Federal Register, Volume 75, Number 219, November 15, 2010, Pages 69571-69850 Page: 69,799
viii, 69849, iii p. ; 28 cm.View a full description of this periodical.
Extracted Text
The following text was automatically extracted from the image on this page using optical character recognition software:
Federal Register/Vol. 75, No. 219/Monday, November 15, 2010 /Rules and Regulations
implemented by broker-dealers.56 For
these broker-dealers, Rule 15c3-5
should have a minimal impact on
current business practices and,
therefore, should not impose significant
additional costs on those broker-dealers
that currently employ a prudent
approach to risk management.57 Rule
15c3-5 will assure that broker-dealer
controls and procedures are
appropriately strengthened, as
necessary, so that consistent standards
are applied for all types of market
access. By requiring all forms of market
access by broker-dealers to meet certain
baseline standards for financial and
regulatory risk management controls,
Rule 15c3-5 should reduce risks to
broker-dealers, the markets, and the
financial system, and thereby enhance
market integrity and investor protection.
3. Risk Management Controls Provided
by Exchanges and ATSs
Several commenters addressed the
role of market centers-exchanges and
ATSs-in connection with the
establishment of risk management
controls.58 Some commenters suggested
that market centers, rather than broker-
dealers with market access, should be
responsible for implementing certain
pre-trade risk management controls.
These commenters generally argued that
the market center is best positioned to
implement pre-trade risk management
controls such as those designed to
prevent erroneous orders and assure
compliance with SRO rules relating to
trading halts and special order types.59
Some commenters argued that applying
pre-trade risk controls at the market
center level would provide for uniform
56 See Proposing Release, Appendix, 75 FR at
4029-4031 (noting current SRO guidance with
regard to internal procedures and controls to
manage the financial and regulatory risks associated
with market access for members that provide
market access to customers).
57Id.
58 See Wedbush Letter at 4; Fortis Letter at 2;
SIFMA Letter at 6; CBOE Letter at 4; Goldman
Letter at 7; GETCO Letter at 6; ITG Letter at 3-4;
Lime Letter at 6; Deutsche Bank Letter at 5-6; letters
to Elizabeth M. Murphy, Secretary, Commission,
from Richard D. Berliand, Managing Director and
Head of Prime Services and Market Structure
Group, and John J. Hogan, Managing Director and
Chief Risk Officer, Investment Bank, J.P. Morgan
Securities Inc., April 26, 2010 ("JP Morgan Letter")
at 2-3; Jesse Lawrence, Director and Managing
Counsel, Pershing LLC, March 24, 2010 ("Pershing
Letter") at 3-4; Nicole Harner Williams, Vice
President and Associate General Counsel, Penson
Worldwide, Inc., March 29, 2010 ("Penson Letter")
at 3; Gary DeWaal, Senior Managing Director and
Group General Counsel, Newedge USA, LLC, March
29, 2010 ("Newedge Letter") at 2, 4; John M.
Damgard, President, Futures Industry Association,
May 6, 2010, ("FIA Letter") at 2.
59 See, e.g., Pershing Letter at 3; Penson Letter at
3; Deutsche Bank Letter at 5; Goldman Letter at 7;ITG Letter at 3; Lime Letter at 6; JP Morgan Letter
at 2.treatment of all orders entered on that
market center,60 and would more
equitably allocate risk management
obligations among those that benefit
from trading.61 In this regard,
commenters noted that certain
exchanges currently provide users with
an array of pre-trade risk controls, and
urged the Commission to allow broker-
dealers to rely on these exchange
controls to comply with the Rule.62 The
Commission believes that market center-
provided pre-trade risk controls can be
useful risk management tools. The
Commission continues to believe,
however, that broker-dealers with
market access should be responsible in
the first instance for establishing and
maintaining appropriate risk
management controls under the Rule.
The Commission notes, as discussed in
Section F. below, that broker-dealers
may be able to use market center-
provided pre-trade risk controls as part
of an overall plan to comply with the
Rule. In addition, the Commission notes
that market centers may independently
implement pre-trade risk management
controls to supplement those applied by
broker-dealers.
4. Routing Brokers
In the Proposing Release, the
Commission requested comment on
whether any particular market access
arrangement warranted different
treatment under the proposed rule. In
response, eight commenters expressed
concern with the application of the
proposed rule to broker-dealers that
provide outbound order routing services
to exchanges.63 In addition, two of these
commenters noted the same concerns
with respect to broker-dealers that
provide outbound order routing services
to ATSs.64 As proposed, Rule 15c3-5
would have applied to routing brokers
because they have "market access," as
defined in Rule 15c3-5(a)(1).
Exchanges and ATSs use outbound
order routing services provided by
broker-dealers to, among other things,
comply with the trade-through
60 See, e.g., Deutsche Bank Letter at 2; Lime Letter
at 6; Wedbush Letter at 4; Pershing Letter at 3.
61 See, e.g., Newedge Letter at 2.
62 See, e.g., Wedbush Letter at 4. See also NYSE
Letter at 3; BATS Letter at 2; BIDS Letter at 2.
63 See Nasdaq Letter at 4; CBOE Letter at 3; EWT
Letter at 4; ConvergEx Letter at 5; GETCO Letter at
5; letters to Elizabeth M. Murphy, Secretary,
Commission, from Eric W. Hess, General Counsel,
Direct Edge Holdings, LLC, March 26, 2010 ("Direct
Edge Letter") at 1-3; Eric J. Swanson, Senior Vice
President and General Counsel, BATS Exchange,
Inc., March 21, 2010 ("BATS Letter") at 3-4; Janet
M. Kissane, Senior Vice President-Legal and
Corporate Secretary, Office of the General Counsel,
NYSE Euronext, March 29, 2010 ("NYSE Letter") at
4-5.64 See, e.g., GETCO Letter at 5; CBOE Letter at 3.
provisions of Rule 611 of Regulation
NMS 65 for NMS stocks, and the trade-
through provisions of Options Linkage
Plan 66 for listed options, by routing
orders to better-priced quotes at away
markets. Some exchanges and ATSs use
affiliated broker-dealers to perform this
function, and others contract with an
unaffiliated broker-dealer to do so.67 In
general, the outbound order routing
service provided to exchanges by
broker-dealers is regulated as a facility
of the exchange, and therefore is subject
to direct Commission oversight.68
Commenters noted that, under the
proposal, orders submitted to an
exchange would first have to flow
through broker-dealer systems that are
subject to the financial and regulatory
risk controls required by proposed Rule
15c3-5, and suggested that requiring
routing brokers to perform the same risk
checks immediately thereafter would be
duplicative.69 These commenters
suggested that subjecting routing
brokers to proposed Rule 15c3-5 would
impose unnecessary costs and
inefficiencies without any
corresponding benefits. In addition,
some commenters argued that routing
brokers would not necessarily have the
requisite knowledge to effectively
implement the required pre-trade risk
checks.70
65 See 17 CFR 242.611. Pursuant to Rule 611 of
Regulation NMS, exchanges and ATSs are required
to, among other things, establish, maintain, and
enforce written policies and procedures that are
reasonably designed to prevent trade-throughs on
such exchange or ATS of protected quotations in
NMS stocks. Exchanges and ATSs generally comply
with this requirement, in part, by employing an
affiliated or unaffiliated broker-dealer to route
orders received by the exchange or ATS to other
trading centers displaying protected quotations.
66 The Options Linkage Plan is a Commission-
approved national market system plan. Securities
Exchange Act Release No. 60405 (July 30, 2009), 74
FR 39362 (August 6, 2009) (Order Approving the
National Market System Plan Relating to Options
Order Protection and Locked/Crossed Markets
Submitted by the Chicago Board Options Exchange,
Incorporated, International Securities Exchange,
LLC, The NASDAQ Stock Market LLC, NASDAQ
OMX BX, Inc., NASDAQ OMX PHLX, Inc., NYSE
Amex LLC, and NYSE Arca, Inc.) ("Options Linkage
Plan").
67 See, e.g., Direct Edge Letter at 2; Nasdaq Letter
at 4; NYSE Letter at 4.
68 See, e.g., The NASDAQ Stock Exchange LLC
Rule 4758(b); BATS Exchange, Inc. Rule 2.11(a);
and New York Stock Exchange, Inc. Rule 13.
Several commenters noted that exchange routing
brokers operate as facilities of exchanges. See
Nasdaq Letter at 4; NYSE Letter at 4; Direct Edge
Letter at 1. Nasdaq stated that "exchange-operated
broker-dealers are already heavily regulated as
exchange facilities, including rule strictly limiting
them to a single client, the exchange itself."
69 See Nasdaq Letter at 4; NYSE Letter at 5; BATS
Letter at 4; Direct Edge Letter at 2-3; CBOE Letter
at 3; GETCO Letter at 5.
70 See Direct Edge Letter at 2; ConvergEx Letterat 5; GETCO Letter at 5; BATS Letter at 4; EWT
Letter at 4.69799
Upcoming Pages
Here’s what’s next.
Search Inside
This issue can be searched. Note: Results may vary based on the legibility of text within the document.
Tools / Downloads
Get a copy of this page or view the extracted text.
Citing and Sharing
Basic information for referencing this web page. We also provide extended guidance on usage rights, references, copying or embedding.
Reference the current page of this Periodical.
United States. Office of the Federal Register. Federal Register, Volume 75, Number 219, November 15, 2010, Pages 69571-69850, periodical, November 15, 2010; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metadc52800/m1/235/: accessed March 28, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.