Rule 4780(b)(1) currently states that ``[t]o qualify as a 
Retail Member Organization, a Member must conduct a retail business or 
handle retail orders on behalf of another broker-dealer.'' \8\ Rather 
than stating that one way to qualify as an RMO is to handle retail 
orders on behalf of another broker-dealer, the Exchange proposes to 
state that a Member may qualify as an RMO if it ``routes'' retail 
orders on behalf of another broker-dealer. The Exchange believes that 
providing routing services on behalf of other broker-dealers with 
retail order flow was the intended meaning of the provision and that 
the term ``handle'' is vague. Thus, the Exchange believes that the 
description would be better if it referred to routing services provided 
to another broker-dealer with retail customers. The Exchange also 
proposes to distinguish such routing services on behalf of another 
broker-dealer from services provided by broker-dealers that carry 
retail customer accounts on a fully disclosed basis, as described 
below.
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    \8\ Emphasis added.
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    As background with respect to the proposed change, the Exchange 
first would like to describe the terms ``introducing broker'', 
``carrying firm'' or ``carrying broker-dealer'', and ``fully 
disclosed,'' as such terms are commonly used in the securities 
industry. An ``introducing'' broker-dealer is ``one that has a 
contractual arrangement with another firm, known as the carrying or 
clearing firm, under which the carrying firm agrees to perform certain 
services for the introducing firm. Usually, the introducing firm 
submits its customer accounts and customer orders to the carrying firm, 
which executes the orders and carries the account. The carrying firm's 
duties include the proper disposition of the customer funds and 
securities after the trade date, the custody of customer securities and 
funds, and the recordkeeping associated with carrying customer 
accounts.'' \9\
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    \9\ See Securities Exchange Act Release No. 31511 (Nov. 24, 
1992), 57 FR 56973 (December 2, 1992).
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    Further, a ``fully disclosed'' introducing arrangement is 
``distinguished from an omnibus clearing arrangement where the clearing 
firm maintains one account for all the customer transactions of the 
introducing firm. In an omnibus relationship, the clearing firm does 
not know the identity of the customers of the introducing firm. In a 
fully disclosed clearing arrangement, the clearing firm knows the 
names, addresses, securities positions and other relevant data as to 
each customer.'' \10\
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    \10\ Id.
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    With respect to a broker-dealer that is routing on behalf of 
another broker-dealer, the Exchange does not believe that the routing 
broker-dealer has sufficient information to assess whether orders are 
truly retail in nature, and thus, requires an RMO routing on behalf of 
other broker-dealers to maintain additional supervisory procedures and 
obtain annual attestations, as described below, in order to submit 
Retail Orders to the Exchange. In contrast, however, if a broker-dealer 
is carrying a customer account on a fully disclosed basis, then such 
carrying broker-dealer is required to perform certain diligence 
regarding such account that the Exchange believes is sufficient to 
assess whether a customer is a retail customer in order to submit 
orders on behalf of such a customer to the Exchange as a Retail Order. 
The carrying broker of an account typically handles orders from its 
retail customers that are ``introduced'' by an introducing broker. 
However, as noted above, in contrast to a typical routing relationship 
on behalf of another broker- dealer, a carrying broker does obtain a 
significant level of information regarding each customer introduced by 
the introducing broker. Accordingly, the Exchange proposes to state in 
BX Rule 4780(b)(1) that for purposes of BX Rule 4780, ``conducting a 
retail business shall include carrying retail customer accounts on a 
fully disclosed basis.''
    BX Rule 4780(b)(6) currently states, in part, that ``[i]f a Retail 
Member Organization represents Retail Orders from another broker-dealer 
customer, the Retail Member Organization's supervisory procedures must 
be reasonably designed to assure that the orders it receives from such 
broker-dealer customer that it designates as Retail Orders meet the 
definition of a Retail Order.'' This includes obtaining attestations 
from the other broker-dealers for whom the RMO routes. In addition to 
the proposed changes to BX Rule 4780(b)(1) described above, the 
Exchange proposes to modify the language of BX Rule 4780(b)(6) to again 
distinguish between an RMO that conducts a retail business because it 
carries accounts on a fully disclosed basis from an RMO that routes 
orders on behalf of another broker-dealer. As proposed, the additional 
attestation requirements of BX Rule 4780(b)(6) would apply to an RMO 
that does not itself conduct a retail business but routes Retail Orders 
on behalf of other broker-dealers. In turn, such attestation 
requirements would not apply to an RMO that carries retail customer 
accounts on a fully disclosed basis. In connection with this change, 
the Exchange is proposing various edits to the existing rule text so 
that the reference is consistently to ``other broker-dealers'' rather 
than ``broker-dealer customers.''
    The Exchange believes that allowing an RMO that carries retail 
customer accounts on a fully disclosed basis to submit Retail Orders to 
the Exchange without obtaining attestations from broker-dealers that 
might introduce such accounts will encourage participation in the 
Retail Program. As noted above, the Exchange believes that the carrying 
broker has sufficient information to itself confirm that orders are 
Retail Orders without such attestations. The Exchange still believes it 
is necessary to require the attestation by broker-dealers that route 
Retail Orders on behalf of other broker- dealers, because, in contrast, 
such broker-dealers typically do not have a relationship with the 
retail customer and would not be in position to confirm that such 
customers are in fact retail customers.
2. Statutory Basis
    BX believes that the proposed rule change is consistent with the 
provisions of Section 6 of the Act,\11\ in general, and with Section 
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, and to remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system.
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    \11\ 15 U.S.C. 78f.
    \12\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative

[[Page 1240]]

acts and practices because it highlights the parties for whom 
additional procedures are required because they do not maintain 
relationships with the end customer (i.e., routing brokers) and still 
requires the RMO to follow such procedures to ensure that such orders 
qualify as Retail Orders. As proposed, however, an RMO would not be 
required to follow such procedures, including obtaining annual 
attestations, to the extent such RMO actually knows the end customer 
and carries the account of such customer and thus can itself confirm 
that the orders qualify as Retail Orders.
    The Exchange believes that the proposed rule change will remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system because it will allow RMOs that carry retail 
customer accounts to participate in the Program without imposing 
additional attestation requirements that the Exchange did not initially 
intend to impose upon them. By removing impediments to participation in 
the Program, the proposed change would permit expanded access of retail 
customers to the Program.

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

    BX 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. The Exchange 
believes that the amendment, by increasing the level of participation 
in the Program, will increase the level of competition around retail 
executions. The Exchange believes that the transparency and 
competitiveness of operating a program such as the Program on an 
exchange market would result in better prices for retail investors and 
benefits retail investors by expanding the capabilities of Exchanges to 
encompass practices currently allowed on non-exchange venues.

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A)(iii) \13\ of the Act and Rule 19b-4(f)(6) thereunder.\14\ 
Because the 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 its filing date, or such shorter time as the Commission may 
designate if consistent with the protection of investors and the public 
interest, the proposed rule change has become effective pursuant to 
19(b)(3)(A) \15\ of the Act and Rule 19b-4(f)(6) thereunder.\16\
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    \13\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \14\ 17 CFR 240.19b-4(f)(6).
    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6).
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    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-BX-2015-086 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-BX-2015-086. 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-BX-2015-086, and should be 
submitted on or before February 1, 2016.

    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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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-00253 Filed 1-8-16; 8:45 am]
 BILLING CODE 8011-01-P