operation of such facilities during such period null and void or modify
the terms of these transactions if the Officer determines that the
transaction(s) are clearly erroneous, or that such actions are
necessary for the maintenance of a fair and orderly market or for the
protection of investors and the public interest. Any such action of the
Officer pursuant to this subsection (e) shall be taken as promptly as
practicable following detection of the erroneous transaction. Each ETP
Holder involved in the transaction shall be notified as soon as
practicable, and the ETP Holder aggrieved by the action may appeal such
action in accordance with the provisions of subsection (c)(2).

Rule 11.20. Trading Halts Due to Extraordinary Market Volatility

    (a) Trading in stocks will halt on the Exchange and will not reopen
for the time periods described in this paragraph (a) if the Dow Jones
Industrial Average reaches Level 1 below its closing value on the
previous trading day:
    (1) before 1:00 p.m. Central Time, for one hour;
    (2) at or after 1:00 p.m. but before 1:30 p.m. Central Time, for 30
minutes.
    If the Dow Jones Industrial Average reaches Level 1 below its
closing value on the previous trading day at or after 1:30 p.m. Central
Time, trading will continue through the facilities of the Exchange
until the close, unless the Dow Jones Industrial Average reaches Level
2 below its closing value on the previous trading day, at which time
trading will be halted for the remainder of the day.
    (b) Trading in stocks will halt on the Exchange and will not re-
open for the time periods described in this paragraph (b) if the Dow
Jones Industrial Average reaches Level 2 below its closing value on the
previous trading day:
    (1) before 12:00 noon Central Time, for two hours;
    (2) at or after 12:00 noon but before 1:00 p.m. Central Time, for
one hour;
    (3) at or after 1:00 p.m. Central Time, for the remainder of the
day.
    (c) If the Dow Jones Industrial Average reaches Level 3 below its
closing value on the previous trading day, trading in stocks will halt
on the Exchange and will not reopen for the remainder of the day.
    (d) On the occurrence of any trading halt pursuant to this Rule,
all outstanding orders in the System will be cancelled.
    Commentary:
    .01 Levels 1, 2 and 3 will be calculated at the beginning of each
calendar quarter, using the average closing value of the Dow Jones
Industrial Average for the month prior to the beginning of the quarter.
Level 1 will be 10% of such average closing value calculation; Level 2
will be 20% of such average closing value calculation; Level 3 will be
30% of such average closing value calculation. Each Level will be
rounded to the nearest fifty points. The values of Levels 1, 2 and 3
will remain in effect until the next calculation.
    .02 The restrictions in this Rule will apply whenever the Dow Jones
Industrial Average reaches the trigger values notwithstanding the fact
that at any given time, the calculation of the value of the average may
be based on the prices of less than all of the stocks included in the
average.
    .03 The reopening of trading following a trading halt under this
Rule will be conducted pursuant to procedures adopted by the Exchange
and communicated by notice to its ETP Holders.
    .04 Nothing in this Rule should be construed to limit the ability
of the Exchange to otherwise halt or suspend the trading in any stock
or stocks traded on the Exchange pursuant to any other Exchange Rule or
policy.

Rule 11.21. Short Sales

    All short sale orders shall be identified as either short sale or
short sale exempt when entered into the System. Any marketable order
entered in the System that, if matched for execution, would violate the
short sale provisions of the Act or the rules and regulations
thereunder shall be cancelled. The foregoing shall not be in limitation
of the Exchange's ability to adopt additional Rules, interpretations or
policies relating to short sales.

Rule 11.22. Locking or Crossing Quotations in NMS Stocks

    (a) Definitions. For purposes of this Rule, the following
definitions shall apply:
    (1) The terms automated quotation, effective national market system
plan, intermarket sweep order, manual quotation, NMS stock, protected
quotation, regular trading hours, and trading center shall have the
meanings set forth in Rule 600(b) of Regulation NMS.
    (2) The term crossing quotation shall mean the display of a bid for
an NMS stock during regular trading hours at a price that is higher
than the price of an offer for such NMS stock previously disseminated
pursuant to an effective national market system plan, or the display of
an offer for an NMS stock during regular trading hours at a price that
is lower than the price of a bid for such NMS stock previously
disseminated pursuant to an effective national market system plan.
    (3) The term locking quotation shall mean the display of a bid for
an NMS stock during regular trading hours at a price that equals the
price of an offer for such NMS stock previously disseminated pursuant
to an effective national market system plan, or the display of an offer
for an NMS stock during regular trading hours at a price that equals
the price of a bid for such NMS stock previously disseminated pursuant
to an effective national market system plan.
    (b) Prohibition. Except for quotations that fall within the
provisions of paragraph (d) of this Rule, Users shall reasonably avoid
displaying, and shall not engage in a pattern or practice of
displaying, any quotations that lock or cross a protected quotation,
and any manual quotations that lock or cross a quotation previously
disseminated pursuant to an effective national market system plan.
    (c) Manual quotations. If a User displays a manual quotation that
locks or crosses a quotation previously disseminated pursuant to an
effective national market system plan, such User shall promptly either
withdraw the manual quotation or route an intermarket sweep order to
execute against the full displayed size of the locked or crossed
quotation.
    (d) Exceptions.
    (1) The locking or crossing quotation was displayed at a time when
the trading center displaying the locked or crossed quotation was
experiencing a

failure, material delay, or malfunction of its systems or equipment.
    (2) The locking or crossing quotation was displayed at a time when
a protected bid was higher than a protected offer in the NMS stock.
    (3) The locking or crossing quotation was an automated quotation,
and the User displaying such automated quotation simultaneously routed
an intermarket sweep order to execute against the full displayed size
of any locked or crossed protected quotation.
    (4) The locking or crossing quotation was a manual quotation that
locked or crossed another manual quotation, and the User displaying the
locking or crossing manual quotation simultaneously routed an
intermarket sweep order to execute against the full displayed size of
the locked or crossed manual quotation.

Rule 11.23. Riskless Principal Transactions

    (a) A ``riskless principal transaction'' is defined as two
offsetting principal transaction legs in which an ETP Holder, (i) after
having received an order to buy a security that it holds for execution
on the Exchange, purchases the security as principal at the same price,
exclusive of markups, markdowns, commissions and other fees, to satisfy
all or a portion of the order to buy or (ii) after having received an
order to sell a security that it holds for execution on the Exchange,
sells the security as principal at the same price, exclusive of
markups, markdowns, commissions and other fees, to satisfy all or a
portion of the order to sell.
    (b) A last sale report for only the initial offsetting transaction
leg of a riskless principal transaction shall be submitted to the
respective consolidated tape in accordance with the rules and
procedures of the market where that transaction leg occurred. A last
sale report for the second offsetting transaction leg of a riskless
principal transaction shall not be submitted by the Exchange to the
respective consolidated tape provided that the second offsetting
transaction leg is submitted to the Exchange for execution and
designated with a riskless principal modifier by the ETP Holder.
    (c) An ETP Holder must have written policies and procedures to
assure that its riskless principal transactions comply with this Rule.
At a minimum these policies and procedures must require that the
customer order be received prior to the offsetting transactions, and
that the second offsetting transaction leg be executed within 60
seconds of the initial offsetting transaction leg. An ETP Holder must
also have supervisory systems in place that produce records that enable
the ETP Holder and the Exchange to accurately and readily reconstruct,
in a time-sequenced manner, all orders related to each riskless
principal transaction.
* * * * *

CHAPTER XII. Trading Practice Rules

* * * * *
Rule 12.6. Customer Priority
    (a)-(c) No change.
    (d) The provisions of paragraphs (a) and (b) of this Rule also
shall not apply if an ETP Holder engages in trading activity to
facilitate the execution, on a riskless principal basis, of another
order from its customer (whether its own customer or the customer of
another member) (the ``facilitated order''), provided that the
requirements of Rule 11.23 are satisfied. Any transaction handled by an
ETP Holder on other than an agency basis that does not satisfy the
requirements of Exchange Rule 11.23 remains a transaction that, unless
otherwise exempt, is subject to the provisions of paragraphs (a) and
(b) of this Rule. This exemption applies to both offsetting transaction
legs of a riskless principal transaction but only to the extent of the
actual number of shares that are required to satisfy the facilitated
order.
Interpretations and Policies
    .01 If [a Designated Dealer] an ETP Holder holds for execution on
the Exchange a customer buy order and a customer sell order that can be
crossed, the [Designated Dealer] ETP Holder shall cross them without
interpositioning itself as a dealer.
    .02 For a pilot period lasting through June 30, 2006:
    (a) [A Designated Dealer] An ETP Holder shall be deemed to have
violated Rule 12.6 if, while holding a customer limit order (as rounded
to a penny increment) representing the NBBO, the [Designated Dealer]
ETP Holder, for his own account, trades with an incoming market or
marketable limit order at a price which is less than one penny better
than the price of such customer limit order (not the quoted price) held
by such [Designated Dealer] ETP Holder.
    (b) [A Designated Dealer] An ETP Holder shall be deemed to have
violated Rule 12.6 if, while holding a customer limit order (as rounded
to a penny increment) at a price outside the NBBO, the [Designated
Dealer] ETP Holder, for his own account, trades with an incoming market
or marketable limit order at a price which is less than the nearest
penny increment to the actual price of the customer limit order (not
the quoted price) held by such [Designated Dealer] ETP Holder.
* * * * *

CHAPTER XIV. Intermarket Trading System Plan

* * * * *
Rule 14.9. ITS ``Trade-Throughs'' and ``Locked Markets''
    (a)-(e) No change.
    (f) This Rule 14.9 shall cease to be operational on the compliance
date for the provisions of Regulation NMS relating to trade-throughs
and locked markets.
* * * * *

CHAPTER XV. Listed Securities and Other Exchange Products

* * * * *

15.10. Portfolio Depositary Receipts

    (1) Applicability. This rule is applicable only to Portfolio
Depositary Receipts. Except to the extent inconsistent with this rule,
or unless the context otherwise requires, the provisions of the By-Laws
and all other rules and policies of the Board shall be applicable to
the trading on the Exchange of such securities. Portfolio Depositary
Receipts are included within the definition of ``security'' or
``securities'' as such terms are used in the By-Laws and Rules of the
Exchange.
    (2) Definitions. The following terms as used in the Rules shall,
unless the context otherwise requires, have the meanings herein
specified:
    (a) Portfolio Depositary Receipt. The term ``Portfolio Depositary
Receipt'' means a security (i) that is based on a unit investment trust
(``Trust'') which holds the securities which comprise an index or
portfolio underlying a series of Portfolio Depositary Receipts; (ii)
that is issued by the Trust in a specified aggregate minimum number in
return for a ``Portfolio Deposit'' consisting of specified numbers of
shares of stock plus a cash amount; (iii) that, when aggregated in the
same specified minimum number, may be redeemed from the Trust which
will pay to the redeeming holder the stock and cash then comprising the
``Portfolio Deposit'; and (iv) that pays holders a periodic cash
payment corresponding to the regular cash dividends or distributions
declared with respect to the component securities of the stock index or
portfolio of securities underlying the Portfolio Depository Receipts,
less certain expenses and other charges as set forth in the Trust
prospectus.
    (b) Reporting Authority. The term ``Reporting Authority'' in
respect of a

particular series of Portfolio Depositary Receipts means the Exchange,
an institution (including the Trustee for a series of Portfolio
Depositary Receipts), or a reporting service designated by the
Exchange, or by the exchange that lists a particular series of
Portfolio Depository Receipts (if the Exchange is trading such series
pursuant to unlisted trading privileges) as the official source for
calculating and reporting information relating to such series,
including, but not limited to, any current index or portfolio value;
the current value of the portfolio of securities required to be
deposited to the Trust in connection with issuance of Portfolio
Depositary Receipts; the amount of any dividend equivalent payment or
cash distribution to holders of Portfolio Depositary Receipts, net
asset value, or other information relating to the creation, redemption
or trading of Portfolio Depositary receipts.
    (3) ETP Holders shall provide to all purchasers of a series of
Portfolio Depositary Receipts a written description of the terms and
characteristics of such securities, in a form approved by the Exchange,
not later than the time a confirmation of the first transaction in such
a series is delivered to such purchaser. In addition, ETP Holders shall
include such a written description with any sales material relating to
a series of Portfolio Depositary Receipts that is provided to customers
or the public. Any other written materials provided by an ETP Holder to
customers or to the public making specific reference to a series of
Portfolio Depositary Receipts as an investment vehicle must include a
statement in substantially the following form: ``A circular describing
the terms and characteristics of [the series of Portfolio Depositary
Receipts] is available from your broker. It is recommended that you
obtain and review such circular before purchasing [the series of
Portfolio Depositary Receipts]. In addition, upon request you may
obtain from your broker a prospectus for [the series of Portfolio
Depositary Receipts].'' An ETP Holder carrying omnibus account for a
non-ETP Holder broker-dealer is required to inform such non-ETP Holder
that execution of an order to purchase a series of Portfolio Depositary
Receipts for such omnibus account will be deemed to constitute
agreement by the non-ETP Holder to make such written description
available to its customers on the same terms as are directly applicable
to ETP Holders under this Rule.
    Upon request of a customer, an ETP Holder shall also provide a
prospectus for the particular series of Portfolio Depositary Receipts.
    (4) Designation of an Index or Portfolio. The trading of Portfolio
Depositary Receipts based on one or more stock indices or securities
portfolios, whether by listing or pursuant to unlisted trading
privileges, shall be considered on a case by case basis. The Portfolio
Depositary Receipts based on each particular stock index or portfolio
shall be designated as a separate series and shall be identified by a
unique symbol. The stocks that are included in an index or portfolio on
which Portfolio Depositary Receipts are based shall be selected by the
Exchange or by such other person as shall have a proprietary interest
in and authorized use of such index or portfolio, and may be revised
from time to time as may be deemed necessary or appropriate to maintain
the quality and character of the index or portfolio.
    (5) Initial and Continued Listing and/or Trading. A Trust upon
which a series of Portfolio Depositary Receipts is based will be traded
on the Exchange, whether by listing or pursuant to unlisted trading
privileges, subject to application of the following criteria:
    (a) Commencement of Trading--For each Trust, the Exchange will
establish a minimum number of Portfolio Depositary Receipts required to
be outstanding at the time of commencement of trading on the Exchange.
    (b) Continued Trading--Following the initial twelve month period
following formation of a Trust and commencement of trading on the
Exchange, the Exchange will consider the suspension of trading in,
removal from listing of, or termination of unlisted trading privileges
for a Trust upon which a series of Portfolio Depositary Receipts is
based under any of the following circumstances: (i) If the Trust has
more than 60 days remaining until termination and there are fewer than
50 record and/or beneficial holders of Portfolio Depositary Receipts
for 30 or more consecutive trading days; or (ii) if the value of the
index or portfolio of securities on which the Trust is based is no
longer calculated or available; or (iii) if such other event shall
occur or condition exists which in the opinion of the Exchange, makes
future dealings on the Exchange inadvisable.
    Upon termination of a Trust, the Exchange requires that Portfolio
Depositary Receipts issued in connection with such Trust be removed
from Exchange listing or have their unlisted trading privileges
terminated. A Trust may terminate in accordance with the provisions of
the Trust prospectus, which may provide for termination if the value of
securities in the Trust falls below a specified amount.
    (c) Term--The stated term of the Trust shall be stated in the Trust
Prospectus. However, a Trust may be terminated under such earlier
circumstances as may be specified in the Trust prospectus.
    (d) Trustee--The trustee must be a trust company or banking
institution having substantial capital and surplus and the experience
and facilities for handling corporate trust business. In cases where,
for any reason, an individual has been appointed as trustee, a
qualified trust company or banking institution must be appointed as co-
trustee.
    (e) Voting--Voting rights shall be as set forth in the Trust
prospectus. The Trustee of a Trust may have the right to vote all of
the voting securities of such Trust.
    (6) Limitation of Exchange Liability. Neither the Exchange, the
Reporting Authority nor any agent of the Exchange shall have any
liability for damages, claims, losses or expenses caused by any errors,
omissions, or delays in calculating or disseminating any current index
or portfolio value, the current value of the portfolio of securities
required to be deposited to the Trust; the amount of any dividend
equivalent payment or cash distribution to holders of Portfolio
Depositary Receipts; net asset value; or other information relating to
the creation redemption or trading of Portfolio Depositary Receipts,
resulting from any negligent act or omission by the Exchange, or the
Reporting Authority, or any agent of the Exchange or any act, condition
or cause beyond the reasonable control of the Exchange or its agent, or
the Reporting Authority, including, but not limited to, an act of God;
fire; flood; extraordinary weather conditions; war; insurrection; riot;
strike; accident; action of government; communications or power
failure; equipment or software malfunction; or any error, omission or
delay in the reports of transactions in one or more of the underlying
securities. The Exchange makes no warranty, express or implied, as to
the results to be obtained by any person or entity from the use of
Portfolio Depositary Receipts or any underlying index or data included
therein and the Exchange makes no express or implied warranties, and
disclaims all warranties or merchantability or fitness for a particular
purpose with respect to Portfolio Depositary Receipts or any underlying
index or data included therein. This limitation of liability shall be
in addition to any other limitation

contained in the Exchange's Articles of Incorporation, By-Laws or
Rules.

Interpretations And Policies

    .01 The Exchange will trade pursuant to unlisted trading
privileges, Portfolio Depositary Receipts based on the Standard and
Poor's Exchange's S&P 500 Index, known as SPDRs.
    .02 The Exchange will trade, pursuant to unlisted trading
privileges, Portfolio Depositary Receipts based on the Standard and
Poor's Exchange's S&P MidCap 400 Index, known as MidCap SPDRs.
    Standard & Poor's'', ``S&P'', ``S&P 500'', ``Standard & Poor's
500'', and ``500'' are trademarks of the McGraw-Hill Companies, Inc.
and have been licensed for use by the Exchange.

15.11. Trust Issued Receipts

    (1) Applicability. This rule is applicable only to Trust Issued
Receipts. Except to the extent inconsistent with this rule, or unless
the context otherwise requires, the provisions of the By-Laws and all
the rules and policies of the Board shall be applicable to the trading
on the Exchange of such securities. Trust Issued Receipts are included
within the definition of ``security'' or ``securities'' as such terms
are used in the By-Laws and Rules of the Exchange. The Exchange will
consider for trading, whether by listing or pursuant to unlisted
trading privileges, Trust Issued Receipts that meet the criteria of
this Rule.
    (2) Definitions. The following terms as used in the Rules shall,
unless the context otherwise requires, have the following meanings
herein specified:
    (a) Trust Issued Receipt. A Trust Issued Receipt is a security (a)
that is issued by a trust (``Trust'') which holds specific securities
deposited with the Trust; (b) that when aggregated in some specified
minimum number, may be surrendered to the Trust by the beneficial owner
to receive the securities; and (c) that pays beneficial owners
dividends and other distributions on the deposited securities, if any
are declared and paid to the trustee by an issuer of the deposited
securities.
    (3) Designation. The Exchange may trade, whether by listing or
pursuant to unlisted trading privileges, Trust Issued Receipts based on
one or more securities. The Trust Issued Receipts based on particular
securities shall be designated as a separate series and shall be
identified by a unique symbol. The securities that are included in a
series of Trust Issued Receipts shall be selected by the Exchange or by
such other person as shall have a proprietary interest in such Trust
Issued Receipts.
    (4) Initial and Continued Listing. Trust Issued Receipts will be
traded on the Exchange subject to application of the following
criteria:
    (a) Initial Listing--For each Trust, the Exchange will establish a
minimum number of Trust Issued Receipts required to be outstanding at
the time of commencement of trading on the Exchange.
    (b) Continued Listing--Following the initial twelve month period
following formation of a Trust and commencement of trading on the
Exchange, the Exchange will consider the suspension of trading in or
removal from listing of a Trust upon which a series of Trust Issued
Receipts is based under any of the following circumstances: (i) if the
Trust has more than 60 days remaining until termination and there are
fewer than 50 record and/or beneficial holders of Trust Issued Receipts
for 30 or more consecutive trading days; (ii) if the Trust has more
than 50,000 receipts issued and outstanding; (iii) if the market value
of all receipts issued and outstanding is less than $1,000,000; or (iv)
if any other event shall occur or condition exists which, in the
opinion of the Exchange, makes further dealings on the Exchange
inadvisable. Upon termination of a Trust, the Exchange requires that
the Trust Issued Receipts issued in connection with such Trust be
removed from Exchange listing. A Trust may terminate in accordance with
the provisions of the Trust prospectus, which may provide for
termination if the value of securities in the Trust falls below a
specified amount.
    (c) Term--The stated term of the Trust shall be as stated in the
Trust prospectus; however, a Trust may be terminated under such earlier
circumstances as may be specified in the Trust prospectus.
    (f) Trustee--The Trustee must be a trust company or banking
institution having substantial capital and surplus and the experience
and facilities for handling corporate trust business. In cases where,
for any reason, an individual has been appointed as trustee, a
qualified trust company or banking institution must be appointed co-
trustee.
    (g) Voting--Voting rights shall be set forth in the Trust
prospectus.
    (5) ETP Holder Obligations. ETP Holders shall provide to all
purchasers of newly issued Trust Issued Receipts a prospectus for the
series of Trust Issued Receipts.
    (6) Trading Issues. Trust Issued Receipts may be acquired, held, or
transferred only in round-lot amounts (or round-lot multiples) of 100
receipts. Orders for less than a round-lot multiple, will be executed
to the extent of the largest round-lot multiple.

Interpretations and Policies

    .01 The Exchange may approve a series of Trust Issued Receipts for
trading, whether by listing or pursuant to unlisted trading privileges,
pursuant to Rule 19b-4(e) under the Act, provided that the following
criteria are satisfied:
    (a) Each security underlying the Trust Issued Receipt must be
registered under Section 12 of the Act;
    (b) Each company whose securities are underlying securities for the
Trust Issued Receipt must have a minimum public float of at least $150
million;
    (c) Each security underlying the Trust Issued Receipt must be
listed on a national securities exchange or traded through the
facilities of NASDAQ as a reported national market system security;
    (d) Each company whose securities are underlying securities for the
Trust Issued Receipt must have an average daily trading volume of at
least 100,000 shares during the preceding sixty-day trading period;
    (e) Each company whose securities are underlying securities for the
Trust Issued Receipt must have an average daily dollar value of shares
traded during the preceding sixty-day trading period of at least $1
million; and
    (f) The most heavily weighted security in the Trust Issued Receipt
cannot initially represent more than 20% of the overall value of the
Trust Issued Receipt.

15.12. Index Fund Shares

    (1) Applicability. This Chapter is applicable only to Index Fund
Shares. Except to the extent inconsistent with this Chapter, or unless
the context otherwise requires, the provisions of the By-Laws and all
other rules and policies of the Exchange shall be applicable to the
trading on the Exchange of Index Fund Shares. Index Fund Shares are
included within the definition of ``security'' or ``securities'' as
such terms are used in the By-Laws and Rules of the Exchange.
    (2) Definitions. The following terms as used in the Rules shall,
unless the context otherwise requires, have the meanings herein
specified:
    (a) Index Fund Shares means a security (a) that is issued by an
open-end management investment company based on a portfolio of stocks
that seeks to provide investment results that correspond generally to
the price and yield performance of a specified foreign

or domestic stock index; (b) that is issued by such an open-end
management investment company in a specified aggregate minimum number
in return for a deposit of specified numbers of shares of stock and/or
a cash amount with a value equal to the next determined net asset
value; and (c) that, when aggregated in the same specified minimum
number, may be redeemed at a holders request by such open-end
investment company which will pay to the redeeming holder the stock
and/or cash with a value equal to the next determined net asset value.
    (b) Reporting Authority. The term ``Reporting Authority'' in
respect of a particular series of Index Fund Shares means the Exchange,
a subsidiary of the Exchange, or an institution or reporting service
designated by the Exchange or its subsidiary as the official source for
calculating and reporting information to such series, including, but
not limited to, any current index or portfolio value; the current value
of the portfolio of any securities required to be deposited in
connection with issuance of Index Fund Shares; the amount of any
dividend equivalent payment or cash distribution to holders of Index
Fund Shares, net asset value, or other information relating to the
issuance, redemption or trading of Index Fund Shares.
    Nothing in this section shall imply that an institution or
reporting service that is the source for calculating and reporting
information relating to Index Fund Shares must be designated by the
Exchange, the term ``Reporting Authority'' shall not refer to an
institution or reporting service not so designated.
    (3) Disclosure. Upon request of a customer, ETP Holders shall
provide to all purchasers of Index Fund Shares a prospectus for the
series of Index Fund Shares.
    (4) Designation. The trading of Index Fund Shares based on one or
more securities, whether by listing or pursuant to unlisted trading
privileges, shall be considered on a case-by-case basis. Each issue of
Index Fund Shares shall be based on each particular stock index or
portfolio and shall be a designated as a separate series and shall be
identified by a unique symbol. The securities that are included in a
series of Index Fund Shares shall be selected by the Exchange or its
agent, a wholly-owned subsidiary of the Exchange, or by such other
person thereof, as shall have authorized use of such index. Such index
or portfolio may be revised from time to time as may be deemed
necessary or appropriate to maintain the quality and character of the
index or portfolio.
    (5) Initial and Continued Listing and/or Trading. Each series of
Index Fund Shares will be traded on the Exchange, whether by listing or
pursuant to unlisted trading privileges, subject to application of the
following criteria:
    (a) Commencement of Trading--For each Series, the Exchange will
establish a minimum number of Index Fund Shares required to be
outstanding at the time of commencement of trading on the Exchange.
    (b) Continued Trading--Following the initial twelve month period
following commencement of trading on the Exchange of a series of Index
Fund Shares, the Exchange will consider the suspension of trading, the
removal from listing, or termination of unlisted trading privileges for
such series under any of the following circumstances: (i) if there are
fewer than 50 beneficial holders of the series of Index Fund Shares for
30 or more consecutive trading days; (ii) if the value of the index or
portfolio of securities on which the series of Index Fund Shares is
based is no longer calculated or available; or (iii) if such other
event shall occur or condition exist which, in the opinion of the
Exchange, makes further dealings on the Exchange inadvisable. Upon
termination of an open-ended management investment company, the
Exchange requires that Index Fund Shares issued in connection with such
entity be removed from Exchange listing.
    (c) Voting--Voting rights shall be as set forth in the applicable
open-end management investment company prospectus.

Interpretations and Policies

    .01 The Exchange may approve a series of Index Fund Shares for
listing pursuant to Rule 19b-4(e) under the Act provided each of the
following criteria is satisfied:
    (a) Eligibility Criteria for Index Components. Upon the initial
listing of a series of Index Fund Shares each component of an index or
portfolio underlying a series of Index Fund Shares shall meet the
following criteria as of the date of the initial deposit of securities
to the fund in connection with the initial issuance of shares of such
fund: (i) Component stocks that in the aggregate account for at least
90% of the weight of the index or portfolio shall have a minimum market
value of at least $75 million; (ii) The component stocks shall have a
minimum monthly trading volume during each of the last six months of at
least 250,000 shares for stocks representing at least 90% of the weight
of the index or portfolio; (iii) The most heavily weighted component
stock cannot exceed 25% of the weight of the index or portfolio, and
the five most heavily weighted component stocks cannot exceed 65% of
the weight of the index or portfolio; (iv) The underlying index or
portfolio must include a minimum of 13 stocks; and (v) All securities
in an underlying index or portfolio must be listed on a national
securities exchange or The Nasdaq Stock Market (including the Nasdaq
SmallCap Market).
    (b) Index Methodology and Calculation. (i) The index underlying a
series of Index Fund Shares will be calculated based on either the
market capitalization, modified market capitalization, price, equal-
dollar or modified equal-dollar weighting methodology; (ii) If the
index is maintained by a broker-dealer, the broker-dealer shall erect a
``fire-wall'' around the personnel who have access to information
concerning changes and adjustments to the index and the index shall be
calculated by a third party who is not a broker-dealer; and (iii) The
current index value will be disseminated every 15 seconds over the
Consolidated Tape Association's Network B.
    (c) Disseminated Information. The Reporting Authority will
disseminate for each series of Index Fund Shares an estimate, updated
every 15 seconds, of the value of a share of each series. This may be
based, for example, upon current information regarding the required
deposit of securities and cash amount to permit creation of new shares
of the series or upon the index value.
    (d) Initial Shares Outstanding. A minimum of 100,000 shares of a
series of Index Fund Shares is required to be outstanding at
commencement of trading.
    (e) Minimal Fractional Trading Variation. The minimum fractional
trading variation may vary among different series of Index Fund Shares
but will be set at 1/16th, 1/32nd, or 1/64th of $1.00.
    (f) Hours of Trading. Trading will occur between 9:30 a.m. and
either 4:00 p.m. or 4:15 p.m. for each series of Index Fund Shares, as
specified by the Exchange.
    (g) Surveillance Procedures. The Exchange will utilize existing
surveillance procedures for Index Fund Shares.
    (h) Applicability of Other Rules. The provisions of the Exchange
Rules and By-Laws will apply to all series of Index Fund Shares.
    .02 The following paragraphs only apply to series of Index Fund
Shares that are the subject of an order by the Securities and Exchange
Commission

exempting such series from certain prospectus delivery requirements
under Section 24(d) of the Investment Company Act of 1940. The Exchange
will inform ETP Holders regarding application of these provisions to a
particular series of Index Fund Shares by means of an Information
Circular prior to commencement of trading in such series. The Exchange
requires that ETP Holders provide to all purchasers of a series of
Index Fund Shares a written description of the terms and
characteristics of such securities, in a form prepared by the open-end
management investment company issuing such securities, not later than
the time a confirmation of the first transaction in such series is
delivered to such purchaser. In addition, ETP Holders shall include
such a written description with any sales material relating to a series
of Index Fund Shares that is provided to customers or the public. Any
other written materials provided by an ETP Holder to customers or the
public making specific reference to a series of Index Fund Shares as an
investment vehicle must include a statement in substantially the
following form: ``A circular describing the terms and characteristics
of [the series of Index Fund Shares] has been prepared by the [open-end
management investment company name] and is available from your broker
or the Exchange. It is recommended that you obtain and review such
circular before purchasing [the series of Index Fund Shares].''
    An ETP Holder carrying an omnibus account for a non-ETP Holder
broker-dealer is required to inform such non-ETP Holder that execution
of an order to purchase a series of Index Fund Shares for such omnibus
account will be deemed to constitute agreement by the non-ETP Holder to
make such written description available to its customers on the same
terms as are directly applicable to ETP Holders under this rule.
    Upon request of a customer, an ETP Holder shall also provide a
prospectus for the particular series of Index Fund Shares.
* * * * *

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 proposal and discussed
any comments it received on the proposed rule change, as amended. 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
Background
    The Exchange is proposing a series of rule changes in connection
with a new electronic trading system (the ``System'') the Exchange is
developing to replace the Exchange's current National Securities
Trading System (``NSTS''). The Exchange states that the System would
provide for a new trading platform and structure in order to take
advantage of opportunities in the marketplace and the implementation of
Regulation NMS (``Regulation NMS'') under the Act, as amended, and the
rules and regulations thereunder.\4\ The System would have different
priority rules than that of NSTS. For example, NSTS and the Exchange's
current trading rules allow preferencing by dealers under certain
circumstances.\5\ The Exchange states that the System (and the proposed
rule change described in this submission) would provide for strict
price-time priority execution, with no priority of execution
distinction made for principal or agency orders.\6\
---------------------------------------------------------------------------

    \4\ 17 CFR 242.600 et seq.
    \5\ See current NSX Rule 11.9, particularly NSX Rules 11.9(l),
(m) and (u).
    \6\ See proposed NSX Rules 11.13 and 11.14.
---------------------------------------------------------------------------

    The proposed rule change, as amended, also incorporates the trade-
through rule of Regulation NMS \7\ by requiring that, for any execution
to occur on the Exchange during regular trading hours,\8\ the price
must be equal to or better than the national best bid or offer that is
a ``protected quotation'' within the meaning of Regulation NMS (the
``Protected NBBO''), unless an exception to the trade-through rule of
Regulation NMS is available.\9\ NSX proposes to route orders that
cannot be executed at the Protected NBBO on the Exchange to away
markets for execution.\10\ Finally, with the System the Exchange
proposes to retain an option for order delivery,\11\ but to require
that Users requesting order delivery be able to process inbound orders
and respond within \1/2\ of a second.\12\
---------------------------------------------------------------------------

    \7\ 17 CFR 242.611.
    \8\ ``Regular Trading Hours'' is defined as between 8:30 a.m.
and 3:00 p.m. Central Time. See proposed NSX Rule 1.5(R)(1). This is
consistent with the definition of ``regular trading hours'' set
forth in Regulation NMS. See 17 CFR 242.600(b)(64).
    \9\ See proposed NSX Rule 11.15.
    \10\ See proposed NSX Rule 11.15(a)(ii).
    \11\ See current NSX Rule 11.9(i).
    \12\ See proposed NSX Rule 11.13(b).
---------------------------------------------------------------------------

    With this proposed rule change, the Exchange is proposing to
substantially revise Chapter XI of its Rules (relating to Trading
Rules), in order to incorporate priority rules and other features
consistent with the System. In connection with the proposed changes to
the trading rules, the Exchange is also proposing changes to certain
other aspects of its rules as follows:
    1. Revisions to Chapter I to incorporate new definitions and other
general provisions;
    2. One change to Chapter II concerning the ETP Holder admission
process and related provisions;
    3. Revisions to Chapter XV, to incorporate provisions relating to
specifications for other products (e.g., exchange-traded funds) that
are currently located in Chapter XI of the Exchange's Rules; and
    4. Certain other technical changes in order to be consistent with
the new trading rules and related changes being proposed.\13\
---------------------------------------------------------------------------

    \13\ The Exchange states that a proposed new Chapter XVI
relating to dues, fees, assessments and other charges and Exchange
rebate programs will be filed with the Commission by the Exchange at
a later date. This will replace the Exchange's current fee schedule
contained in NSX Rule 11.10, which is being removed in connection
with the proposed changes to Chapter XI described herein.
---------------------------------------------------------------------------

    Finally, in connection with the new System and the proposed changes
to the Exchange's trading rules, the Exchange is requesting that the
Commission approve NSX Securities LLC (``NSX Securities'') to be a
facility (as defined in Section 3(a)(2) of the Act) of the Exchange.
Trading Rules
    Chapter XI of the Exchange's Rules is proposed to be substantially
revised in order to accommodate the proposed new market structure. The
Exchange states that, although certain aspects of NSX's current Chapter
XI have been retained in part, as noted below, for the most part
proposed Chapter XI is not based on current Exchange Rules. In general,
the proposed Chapter is ordered as follows: (1) Introductory
provisions, such as hours of trading and price variations; (2)
Registration and obligations of Market Makers (which are optional in
this proposed market structure); (3) Access to the System; (4) Types of
orders and messages that can be entered into the System; (5) Order
priority and execution; and (6) Clearance and settlement, clearly
erroneous executions, and other miscellaneous provisions.

A. Hours of Trading, Units of Trading, Price Variations, and Securities
Eligible for Trading

    Proposed NSX Rule 11.1 generally provides for trading hours as
determined by the Board of Directors of the Exchange (the ``Board''),
with notice to ETP Holders.\14\ Current NSX Rule 11.1 provides for
specific hours of trading.\15\ The Exchange is proposing this change to
provide greater flexibility to respond to market conditions. The
Exchange is also proposing to set forth the specific holidays it
observes.\16\
---------------------------------------------------------------------------

    \14\ See proposed NSX Rule 11.1(a).
    \15\ See current NSX Rule 11.1(a).
    \16\ See proposed NSX Rule 11.1(b).
---------------------------------------------------------------------------

    NSX Rule 11.2 is proposed to be changed to define 100 shares as a
``round lot,'' any amount less than 100 shares as an ``odd lot'' and
any amount greater than 100 shares that is not a multiple of a round
lot as a ``mixed lot''.\17\ The Exchange is also proposing to remove
current language in NSX Rule 11.2 and elsewhere relating to bonds, as
it has not traded bonds for many years.
---------------------------------------------------------------------------

    \17\ See proposed NSX Rule 11.2.
---------------------------------------------------------------------------

    The Exchange states that the language of proposed NSX Rule 11.3(a)
is identical to the language of current NSX Rule 11.3. Proposed NSX
Rule 11.3(b) requires that Crosses (as described in proposed NSX Rule
11.12 and Section D below) must improve each side of the Exchange's
best bid or offer (``Top of Book'') by at least $0.01 per share,
subject to limited exceptions as described in Section D below. Proposed
NSX Rule 11.4 provides that any class of securities listed or admitted
to unlisted trading privileges on the Exchange may be designated for
trading by the Exchange.\18\
---------------------------------------------------------------------------

    \18\ This proposed Rule is generally consistent with current NSX
Rule 11.9(b). Current Rules 11.4 and 11.5 are proposed to be
replaced in their entirety, as they relate to trading ex-dividend
and related issues that will no longer apply because no orders will
remain in the System beyond a single trading day.
---------------------------------------------------------------------------

B. Market Makers

    Proposed NSX Rules 11.5 through 11.8 set forth the registration
process and obligations of Market Makers. NSX states that Market Makers
are purely optional in this proposed market structure. The Exchange
states that it does not expect Market Makers to play a significant role
on the Exchange at the outset, but is including these provisions in
order to provide flexibility as it expands the System's functionality
to provide for additional order types and other features that may make
Market Maker registration more attractive.
    Proposed NSX Rule 11.5 provides for a registration process for
Market Makers. No ETP Holder may act as a Market Maker in any security
on the Exchange unless the ETP Holder is registered as a Market Maker
in the security.\19\ The Exchange plans to administer the Market Maker
application process in similar fashion to its administration of
applications for equity trading permits, which is described below.
Market Makers must file an application for registration in the form
prescribed by the Exchange. When reviewing such applications, the
Exchange would consider factors such as the applicant's capital,
operations, personnel, technical resources, and disciplinary history.
Market Makers must maintain at least the minimum net capital required
under Rule 15c3-1 under the Act.\20\ The Exchange may suspend or
terminate the registration of a Market Maker if the Exchange determines
that (1) the Market Maker has substantially or continually failed to
engage in dealings in accordance with the Exchange Rules; (2) the
Market Maker has failed to meet the minimum net capital requirements
described above; or (3) the Market Maker has failed to maintain fair
and orderly markets.\21\ A Market Maker may withdraw its registration
by giving written notice to the Exchange, subject to the Exchange's
right to require a minimum prior notice period or to place such other
conditions on withdrawal (and re-registration following withdrawal) as
it deems appropriate in the interests of maintaining fair and orderly
markets.\22\
---------------------------------------------------------------------------

    \19\ See proposed NSX Rule 11.5(a). Registered Market Makers
will be designated as dealers on the Exchange for all purposes under
the Act and the rules and regulations thereunder.
    \20\ See proposed NSX Rule 11.5(b).
    \21\ See proposed NSX Rule 11.5(d).
    \22\ See proposed NSX Rule 11.5(e).
---------------------------------------------------------------------------

    Proposed NSX Rule 11.6 provides for the registration of Market
Maker Authorized Traders (``MMATs'') who are permitted to enter orders
for the account of the Market Maker for which they are registered.
MMATs may be officers, partners, employees, or other associated persons
of Market Makers, and must register as an MMAT on the form prescribed
by the Exchange.\23\ MMATs must successfully complete a ``Series 7''
examination, unless the Exchange waives this requirement for applicant
MMATs who have served as dealer-specialists or market makers on another
national securities exchange or association for at least two
consecutive years within three years of the MMAT application.\24\ The
Exchange may grant conditional registration as an MMAT subject to
conditions the Exchange deems appropriate in the interests of
maintaining a fair and orderly market.\25\ The Exchange may also
suspend or withdraw the registration of an MMAT if (1) the MMAT has
caused its Market Maker to fail to comply with securities laws or the
By-laws, Rules and procedures of the Exchange; (2) the MMAT is not
properly performing its responsibilities as an MMAT or has failed to
meet the conditions of registration described above; or (3) the
Exchange believes suspension or withdrawal is in the interest of
maintaining fair and orderly markets to suspend or withdraw the MMAT's
registration.\26\ The Exchange would also withdraw the registration of
an MMAT upon the written request of the ETP Holder for which the MMAT
is registered.\27\
---------------------------------------------------------------------------

    \23\ See proposed NSX Rule 11.6(b). Market Makers must ensure
that their MMATs are in compliance with NSX Rules and are properly
qualified to perform market-making activities on the Exchange. See
proposed NSX Rule 11.6(b)(5). Market Makers are responsible for the
acts and omissions of their MMATs. See proposed NSX Rule 11.8(c).
    \24\ See proposed NSX Rule 11.6(b)(2).
    \25\ See proposed NSX Rule 11.6(b)(4).
    \26\ See proposed NSX Rule 11.6(c)(1).
    \27\ See proposed NSX Rule 11.6(b)(3).
---------------------------------------------------------------------------

    Proposed NSX Rule 11.7 provides for a registration process for
Market Makers in a particular security. Market Makers must register in
a particular security by filing a security registration form with the
Exchange. Unless otherwise provided by the Exchange, such registration
shall become effective on the first business day following the
Exchange's approval of the registration.\28\ In considering the
approval of a Market Maker's registration in a particular security, the
Exchange may consider the Market Maker's financial resources; the
Market Maker's experience, expertise and past performance in making
markets; the Market Maker's operational capability; the effect on
competition among Market Makers; the Market Maker's clearing
arrangements; and the character of the market for the security.\29\ A
Market Maker may terminate its registration in a security by giving
written notice to the Exchange, subject to the Exchange's right to
require a minimum prior notice period or impose such other conditions
as it deems appropriate in the interests of maintaining fair and
orderly markets.\30\ Proposed NSX Rule 11.7(c) allows the Exchange to
terminate such registration if the Market Maker has not met its
obligations as set forth in the

Exchange Rules or has not maintained fair and orderly markets.
---------------------------------------------------------------------------

    \28\ Id.
    \29\ See proposed NSX Rule 11.7(a).
    \30\ See proposed NSX Rule 11.7(b). A Market Maker may also
withdraw temporarily from its Market Maker status in a security if
legal or regulatory requirements necessitate. See proposed NSX Rule
11.8(e).
---------------------------------------------------------------------------

    Proposed NSX Rule 11.8 sets forth certain obligations of Market
Makers. Market Makers generally must engage in a course of dealings for
their own account to assist in the maintenance of fair and orderly
markets on the Exchange.\31\ Market Makers are specifically required,
among other things, to maintain continuous limit orders to buy and sell
for round lots in those securities in which Market Makers is registered
to trade; to comply with all Exchange Rules; to inform the Exchange of
a material change in the financial or operation condition or in the
personnel of the Market Maker; to maintain a current list of MMATs and
provide an updated version of this list to the Exchange upon any change
in MMATs; and to clear and settle transactions through the facilities
of a registered clearing agency.\32\ Substantial or continued failure
to comply with these requirements may subject a Market Maker to
suspension or revocation of the Market Maker's registration in one or
more securities, or other disciplinary action.\33\
---------------------------------------------------------------------------

    \31\ See proposed NSX Rule 11.8(a).
    \32\ See proposed NSX Rule 11.8(a).
    \33\ See proposed NSX Rule 11.8(d). Current NSX Rules 11.6
through 11.9, which relate to various types of trading on the
Exchange, are proposed to be replaced in their entirety with the
proposed Rules described herein.
---------------------------------------------------------------------------

C. Access to the System and Authorized Traders

    Orders may be entered on the System only by Users who have obtained
authorized access by entering into a User Agreement with the Exchange
in the form prescribed by the Exchange.\34\ In addition to ETP Holders,
non-ETP Holders may enter into User Agreements and thereby access the
System, subject to the requirements of proposed NSX Rule 11.9. A non-
ETP Holder accessing the System is known as a ``Sponsored
Participant.''\35\ A Sponsored Participant, to obtain access to the
System, must be a registered broker or dealer and a self-clearing
member of a qualified clearing agency (``Qualified Clearing
Agency''),\36\ and must enter into an agreement with a Sponsoring ETP
Holder \37\ pursuant to which the Sponsoring ETP Holder agrees to be
responsible for any and all actions taken by or on behalf of the
Sponsored Participant.\38\ The Sponsored Participant must also (1)
agree to comply with the Exchange's Rules and procedures as if the
Sponsored Participant were an ETP Holder; (2) maintain a current list
of its Authorized Traders who may access the System on behalf of the
Sponsored Participant (and provide such list to the Sponsoring ETP
Holder and the Exchange on request); (3) familiarize its Authorized
Traders with the Sponsored Participant's obligations and assure that
they receive appropriate training; (4) take reasonable security
precautions to prevent access to the System by anyone other than the
Sponsored Participant's Authorized Traders; and (5) establish adequate
procedures and controls to effectively monitor the Sponsored
Participant's employees, agents and customers' use and access to the
System.\39\ The Exchange intends to administer the Sponsored
Participant access provisions of proposed NSX Rule 11.9 in a fashion
similar to its current non-member give-up rule.\40\
---------------------------------------------------------------------------

    \34\ See proposed NSX Rule 11.9(a).
    \35\ See proposed NSX Rule 1.5(S)(1).
    \36\ ``Qualified Clearing Agency'' is defined in proposed NSX
Rule 15(Q)(1) as a clearing agency registered with the Commission
pursuant to Section 17A of the Act that is deemed qualified by the
Exchange.
    \37\ See proposed NSX Rule 1.5(S)(2).
    \38\ See proposed NSX Rule 11.9(b). The Sponsoring ETP Holder
must also agree to pay when due any amounts arising from the
Sponsored Participant's access to the System. See proposed NSX Rule
11.9(b)(2)(B)(iii).
    \39\ See proposed NSX Rule 11.9(b)(2)(D)-(H).
    \40\ See Interpretation and Policy .03 of Section 2.4 of the NSX
Rules.
---------------------------------------------------------------------------

    Proposed NSX Rule 11.10 requires that ETP Holders maintain a list
of Authorized Traders (``ATs'') who may obtain access to the System on
behalf of the ETP Holder or the ETP Holder's Sponsored Participant, and
requires that an ETP Holder provide such list to the Exchange upon
request.\41\ An ETP Holder must have reasonable procedures to ensure
that its ATs (1) comply with all Exchange Rules and other procedures
relating to the System; and (2) maintain the physical security of the
System and the equipment used to access it.\42\ An ETP Holder must
suspend or withdraw a person's status as an AT if the Exchange so
directs after determining that the AT has caused the ETP Holder to fail
to comply with the Exchange Rules.\43\
---------------------------------------------------------------------------

    \41\ See proposed NSX Rule 11.10(a).
    \42\ See proposed NSX Rule 11.10(b), (d).
    \43\ See proposed NSX Rule 11.10(c).
---------------------------------------------------------------------------

D. Types of Orders and Messages That May Be Entered Into the System

    Proposed NSX Rule 11.11 allows Users (i.e., ETP Holders and
Sponsored Participants) to enter market orders and limit orders with
various time-in-force terms and other modifiers. The System would not
allow a time-in-force term longer than Day +.\44\ Unexecuted Day orders
would expire at the closing of trading on the exchange where the
security is listed. Unexecuted Day + orders would expire at the closing
of trading on NSX.\45\ Other order types permitted to be entered into
the System include Reserve Orders,\46\ Odd Lot and Mixed Lot
Orders,\47\ Post Only Orders,\48\ and NSX Only Orders.\49\
---------------------------------------------------------------------------

    \44\ See proposed NSX Rule 11.11(a)(3), which defines a Day +
Order type.
    \45\ See proposed NSX Rule 11.11(b)(2)-(5).
    \46\ A Reserve Order is a limit order with a portion of the
quantity displayed (the ``displayed quantity'') and with a reserve,
or undisplayed, portion of the quantity (``reserve quantity''). See
proposed NSX Rule 11.11(c)(2).
    \47\ See proposed NSX Rule 11.11(c)(3)-(4). Odd Lot and Mixed
Lot Orders are only eligible to be protected quotations if
aggregated to form a round lot.
    \48\ A Post Only Order is a limit order that is to be posted on
the Exchange and not routed away to another trading center. A Post
Only Order will be rejected without execution if it is immediately
marketable on the System when entered. See proposed NSX Rule
11.11(c)(5).
    \49\ An NSX Only Order is an order that is to be cancelled
(without routing away to another trading center) if it cannot be
executed on the Exchange within the System's execution parameters.
See proposed NSX Rule 11.11(c)(6).
---------------------------------------------------------------------------

    A Sweep Order type is provided for in proposed NSX Rule
11.11(c)(7). A Sweep Order that is designated as a ``Protected Sweep
Order'' would be converted into one or more limit orders to be matched
for execution against protected quotations on the Exchange and at away
markets to the extent the prices of such protected quotations are
superior to the limit price of the Sweep Order.\50\ A Sweep Order that
is designated as a ``Full Sweep Order'' would be converted into one or
more limit orders to be matched for execution against the best
available quotation on the Exchange and each other market (automated
and manual) with a price superior to the limit price of the Sweep
Order.\51\ The Exchange states that all

limit orders converted from Protected Sweep Orders and Full Sweep
Orders would be deemed intermarket sweep orders under Regulation NMS
\52\ and shall be so marked.\53\ A Sweep Order designated ``Destination
Sweep Order'' would be routed to an away trading center specified by
the User, after the order has been exposed to the System's electronic
file of orders (the ``NSX Book'').\54\ The System would also accept
incoming intermarket sweep orders from other markets and would execute
these consistent with the requirements of Regulation NMS.\55\
---------------------------------------------------------------------------

    \50\ See proposed NSX Rule 11.11(c)(7)(i)(A). A Protected Sweep
Order that is designated ``Sweep and Post'', meaning the unfilled
portion of the Sweep Order following the market sweep will be posted
on the NSX Book, will be converted into one or more limit orders and
matched for execution against protected quotations with prices
superior or equal to the limit price of the Protected Sweep Order.
See proposed NSX Rules 11.11(c)(7)(ii); 11.15(b)(i).
    If a limit order that has been converted from a Protected Sweep
Order cannot be executed against the protected quotation that it was
routed to execute against because the protected quotation is no
longer available (due to a race condition), the limit order will be
available for execution against other orders in the applicable
market that are priced the same as or better than such limit order.
    \51\ See proposed NSX Rule 11.11(c)(7)(i)(B). A Full Sweep Order
that is designated ``Sweep and Post'', meaning the unfilled portion
of the Sweep Order following the market sweep will be posted on the
NSX Book, will be converted into one or more limit orders and
matched for execution against the best available quotation on the
Exchange and each other market (automated and manual) with a price
superior or equal to the limit price of the Full Sweep Order. See
proposed NSX Rules 11.11(c)(7)(ii); 11.15(b)(ii).
    If a limit order that has been converted from a Full Sweep Order
cannot be executed against the quotation that it was routed to
execute against because the quotation is no longer available (due to
a race condition), the limit order will be available for execution
against other orders in the applicable market that are priced the
same as or better than such limit order.
    \52\ 17 CFR 242.600(b)(30).
    \53\ See proposed NSX Rule 11.11(c)(7)(iv).
    \54\ See proposed NSX Rule 11.11(c)(7)(i)(C).
    \55\ See proposed NSX Rule 11.11(c)(9).
---------------------------------------------------------------------------

    The System would allow Users to enter a ``Destination Specific
Order'' instructing the Exchange to route the order to a specified away
trading center, after exposing the order to the NSX Book.\56\ The
Exchange states that it has included this order type in order to allow
Users to access manual markets if they so choose.
---------------------------------------------------------------------------

    \56\ See proposed NSX Rule 11.11(c)(8).
---------------------------------------------------------------------------

    Proposed NSX Rule 11.11(e) allows a User to cancel or replace an
existing order entered into the System by the User, subject to certain
limitations.\57\ No cancellation or replacement of an order would be
effective until the User has received written confirmation of the
cancellation and replacement from the Exchange.\58\
---------------------------------------------------------------------------

    \57\ These limitations include the following: (1) An order may
only be cancelled or replaced if it has a time-in-force term longer
than immediate-or-cancel and if the order has not yet been executed;
(2) An order routed to another trading center that the User wishes
to cancel will be placed in a ``Cancel Pending'' state until the
routing process is completed, and executions received while an order
is in a ``Cancel Pending'' state will be processed normally; and (3)
Only the price and quantity terms of an order may be changed by a
replace message. See proposed NSX Rule 11.11(e)(i)-(iii).
    \58\ See proposed NSX Rule 11.11(e)(iv).
---------------------------------------------------------------------------

    Proposed NSX Rule 11.12 allows a User to post a cross message
(``Cross'') on the System if the price of the trade is better than the
best bid and offer on NSX, and (following the compliance date for Rule
611 of Regulation NMS) if it is equal to or better than the Protected
NBBO. Crosses must improve each side of the Top of Book by at least one
penny a share, except in the case of a Midpoint Cross and a Clean
Cross. A Midpoint Cross may improve the Top of Book by as little as
one-half the minimum increment provided in NSX Rule 11.3(a), if it is
priced at the midpoint of the Protected NBBO (or, prior to the
compliance date for Rule 611 of Regulation NMS, if it is priced at the
midpoint of the best bid and offer on the Exchange).\59\ A Clean Cross
may be executed on the System at a price equal to or better than the
Top of Book if (i) it is for at least 5,000 shares and has an aggregate
value of at least $100,000, (ii) neither side of the Cross is for the
account of the User, (iii) the size of the Cross is greater than the
size of the total interest on NSX at the Cross price, and (iv)
following the compliance date for Rule 611 of Regulation NMS, it is at
a price equal to or better than the Protected NBBO.\60\ The Exchange
states that the requirements of the Midpoint Cross and the Clean Cross
are substantively similar to rules of other national securities
exchanges.\61\
---------------------------------------------------------------------------

    \59\ See proposed NSX Rule 11.12(c).
    \60\ See proposed NSX Rule 11.12(d). Pursuant to proposed NSX
Rule 11.3(b), Clean Crosses may not be executed in increments
smaller than those permitted by NSX Rule 11.3(a).
    \61\ See, e.g., PCX Equities, Inc. Rule 7.6(a), Commentary .05,
and Rule 7.31(y) (relating to Midpoint Cross); Boston Stock Exchange
Rules Chapter II, Section 18 (relating to Clean Cross).
---------------------------------------------------------------------------

    NSX Rule 11.12(e) requires that all Users entering a proprietary
Cross comply with the Exchange's Customer Priority Rule (i.e., the
price of the Cross must be better than any customer order the User is
holding by at least $0.01). A User may also post a ``Cross/Sweep''
message that enters a Sweep Order for the account of the User sweeping
all protected quotations that are superior to the Cross price, and
simultaneously executes the Cross. In connection with any Cross/Sweep,
the User must fully disclose the material facts relating to the Sweep
Order to any customer for whose account either side of the Cross is
being executed.\62\
---------------------------------------------------------------------------

    \62\ See proposed NSX Rule 11.12(f).
---------------------------------------------------------------------------

    Proposed NSX Rule 11.13(a) provides that proprietary and agency
orders shall be subject to the same ranking and execution processes.
Users must identify all orders as either proprietary or agency, and for
all agency orders, must include an identifier that enables the User to
identity the User's customer on whose behalf the order is being
entered.\63\
---------------------------------------------------------------------------

    \63\ See proposed NSX Rule 11.13(a).
---------------------------------------------------------------------------

    Proposed NSX Rule 11.13(b) contains the Exchange's proposed order
delivery rule. The Exchange states that this rule is substantively
identical to the Exchange's current order delivery rule,\64\ except
that it requires that Users selecting order delivery demonstrate their
ability to automatically process the inbound order and respond
appropriately within \1/2\ a second. If no response to an inbound order
is received within \1/2\ a second from a User selecting order delivery,
the User's displayed order would be cancelled.\65\ The Exchange is
proposing to change the required response time from 1 second to \1/2\ a
second in order to provide the Exchange with a ``buffer'' to ensure
that the Exchange meets the definition of an ``automated trading
center'' under Regulation NMS.\66\ Based on current processing speeds
in the securities industry, the Exchange believes that its Users should
have no problem complying with this required response time.
---------------------------------------------------------------------------

    \64\ See current NSX Rule 11.9(i).
    \65\ See proposed NSX Rule 11.13(b).
    \66\ 17 CFR 242.600(b)(4).
---------------------------------------------------------------------------

E. Order Priority and Execution

    Proposed NSX Rules 11.14 and 11.15 set forth the priority and
execution parameters of the System. The Exchange states that orders are
prioritized on a strict price-time basis, first by price and then by
time.\67\ Only the displayed portion of a Reserve Order has time
priority.\68\
---------------------------------------------------------------------------

    \67\ See proposed NSX Rule 11.14(a).
    \68\ See proposed NSX Rule 11.14(a)(4).
---------------------------------------------------------------------------

    Incoming orders (other than Sweep Orders) are first matched for
execution against orders in the NSX Book.\69\ Proposed NSX Rule 11.15
reflects the trade-through rule of Regulation NMS \70\ by requiring
that, for any execution on NSX to occur during Regular Trading Hours
(i.e., between 8:30 a.m. and 3:00 p.m. Central Time), the price must be
equal to or better than the Protected NBBO unless the order is marked
as an intermarket sweep order or unless another exception to the trade-
through rule of Regulation NMS is available. Orders that cannot be
executed within these parameters are eligible for routing to away
trading centers for execution at the Protected NBBO.
---------------------------------------------------------------------------

    \69\ See proposed NSX Rule 11.15(a)(i).
    \70\ 17 CFR 242.611.
---------------------------------------------------------------------------

    Unless the terms of the order direct otherwise, any order other
than a Sweep Order that cannot be executed on the Exchange would be
converted into one or more limit orders, as necessary, to match the
price of each protected quotation at the Protected NBBO available at
away markets, and these limit orders would be routed to the applicable
market for execution against the applicable protected quotation at the
Protected NBBO.\71\
---------------------------------------------------------------------------

    \71\ See proposed NSX Rule 11.15(a)(ii).
---------------------------------------------------------------------------

    Unless the terms of the order direct otherwise, any order not
executed in

full on the Exchange which by its terms is not eligible for routing
away, or which is not executed in full when routed away, would be
ranked in the NSX Book in accordance with order priority rules of
proposed NSX Rule 11.14.\72\
---------------------------------------------------------------------------

    \72\ See proposed NSX Rule 11.15(a)(iii).
---------------------------------------------------------------------------

    Sweep Orders would be matched for execution in the NSX Book to the
extent possible at the Protected NBBO, and simultaneously converted
into one or more limit orders and routed to away markets to be matched
for execution against quotations in accordance with the terms of the
Sweep Order (as described in Section D above).\73\
---------------------------------------------------------------------------

    \73\ See proposed NSX Rule 11.15(b).
---------------------------------------------------------------------------

    Proposed NSX Rule 11.15(d) states that the System would be operated
as a ``automated market center'' within the meaning of Regulation NMS,
and would display automated quotations at all times except in the event
that a systems malfunction renders the System incapable of displaying
automated quotations. The Exchange states that it would communicate to
its ETP Holders its procedures relating to any change from automated to
manual quotations in the event of such a systems malfunction.

F. Other Trading-Related Rules

    Proposed NSX Rules 11.16 through 11.22 relate to other trading-
related matters such as clearance and settlement, clearly erroneous
executions, trading halts, short sales, and locked and crossed markets.
Purposed NSX Rule 11.16 describes the Exchange's trade reporting
processes. Pursuant to proposed NSX Rule 11.16, the Exchange would
report all executions occurring on the System to an appropriate
consolidated transaction reporting system to the extent required by
law, and would promptly notify Users of all executions of their orders
as soon as executions take place.
    Proposed NSX Rule 11.17 covers clearance and settlement. Proposed
NSX Rule 11.17(a) requires that each ETP Holder either be a member of a
Qualified Clearing Agency or clear transactions executed on the
Exchange through another ETP Holder that (i) is a member of a Qualified
Clearing Agency and (ii) agrees to be responsible for such clearance
and settlement. The Exchange states that trading on the System would be
on an anonymous basis.
    The Exchange states that proposed NSX Rule 11.18 is based on NSX's
current limitation of liability rule set forth in NSX Rule 11.9(t), but
has been expanded in three ways. First, proposed NSX Rule 11.18
describes with greater specificity the categories of actions for which
the Exchange would not be liable. Second, proposed NSX Rule 11.8(B)
contains an agreement by each ETP Holder to release and discharge the
Exchange and its related persons from all claims and damages arising
from the ETP Holder's use of the facilities of the Exchange (including
the System). Third, proposed NSX Rule 11.8(C) contains a disclaimer by
the Exchange of any and all express or implied warranties relating to
the System.
    Proposed NSX Rule 11.19 provides for a review process for
determining clearly erroneous executions. The process generally
involves a review by an Exchange officer upon request of an ETP Holder
(which must submitted within 15 minutes of the trade in question), with
an appeal to a Clearly Erroneous Execution Panel available for parties
affected by the officer's determination.\74\
---------------------------------------------------------------------------

    \74\ See proposed NSX Rule 11.19(c). In addition to the process
provided for in proposed NSX Rule 11.19, the Exchange has adopted
internal guidelines concerning clearly erroneous executions. The
Exchange states that its staff uses these guidelines to help
determine what constitutes a clearly erroneous execution.
---------------------------------------------------------------------------

    Proposed NSX Rule 11.20 incorporates the New York Stock Exchange's
``circuit breaker'' tests based upon reductions to the Dow Jones
Industrial Average. Proposed NSX Rule 11.21, relating to short sales,
requires that all short sale orders entered into the System be
identified either as ``short sale'' or ``short sale exempt''. It also
provides that any marketable order entered in the System which, if
matched for execution, would violate the short sale provisions under
the Act and, therefore, would be cancelled.
    Proposed NSX Rule 11.22 relates to locking or crossing quotations
and is substantively identical to the proposed rule language that was
provided to NSX and other national securities exchanges by the
Commission.
    Proposed NSX Rule 11.23 relates to riskless principal transactions.
A ``riskless principal transaction'' is defined as ``two offsetting
principal transaction legs in which an ETP Holder, (i) after having
received an order to buy a security that it holds for execution on the
Exchange, purchases the security as principal at the same price,
exclusive of markups, markdowns, commissions and other fees, to satisfy
all or a portion of the order to buy or (ii) after having received an
order to sell a security that it holds for execution on the Exchange,
sells the security as principal at the same price, exclusive of
markups, markdowns, commissions and other fees, to satisfy all or a
portion of the order to sell.''\75\ The Exchange states that only the
initial offsetting transaction leg of an appropriately designated
riskless principal transaction would be submitted by the Exchange to
the appropriate consolidated tape.\76\ An ETP Holder must have written
policies and procedures to assure compliance with this proposed Rule,
which must require (at a minimum) that the customer order be received
prior to the offsetting transactions, and that the second offsetting
transaction leg be executed within 60 seconds of the initial offsetting
transaction leg.\77\ The Exchange's customer priority rules applicable
to proprietary trading would not apply to a riskless principal
transaction meeting the standards of NSX Rule 11.23 that is executed by
an ETP Holder to facilitate the execution of a customer order.\78\
---------------------------------------------------------------------------

    \75\ Proposed NSX Rule 11.23(a).
    \76\ See proposed NSX Rule 11.23(b).
    \77\ See proposed NSX Rule 11.23(c). ETP Holders must also have
supervisory systems that produce records enabling the ETP Holder and
the Exchange to accurately and readily reconstruct, in a time-
sequenced manner, all orders related to each riskless principal
transaction. See proposed NSX Rule 11.23(c).
    \78\ See proposed NSX Rule 12.6(d).
---------------------------------------------------------------------------

Other Proposed Rule Changes

A. Chapter I--Adoption, Interpretation, and Application of Rules;
Definitions

    Chapter I is proposed to be revised to incorporate certain new
definitions and other provisions relating to the proposed trading rule
changes described above. Specifically, proposed NSX Rule 1.4 provides
for different effective times of certain of the new trading rules
described above. Proposed NSX Rule 1.4 provides that the Exchange's
proposed rule relating to Sweep Orders (proposed NSX Rule
11.11(c)(7)(iv)) shall not become effective until the compliance date
for Rule 611 of Regulation NMS, and provides that the proposed Trading
Rules relating to the trade-through rule and locked and crossed markets
(i.e., proposed NSX Rules 11.15 and 11.22) shall only apply to
quotations for securities subject to the Intermarket Trading System
Plan until the compliance date for those sections of Regulation NMS
relating to trade-throughs and locked and crossed markets,
respectively.
    NSX Rule 1.5 is proposed to be revised to include a number of
additional definitions used in the proposed changes to Chapter XI.

B. Chapter II--Equity Trading Permits and ETP Holders

    In Chapter II, relating to ETPs and ETP Holders, Interpretation .03
under NSX Rule 2.4 is proposed to be deleted, because it is being
substantively replaced by proposed NSX Rule 11.9 providing for
Sponsored Participants.

C. Chapter XV--Listed Securities and Other Exchange Products

    Chapter XV is proposed to be revised to move provisions relating to
specifications for certain products (e.g. index funds) from NSX Rules
11.9(v)-(x) to Chapter XV.\79\ The Exchange states that certain
terminology and cross-reference changes have been made to these
provisions, but no substantive changes have been made.
---------------------------------------------------------------------------

    \79\ See proposed NSX Rules 15.10-15.12.
---------------------------------------------------------------------------

D. Other Technical Changes To Rules

    The Exchange states that other technical changes are proposed to be
made to certain provisions of the NSX Rules in order to be consistent
with the proposed changes described above. These changes include the
following:
    1. A change to Interpretation .01 of NSX Rule 3.6, requiring that
all ETP Holders who handle customer orders on the Exchange establish
and enforce fixed standards for queuing and executing customer orders.
This interpretation formerly only applied to Designated Dealers on the
Exchange. As the position of Designated Dealer is proposed to be
removed in connection with the proposed new market structure, this
interpretation is proposed to be revised to apply to all ETP Holders.
    2. NSX Rule 5.5 (relating to ``Chinese Wall'' procedures) is
proposed to be revised to apply to any ETP Holder that trades for its
own account in a security or has a specialist operation in a
security.\80\
---------------------------------------------------------------------------

    \80\ The Rule currently only applies to Designated Dealers.
---------------------------------------------------------------------------

    3. The interpretations under NSX Rule 12.6, the Exchange's Customer
Priority Rule, are proposed to be revised to apply to all ETP Holders
that conduct both proprietary and agency trading, rather than only
Designated Dealers.
    4. NSX Rule 14.9, relating to Intermarket Trading System ``trade-
throughs'' and locked and crossed markets, is proposed to be deleted
simultaneously with the compliance date for those provisions of
Regulation NMS relating to trade-throughs and locked and crossed
markets. The Exchange believes this change is appropriate because
proposed NSX Rules 11.15 and 11.22 provide restrictions on trade-
throughs and locked and crossed markets that are consistent with
Regulation NMS and the Commission's guidance on these issues. The
Exchange is not proposing any additional changes to Chapter XIV
relating to the Intermarket Trading System (``ITS'') Plan at this time,
because it understands that the ITS Plan will be phased out of
existence and replaced with new linkages in the near future in
connection with the implementation of Regulation NMS.
NSX Securities, LLC
    In connection with the proposed changes to the trading rules
described above, the Exchange requests that the Commission approve NSX
Securities, LLC (``NSX Securities'') to be a facility (as defined in
Section 3(a)(2) of the Act) of the Exchange.
    The Exchange states that NSX Securities, a wholly-owned subsidiary
of the Exchange, is registering as a broker-dealer, has applied for
membership in the National Association of Securities Dealers, Inc.
(``NASD''), and is applying to become an ETP Holder. The Exchange
states that NSX Securities plans to provide an optional routing service
for the Exchange, in which NSX Securities would route orders to other
securities exchanges, facilities of securities exchanges, automated
trading systems, electronic communications networks or other brokers or
dealers (collectively, ``Trading Centers'') from the Exchange (such
function of NSX Securities is referred to as the ``Outbound
Router'').\81\
---------------------------------------------------------------------------

    \81\ The optional routing of orders to away markets by the
System is described above.
---------------------------------------------------------------------------

    NSX states that, as an Outbound Router, NSX Securities would
receive instructions from the Exchange, route orders to other Trading
Centers in accordance with those instructions and be responsible for
reporting resulting executions back to the Exchange. In addition, all
orders routed through NSX Securities would be subject to the terms and
conditions of the Exchange Rules.
    NSX states that it would regulate the Outbound Router function of
NSX Securities as a facility (as defined in Section 3(a)(2) of the Act)
subject to Section 6 of the Act. As such, the Exchange states that the
Outbound Router function of NSX Securities would be subject to the
Commission's continuing oversight. In particular, and without
limitation, under the Act, NSX states that it is responsible for filing
with the Commission rule changes and fees relating to the NSX
Securities Outbound Router function, and NSX Securities would be
subject to exchange non-discrimination requirements.\82\
---------------------------------------------------------------------------

    \82\ See, e.g., Section 6(b)(5) of the Act, 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Pursuant to Rule 17d-1 under the Act, where a member of the
Securities Investor Protection Corporation is a member of more than one
self-regulatory organization (``SRO''), the Commission shall designate
to one of such organizations the responsibility for examining such
member for compliance with the applicable financial responsibility
rules.\83\ The SRO designated by the Commission is referred to as a
``Designated Examining Authority.'' As noted above, NSX Securities is
applying to become an ETP Holder of the Exchange, and has applied for
membership in the NASD. The NASD is an SRO not affiliated with NSX or
any of its affiliates. NSX understands that, once NSX Securities is
approved as a member of the NASD, the NASD would become the Designated
Examining Authority for NSX Securities pursuant to Rule 17d-1 of the
Act with the responsibility for examining NSX Securities for compliance
with the applicable financial responsibility rules.
---------------------------------------------------------------------------

    \83\ 17 CFR 240.17d-1. Pursuant to Rule 17d-1 under the Act, in
making such designation the Commission shall take into consideration
the regulatory capabilities and procedures of the SROs, availability
of staff, convenience of location, unnecessary regulatory
duplication, and such other factors as the Commission may consider
germane to the protection of investors, the cooperation and
coordination among self-regulatory organizations, and the
development of a national market system for the clearance and
settlement of securities transactions.
---------------------------------------------------------------------------

    ETP Holders' use of NSX Securities to route orders to another
Trading Center would be optional, as described above. Those ETP Holders
who choose to use the Outbound Routing service of NSX Securities must
sign an NSX Securities Routing Agreement (which is incorporated into
the Exchange's User Agreement). Among other things, the NSX Securities
Routing Agreement provides that all orders routed through NSX
Securities are subject to the terms and conditions of the Exchange
Rules.
    The Exchange recognizes that after its demutualization becomes
effective,\84\ its ownership of NSX Securities `` by virtue of NSX
Securities being an ETP Holder `` would be in violation of proposed
limitations \85\ to be set forth in the Exchange Rules, unless the
Exchange's

ownership of NSX Securities is approved by the Commission.
---------------------------------------------------------------------------

    \84\ See Securities Exchange Act Release Nos. 53721 (April 25,
2006), 71 FR 26155 (May 3, 2006) (notice of filing of File No. SR-
NSX-2006-03) (``Demutualization Rule Filing''); and 53963 (June 8,
2006), 71 FR 34660 (June 15, 2006) (order approving File No. SR-NSX-
2006-03).
    \85\ See proposed NSX Rule 2.10 on page 146 of the
Demutualization Rule Filing.
---------------------------------------------------------------------------

    The Exchange further recognizes that the ownership of NSX
Securities by the Exchange may pose a conflict of interest between the
regulatory responsibilities of the Exchange and the broker or dealer
activities of NSX Securities. This is because the financial interests
of the Exchange may conflict with the responsibilities of the Exchange
as an SRO regarding NSX Securities.
    The Exchange believes, however, that such conflict may be mitigated
with the following proposed undertakings of the Exchange and NSX
Securities.

A. Proposed Undertakings

    Each of the Exchange and NSX Securities undertakes as follows:
    1. The Exchange will regulate the Outbound Router function of NSX
Securities as a facility (as defined in Section 3(a)(2) of the Act),
subject to Section 6 of the Act. In particular, and without limitation,
under the Act, the Exchange will be responsible for filing with the
Commission rule changes and fees relating to the NSX Securities
Outbound Router function and NSX Securities will be subject to exchange
non-discrimination requirements.
    2. NASD, an SRO unaffiliated with the Exchange or any of its
affiliates, will carry out oversight and enforcement responsibilities
as the Designated Examining Authority designated by the Commission
pursuant to Rule 17d-1 of the Act with the responsibility for examining
NSX Securities for compliance with the applicable financial
responsibility rules.
    3. An ETP Holder's use of NSX Securities to route orders to another
Trading Center will be optional. Any ETP Holder that does not want to
use NSX Securities may use other routers to route orders to other
Trading Centers.\86\
---------------------------------------------------------------------------

    \86\ An ETP Holder may choose to enter a Post Only Order or an
NSX Only Order into the System. The terms of each such order provide
that, if the order is not executable on the System, the order will
be cancelled and returned to the ETP Holder, at which time the ETP
Holder could choose to route the order to another market. See
proposed NSX Rule 11.11(c)(5)-(6).
---------------------------------------------------------------------------

    4. NSX Securities will not engage in any business other than (1)
its Outbound Router function and (2) any other activities it may engage
in as approved by the Commission.\87\
---------------------------------------------------------------------------

    \87\ NSX Securities' outbound routing function includes the
clearing functions that it may perform for trades with respect to
orders routed to other trading centers.
---------------------------------------------------------------------------

    NSX is reflecting these undertakings in proposed NSX Rule 2.11.

B. Request for Approval

    In sum, the Exchange believes that the proposed undertakings of the
Exchange and NSX Securities set forth above would address the potential
conflict of interest with the regulatory responsibilities of the
Exchange and the ownership and operation of NSX Securities by the
Exchange. Consequently, subject to the proposed undertakings set forth
above, the Exchange requests that the Commission approve NSX Securities
to be a facility (as defined in Section 3(a)(2) of the Act)\88\ of the
Exchange.
---------------------------------------------------------------------------

    \88\ 15 U.S.C. 78c(a)(2).
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes the proposed rule change, as amended, is
consistent with Section 6(b) of the Act \89\ in general, and furthers
the objectives of Section 6(b)(5) \90\ in particular, in that it is
designed 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 and, generally, in that it protects
investors and the public interest.
---------------------------------------------------------------------------

    \89\ 15 U.S.C. 78f(b).
    \90\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

    The Exchange does not believe that the proposed rule change, as
amended, will impose any inappropriate burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

    The Exchange has neither solicited nor received written comments on
the proposed rule change, as amended.

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

    Within 35 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 will:
    (a) by order approve such proposed rule change, as amended; or
    (b) institute proceedings to determine whether the proposed rule
change, as amended, should be 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, as amended, 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_ADDRESS>Please include

File Number SR-NSX-2006-08 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NSX-2006-08. 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 inspection and
copying in the Commission's Public Reference Room. Copies of such
filing also will be available for inspection and copying at the
principal office of the NSX. 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-NSX-2006-08 and should be submitted on or before July
27, 2006.

For the Commission, by the Division of Market Regulation, pursuant
to delegated authority.\91\
---------------------------------------------------------------------------

    \91\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Nancy M. Morris,
Secretary.
[FR Doc. 06-5961 Filed 7-5-06; 8:45 am]

BILLING CODE 8010-01-P