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August 11, 2008

Trading Rules Put on Fast Track

By Nina Mehta

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  • Trading Rules Put on Fast Track
  • Page 2

A plan by the Securities and Exchange Commission to speed up the approval process for exchanges submitting rule changes could make it easier and quicker for exchanges to tweak their trading platforms. In July, the regulator issued guidance that broadens the scope of exchange rule changes subject to immediate effectiveness on filing. These rules will no longer require Commission approval.

Most significantly, the SEC's new guidance outlined a new category of rule changes involving "trading systems" that can be effective immediately on filing. This category encompasses trading rules, rules affecting market-maker obligations, those involving preferenced order flow, and other market-related changes.

"This is an incremental step in the right direction," said Adam Nunes, vice president at Nasdaq OMX and head of Nasdaq Options Market. "To the extent we can move more [regular] filings to immediately effective filings, that will allow the Commission staff to focus more time and attention on those that deserve their focus."

Nunes describes trading-system rule changes as a "broad category" that potentially covers many of Nasdaq's filings. Changes in this area "could give us the flexibility to move more quickly," he said. "However, immediately effective filings are still subject to a 30-day waiting period."

The rule filings impacted are proposed rule changes deemed "noncontroversial" by the exchanges. "Many are not big, important system changes, but things we're changing in the day-to-day operation of our business," Nunes said. "Sometimes you can do small things to improve the quality of a market, but you must wait two months to get it in even though no one is going to comment on those filings."

The SEC's recent move was prompted by exchanges' repeated calls to speed up rule approvals, and by a March report from the Commission's Office of Inspector General that recommended improving the timeliness of the filing process. The Commission also said it will publish proposed rule filings for notice in the Federal Register within 15 business days of their submission, unless the director of the Division of Trading and Markets makes an exception, granting the Commission more time to consider the proposed change.

Proposed rules that require Commission notice and approval are submitted under Section 19(b)(2) of the Exchange Act. Those that qualify for immediate effectiveness are submitted under Section 19(b)(3)(A). They include "noncontroversial" proposed rules and fee filings. Fee changes can be effected immediately, while other immediately effective filings require a 30-day delay before they can be implemented. Currently, more than half the rule filings submitted to the SEC qualify for immediate effectiveness, with the rest requiring a comment period and official approval.

Based on the SEC's new guidance, more rule changes will qualify for immediate effectiveness. The SEC said it would also allow "copycat" rules that are based on and similar to approved rules submitted by another self-regulatory organization to be effective on filing. Changes to rules involving minor rule violations will fall into the immediately effective camp as well.

In announcing these changes, the SEC said more rules may be abrogated by the SEC after they become effective, if they're filed incorrectly or shouldn't have been filed for immediate effectiveness in the first place. Exchanges are still obligated to submit all the paperwork for rule filing that are immediately effective. The SEC's final rule and guidance became effective on July 11.