[Federal Register: March 18, 2008 (Volume 73, Number 53)]
[Notices]
[Page 14521-14543]
[DOCID:fr18mr08-131]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57478; File Nos. SR-NASDAQ-2007-004 and SR-NASDAQ-2007-
080]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing of Amendment No. 2 to a Proposed Rule Change and Order
Granting Accelerated Approval to a Proposed Rule Change, as Amended, To
Establish Rules Governing the Trading of Options on the NASDAQ Options
Market; Order Approving a Proposed Rule Change Relating to the LLC
Agreement Establishing the NASDAQ Options Market LLC and Delegation
Agreement Delegating to NOM LLC the Authority To Operate the NASDAQ
Options Market; Order Granting an Application of The NASDAQ Stock
Market LLC for an Exemption Pursuant to Section 36(a) of the Exchange
Act from the Requirements of Section 19(b) of the Exchange Act; and
Order Granting an Exemption for the NASDAQ Options Market LLC from
Section 11A(b) of the Exchange Act

March 12, 2008.

I. Introduction

    On January 30, 2007, The NASDAQ Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change (``Trading Rules Proposal'') to adopt rules
governing participation in and trading on The NASDAQ Options Market
(``NOM''), which will be an options exchange facility of Nasdaq
operated by The Nasdaq Options Market LLC (``NOM LLC''). The proposed
rule change, as modified by Amendment No. 1, was published for comment
in the Federal Register on May 1, 2007.\3\ The Commission received five
comment letters regarding the proposed rule change.\4\ Nasdaq responded
to the

commenters in a letter dated December 13, 2007,\5\ and filed Amendment
No. 2 to the proposal on December 13, 2007. This notice and order
provides notice and solicits comments from interested persons regarding
Amendment No. 2 and approves the Trading Rules Proposal, as amended, on
an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 55667 (April 25,
2007), 72 FR 23869 (``Trading Rules Proposal Notice'').
    \4\ See letters to Nancy M. Morris, Secretary, Commission, from
Stephen Schuler, Managing Member, Global Electronic Trading Company
(``GETCO''), and Daniel Tierney, Managing Member, GETCO, dated July
20, 2007 (``GETCO Letter''); Michael J. Simon, Secretary, The
International Securities Exchange, LLC (``ISE''), dated June 15,
2007 (``ISE Letter''); John C. Nagel, Director and Associate General
Counsel, Citadel Investment Group L.L.C. (``Citadel''), dated June
11, 2007 (``Citadel Letter''); Michael T. Bickford, Senior Vice
President, Options, American Stock Exchange LLC (``Amex''), dated
May 24, 2007 (``Amex Letter''); and Christopher Nagy, Chair,
Securities Industry and Financial Markets Association (``SIFMA'')
Options Committee, dated May 22, 2007 (``SIFMA Letter'').
    \5\ See letter from Jeffrey S. Davis, Vice President and Deputy
General Counsel, Nasdaq, to Nancy M. Morris, Secretary, Commission,
dated December 13, 2007 (``Nasdaq Response'').
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    Also, on September 17, 2007, the Exchange filed with the Commission
a proposed rule change, pursuant to Section 19(b)(1) of the Act \6\ and
Rule 19b-4 thereunder,\7\ to establish, through a limited liability
company agreement, NOM LLC, and to delegate to NOM LLC the authority to
operate NOM as a facility of Nasdaq (``Corporate Structure Proposal,''
and, with the Trading Rules Proposal, the ``Proposals''). The proposed
rule change was published for comment in the Federal Register on
October 12, 2007.\8\ The Commission received no comments on the
proposal. This order approves the Corporate Structure Proposal.
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    \6\ 15 U.S.C. 78s(b)(1).
    \7\ 17 CFR 240.19b-4.
    \8\ See Securities Exchange Act Release No. 56604 (October 3,
2007), 72 FR 58137 (``Corporate Structure Proposal Notice'').
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    On December 13, 2007, Nasdaq requested that the Commission grant
NOM LLC a permanent exemption from the requirement under Section 11A(b)
of the Act and Rule 609 thereunder that a securities information
processor (``SIP'') acting as an exclusive processor register with the
Commission.\9\ Further, on December 13, 2007, Nasdaq asked the
Commission to exempt Nasdaq from the rule filing requirements of
Section 19(b) of the Act for changes to NOM rules that are effected
solely by virtue of a change to a Chicago Board Options Exchange
(``CBOE''), New York Stock Exchange (``NYSE''), or Financial Industry
Regulatory Authority (``FINRA'') rule that NOM has incorporated by
reference. This order grants these exemptions.
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    \9\ 15 U.S.C. 78k-1(b). Rule 609 under the Act, 17 CFR 242.609,
requires that the registration of a securities information processor
be on Form SIP, 17 CFR 249.1001.
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II. Discussion and Commission Findings

    After careful review of the Trading Rule Proposal, as amended, and
consideration of the comment letters and Nasdaq's response to the
commenters, and the Corporate Structure Proposal, the Commission finds
that the Trading Rules Proposal, as amended, and the Corporate
Structure Proposal are consistent with the requirements of the Act and
the rules and regulations thereunder applicable to a national
securities exchange.\10\ Specifically, the Commission finds that the
Proposals are consistent with Section 6(b)(5) of the Act,\11\ which
requires, among other things, that the rules of a national securities
exchange be designed to prevent fraudulent and manipulative acts and
practices; to promote just and equitable principles of trade; to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, and processing information with respect to, and
facilitating transactions in securities; to remove impediments to and
perfect the mechanism of a free and open market and a national market
system; and, in general, to protect investors and the public interest.
Section 6(b)(5) also requires that the rules of an exchange not be
designed to permit unfair discrimination among customers, issuers,
brokers, or dealers. Further, the Commission finds that the Proposals
are consistent with Sections 6(b)(1) of the Act,\12\ which requires,
among other things, that a national securities exchange be so organized
and have the capacity to carry out the purposes of the Act, and to
comply and enforce compliance by its members and persons associated
with its members, with the provisions of the Act, the rules and
regulation thereunder, and the rules of the exchange, and Section
6(b)(2) of the Act,\13\ which requires, in part, that the rules of an
exchange assure a fair representation of its members in the selection
of its directors and administration of its affairs.
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    \10\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ 15 U.S.C. 78f(b)(1).
    \13\ 15 U.S.C. 78f(b)(2).
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    Overall, the Commission believes that approving Nasdaq's Proposals
could confer important benefits on the public and market participants.
In particular, NOM's entry into the marketplace could provide market
participants with an additional venue for executing orders in
standardized options, enhance innovation, and increase competition
between and among the options exchanges, resulting in better prices and
executions for investors.
    This discussion does not review every detail of the proposed rule
changes, but focuses on the comments received and the most significant
rules and policy issues considered in review of the proposals.

A. Corporate Structure

    In connection with the establishment of NOM, Nasdaq has entered
into a limited liability company agreement (``NOM LLC Agreement'') to
establish NOM LLC as a Delaware limited liability company that will
operate NOM as a facility of Nasdaq, as that term is defined in Section
3(a)(2) of the Act.\14\ Nasdaq and NOM LLC also will enter into a
delegation agreement (``NOM Delegation Agreement''), pursuant to which
Nasdaq will delegate to NOM LLC certain limited responsibilities and
obligations with respect to the operation of NOM as an options facility
of Nasdaq.\15\
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    \14\ 15 U.S.C. 78c(a)(2). Pursuant to Section 3(a)(2), a
``facility'' ``with respect to an exchange includes its premises,
tangible or intangible property whether on the premises or not, any
right to the use of such premises or property or any service thereof
for the purpose of effecting or reporting a transaction on an
exchange (including, among other things, any system of communication
to or from the exchange, by ticker or otherwise, maintained by or
with the consent of the exchange), and any right of the exchange to
the use of any property or service.''
    \15\ The form of each of the NOM LLC Agreement and NOM
Delegation Agreement are available at the Commission's Web site
http://www.sec.gov.
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    Nasdaq, a registered national securities exchange, is the wholly-
owned subsidiary of The NASDAQ Stock Market, Inc. (``Nasdaq Holding
Company''). NOM LLC will be a direct, wholly-owned subsidiary of
Nasdaq, and, pursuant to the NOM LLC Agreement, Nasdaq may not transfer
or assign, in whole or in part, its interest in NOM LLC.\16\ Further,
NOM will be operated as a facility of the Exchange and Nasdaq will
retain self-regulatory responsibility for NOM.
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    \16\ See NOM LLC Agreement, Section 19. Also, Nasdaq Holding
Company may not transfer or assign its interest in Nasdaq, other
than to an affiliate of Nasdaq Holding Company. See Limited
Liability Company Agreement of The NASDAQ Stock Market LLC, Section
20. Any change to Nasdaq's status as the sole member of NOM LLC, or
to Nasdaq Holding Company's status as the sole member of Nasdaq,
would have to be filed pursuant to Section 19(b) of the Act. 15
U.S.C. 78s.
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1. Changes in Control of NOM; Ownership and Voting Limitations
    The Commission notes that the Nasdaq Holding Company's Restated
Certificate of Incorporation imposes limits on direct and indirect
changes in control, which are designed to prevent any shareholder from
exercising undue control over the operation of the Exchange and to
ensure that the

Exchange and the Commission are able to carry out their regulatory
obligations under the Act. Specifically, no person who beneficially
owns shares of common stock, preferred stock, or notes in excess of
five percent of the securities generally entitled to vote may vote
shares in excess of five percent.\17\
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    \17\ See Nasdaq Holding Company Restated Certificate of
Incorporation, Article Fourth, C. The Nasdaq Holding Company board
of directors may approve an exemption from the five percent voting
limitation for any person that is not a broker-dealer, an affiliate
of a broker-dealer, or a person subject to a statutory
disqualification under Section 3(a)(39) of the Act. See id. Any such
exemption from the five percent voting limitation would not be
effective until approved by the Commission pursuant to Section 19 of
the Act. See Nasdaq Holding Company By-Laws, Article XII, Section
12.5.
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    The Exchange's rules also prohibit Exchange members and persons
associated with Exchange members from beneficially owning more than 20
percent of the then-outstanding voting securities of Nasdaq Holding
Company.\18\ Members that trade on an exchange or through the facility
of an exchange traditionally have ownership interests in such exchange
or facility. The Commission has noted in the past, however, that a
member's interest in an exchange could become so large as to cast doubt
on whether the exchange can fairly and objectively exercise its self-
regulatory responsibilities with respect to that member.\19\ A member
that is a controlling shareholder of an exchange might be tempted to
exercise that controlling influence by directing the exchange to
refrain from, or the exchange may hesitate to, diligently monitor and
surveil the member's conduct or diligently enforce its rules and the
federal securities laws with respect to conduct by the member that
violates such provisions.
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    \18\ See Exchange Rule 2130.
    \19\ See Securities Exchange Act Release No. 53128 (January 13,
2006), 71 FR 3550 (January 23, 2006) (order approving Nasdaq's
application to register as a national securities exchange)
(``Registration Approval Order'') at note 42 and accompanying text.
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    The Commission believes that the proposed corporate structure for
NOM is consistent with the Act. The voting restrictions imposed on
shareholders of Nasdaq Holding Company will flow through to NOM LLC by
virtue of the fact that NOM LLC will be a wholly-owned subsidiary of
Nasdaq, which is a wholly-owned subsidiary of Nasdaq Holding Company.
The ownership limitation on members of Nasdaq will apply to NOM
participants by virtue of the fact that all NOM participants must be
members of the Exchange. These ownership and voting restrictions are
designed to minimize the potential that a person could improperly
interfere with or attempt to restrict the ability of the Commission or
the Exchange to effectively carry out their regulatory oversight
responsibilities under the Act.
2. Fair Representation
    NOM LLC will not have its own board of directors or committees
separate from the board and committees of the Exchange. The Commission
believes that because NOM LLC does not have a separate board, and
because all NOM participants will be Exchange members, the composition
of and selection process for the Exchange board continues to satisfy
the requirement in Section 6(b)(3) of the Act that the rules of the
Exchange provide for the fair representation of members in the
selection of directors and the administration of the Exchange.\20\
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    \20\ See Registration Approval Order, supra note 19, at 3553.
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3. Regulatory Independence
    As noted above, NOM LLC will not have its own board or committees
separate from those of the Exchange. Additionally, pursuant to the NOM
LLC Agreement, management of the company is vested in the Exchange, and
the officers of NOM LLC will be the officers of the Exchange.\21\ As a
result, NOM LLC may only act through the Exchange and its officers and
directors.
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    \21\ See NOM LLC Agreement, Sections 9 and 10, respectively. See
also Section 9(b) of the NOM LLC Agreement which requires NOM LLC
and the Exchange to comply with federal securities laws and the
rules and regulations thereunder, and to cooperate with the
Commission and NOM pursuant to their regulatory authority.
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    The Commission notes that certain provisions of the Exchange's and
Nasdaq Holding Company's corporate documents are designed to maintain
the independence of Nasdaq's self-regulatory function, enable the
Exchange to operate in a manner that complies with federal securities
laws, including the objectives of Sections 6(b) and 19(g) of the Act,
and facilitate the ability of Nasdaq and the Commission to fulfill
their regulatory and oversight obligations under the Act.\22\ As a
facility of Nasdaq, the protections afforded by these provisions in the
corporate documents of the Exchange and Nasdaq Holding Company extend
to the operation of NOM.
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    \22\ A discussion of Nasdaq's corporate structure and the
protections afforded by the corporate documents of Nasdaq and Nasdaq
Holding Company, is set forth in the Registration Approval Order,
supra note 19. The corporate documents of Nasdaq and Nasdaq Holding
Company are not being amended by this proposed rule change.
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    Similar provisions also are included in the NOM Delegation
Agreement. For example, NOM agrees: (1) To keep confidential non-public
information relating to Nasdaq and not to use such information for any
commercial purposes; (2) to provide the Commission and Nasdaq access to
NOM's books and records at all times and to maintain such books and
records within the United States; (3) that the books, records,
premises, officers, and employees of NOM shall be deemed to be those of
Nasdaq for purposes of the Act; and (4) to cooperate with, and take
reasonable steps to cause its agents to cooperate with, the Commission
and Nasdaq pursuant to their regulatory authority. In addition, NOM and
its officers and employees submit to the jurisdiction of the Commission
and agree to give due regard to the preservation of the self-regulatory
function of Nasdaq.\23\ Further, the NOM Delegation Agreement may not
be amended unless such amendment is filed with, or filed with and
approved by, the Commission pursuant to Section 19 of the Act.\24\ The
Commission believes that these provisions, which are designed to assist
Nasdaq in fulfilling its self-regulatory obligations and in
administering and complying with the requirements of the Act, are
consistent with the Act, in particular Sections 6(b)(1) and 19(g).
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    \23\ See NOM Delegation Agreement, II.B.
    \24\ See NOM Delegation Agreement, III.
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B. Status of NOM as a Facility of Nasdaq and Delegation of Authority to
NOM LLC

    As a facility of Nasdaq, NOM will be subject to the Commission's
oversight and examination. Consequently, the Commission will have the
same authority to oversee the premises, personnel, and records of NOM
LLC as it currently has with respect to Nasdaq. In addition, Nasdaq
will be fully responsible for all activity that takes place through
NOM, and NOM participants will be subject to Nasdaq's rules and
oversight.
    As described in detail in the Notice, the NOM Delegation Agreement
provides that Nasdaq will delegate to NOM LLC performance of certain
limited responsibilities and obligations of Nasdaq with respect to the
operation of NOM as an options trading facility. Nasdaq, however,
expressly retains ultimate responsibility for the fulfillment of its
statutory and self-regulatory obligations under the Act. Accordingly,
as described more fully below, Nasdaq will retain ultimate
responsibility for such delegated responsibilities and functions, and
any actions taken pursuant to delegated authority will remain subject
to review, approval or rejections by Nasdaq's board

of directors in accordance with procedures established by Nasdaq's
board of directors. Nasdaq has filed the NOM Delegation Agreement as
part of its rules.
    Pursuant to the Delegation Agreement, Nasdaq expressly retains the
authority to (1) delegate authority to NOM LLC to take actions on
behalf of the Exchange, and (2) direct NOM LLC to take action necessary
to effectuate the purposes and functions of Nasdaq, consistent with the
independence of Nasdaq's regulatory functions, exchange rules, policies
and procedures, and the federal securities laws.\25\ NOM LLC will have
delegated authority to, among other things, operate NOM, develop and
adopt governing listing standards applicable to options listed on NOM
in consultation with Nasdaq, and establish and assess listing fees,
transaction fees, market data fees and other fees for the products and
services offered by NOM.\26\ In addition, NOM LLC will have the
authority to act as a SIP for quotations and transaction information
related to securities traded on NOM and any trading facilities operated
by NOM LLC.\27\
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    \25\ See Corporate Structure Proposal Notice, supra note 8, at
58140 and NOM Delegation Agreement, I.
    \26\ See Corporate Structure Proposal Notice, supra note 8, at
58140 and NOM Delegation Agreement, II.A.
    \27\ See NOM Delegation Agreement, II.A.3.
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    NOM LLC also will have authority to develop, adopt, and administer
rules governing participation in NOM,\28\ but the Exchange represents
that it will have ultimate responsibility for the operations, rules and
regulations developed by NOM LLC, as well as their enforcement.
Further, the Exchange represents that actions taken by NOM LLC pursuant
to its delegated authority will remain subject to review, approval or
rejection by the Exchange's board of directors.\29\ In addition, NOM
LLC will be responsible for referring to Nasdaq any complaints of a
regulatory nature involving potential rule violations by member
organizations or employees,\30\ and Nasdaq will retain overall
responsibility for ensuring that the statutory and self-regulatory
functions of the Exchange are fulfilled.\31\
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    \28\ Id.
    \29\ See Corporate Structure Proposal Notice, supra note 8, at
58140.
    \30\ See NOM Delegation Agreement, II.A.9.
    \31\ See NOM Delegation Agreement, I.1.
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    The Commission finds that it is consistent with the Act for Nasdaq
to delegate the operation of NOM to NOM LLC, while retaining ultimate
responsibility for statutory and self-regulatory obligations and
ensuring that NOM's business is conducted in a manner consistent with
the requirements of the Act.

C. Access to NOM

    Only Options Participants (``Options Participants'' or
``Participants'') may transact business on NOM via the System.\32\
There are two categories of Participants: (1) Options Order Entry Firms
(``OEFs''), which represent customer orders as agent or conduct
proprietary trading; and (2) Options Market Makers (``Options Market
Makers'' or ``Market Makers''). A Participant must be a member of
Nasdaq and of another registered options exchange that is not
registered solely under Section 6(g) of the Act.\33\ As Nasdaq members,
Participants must satisfy the requirements of the Nasdaq Rule 1000
Series (Membership, Registration, and Qualification Requirements), as
well as additional requirements set forth in the NOM rules.\34\
Further, an OEF may transact business with Public Customers only if it
is a member of another registered national securities exchange or
association with which Nasdaq has entered into an agreement under Rule
17d-2 under the Act \35\ pursuant to which the other exchange or
association is the designated options examining authority for the
OEF.\36\ In addition, Options Participants that transact business with
customers must be members of FINRA.\37\
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    \32\ See NOM Rules, Chapter II, Section 1(a). An Options
Participant is a firm or organization registered with Nasdaq
pursuant to Chapter II of the NOM Rules for purposes of
participating in options trading on NOM as an Order Entry Firm or
Options Market Maker. See NOM Rules, Chapter I, Section 1(a)(40).
    \33\ 15 U.S.C. 78f(g). See NOM Rules, Chapter II, Sections
1(a)(iii) and 2(f). In Amendment No. 2, Nasdaq proposes to eliminate
from Chapter II, Section 1(b)(iii) a provision stating that a Nasdaq
member would automatically become a NOM Participant upon completing
a NOM Application and paying the applicable fees. Nasdaq believes
that this provision did not accurately reflect the intended scope of
review of NOM applicants, and that eliminating the provision will
improve the quality of regulation of NOM. The Commission finds that
this change is consistent with the Act.
    \34\ See NOM Rules, Chapter II. Nasdaq's rules apply to
Participants unless a specific NOM rule governs or unless the
context otherwise requires. See NOM Rules, Chapter I, Section 2.
Among others, Participants will be able to provide sponsored access
to NOM to a non-member (``Sponsored Participant'') pursuant to
Nasdaq Rule 4611(d), which Nasdaq adopted in 2007. See Securities
Exchange Act Release Nos. 55061 (January 8, 2007), 72 FR 2052
(January 17, 2007) (notice of filing and immediate effectiveness of
File No. SR-Nasdaq-2006-061) (adopting Nasdaq Rule 4611(d)); and
55550 (March 28, 2007), 72 FR 16389 (April 4, 2007) (notice of
filing and immediate effectiveness of File No. SR-Nasdaq-2007-010)
(revising Nasdaq Rule 4211(d)).
    \35\ 17 CFR 240.17d-2.
    \36\ See NOM Rules, Chapter XI, Section 1. See also notes 240 to
241, infra, and accompanying text for a discussion of Rule 17d-2.
    \37\ See NOM Rules, Chapter II, Section 2(f).
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    Among other things, each Participant must be registered as a
broker-dealer and have as the principal purpose of being a Participant
the conduct of a securities business, which shall be deemed to exist if
and so long as: (1) The Participant has qualified and acts in respect
of its business on NOM as either an OEF or an Options Market Maker or
both; and (2) all transactions effected by the Participant are in
compliance with Section 11(a) of the Act \38\ and the rules and
regulations thereunder.\39\ Participants may trade options for their
own proprietary accounts or, if authorized to do so under applicable
law, may conduct business on behalf of customers.\40\
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    \38\ 15 U.S.C. 78k(a).
    \39\ See NOM Rules, Chapter II, Section 2(e).
    \40\ See NOM Rules, Chapter II, Section 1(a).
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1. OEFs
    OEFs are Participants representing customer orders as agent on NOM
or trading as principal on NOM.\41\ OEFs also may register as Market
Makers. A Market Maker that engages in specified Other Business
Activities, or that is affiliated with a broker-dealer that engages in
Other Business Activities, including functioning as an OEF, must have
an Information Barrier between the market making activities and the
Other Business Activities.\42\
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    \41\ See NOM Rules, Chapter VII, Section 1.
    \42\ See NOM Rules, Chapter VII, Section 10.
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    One commenter believes that the ability of OEFs, like Market
Makers, to enter orders on both sides of the market for the same
customer raises questions concerning the rights and responsibilities of
the OEF and the customer. In particular, the commenter asks whether
Market Makers will have exclusive access to certain NOM systems or
other tools, or otherwise have rights that differ from the rights of
these customers. The commenter also asserts that NOM's proposal lacks
clarity regarding its Participants' responsibility for surveillance of
the activities of these market participants.\43\
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    \43\ See SIFMA Letter, supra note 4, at 2.
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    In response, Nasdaq stated its belief that the NOM market model is
similar to Nasdaq's equity market structure and does not raise any
unique or challenging issues for order entry firms and investors.
Nasdaq further believes that most Participants will be familiar with
the regulatory and surveillance requirements associated with access to
NOM from their businesses in equity securities.\44\ Nasdaq represents
that,

within the System, Market Makers will not have any special priorities
or other privileges.\45\
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    \44\ See Nasdaq Response, supra note 5, at 2.
    \45\ 45 Id. at 5. Registered market makers do, however, receive
certain benefits for carrying out their responsibilities. For
example, a lender may extend credit to a broker-dealer without
regard to the restrictions in Regulation T of the Board of Governors
of the Federal Reserve System if the credit is used to finance the
broker-dealer's activities as a specialist or market maker on a
national securities exchange (see 12 CFR 221.5(c)(6)). In addition,
market makers are excepted from the prohibition in Section 11(a) of
the Act.
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    The Commission believes that it is consistent with the Act for an
options exchange not to prohibit a user of its market from effectively
operating as a market maker by holding itself out as willing to buy and
sell options contracts on a regular or continuous basis without
registering as a market maker.\46\ The Commission notes that although
an entity that effectively acts as a market maker but is not registered
as such will not be required to comply with any rules applicable to a
Market Maker, it also will not be eligible to receive certain benefits
of being a Market Maker.\47\ The Commission also agrees with Nasdaq's
assertion that NOM does not raise any unique issues related to
surveillance or the responsibilities of OEFs, and notes that all
Options Participants must also be members of Nasdaq. Further, the
Commission notes that an entity that acts as a ``dealer,'' as defined
in Section 3(a)(5) of the Act,\48\ would be required to register with
the Commission under Section 15 of the Act,\49\ and the rules and
regulations thereunder, or qualify for any exception or exemption from
registration.\50\
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    \46\ See Securities Exchange Act Release No. 38054 (December 16,
1996), 61 FR 67365 (December 20, 1996) (order approving File No. SR-
CBOE-95-48).
    \47\ See infra notes 76 and 84 and accompanying text.
    \48\ 15 U.S.C. 78c(a)(5).
    \49\ 15 U.S.C. 78o.
    \50\ Activity that may cause a person to be deemed a dealer
includes ``'quoting a market in or publishing quotes for securities
(other than quotes on one side of the market on a quotations system
generally available to non-broker-dealers, such as a retail screen
broker for government securities).''' See Definition of Terms in and
Specific Exemptions for Banks, Savings Associations, and Savings
Banks Under Sections 3(a)(4) and 3(a)(5) of the Securities Exchange
Act of 1934, Securities Exchange Act Release No. 47364, 68 FR 8685,
8689, note 26 (February 24, 2003) (quoting OTC Derivatives Dealers,
Securities Exchange Act Release No. 40594, 63 FR 59362, 59370, note
61 (November 3, 1998)).
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2. Market Makers
a. Registration of Market Makers
    An Options Market Maker is a Participant registered with Nasdaq as
a Market Maker.\51\ To register as a Market Maker, a Participant must
file a written application with Nasdaq Regulation, which will consider
an applicant's market making ability and other factors it deems
appropriate in determining whether to approve an applicant's
registration.\52\ All Market Makers are designated as specialists on
NOM for all purposes under the Act or rules thereunder.\53\ The NOM
Rules place no limit on the number of qualifying entities that may
become Market Makers.\54\ The good standing of a Market Maker may be
suspended, terminated, or withdrawn if the conditions for approval
cease to be maintained or the Market Maker violates any of its
agreements with Nasdaq or any provisions of the NOM Rules.\55\ A
Participant that has qualified as a Market Maker may register to make
markets in individual series of options.\56\
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    \51\ See NOM Rules, Chapter VII, Section 2.
    \52\ See NOM Rules, Chapter VII, Section 2(a).
    \53\ See NOM Rules, Chapter VII, Section 2.
    \54\ See NOM Rules, Chapter VII, Rule 2(c). However, Nasdaq may
limit access to the System based on system constraints, capacity
restrictions, or other factors relevant to protecting the integrity
of the System, pending action required to address the issue of
concern. To the extent that Nasdaq places limitations on access to
the System on any Participant(s), such limits shall be objectively
determined and submitted to the Commission for approval pursuant to
a rule change filed under Section 19(b) of the Act. See NOM Rules,
Chapter VII, Section 2(c).
    \55\ See NOM Rules, Chapter VII, Section 4(b).
    \56\ See NOM Rules, Chapter VII, Section 3(a).
---------------------------------------------------------------------------

    The Commission finds that NOM Market Maker qualifications
requirements are consistent with the Act, and notes that they are
similar to those of other options exchanges.\57\ Further, the
Commission believes that allowing NOM Market Makers to register by
series, rather than by class, will permit Market Makers to select the
options series they are most interested in trading. This is designed to
help to reduce the number of quotes submitted by such Market Makers,
and therefore could help to mitigate NOM's quote message traffic and
capacity.\58\
---------------------------------------------------------------------------

    \57\ See, e.g., BOX Rules, Chapter VI, Section 2 and ISE Rule
804.
    \58\ See Securities Exchange Act Release No. See Securities
Exchange Act Release No. 55027 (December 29, 2006), 72 FR 1358
(January 11, 2007) (order approving File No. SR-Phlx-2006-53).
Further, one commenter believes that series-by-series registration
will allow market makers to target the series for which they are
most apt to provide liquidity, which in turn will create greater
liquidity across the entire market. See GETCO Letter, supra note 4,
at 2.
---------------------------------------------------------------------------

b. Market Maker Obligations
    Pursuant to NOM rules, the transactions of a Market Maker in its
market making capacity must constitute a course of dealings reasonably
calculated to contribute to the maintenance of a fair and orderly
market.\59\ Further, among other things, a Market Maker must: (1) On a
daily basis participate in the pre-opening phase and maintain a two-
sided market on a continuous basis in at least 75% of the options
series in which it is registered;\60\ (2) enter a size of at least ten
contracts for its best bid and its best offer;\61\ and (3) maintain
minimum net capital in accordance with Commission and Nasdaq rules.\62\
In addition, Nasdaq may call upon a Market Maker to submit a single bid
or offer or to maintain continuous bids and offers in one or more of
the series in which the Market Maker is registered if, in Nasdaq's
judgment, it is necessary to do so in the interest of fair and orderly
markets.\63\ If Nasdaq finds any substantial or continued failure by a
Market Maker to engage in a course of dealings as specified in Chapter
VII, Section 5(a) of the NOM Rules, such Market Maker will be subject
to disciplinary action or suspension or revocation of registration in
one or more of the securities in which the Market Maker is
registered.\64\
---------------------------------------------------------------------------

    \59\ See NOM Rules, Chapter VII, Section 5(a). Amendment No. 2
replaces the provisions in the NOM proposal related to the
Exchange's ability to automatically cancel all bids and offers
posted by a Market Maker under certain circumstances with provisions
allowing any Options Participant to ask NOM staff to simultaneously
cancel all of the Options Participant's bids, offers, and orders in
all series. See NOM Rules, Chapter VII, Section 11. The Commission
believes that the proposed change is reasonably designed to enable
Participants to limit their risk and is consistent with the Act.
    \60\ See NOM Rules, Chapter VII, Section 6(d)(i).
    \61\ See NOM Rules, Chapter VII, Section 6(a).
    \62\ See NOM Rules, Chapter VII, Section 4(a)(i).
    \63\ See NOM Rules, Chapter VII, Section 6(d)(ii).
    \64\ See NOM Rules, Chapter VII, Section 5(c).
---------------------------------------------------------------------------

    One commenter notes that NOM's rules do not appear to assure that
there will be continuous quotes in a particular series because a Market
Maker could cease disseminating quotes for a series at any time during
the trading day, and requests that Nasdaq clarify a market maker's
continuous quoting obligations.\65\ In response, Nasdaq notes that
other options markets face the possibility that a registered market
maker will withdraw its quotes during the trading day, and that NOM's
rules permit Nasdaq to require a market maker to quote continuously in
a series in which it is registered.\66\ Nasdaq further notes that it
intends to provide functionality that will allow its Market Makers to
instruct the NOM System to automatically input a quotation on the side
of the market that has been depleted. In addition, Nasdaq represents
that it will bring an appropriate disciplinary action against a Market

Maker that fails to meet its quoting obligations.\67\
---------------------------------------------------------------------------

    \65\ See SIFMA Letter, supra note 4, at 1.
    \66\ See Nasdaq Response, supra note 5, at 3, and NOM Rules,
Chapter VII, Section 6(d)(ii).
    \67\ See Nasdaq Response, supra note 5, at 3.
---------------------------------------------------------------------------

    This commenter also requests clarification of NOM's treatment of
options series without a Market Maker. In particular, the commenter
questions the actions NOM will take if a Market Maker withdraws from
making markets in a series, including whether NOM will continue to
match orders in the series.\68\ To the extent that the commenter is
questioning what will happen if a Market Maker registered in a series
does not have a quote in that series (as opposed to the Market Maker
withdrawing from registration in the series),\69\ Nasdaq states that
NOM will continue to route and execute orders in that series. In
addition, Nasdaq states that, if an order is received by NOM when its
quote is not at the NBBO, NOM will route the order automatically to a
market at the NBBO. An order displayed on NOM that becomes marketable
will be accessible through the Linkage.\70\
---------------------------------------------------------------------------

    \68\ See SIFMA Letter, supra note 4, at 2.
    \69\ See discussion infra notes 77 to 79 and accompanying text.
    \70\ See Nasdaq Response, supra note 5, at 3.
---------------------------------------------------------------------------

    The definition of a ``market maker'' includes a dealer who holds
itself out as being willing to buy and sell a security for his account
on a regular or continuous basis.\71\ Therefore, although under NOM's
proposal certain series may not have continuous quotes disseminated by
NOM, the Commission believes that the obligations imposed by the NOM
Rules on Market Makers fall within the definition of market maker
because they will require a NOM Market Maker to hold itself out as
being willing to buy and sell a security for its account on a regular
basis. The Commission therefore believes that the obligations imposed
by the NOM Rules on Market Makers are consistent with the Act.\72\
---------------------------------------------------------------------------

    \71\ See 15 U.S.C. 78c(a)(38) (definition of ``market maker'').
    \72\ The Commission notes that in approving the rules of the
Boston Options Exchange (``BOX''), the Commission acknowledged that
certain options series might not have continuous quotes disseminated
by BOX, but concluded that the obligations imposed on market makers
under the BOX Rules were consistent with the Act. The Commission
also noted that the CBOE's Hybrid trading system had market maker
obligations comparable to those proposed for BOX and also did not
require market makers to quote all series. See Securities Exchange
Act Release No. 49068 (January 13, 2004), 69 FR 2775 (January 20,
2004) (order approving File No. SR-BSE-2002-15) (``BOX Approval
Order'').
---------------------------------------------------------------------------

    The commenter also asserts that other options exchanges generally
require market makers to provide two-sided quotations for 80% of the
classes in which a market maker is registered, and that uniform
quotation requirements among the options markets would be
desirable.\73\ In its response letter, Nasdaq states that NOM's Market
Maker participation standard, which will allow Market Makers to
register in particular options series rather than an entire class,
should result in active participation in all series for which a Market
Maker registers voluntarily.\74\ In addition, Nasdaq maintains that its
approach is numerically superior to other options exchanges, noting
that the BOX Rules effectively require market makers to maintain
continuous two-sided quotes in only 72% of the series in which they are
registered, or at times in only 60% of the series in which they are
registered.\75\
---------------------------------------------------------------------------

    \73\ See SIFMA Letter, supra note 4, at 2.
    \74\ See Nasdaq Response, supra note 5, at 5.
    \75\ See id. and BOX Rules, Chapter VI, Section 6(d)(i).
---------------------------------------------------------------------------

    Market makers receive certain benefits for carrying out their
responsibilities. For example, a lender may extend credit to a broker-
dealer without regard to the restrictions in Regulation T of the Board
of Governors of the Federal Reserve System if the credit is used to
finance the broker-dealer's activities as a specialist or market maker
on a national securities exchange.\76\ In addition, market makers are
excepted from the prohibition in Section 11(a) of the Act. The
Commission believes that a market maker must have sufficient
affirmative obligations, including the obligation to hold itself out as
willing to buy and sell options for its own account on a regular or
continuous basis, to justify this favorable treatment. The Commission
further believes that the rules of all U.S. options markets need not
provide the same standards for market maker participation, so long as
they impose affirmative obligations that are consistent with the Act.
The Commission believes that NOM's market maker participation
requirements impose sufficient affirmative obligations on NOM Market
Makers and, accordingly, that NOM's requirements are consistent with
the Act.
---------------------------------------------------------------------------

    \76\ 12 CFR 221.5(c)(6).
---------------------------------------------------------------------------

    Nasdaq will open trading in an options series only if there is at
least one Market Maker registered for trading in that series.\77\ One
commenter requests clarification of NOM's treatment of options series
without a Market Maker. In particular, the commenter questions the
actions NOM will take if a Market Maker withdraws from making markets
in a series, including whether NOM will continue to match orders in the
series.\78\ In response, Nasdaq states that it is amending proposed
Chapter IV, Section 5 to provide that, in the event a sole Market Maker
for a series withdraws its registration and ceases making markets, NOM
will place the series in a non-regulatory suspension and halt trading
until such time as a member registers to make markets in that
series.\79\
---------------------------------------------------------------------------

    \77\ See NOM Rules, Chapter IV, Section 5.
    \78\ See SIFMA Letter, supra note 4, at 2.
    \79\ See Nasdaq Response, supra note 5, at 3. Nasdaq further
notes that, in Amendment No. 2, it proposes to clarify that in such
circumstances, NOM will not execute orders on its book and will have
no rights and privileges under the Linkage Plan to accept inbound
orders from away markets. Nasdaq will continue to accept and route
Participant orders that are designated for routing and execution at
the best price in away markets. Id.
---------------------------------------------------------------------------

    In addition, the commenter notes that the proposal does not address
a Market Maker's use of the matching system for new customer orders
after it has withdrawn as a Market Maker.\80\ To the extent that the
commenter is asking whether a Market Maker can enter a customer order
when it is not quoting in a series in which it is registered, Nasdaq
notes that the NOM Rules require that, if a Market Maker enters a bid
in a series in which he is registered, he must also enter an offer,\81\
and that therefore a Market Maker will not be able to enter customer
orders without submitting a quote on the other side of the market from
the customer order.\82\ Further, Nasdaq notes that the NOM Rules
prohibit a Market Maker from acting as an OEF without instituting
appropriate information barriers.\83\ To the extent that the commenter
is asking whether an entity that withdraws as a Market Maker in a
series can then act as an OEF in that series, Nasdaq notes that a
Participant that has withdrawn as a Market Maker and is participating
in NOM as an OEF would not receive favorable margin treatment under
Regulation T.\84\
---------------------------------------------------------------------------

    \80\ See SIFMA Letter, supra note 4, at 2.
    \81\ See NOM Rules, Chapter VII, Section 6(b), which states that
a Market Maker that enters a bid (offer) in a series in which he is
registered on NOM must enter an offer (bid).
    \82\ See Nasdaq Response, supra note 5, at 4.
    \83\ See NOM Rules, Chapter VII, Section 10.
    \84\ See Nasdaq Response, supra note 5, at 4.
---------------------------------------------------------------------------

    The Commission believes that Nasdaq has adequately clarified NOM's
treatment of options series when either: (1) A registered Market Maker
is not quoting in that series or (2) a registered Market Maker
withdraws from registration in the series.
c. Single Market Maker Requirement
    One commenter believes that Nasdaq should require at least two
market makers for an options series to be listed and traded on NOM so
that adequate depth and liquidity will be available to market
participants.\85\ The commenter

also believes that, in the context of the order exposure requirements
established in Chapter VII, Section 14 of the NOM Rules,\86\ there will
not be meaningful order exposure with a ``trading crowd'' of fewer than
two market makers.\87\ In addition, the commenter believes that the
term ``trading crowd'' may be a misnomer if the trading crowd consists
of only one market maker.\88\
---------------------------------------------------------------------------

    \85\ See Amex Letter, supra note 4, at 2.
    \86\ Amendment No. 2 renumbers this provision as Chapter VII,
Section 12 of the NOM Rules.
    \87\ See Amex Letter, supra note 4, at 1.
    \88\ Id. at 2. Amex also questions the meaning of the term
``trading crowd'' in Chapter III, Section 4(f) of the NOM Rules.
Nasdaq notes that it has deleted the term ``trading crowd'' from
this rule to make clear that the electronic crowd will be composed
of all NOM Participants, as is the case for other electronic
markets. See Nasdaq Response, supra note 5, at note 9.
---------------------------------------------------------------------------

    In response, Nasdaq asserts that neither the Act nor Commission
rules require a market to provide for more than one market maker, and,
in fact, the specialist system is an example of a one market maker
market model.\89\ Nasdaq believes that the NOM structure fulfills the
objectives of Section 11A of the Act by providing a trading platform
that will allow customer orders to meet without the intervention of a
dealer.\90\ Nasdaq further maintains that lower barriers to
participation will attract liquidity and market depth from order entry
firms and other market participants. Nasdaq also notes that it intends
to provide an environment whereby robust competition between multiple
market makers will provide depth and liquidity, but that it does not
believe market participants should be prevented from trading directly
with one another due to the absence of multiple dealers.\91\
---------------------------------------------------------------------------

    \89\ See Nasdaq Response, supra note 5, at 8 to 9.
    \90\ Id. at 8.
    \91\ Id. at 9.
---------------------------------------------------------------------------

    The Commission agrees that the Act does not mandate a particular
market model for national securities exchanges, and believes that many
different types of market models could satisfy the requirements of the
Act. The Commission does not believe that the Act requires an exchange
to have market makers.\92\ Although Market Makers could be an important
source of liquidity on NOM, they likely will not be the only source. In
particular, the NOM System is designed to match buying and selling
interest of all Participants on NOM. The Commission therefore believes
that the NOM structure is consistent with the Act.
---------------------------------------------------------------------------

    \92\ In its release adopting Regulation ATS, the Commission
rejected the suggestion that a guaranteed source of liquidity was a
necessary component of an exchange. See Securities Exchange Act
Release No. 40760 (December 8, 1998), 63 FR 70844 (December 22,
1998) (``Regulation ATS Release''). See also Securities Exchange Act
Release No. 44983 (October 25, 2001), 66 FR 55225 (November 1, 2001)
(File No. SR-PCX-00-25) (order approving Archipelago Exchange as the
equities trading facility of the Pacific Exchange), at Section IV.B.
---------------------------------------------------------------------------

D. NOM Trading System

1. Overview
    NOM will be a fully automated electronic system (``System'') for
trading standardized options, and will be a facility of Nasdaq, as
defined in Section 3(a)(2) of the Act.\93\ Participants will be able to
enter Displayed Orders on NOM at single and multiple price levels for
the following order types: \94\ Market Orders; Limit Orders; Reserve
Orders; \95\ Minimum Quantity Orders; \96\ Discretionary Orders; \97\
and Price Improving Orders.\98\ Participants may designate orders to be
routed to other market centers when trading interest is not present on
NOM or to be executed only on NOM.\99\ Nasdaq also had originally
proposed to allow Participants to enter Non-Displayed Orders.\100\
Commenters expressed concerns about the use of Non-Displayed Orders in
the options markets.\101\ Nasdaq in Amendment No. 2 has proposed to
eliminate Non-Displayed Orders.\102\ Because Nasdaq has proposed to
eliminate this order type, this order does not make any findings with
respect to Non-Displayed Orders.
---------------------------------------------------------------------------

    \93\ 15 U.S.C. 78c(a)(2). The System includes: (1) An order
execution service that allows Participants to automatically execute
transactions in securities listed and traded on NOM; (2) a trade
reporting service that submits locked-in trades to a registered
clearing agency for clearance and settlement, transmits last sale
reports to the Options Price Reporting Authority, if required, for
dissemination to the public and industry, and provides Participants
with monitoring and risk management capabilities; and (3) a data
feed(s) that can be used to display without attribution to
Participants' MPIDs Displayed Orders on both the bid and offer side
of the market for price levels within NOM using the minimum price
variation applicable to the security. See NOM Rules, Chapter VI,
Section 1(a). See Trading Rules Proposal Notice, supra note 3, for a
more complete description of NOM operation and rules. The Commission
notes that the Plan for Reporting of Consolidated Options Last Sale
Reports and Quotation Information (``OPRA Plan'') requires each
party to the plan to collect and promptly transmit to OPRA all last
sale reports relating to its market. See OPRA Plan, Section V(a).
    \94\ NOM does not propose to trade complex orders at this time.
Participants may enter orders with the following time-in-force
designations: Expire Time; Immediate or Cancel (``IOC''); DAY; and
Good Til Cancelled. See NOM Rules, Chapter VI, Section 1(g).
    \95\ A Reserve Order is a limit order with displayed size and an
additional non-displayed amount, both of which are available for
execution against incoming orders. If the displayed portion of a
Reserve Order is executed fully, the System will replenish the
display portion from reserve up to the size of the original display
amount. The System creates a new time stamp for the replenished
portion of an order each time it is replenished from reserve, while
the reserve portion retains the time stamp of its original entry.
See NOM Rules, Chapter VI, Section 1(e)(1).
    \96\ A Minimum Quantity Order must be designated as IOC and
requires that a specified minimum number of contracts be traded. A
Minimum Quantity Order received prior to the Opening Cross or after
the market close will be cancelled. See NOM Rules, Chapter VI,
Section 1(e)(3).
    \97\ A Discretionary Order has both a displayed price and size
and a non-displayed discretionary price range at which the entering
party is willing to buy or sell. The non-displayed interest is not
entered into the System book but is converted, along with the
displayed size, into an IOC buy (sell) order at the highest (lowest)
price in the discretionary price range when displayed contracts
become available on the opposite side of the market or an execution
takes place at any price within the discretionary price range. If
more than one Discretionary Order is available for conversion into
an IOC order, the System will convert and process all such orders in
the same order as they were entered. If an IOC order is not executed
in full, the unexecuted portion of the order is reposted
automatically and displayed in the System book with a new time stamp
at its original displayed price and with its non-displayed
discretionary price range. See NOM Rules, Chapter VI, Section
1(e)(4).
    \98\ A Price Improving Order is an order to buy or sell an
option at a specified price smaller than the minimum price variation
(``MPV'') in the security. Price Improving Orders may be entered in
increments as small as one cent. A Price Improving Order will be
displayed at the MPV in that security and rounded up for sell orders
and down for buy orders. See NOM Rules, Chapter VI, Section 1(e)(6).
    \99\ See NOM Rules, Chapter VI, Section 11(a). See also
Amendment No. 2 and the Trading Rules Proposal Notice, supra note 3,
at 23871.
    \100\ A Non-Displayed Order was defined as a limit order that is
not displayed in the System but is available for execution against
all incoming orders until executed in full or cancelled.
    \101\ See Citadel Letter, supra note 4, at 3, and Amex Letter,
supra note 4, at 2.
    \102\ Nasdaq has made corresponding changes throughout the NOM
Rules to reflect the deletion of this order type.
---------------------------------------------------------------------------

    All trading interest on NOM will be automatically executable. The
NOM System and rules provide for the ranking, display, and execution of
all orders in price/time priority without regard to the status of the
entity entering an order.\103\ Displayed Orders will have priority over
non-displayed interest at the same price.\104\ Any price improvement
resulting from an execution in the System will accrue to the party
taking liquidity.\105\
---------------------------------------------------------------------------

    \103\ See NOM Rules, Chapter VI, Section 10. In Amendment No. 2,
Nasdaq made a technical change to Chapter VI, Section 10 to clarify
that the System will execute trading interest at the best price in
the System before executing trading interest at the next best price.
This change does not alter the execution algorithm as it was
proposed. See Amendment No. 2.
    \104\ See NOM Rules, Chapter VI, Section 10(1). At each price,
trading interest will be executed in the following order: (A)
Displayed Orders; (B) the Non-Displayed portion of Reserve Orders,
in time priority among such interest; and (C) the discretionary
portion of Discretionary Orders, in time priority among such
interest.
    \105\ See NOM Rules, Chapter VI, Section 10. One commenter
maintains that the original proposal did not define ``taker of
liquidity'' and failed to specify how price improvement would accrue
to the taker of liquidity. See Amex Letter, supra note 4, at 3. In
response, Amendment No. 2 modifies NOM's rules to indicate that any
price improvement will accrue to the party removing liquidity
previously posted to the Book. See NOM Rules, Chapter VI, Section
10(3). The Commission believes that this change clarifies NOM's
rules and is consistent with the Act.

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

    The Commission believes that NOM's proposed execution priority
rules are consistent with the Act. The Commission notes that one
commenter specifically supported NOM's price/time priority algorithm,
noting its belief that ``flat and open'' systems encourage better
executions and provide increased liquidity to the market.\106\ The
Commission also believes that NOM's proposed order types are consistent
with the Act, and discusses several particular order types below.
---------------------------------------------------------------------------

    \106\ See GETCO Letter, supra note 4, at 1.
---------------------------------------------------------------------------

2. Attributable Orders
    A Displayed Order may be entered with attribution to a
Participant's MPID (an Attributable Order) or on an anonymous basis (a
Non-Attributable Order).\107\ One commenter expresses concern that
Attributable Orders could result in discrimination against particular
members.\108\ The commenter believes, for example, that it is
beneficial for a firm to identify itself when facilitating customer
order flow since an exchange and its members may want to allow
particular members to trade against more than the minimum guaranteed
amount of the order to encourage the member to send more order flow to
that exchange.\109\
---------------------------------------------------------------------------

    \107\ See NOM Rules, Chapter VI, Section 1(d).
    \108\ See ISE Letter, supra note 4, at 2.
    \109\ Id. at note 3.
---------------------------------------------------------------------------

    The commenter also expressed concern that identifying the entering
firm could encourage internalization. The commenter also asserts that
Attributable Orders would defeat the anti-internalization function of
the information barriers between a firm's market making and customer
order entry activities.\110\ The commenter believes that the
internalization concern is particularly significant in the context of
Nasdaq's ``first-in-first-out'' market model, where orders at a given
price will be executed in sequence, with no priority for customer
orders at the best price or pro rata distribution among participants
quoting at that price. With no customer priority or pro rata allocation
among Participants quoting at the best price, the commenter believes
that a Participant that sees its firm's order at the top of the book
would be able to execute against, and internalize, all of the displayed
order.\111\
---------------------------------------------------------------------------

    \110\ Id. at 2-3.
    \111\ Id. at 3.
---------------------------------------------------------------------------

    In its response letter, Nasdaq notes that Attributable Orders are a
voluntary feature of the System, and that no firm will be required to
reveal its identity.\112\ Nasdaq also argues that there is no selective
disclosure; Nasdaq will publish the identity of the NOM Participant
only when the order is posted on the NOM book, and that disclosure will
be made simultaneously to all market participants in a proprietary data
feed.\113\ Further, Nasdaq notes that information barriers are designed
to prevent a Market Maker from obtaining and using information about
customer orders prior to execution, and that OEFs must route customer
orders to the best available market, even if that is the market
displaying the firm's Attributable Order.\114\ Nasdaq also believes
that its price/time algorithm allows less internalization than ISE's
pro rata allocation, which guarantees 40% of the order to a market
maker under certain conditions. Nasdaq further notes that there is
always the possibility that an incoming order trades with a Price
Improving Order, rather than a displayed Attributable Order.
---------------------------------------------------------------------------

    \112\ See Nasdaq Response, supra note 5, at 7.
    \113\ Id.
    \114\ Id.
---------------------------------------------------------------------------

    To the extent that a market participant is concerned that its order
would be discriminated against, as Nasdaq notes, the market participant
can choose to enter a Non-Attributable Order. In addition, the
Commission does not believe that it is likely that participants in a
fully electronic market, such as NOM, will refrain from trading with a
particular Participant's Attributable Orders in order to allow that
Participant to do so, particularly in light of their best execution
obligations.
    Moreover, the Commission does not believe that a member's use of
Attributable Orders, by itself, will cause a Market Maker to violate
NOM's information barrier rule. The purpose of requiring information
barriers is to prohibit the flow of material non-public information
between the market making activities and other business activities of a
firm. With respect to Attributable Orders, a Market Maker will learn
the identity of an Attributable Order at the same time as all other
Participants--that is, once it is displayed on NOM and disseminated
over NOM's proprietary data feed. The Market Maker will not have any
knowledge of the order prior to that time. The Commission does not
believe that allowing Market Makers to see this information once it is
posted on the book undermines the policy of having information
barriers. The Commission might reach a different conclusion, however,
if order attribution information were disclosed preferentially to
certain Participants or if Market Makers had a systemic or other
advantage that allowed them to receive this information in a more
timely manner.
3. Reserve Orders and Price Improving Orders \115\
---------------------------------------------------------------------------

    \115\ Nasdaq has proposed in Amendment No. 2 to eliminate the
Non-Displayed Order type. Therefore, this approval order does not
discuss Non-Displayed Orders. See supra notes 100 to 102 and
accompanying text.
---------------------------------------------------------------------------

    Nasdaq proposes to allow participants to enter Reserve Orders,
which are limit orders with displayed size and an additional non-
displayed amount, both of which are available for execution against
incoming orders. If the displayed portion of a Reserve Order is
executed fully, the System will replenish the display portion from
reserve up to the size of the original display amount. The non-
displayed portion of a Reserve Order has lower priority than any
displayed order.
    In addition, Nasdaq proposes a new order type called a Price
Improving Order. A Price Improving Order has a specified price smaller
than the minimum price variation (``MPV'') in the option. Price
Improving Orders may be entered in increments as small as one cent.
Price Improving Orders will be displayed at the MPV in that security
and rounded up for sell orders and down for buy orders. For the reasons
discussed below, the Commission finds Reserve Orders and Price
Improving Orders consistent with the Act.
a. Quote Rule
    One commenter argues that Price Improving Orders would violate Rule
602 of Regulation NMS (the ``Quote Rule'') because Nasdaq will not
disseminate its best bid or offer.\116\
---------------------------------------------------------------------------

    \116\ See ISE Letter, supra note 4, at 2 (incorporating by
reference the commenter's June 1, 2007, letter from Michael J.
Simon, Secretary, ISE, to Nancy M. Morris, Secretary, Commission,
regarding File No. SR-CBOE-2007-39 (``ISE June 2007 Letter'')).
---------------------------------------------------------------------------

    The Quote Rule requires a national securities exchange to collect,
process, and make available to vendors the best bid, the best offer,
and aggregate quotation sizes for each subject security that is
communicated on any national securities exchange by a responsible
broker or dealer. A ``bid'' or ``offer'' is defined as ``the bid price
or the offer price communicated by a member of a national securities
exchange or member of a national securities association to any broker
or dealer, or to any customer.

* * * '' \117\ Because the non-displayed size of a Reserve Order or the
non-displayed price of a Price Improving Order is sent to NOM but not
communicated to anyone, it is not a bid, offer, or quotation. Thus, the
Quote Rule does not require this information to be disseminated.\118\
---------------------------------------------------------------------------

    \117\ 17 CFR 242.600(a)(8).
    \118\ See also Citadel Letter, supra note 4, at 4 supporting
this analysis.
---------------------------------------------------------------------------

    The Quote Rule also requires responsible brokers and dealers to be
firm for their quotes.\119\ In Amendment No. 2 Nasdaq has proposed to
modify Chapter VII, Section 6(c)(1) of the NOM Rules to explicitly
state that all quotes and orders entered into NOM by Options
Participants, including the non-displayed portions of Reserve Orders
and Price Improving Orders, must be firm under NOM rules and Rule 602
of Regulation NMS.
---------------------------------------------------------------------------

    \119\ 17 CFR 242.602(b)(2) and (c)(3).
---------------------------------------------------------------------------

b. Transparency, Quote Competition, and Internalization
    Several commenters expressed concern about the impact of Price
Improving Orders and Reserve Orders on market quality. In particular,
one commenter believes such orders will undermine transparency in the
options markets and that, because the prices and sizes of such orders
are not disseminated, it will be impossible for market participants to
know the true best trading interest on NOM.\120\ This commenter argues
that Price Improving Orders will discourage market participants from
quoting their best prices and submitting displayable limit orders
because contra-side orders could be ``pennied'' by Price Improving
Orders at opportune moments. The commenter believes that these
disincentives ultimately will reduce price competition in the U.S.
options markets.\121\ Another commenter expresses a concern that no one
will know the actual prices communicated to the exchange, which are
prices at which transactions can take place.\122\ This commenter is
concerned that if other options markets adopted similar order types,
there would be a trading environment in which there would be no way for
customers to make intelligent pricing decisions or for broker-dealers
to fulfill their best execution obligations.\123\
---------------------------------------------------------------------------

    \120\ See Citadel Letter, supra note 4, at 1-3.
    \121\ See Citadel Letter, supra note 4, at 3. The commenter
further believes that the concerns raised by Hidden Orders exceed
those raised by the auction facilities on other options exchanges
(including BOX's PIP and the International Securities Exchange's
PIM) because Hidden Orders would be a fundamental component of NOM
rather than a separate auction facility operating parallel to the
regular options market. Id.
    \122\ See ISE Letter, supra note 4, at note 1-2.
    \123\ Id. at 2.
---------------------------------------------------------------------------

    One commenter expresses the concern that Price Improving Orders
will enable Participants to internalize their order flow without the
possibility of real order interaction. This commenter argues that the
purpose of the requirement that a member display a customer order and
wait three seconds before trading against the order is to provide other
market participants with a chance to trade with the order before the
member internalizes it. The commenter argues that, because only the
Participant that enters the Price Improving Order will know the true
price of the order, only that member can accurately run its pricing
model to determine whether it is economically viable to trade against
the order. The commenter does not believe this is a level playing
field.\124\ Similarly, another commenter asserts that permitting Price
Improving Orders to satisfy NOM's order exposure requirement \125\ will
``invite rampant internalization'' by Participants, who will be able to
trade with their agency orders without the market having a meaningful
opportunity to compete for the orders.\126\
---------------------------------------------------------------------------

    \124\ See ISE June 2007 Letter, supra note 116, at 3.
    \125\ See NOM Rules, Chapter VII, Section 12. Chapter VII,
Section 12 of the NOM Rules prohibits a Participant from executing
as principal an order it represents as agent unless (1) the order is
exposed on NOM for at least three seconds, or (2) the Participant
has been bidding or offering on NOM for at least three seconds prior
to receiving the agency order that is executable against such bid or
offer.
    \126\ See Citadel Letter, supra note 4, at 3. This commenter
further argues that Nasdaq should amend Chapter VII, Section 12,
Commentary .04 to provide that a Participant cannot inform another
Options Participant or any other third party of the terms of an
order submitted to NOM after, as well as prior to, submitting the
order to NOM. Nasdaq has made this change in Amendment No. 2.
---------------------------------------------------------------------------

    On the other hand, another commenter asserts that the use of non-
displayed and reserve orders, which have been available for years in
the equity markets, has not diminished competition or liquidity in
these markets.\127\ This commenter believes that Reserve Orders will
encourage liquidity providers to bring their interest to the market in
a manner best suited to their trading requirements. The commenter
further believes that the increased use of reserve orders in the
options markets would help to mitigate concerns regarding the effect of
penny increments on institutional investors.\128\
---------------------------------------------------------------------------

    \127\ See GETCO Letter, supra note 4, at 2-3.
    \128\ Id. at 3. The commenter also notes that the Commission
previously approved a reserve order type for NYSE Arca Options,
citing to NYSE Arca Options Rule 6.62(c)(3). Id. at note 6 and
accompanying text.
---------------------------------------------------------------------------

    Price Improving Orders will allow market participants to submit an
order priced between the MPV that will be rounded to the nearest MPV
for display.\129\ Without this order type, market participants would
not be able to submit orders priced between the MPV. Instead, orders,
if submitted, would be priced (and displayed) at the MPV. Thus, the
Price Improving Order type will not ``take away'' transparency that
would already exist. The Commission recognizes that Price Improving
Orders will not be displayed at their actual penny price. Price
Improving Orders, however, will provide for investors the opportunity
to trade at a better price than would otherwise be available--inside
the disseminated best bid and offer for a security. The Commission
believes that this opportunity for investors to receive executions
inside the disseminated best bid or offer could result in better
executions for investors, and that Price Improving Orders are
consistent with the Act.
---------------------------------------------------------------------------

    \129\ Price Improving Orders are defined as orders to buy or
sell at a specified increment smaller than the MPV in a security,
and they may be entered in increments as small as one cent. See NOM
Rules, Chapter VI, Section 1(e)(6). Because a Price Improving Order
can only be entered in an increment smaller than the MPV in an
options series, and cannot be entered in an increment smaller than
one cent, Participants will not be able to enter Price Improving
Orders in options series for which the MPV is a penny.
---------------------------------------------------------------------------

    In response to a commenter's concern about broker-dealers' ability
to fulfill their best execution obligations,\130\ as just discussed,
the Commission believes that Price Improving Orders likely will provide
another opportunity for investors to receive executions inside the
disseminated best bid or offer for a security, which could result in
better executions for investors. The availability of this price
improvement feature will be a factor to be considered in a broker-
dealer's best execution routing determination, similar to other factors
a broker-dealer must consider in connection with its best execution
obligation.
---------------------------------------------------------------------------

    \130\ See ISE Letter, supra note 4, at note 1-2.
---------------------------------------------------------------------------

    The duty of best execution requires a broker-dealer to seek the
most favorable terms reasonably available under the circumstances for a
customer's transaction.\131\ The Commission has not viewed the duty of
best execution as requiring automated routing on an order-by-order
basis to the market with the best quoted price at that time. Rather,
the duty of best execution requires broker-dealers to periodically
assess the quality of competing markets

to assure that order flow is directed to markets providing the most
beneficial terms for their customer orders.\132\ Broker-dealers must
examine their procedures for seeking to obtain best execution in light
of market and technology changes and modify those practices if
necessary to enable their customers to obtain the best reasonably
available terms.\133\ In doing so, broker-dealers must take into
account price improvement opportunities, and whether different markets
may be more suitable for different types of orders or particular
securities.\134\
---------------------------------------------------------------------------

    \131\ See, e.g., Securities Exchange Act Release No. 37619A
(September 6, 1996), 61 FR 48290 (September 12, 1996) (``Order
Handling Rules Release'').
    \132\ Order Handling Rules Release, 61 FR at 48322-48333 (``In
conducting the requisite evaluation of its internal order handling
procedures, a broker-dealer must regularly and rigorously examine
execution quality likely to be obtained from different markets or
market makers trading a security.''). See also Newton v. Merrill,
Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, at 271, 274 (3d
Cir.), cert. denied, 525 U.S. 811 (1998); Payment for Order Flow,
Securities Exchange Act Release No. 34902 (October 27, 1994), 59 FR
55006, at 55009 (November 2, 1994).
    \133\ Order Handling Rules, 61 FR at 48323.
    \134\ Order Handling Rules, 61 FR at 48323. For example, in
connection with orders that are to be executed at a market opening
price, ``[b]roker-dealers are subject to a best execution duty in
executing customer orders at the opening, and should take into
account the alternative methods in determining how to obtain best
execution for their customer orders.'' Disclosure of Order Execution
and Routing Practices, Securities Exchange Act Release No. 43590
(November 17, 2000), 65 FR 75414, 75422 (December 1, 2000) (adopting
new Exchange Act Rules 11Ac1-5 and 11Ac1-6 and noting that
alternative methods offered by some Nasdaq market centers for pre-
open orders included the mid-point of the spread or at the bid or
offer).
---------------------------------------------------------------------------

    The Commission also believes that Price Improving Orders will
provide market participants with an additional tool to submit trading
interest to the Exchange. This order type may serve to increase
liquidity to the extent that market participants find the order type to
be useful and result in better executions. Further, market participants
may be incented to compete by putting forth their best price--priced in
a penny increment--to potentially match or better any other Price
Improving Orders resident in the System. This may result in more
aggressive, rather than less aggressive, trading interest.
    The Commission also believes that Reserve Orders will provide
market participants with an additional tool to submit trading interest
to the exchange. Specifically, the ability to enter an order with a
certain size displayed and additional size not displayed may provide
market participants greater choice to submit trading interest in a
manner best suited to their trading needs. This in turn may encourage
market participants to bring liquidity to the exchange that they might
not otherwise have submitted.
    Moreover, the Commission believes that the ability to ``fish''
inside the displayed quote, coupled with the restriction on the
Participant that initially submitted the Price Improving Order from
trading with that order until after three seconds has elapsed, will
provide a meaningful opportunity for interaction prior to the time at
which the submitting Participant can interact with the order. The
Commission also notes that a Participant that would like to trade
against its customer order runs the risk that the customer order, if
entered as a Price Improving Order, will execute against another Price
Improving Order (or Discretionary Order) resident in the system. The
Commission does not believe that the availability and use of Price
Improving Orders will reduce the quality or competitiveness of the
options markets by increasing the level of internalization in the
options markets.
c. Linkage Plan
    One commenter believes that the Trading Rules Proposal fails to
address how Reserve Orders and Price Improving Orders will interact
with the requirements of the Plan for the Purpose of Creating and
Operating an Intermarket Options Linkage (``Linkage Plan'').\135\
Specifically, this commenter notes that, because such orders are not
disseminated, they presumably will not trigger other options markets'
obligations to avoid trading through or obligate other markets to send
orders to NOM through the Linkage.\136\ Accordingly, the commenter
believes that away markets will fail to benefit from superior prices
available on NOM, and Non-Displayed Orders and Price Improving Orders
will undermine market-wide trade-through protection.\137\
---------------------------------------------------------------------------

    \135\ See Citadel Letter, supra note 4, at 3. Another commenter
generally states its belief that the concept of a Non-Displayed
Order is inconsistent with the obligations required by the Linkage
Plan. See Amex Letter, supra note 4, at 2.
    \136\ See Citadel Letter, supra note 4, at 3.
    \137\ Id.
---------------------------------------------------------------------------

    In its response, Nasdaq states that incoming orders from the
intermarket linkage will interact with Price Improving Orders. Such
incoming orders will automatically execute against any such order with
a better price than the displayed bid or offer.\138\
---------------------------------------------------------------------------

    \138\ See Nasdaq Response, supra note 5, at 13.
---------------------------------------------------------------------------

    The Commission believes that NOM's Rules adequately address how its
market will interact with the Linkage Plan. The Linkage Plan, and SRO
rules adopted pursuant to the Plan, provide trade through protection to
the national best bid and offer (``NBBO'').\139\ The NBBO will not
include the non-displayed price of a Price Improving Order or the
reserve size of a Reserve Order. Therefore, the non-displayed price of
a Price Improving Order and the non-displayed size of a Reserve Order
are not subject to trade through protection under the Linkage Plan.
---------------------------------------------------------------------------

    \139\ The national best bid or offer is defined in the Linkage
Plan as the national best bid and offer in an options series
calculated by a Participant. See Section 2(19) of the Linkage Plan.
---------------------------------------------------------------------------

d. Penny Pilot
    One commenter believes that the Trading Rules Proposal will
circumvent the industry efforts with respect to the Penny Pilot Program
by moving to hidden penny quoting without the benefit of careful study
of the data yielded in the Pilot.\140\ Another commenter believes that
the appropriate way to address penny pricing in options is through the
current Penny Pilot. This commenter recommends that the Commission
consider any expansion of penny quoting only through review of the
experience under the Pilot.\141\
---------------------------------------------------------------------------

    \140\ See Citadel Letter, supra note 4, at 4.
    \141\ See ISE June 2007 Letter, supra note 116, at 3.
---------------------------------------------------------------------------

    As discussed above and below, the Commission finds that the Trading
Rules Proposal, as amended, is consistent with the Act. The Commission
previously has approved proposals by other options exchanges to trade
in penny increments.\142\ The Commission does not believe it is
appropriate to prohibit Nasdaq from implementing another initiative
designed to allow limited trading, not quoting, in penny increments.
---------------------------------------------------------------------------

    \142\ See, e.g., Securities Exchange Act Release Nos. 54229
(July 27, 2006), 71 FR 44508 (August 3, 2006) (File No. SRSR-CBOE-
2005-90) (order approving CBOE's Simple Auction Liaison system);
50819 (December 8, 2004), 69 FR 75093 (December 15, 2004) (File No.
SR-ISE-2003-06) (order approving ISE's Price Improvement Mechanism);
and BOX Approval Order, supra note 72 (approving BOX's Price
Improvement Period).
---------------------------------------------------------------------------

4. Opening and Halt Cross
    Nasdaq had originally proposed a single price opening and reopening
via an electronic cross, modeled on the Opening and Halt Crosses Nasdaq
developed for the trading of equities.\143\ Nasdaq in Amendment No. 2
proposes to revise the procedures it will use to resume trading in an
option following the conclusion of a trading halt in the underlying
security. Specifically, rather than using a single price reopening
following a trading halt, as originally

proposed, Nasdaq proposes to process orders in time priority according
to the execution algorithm provided in the NOM Rules.\144\ According to
Nasdaq, the proposal to use NOM's regular processing following a
trading halt is designed to respond to comments from industry
participants that options prices are based on the prices of the
underlying security.\145\
---------------------------------------------------------------------------

    \143\ See NOM Rules, Chapter VI, Section 8. See Trading Rules
Proposal Notice, supra note 3, for a detailed description of the
proposed Opening and Halt Crosses.
    \144\ See NOM Rules, Chapter VI, Section 10(4).
    \145\ See Amendment No. 2 at 7.
---------------------------------------------------------------------------

    The Commission believes that NOM's rules for an Opening Cross will
help to ensure that the opening of NOM is conducted in a fair and
orderly fashion and is consistent with the Act. The Commission further
believes that the proposed change to NOM's procedure for re-opening
trading in an option following the conclusion of a trading halt in the
underlying security is reasonably designed to provide for an orderly
re-opening of trading in the option and is consistent with the Act.
5. Closing Cross
    At the close of trading, NOM will conduct a single price Closing
Cross.\146\ One commenter notes that the rules, as originally proposed,
provided that the Closing Cross for all options would occur at 4 p.m.,
although options on fund shares and broad-based indexes trade until
4:15 p.m., and did not indicate when the Closing Cross would
terminate.\147\ In response, Nasdaq in Amendment No. 2 revised Chapter
VI, Section 9(b) of the NOM Rules to indicate that the Closing Cross
for options on broad-based indexes and fund shares will occur at 4:15
p.m. In addition, Nasdaq indicated that the Closing Cross occurs
automatically and generally takes place in under one second, although
the process may take several seconds on high-volume trading days.\148\
The Commission believes that these changes adequately clarify the
timing of the Closing Cross.\149\
---------------------------------------------------------------------------

    \146\ See NOM Rules, Chapter VI, Section 9. See also Trading
Rules Proposal Notice, supra note 3, for a more detailed description
of the proposed Closing Cross.
    \147\ See Amex Letter, supra note 4, at 3.
    \148\ See Nasdaq Response, supra note 5, at 10.
    \149\ In Amendment No. 2, Nasdaq proposes changes to the
definitions of Imbalance Only (``IO''), Market on Close (``MOC''),
and Limit on Close (``LOC'') orders to replace certain times
specified in the rules (e.g., 3:50:00 p.m.) with more general
descriptions (e.g., 10 minutes prior to the close).
---------------------------------------------------------------------------

    One commenter notes that the NOM Rules indicate that an MOC order
might not be executed. The commenter believes that an MOC order is a
market order, and the operation of the Closing Cross will alter the
nature of a market order as generally understood by market
participants. The commenter further believes that Nasdaq should better
explain the operation of MOC orders.\150\ In response, Nasdaq
acknowledges that MOC orders are not guaranteed to execute during the
Closing Cross but notes that MOC orders receive the highest execution
priority during the Closing Cross process.\151\ Thus, Nasdaq states
that MOC orders should execute at the cross price provided that there
is adequate trading interest on the other side of the market.\152\
---------------------------------------------------------------------------

    \150\ See Amex Letter, supra note 4, at 3.
    \151\ See Nasdaq Response, supra note 5, at 10 to 11. See also
NOM Rules, Chapter VI, Section 9(b)(3).
    \152\ See Nasdaq Response, supra note 5, at 11.
---------------------------------------------------------------------------

    As noted above, the NOM Closing Cross is modeled on the Closing
Cross that Nasdaq uses in its equity market.\153\ Like the NOM Closing
Cross, the Nasdaq Closing Cross includes MOC orders, which might not be
executed during the Nasdaq Closing Cross.\154\ The Commission believes
that NOM's rules adequately explain the operation of MOC orders.
---------------------------------------------------------------------------

    \153\ See Nasdaq Rule 4754.
    \154\ See Nasdaq Rule 4754(b)(3).
---------------------------------------------------------------------------

    Nasdaq proposes to disseminate in connection with the Opening Cross
and Closing Cross an Order Imbalance Indicator.\155\ The Order
Imbalance Indicator for the Closing Cross will disseminate, in part,
the following information: (1) A Current Reference Price, which is the
single price that is at or within the current NOM best bid and offer at
which the maximum number of contracts of MOC, LOC, IO, and Close
Eligible Interest \156\ can be paired; \157\ (2) a Far Clearing Price,
which is an indicative price at which MOC, LOC, and IO orders would
execute if the Closing Cross were to occur at that time; and (3) a Near
Clearing Price, which is an indicative price at which MOC, LOC, IO, and
Close Eligible Interest would execute if the Closing Cross were to
occur at that time.\158\
---------------------------------------------------------------------------

    \155\ See proposed Chapter VI, Sections 8(a)(2) and 9(a)(7) of
the NOM Rules. For the Opening Cross, Nasdaq will disseminate the
Order Imbalance Indicator every five seconds beginning at 9:25 a.m.
For the Closing Cross, Nasdaq will disseminate the Order Imbalance
Indicator every five seconds for 10 minutes prior to the Closing
Cross. See proposed NOM Rules, Chapter VI, Sections 8(a)(2) and
8(b)(1) and 9(a)(7) and 9(b)(1) for a detailed description of the
Order Imbalance Indicator.
    \156\ Close Eligible Interest is defined to mean any quotation
or any order that may be entered into the system and designated with
a time-in-force of DAY, GTC, or EXPR. See proposed Chapter VI,
Section 9(a)(1) of NOM Rules.
    \157\ If more than one price exists pursuant to this
calculation, the Current Reference Price is the price that minimizes
any Imbalance. If more than one price exists under that calculation,
the Current Reference Price is the entered price at which contracts
will remain unexecuted in the cross. And, if more than one price
exists under that calculation, the Current Reference Price is the
price that minimizes the distance from the bid-ask midpoint of the
inside quotation prevailing within the NOM System at the time of the
order imbalance indicator dissemination. See proposed Chapter VI,
Section 9(a)(7)(A) of the NOM Rules.
    \158\ For the Opening Cross, the Far Clearing Price and Near
Clearing Price will be the same as the Current Reference Price. See
proposed Chapter VI, Section 8(a)(2)(A) and (E) of the NOM Rules.
---------------------------------------------------------------------------

    One commenter notes that the Order Imbalance Indicator would show
the price in penny increments at which certain orders would execute at
the time the Order Imbalance Indicator is disseminated.\159\ The
commenter believes that the Order Imbalance Indicator is inconsistent
with the options Penny Pilot Program and that the Order Imbalance
Indicator should be disseminated in the applicable minimum price
variation for an option, rather than in penny increments.\160\
---------------------------------------------------------------------------

    \159\ See Amex Letter, supra note 4, at 2.
    \160\ Id. The Penny Pilot Program of the various options
exchanges allows the exchanges to quote certain options classes in
one-cent or five-cent increments, depending on the price of the
option. See, e.g., Securities Exchange Act Release No. 56567
(September 28, 2007), 72 FR 56396 (October 3, 2007) (order approving
File No. SR-Amex-2007-96).
---------------------------------------------------------------------------

    In its response, Nasdaq states that the Order Imbalance Indicator
will benefit investors and improve transparency by providing market
participants with information that will allow them to route customer
orders to the best market.\161\ To ensure that the Order Imbalance
Indicator fully complies with Rule 602 of Regulation NMS, however,
Nasdaq proposes in Amendment No. 2 to modify the proposed NOM Rules
relating to the Closing Cross to state that the Current Reference Price
and Near Clearing Price \162\ will be disseminated in the minimum price
increment applicable to the option in question and never at a price
that would expose undisplayed trading interest that is available for
execution on the NOM Book. Nasdaq states that only the Current
Reference Price and Near Clearing Price are affected by this
restriction because they are the only aspects of the Order Imbalance
Indicator that may include information based on non-displayed orders
resting on the NOM book.\163\ Nasdaq further states that the remaining
data elements of the Order Imbalance Indicator do not transmit
information regarding the

pricing of specific orders and therefore do not implicate Rule 602 of
Regulation NMS.\164\
---------------------------------------------------------------------------

    \161\ See Nasdaq Response, supra note 5, at 9.
    \162\ See NOM Rules, Chapter VI, Sections 9(a)(7)(A) and
9(a)(7)(E)(ii).
    \163\ This is because the Current Reference Price and Near
Clearing Price take into account the Close Eligible Interest, which
is defined as any quotation or any order that may be entered into
the System and designated with a time-in-force of DAY, GTC, or EXPR.
Thus, Close Eligible Interest includes orders, including non-
displayed orders, on the NOM Book.
    \164\ See Nasdaq Response, supra note 5, at 6 and 9.
---------------------------------------------------------------------------

    The Commission agrees with Nasdaq's analysis and believes that the
Order Imbalance Indicator, as proposed to be amended in Amendment No.
2, is consistent with Rule 602 of Regulation NMS. Nasdaq will not
disseminate the prices of non-displayed orders resting on the NOM book
after the Opening Cross \165\ and therefore, such non-displayed orders
will not be bids or offers \166\ required to be made available to
vendors by the Exchange under Rule 602. Further, the Commission does
not believe that the Order Imbalance Indicator, as amended, is
inconsistent with the Penny Pilot because it will not make available
during regular trading hours information in a pricing increment other
than the MPV.
---------------------------------------------------------------------------

    \165\ The Commission does not believe that the Order Imbalance
Indicator disseminated prior to the Opening Cross (and thus
disseminated prior to the 9:30 a.m. EST) raises the same issues
under the Quote Rule because the information will be disseminated
prior to the commencement of trading on the exchange. See Rule
602(a)(1)(i)(B) of Regulation NMS, 17 CFR 242.602(a)(1)(i)(B).
    \166\ See Rule 600(b)(8) of Regulation NMS, 17 CFR
242.600(b)(8).
---------------------------------------------------------------------------

6. Obvious Errors
    The Commission believes that in most circumstances trades that are
executed between parties should be honored. On rare occasions, the
price of the executed trade indicates an ``obvious error'' may exist,
suggesting that it is unlikely that the parties to the trade had come
to a meeting of the minds regarding the terms of the transaction. In
the Commission's view, the determination of whether an ``obvious
error'' has occurred should be based on specific and objective criteria
and subject to specific and objective procedures.\167\
---------------------------------------------------------------------------

    \167\ See, e.g., Securities Exchange Act Release Nos. 54608
(October 16, 2006), 71 FR 62021 (October 20, 2006) (File No. SR-
Amex-2005-60) (order approving changes to Amex's obvious error
rule); 47628 (April 3, 2003), 68 FR 17697 (April 10, 2003) (File No.
SR-CBOE-00-55) (order approving CBOE Direct); and BOX Approval
Order, supra note 72.
---------------------------------------------------------------------------

    In Amendment No. 2, Nasdaq revised its proposed rule dealing with
options obvious errors. Specifically, Nasdaq amended Chapter V, Section
6, Obvious Errors, to: (1) Apply the obvious error rule solely to
obvious price errors and to series quoted no bid; (2) streamline the
procedures governing review of obvious error requests by the Market
Operations Review Committee (``MORC''); and (3) add a provision stating
that the MORC must include representatives of one member engaged in
market making and two industry representatives not engaged in market
making, and that at no time shall members engaged in market making
constitute more than 50% of the MORC. The Commission believes that the
provisions of Nasdaq's obvious error rule, as revised by Amendment No.
2, are consistent with the Act and, in particular, with Section
6(b)(5), in that they provide clear and objective standards and
procedures for determining whether an obvious error has occurred. The
Commission also believes that the revised proposed rule is consistent
with obvious error rules previously approved by the Commission for
other exchanges.\168\
---------------------------------------------------------------------------

    \168\ See, e.g., Securities Exchange Release Nos. 54228 (July
27, 2006), 71 FR 44066 (August 3, 2006) (File No. SR-ISE-2006-14)
(approving current version of ISE Rule 7.20 (options obvious error
rule)); 54070 (June 29, 2006), 71 FR 38441 (July 6, 2006) (File No.
SR-Phlx-2005-73) (approving current version of Phlx Rule 1092
(options obvious error rule)); and 56487 (September 20, 2007), 72 FR
54956 (September, 27, 2007) (File No. SR-CBOE-2007-04) (approving
current version of CBOE Rule 6.25 (options obvious error rule)).
---------------------------------------------------------------------------

    One commenter seeks clarification as to who will be responsible for
trade errors in the context of the Linkage.\169\ Nasdaq states that
NOM's Rules recognize only Obvious Errors, as defined in Chapter VI,
Section 6 of the NOM Rules. If a trade does not meet the definition of
an Obvious Error, NOM will take no action with respect to the trade. In
the event of an Obvious Error on NOM involving an away market, the away
market is authorized as a party to the transaction to file with NOM for
review of the Obvious Error. In the event of an Obvious Error on an
away market, NOM's Obvious Error rule authorizes NOM to file for review
of that Obvious Error on behalf of the NOM Participant. If necessary,
NOM will file for such review through NOS or the member of the away
market which it used to route the order.\170\
---------------------------------------------------------------------------

    \169\ See SIFMA Letter, supra note 4 at 2.
    \170\ See Nasdaq Response, supra note 5, at 9, and Amendment No.
2.
---------------------------------------------------------------------------

7. Miscellaneous
    One commenter believes that, under the NOM Rules, quotes are the
same as orders and therefore reads Chapter VI, Section 5(b) of the NOM
Rules to mean that Nasdaq proposes to trade all options series on NOM
in penny increments, in violation of the Penny Pilot Program.\171\
---------------------------------------------------------------------------

    \171\ See Amex Letter, supra note 4, at 2.
---------------------------------------------------------------------------

    In response, Nasdaq states that the commenter has misread the
proposal and that Nasdaq does not propose to quote all options on NOM
in penny increments. In this regard, Nasdaq notes that Chapter VI,
Section 5(a) of the NOM Rules governs quotation increments and is
consistent with the Penny Pilot Program, while Section 5(b) specifies
the minimum trading increment on NOM.\172\ The Commission believes that
Nasdaq has clarified that it does not propose to quote all options on
NOM in penny increments and that the NOM Rules are consistent with the
Penny Pilot Program. The Commission also does not believe that trading
in penny increments is inconsistent with the Penny Pilot Program.\173\
---------------------------------------------------------------------------

    \172\ See Nasdaq Response, supra note 5, at 7.
    \173\ See supra note 142 and accompanying text.
---------------------------------------------------------------------------

    In response to questions from commenters regarding the NOM closing
time,\174\ Nasdaq in Amendment No. 2 proposes to modify the NOM Rules
to provide that the NOM closing time will be 4 p.m. ET, except for
options on broad-based indexes and Fund Shares, which will close at
4:15 p.m. ET.\175\ The Commission believes that these modifications
will make NOM's closing time consistent with the rules of the other
U.S. options exchanges.\176\
---------------------------------------------------------------------------

    \174\ See Amex Letter, supra note 4, at 4, and SIFMA Letter,
supra note 4, at 2.
    \175\ See NOM Rules, Chapter VI, Section 2.
    \176\ See, e.g., ISE Rule 700 and CBOE Rules 6.1 and 24.6. In
addition, in Amendment No. 2 Nasdaq proposes to revise Chapter VI,
Section 2 of the NOM Rules to indicate that the System will be
available to accept bids, offers, and orders beginning at 9 a.m.,
rather than 8 a.m. Similarly, Nasdaq proposes in Amendment No. 2 to
revise Chapter VI, Section 9 of the NOM Rules to indicate that IO
orders, LOC orders, and MOC orders may be entered beginning at 9
a.m., rather than 8 a.m.
---------------------------------------------------------------------------

E. Order Routing

    With respect to securities traded on NOM (``System Securities''),
\177\ Participants may designate orders to be routed to another market
center when trading interest is not available on NOM or to execute only
on NOM.\178\ Orders that are designated to be routed will be routed to
another options market when NOM is not at the NBBO, consistent with the
locked and crossed market and trade through provisions of the Linkage
Plan.\179\ Orders routed by the System to other markets do not retain
time priority with respect to other orders in the System and the System
will continue to execute other orders while routed orders are away at
another market center.\180\ If a routed order is returned, in whole or
in part, that order (or its remainder) will receive a new time stamp
reflecting the time of its return to the System.\181\ Participants
whose orders are routed to

away markets will be obligated to honor such trades to the same extent
they will be obligated to honor a trade executed on NOM.\182\
---------------------------------------------------------------------------

    \177\ See NOM Rules, Chapter VI, Section 1(b).
    \178\ See NOM Rules, Chapter VI, Section 11(a) and Amendment No.
2.
    \179\ See id. and infra note 195 and accompanying text.
    \180\ See NOM Rules, Chapter VI, Section 11(c).
    \181\ Id.
    \182\ See NOM Rules, Chapter VI, Section 11(d).
---------------------------------------------------------------------------

    One commenter believes that NOM's rules, as proposed, provided
different order routing attributes for ``system'' and ``non-system''
securities, but failed to adequately define these terms, resulting in
confusion regarding the operation of the order routing mechanism.\183\
---------------------------------------------------------------------------

    \183\ See Amex Letter, supra note 4, at 3.
---------------------------------------------------------------------------

    In response, Nasdaq, in Amendment No. 2, proposes to revise
proposed Chapter VI, Section 1(b) of the NOM Rules to define ``System
Securities'' as all options currently trading on NOM, and to define
``Non-System Securities'' as all other options. Nasdaq states it will
accept orders in Non-System Securities for routing but will not execute
these orders in the System.\184\ Nasdaq represents that System and Non-
System Securities will be identified clearly via the NOM data feed and
in a daily list posted on the NOM Web site.\185\ Nasdaq further states
that the System will be programmed to differentiate between System
Securities and Non-System Securities and will process each in
accordance with the NOM Rules.\186\ The Commission believes that
Nasdaq's proposed changes and response adequately clarify the operation
of the order routing mechanism for ``System Securities'' and ``Non-
System Securities.''
---------------------------------------------------------------------------

    \184\ See Nasdaq Response, supra note 5, at 11. See also NOM
Rules, Chapter VI, Section 11(a).
    \185\ See Nasdaq Response, supra note 5, at 11.
    \186\ Id.
---------------------------------------------------------------------------

    In Amendment No. 2, Nasdaq further proposes to amend proposed
Chapter VI, Section 11(e) of the NOM Rules to establish Nasdaq Options
Services LLC (``NOS'') as NOM's exclusive order router. NOS will
perform only two functions, the routing of orders with respect to
System Securities and the routing of orders with respect to Non-System
Securities. Nasdaq states that NOS will be a facility of Nasdaq only
with respect to the routing of orders for System Securities.\187\ NOS
will be programmed to follow the algorithm and order type instructions
established in the NOM Rules and will not have discretion to change the
terms of an order or the order routing instructions.\188\
---------------------------------------------------------------------------

    \187\ See NOM Rules, Chapter VI, Section 11(e) and Nasdaq
Response, supra note 5, at 11.
    \188\ See Nasdaq Response, supra note 5, at 11.
---------------------------------------------------------------------------

    NOS will be a member of an SRO unaffiliated with Nasdaq that is its
designated examining authority, and NOM will establish and maintain
procedures and internal controls reasonably designed to restrict the
flow of confidential and proprietary information between Nasdaq and its
facilities, including NOS, and any other entity.\189\ In addition, the
books, records, premises, officers, directors, agents, and employees of
NOS, as a facility of Nasdaq, will be deemed to be those of the
Exchange for purposes of and subject to oversight pursuant to the
Act.\190\ Further, Participants are not required to use NOS to route
orders, and a Participant may route its orders through any available
router it selects.\191\
---------------------------------------------------------------------------

    \189\ See NOM Rules, Chapter VI, Section 11(e).
    \190\ Id. In addition, the books and records of NOS, as a
facility of the Exchange, will be subject at all times to inspection
and copying by the Exchange and the Commission. Id.
    \191\ See Nasdaq Response, supra note 5, at 11. See also NOM
Rules, Chapter VI, Section 1(b) (allowing Participants to designate
orders as available for routing or not available for routing).
---------------------------------------------------------------------------

    The Commission agrees with the Exchange that routing with respect
to System Securities will be a ``facility'' of the Exchange, and,
consequently, the operation of NOS in this capacity will be subject to
Exchange oversight, as well as Commission oversight. The Commission
notes that the functionality to be provided by NOS is not the exclusive
means for accessing better-priced orders in other market centers.
Accordingly, NOS's routing services are optional, and a NOM Participant
is free to route its orders to other market centers through alternative
means. In light of the protections discussed above, including the
regulation of NOS as a facility of the Exchange with respect to the
routing of orders for System Securities, the Commission believes that
Nasdaq's rules and procedures regarding the use of NOS to route orders
to away markets are consistent with the Act.\192\
---------------------------------------------------------------------------

    \192\ In addition, the Commission notes that the Nasdaq rules
and procedures applicable to NOS are similar to the rules and
procedures adopted by other exchanges to govern their order routers.
See, e.g., ISE Rule 2108; NYSE Rule 17; and Phlx Rule 185(g).
---------------------------------------------------------------------------

F. Linkage

    As described above, Nasdaq proposes to use NOS to route orders to
other options exchanges. NOM will, however, participate in the Linkage
Plan to receive orders from options exchanges that use the Linkage to
route orders. To receive orders through the Linkage, Nasdaq proposes to
adopt rules relating to the Linkage Plan that are substantially similar
to the rules of the other options exchanges that participate in the
Linkage Plan. In general, the proposed rules include relevant
definitions; establish the conditions pursuant to which Market Makers
may enter Linkage orders; impose obligations on the Exchange regarding
how it must process incoming Linkage orders; establish a general
standard that Participants should avoid trade-throughs; establish
potential regulatory liability for Participants that engage in a
pattern or practice of trading through other exchanges; and establish
obligations with respect to locked and crossed markets.\193\
---------------------------------------------------------------------------

    \193\ See NOM Rules, Chapter XII.
---------------------------------------------------------------------------

    One commenter questioned how NOM will ensure that orders designated
for execution solely on NOM will not create a trade-through or locked
or crossed market. In particular, the commenter requests clarification
regarding the treatment of an order that locks or crosses the NBBO,
NOM's responsibility for such an order, and the action NOM will take if
the market already is locked or crossed when it receives an order.\194\
---------------------------------------------------------------------------

    \194\ See Amex Letter supra note 4, at 3.
---------------------------------------------------------------------------

    In response, Nasdaq states that Chapter VI, Section 7(b)(3)(C) of
the NOM Rules sets forth the procedures that NOM will use to ensure
compliance with the trade through and locked and crossed market
provisions of the Linkage Plan.\195\ Nasdaq proposes in Amendment No. 2
to state explicitly in the NOM Rules that an order will not be executed
at a price that trades through another market or displayed at a price
that would lock or cross another market. Nasdaq further proposes to add
in Amendment No. 2 that an order that is designated as routable will be
routed in compliance with applicable trade through and locked and
crossed markets restrictions.\196\ With respect to non-routable orders,
Nasdaq notes that the System will re-price a Displayed Order that, at
the time of entry, would cause a locked or crossed market or a trade
through violation, to the current national best offer (for bids) or the
current national best bid (for offers) and display the order at one
minimum price variation below (for bids) or above (for offers) the
national best price.\197\ These

do-not-ship orders will remain on Nasdaq's book until cancelled or
executed by another NOM Participant or market center.\198\ Nasdaq
states that the System, therefore, will systemically avoid executing an
order at a price that would trade through a price on another market and
will prevent Nasdaq from displaying a quotation that would lock or
cross a quotation displayed by another market.\199\ In addition, Nasdaq
represents that it will program the System to avoid joining a locked or
crossed market when the market is already locked or crossed.\200\
---------------------------------------------------------------------------

    \195\ See Nasdaq Response, supra note 5, at 10.
    \196\ See NOM Rules, Chapter VI, Section 7(b)(3)(C).
    \197\ See NOM Rules, Chapter VI, Section 7(b)(3)(C). As
originally proposed, Chapter VI, Section 7(b)(3)(C) of the NOM Rules
provided that if a Displayed Order that the entering party has
elected not to make eligible for routing would cause a locked or
crossed market or a trade through violation at the time of entry,
the System would re-price the order to one minimum price variation
(``MPV'') below the current national best offer (for bids) or one
MPV above the current national best bid (for offers). In Amendment
No. 2, Nasdaq proposes to revise the rule to provide that the System
will re-price such an order to the current national best offer (for
bids) or the current national best bid (for offers) and display the
order at one MPV below (for bids) or above (for offers) the national
best price. Nasdaq believes that the procedure proposed in Amendment
No. 2 is superior to the original procedure, which would have
converted the re-priced order into a Non-Displayed Order.
    \198\ See Nasdaq Response, supra note 5, at 10.
    \199\ Id.
    \200\ Id.
---------------------------------------------------------------------------

    The Commission believes that Nasdaq has responded adequately to the
commenter's questions regarding NOM's procedures and rules for
complying with the Linkage Plan, and that NOM's rules, as amended, are
reasonably designed to comply with the locked and crossed market and
trade through provisions of the Linkage Plan.
    As noted above, Nasdaq intends to use NOS to route orders to other
markets. To allow Nasdaq to use the Linkage to send orders to other
markets, if it wanted to do so, NOM Rules provide that one Options
Market Maker per eligible series will be designated as the
``InterMarket Linkage Market Maker'' or ``ILM'' to be responsible for
P/A and Satisfaction orders that would be sent to away markets through
the Linkage for options trading on NOM. The ILM responsible for such
orders will be required to adhere to the responsibilities of an
Eligible Market Maker, as set forth in the Linkage Plan.\201\
---------------------------------------------------------------------------

    \201\ See NOM Rules, Chapter VII, Section 5(a)(ix). The ILM will
perform substantially similar functions that the BOX InterMarket
Linkage Market Maker performs on BOX. See BOX Rules, Chapter VI,
Section 5(a)(ix), and Chapter XII.
---------------------------------------------------------------------------

    The ILM will be required to act with due diligence with regard to
the interests of orders entrusted to it and fulfill other duties of an
agent, including, but not limited to, ensuring that such orders,
regardless of their size or source, receive proper representation and
timely execution in accordance with the terms of the orders and the
rules of the Exchange. The ILM must provide NOM with written
instructions for the routing of any P/A orders it may send through the
InterMarket Linkage. NOM will immediately route all P/A orders on
behalf of the ILM according to these instructions.\202\
---------------------------------------------------------------------------

    \202\ The order would be generated automatically by NOM and
routed to the away exchange with the required clearing information
included. Each execution received from an away exchange would result
in the automatic generation of a trade execution on NOM between the
original order and the ILM.
---------------------------------------------------------------------------

    One commenter seeks clarification as to who would fulfill the role
of the ILM if the ILM is excused temporarily from its responsibilities,
and who would be responsible for trade throughs.\203\
---------------------------------------------------------------------------

    \203\ See SIFMA Letter, supra note 4, at 2.
---------------------------------------------------------------------------

    In response, Nasdaq states that it intends to use NOS to fulfill
Nasdaq's order routing obligations under the Linkage Plan.\204\
Although Nasdaq believes that it therefore will rarely, if ever, need
to appoint an ILM, Nasdaq notes that Chapter VII, Rule 5(a)(ix) of the
NOM Rules provides Nasdaq with the ability to designate a market maker
as the ILM for a particular series.\205\ In the event that the ILM
substantially fails to engage in a course of dealings under this rule,
Nasdaq Regulation may bring a disciplinary action.\206\ In addition,
Nasdaq states that neither Nasdaq or any Participant will face
liability for trade throughs because NOM is programmed to comply with
the requirements of the Linkage Plan. If NOM has a System malfunction
that results in a trade through, Nasdaq believes that such an
occurrence would fall under the exception in Section 8(c)(iii) of the
Linkage Plan. If Nasdaq receives a Satisfaction Order from an away
market, NOM will execute the order against trading interest available
on the NOM Book.\207\
---------------------------------------------------------------------------

    \204\ See Nasdaq Response, supra note 5, at 4.
    \205\ See Nasdaq Response, supra note 5, at 4. The Commission
notes that if there is no Market Maker registered in a particular
series, NOM will place that series in a non-regulatory suspension
and halt trading until such time as a member registers to make
markets in that series. See supra note 79 and accompanying text.
    \206\ See NOM Rules, Chapter VII, Section 5(c).
    \207\ See Nasdaq Response, supra note 5, at 4.
---------------------------------------------------------------------------

    The Commission notes that NOM's rules and the NOM System are
designed to comply with the requirements of the Linkage Plan, including
the trade through requirements. The Commission believes that the
proposed NOM rules regarding the Intermarket Linkage are consistent
with the requirements of the Linkage Plan and the Act. The Commission
reminds Nasdaq, however, that to the extent trades are executed on NOM
that do not comply with the trade through requirements of the Linkage
Plan, Nasdaq, as a Plan Participant, will have the obligation to comply
with the requirements of the Linkage Plan, including responding to
Satisfaction Orders. Further, before Nasdaq can begin operating NOM,
Nasdaq must become a participant in the Linkage Plan.

G. Strike Prices

    Nasdaq proposes to participate in the $2.50 Strike Price Program
\208\ and in the $1 Strike Price Program.\209\ Amendment No. 2 proposes
to amend the NOM Rules to reflect the expansion of the $2.50 Strike
Price Program to include strike prices between $50 and $75 under
certain conditions and to indicate that NOM's $1 Strike Price Program
will expire on June 5, 2008, rather than June 5, 2007.\210\ These
changes conform NOM's rules to the existing rules of the other options
markets.\211\
---------------------------------------------------------------------------

    \208\ The $2.50 strike price program allows the options
exchanges to list options in up to 200 classes at $2.50 strike price
intervals for strike prices greater than $25 but less than $75. See,
e.g., Securities Exchange Act Release Nos. 40662 (November 12,
1998), 63 FR 64297 (November 19, 1998) (order approving File Nos.
SR-Amex-98-21; SR-CBOE-98-29; SR-PCX-98-31; and SR-Phlx-98-26)
(``1998 Order'') and 52893 (December 5, 2005), 70 FR 73488 (December
12, 2005) (order approving File No. SR-Amex-2005-067). The 200
classes eligible for the $2.50 Strike Price Program were allocated
among the options exchanges pursuant to a formula approved by the
Commission as part of the permanent approval of the program. Each
options exchange may list options with $2.50 strike price intervals
on any options class that another exchange selects as part of its
program. Any modification to the $2.50 Strike Price Program would
require the filing of a proposed rule change with the Commission
pursuant to Section 19(b) of the Act.
    \209\ Under the $1 Strike Price Program, each options exchange
may select a total of five individual stocks on which options series
may be listed at $1 intervals, and each exchange may list $1 strikes
on any options class designated by another exchange as part of its
$1 Strikes Program. See, e.g., Securities Exchange Act Release No.
55714 (May 7, 2007), 72 FR 26853 (May 11, 2007). See NOM Rules,
Chapter IV, Section 6, Supplementary Material .03 and Supplementary
Material .02. The Commission notes that several of the options
exchanges have amended their rules, in part, to allow the exchanges
to select a total of ten individual stocks on which options series
may be listed at $1 intervals. See, e.g., Securities Exchange Act
Release Nos. 57049 (December 27, 2007), 73 FR 528 (January 8, 2008)
(order approving File No. SR-CBOE-2007-125) and 57110 (January 8,
2008) (notice of filing and order granting accelerated approval of
File No. SR-Amex-2007-141) (together, the ``1 Strike Price
Orders'').
    \210\ See NOM Rules, Chapter IV, Section 6, Supplementary
Material .03(b) and Supplementary Material .02.
    \211\ The Commission notes that several of the options exchanges
have recently amended their rules to make the $1 Strike Price
Program permanent. See, e.g., $1 Strike Price Orders, supra note
209.
---------------------------------------------------------------------------

    One commenter believes that the terms of NOM's participation in the
$2.50 Strike Price Program and the $1 Strike Price Program are
unclear.\212\ In particular, the commenter questions whether NOM will
trade only those classes currently included in the $2.50

Strike Price Program and in the $1 Strike Price Program.\213\ NOM's
rules provide that it may list $1 strikes in options classes on five
individual stocks, as designated by NOM, as well as any options class
specifically designated by another exchange that employs a similar $1
strike price program.\214\ NOM's rules also provide that Nasdaq may
list series at $2.50 strike price intervals in any multiply traded
option once another exchange has selected that option to be a part of
the program.\215\ The Commission believes that Nasdaq's proposal, as
amended, makes clear that NOM will participate in the $2.50 Strike
Price Program and the $1 Strike Price Program on the same terms and
conditions as the other options exchanges.\216\ The Commission also
believes that Nasdaq's proposed rules relating to the $2.50 Strike
Price and $1 Strike Price Programs will provide investors with
flexibility in tailoring their options positions to meet their
investment objectives while avoiding the unnecessary proliferation of
illiquid options series.\217\
---------------------------------------------------------------------------

    \212\ See Amex Letter, supra note 4, at 3-4.
    \213\ Id. at 4.
    \214\ See NOM Rule, Chapter IV, Section 6, Supplementary
Material .02(a).
    \215\ See NOM Rule, Chapter IV, Section 6, Supplementary
Material .03(a).
    \216\ As noted above, several of the options exchanges have
recently expanded and made permanent their $1 Strike Price Programs.
See supra notes 209 and 211.
    \217\ See, e.g. 1998 Order, supra note 208, and Securities
Exchange Act Release Nos. 47991 (June 5, 2003), 68 FR 35243 (June
12, 2003) (File No. SR-CBOE-2001-60) (order approving CBOE's $1
Strike Price Program through June 5, 2004) and 48024 (June 12,
2003), 68 FR 36617 (June 18, 2003) (File No. SR-Amex-2003-36) (order
approving Amex's $1 Strike Price Program through June 5, 2004).
---------------------------------------------------------------------------

H. Securities Traded on NOM

    Nasdaq proposes to adopt initial and continued listing standards
for equity and index options \218\ that are substantially similar to
the listing standards adopted by other options exchanges.\219\ In
Amendment No. 2, Nasdaq proposes to revise proposed Chapter IV, Section
3 of the NOM Rules to allow NOM to list and trade an option on an
underlying equity security that does not satisfy certain of the
criteria for initial listing in the NOM Rules provided that: (1) The
underlying security meets the criteria for continued listing set forth
in the NOM Rules; and (2) options on such underlying security are
listed and traded on at least one other registered national securities
exchange.\220\ This proposed change to the proposed NOM Rules, which is
narrowly tailored to address the circumstances where an equity option
class is currently ineligible for initial listing on NOM even though it
meets NOM's continued listing standards and is trading on another
options exchange, is substantially similar to rules adopted by other
options exchanges.\221\
---------------------------------------------------------------------------

    \218\ See NOM Rules, Chapters IV and XIV.
    \219\ See, e.g., BOX Rules, Chapters IV and XIV. In response to
a commenter's concern that its proposed definition of ``index
option'' could have included exchange-traded funds, as well as index