November 28, 2006

Mr. James C. Yong
Chief Regulatory Officer
National Stock Exchange, Inc.
One Financial Place
440 South LaSalle Street, Suite 2600
Chicago, IL 60605

Dear Mr. Yong:

In your letter dated November 28, 2006, on behalf of the National Stock Exchange, Inc. ("NSX"), NSX requests assurances that the staff of the Division of Market Regulation ("Staff") would not recommend enforcement action under Rule 10b-10(a) and Rule 203(b)(1) of Regulation SHO¹ under the Securities Exchange Act of 1934 ("Exchange Act"), Regulation T of the Board of Governors of the Federal Reserve System ("Regulation T"),² or Section 15(b)(8) of the Exchange Act with respect to certain activities involving NSX's proposed outbound routing arrangement and associated execution and settlement services arrangement instituted to comply with Rule 611 of Regulation NMS (the "Outbound Routing Arrangement"). In particular, NSX seeks assurances that the Staff would not recommend enforcement action if the Dual Member (as defined in your letter) does not send a trade confirmation to NSX containing all of the information as provided under Rule 10b-10(a) for Outbound Trades (as defined in your letter), and if the Dual Member does not comply with the locate requirement of Rule 203(b)(1) of Regulation SHO when accepting short sale Outbound Trades from NSX under the Outbound Routing Arrangement. NSX also seeks assurances that the Staff would not recommend enforcement action if the Dual Member treats NSX's account opened with it in connection with the Outbound Routing Arrangement as a "broker-dealer credit account" for purposes of Regulation T. In addition, NSX seeks assurances that the Staff would not recommend enforcement action to the Commission under Section 15(b)(8) if a broker-dealer that is a member of NSX but not a member of a national securities association ("NSX Member")³ treats income derived from transactions through the Outbound Routing Arrangement as "income derived from transactions... through the Intermarket Trading System" for purposes of the exemption provided in Rule 15b9-1.

1. Rule 10b-10

Based on the facts and representations set forth in your letter, but without necessarily agreeing with your analysis, the Staff will not recommend enforcement action to the Commission under Rule 10b-10(a) against the Dual Member if the Dual Member does not give or send written notification to NSX disclosing all of the information required by Rule 10b-10(a) for Outbound Trades.⁴

2. Regulation SHO's Locate Requirement

Rule 203(b)(1) of Regulation SHO provides that a broker-dealer may not accept a short sale order in an equity security from another person, or effect a short sale in an equity security for its own account, unless the broker or dealer has borrowed the security, or entered into a bona-fide arrangement to borrow the security, or has reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due, and documented compliance with the above. Rule 203(b)(2)(i) excepts a broker-dealer from the locate requirement if, among other things, the short sale order is from another registered broker-dealer required to comply with the rule. Accordingly, the Originating Broker-Dealer is obligated to comply with the locate requirement prior to transmitting the order to NSX, and, absent relief, the Dual Member is obligated to comply with the locate obligation prior to accepting a short sale order routed from NSX under the Outbound Trading Arrangement. Based on the facts and representations set forth in your letter, the Staff will not recommend enforcement action to the Commission under Rule 203(b)(1) of Regulation SHO if the Dual Member does not perform the locate when accepting short sale Outbound Trades from NSX under the Outbound Routing Arrangement provided the following conditions are met:

1. In no event shall either NSX or the Dual Member change the Originating Broker-Dealer's marking of an order "long," "short," or "short-exempt."
    
2. Except as otherwise stated herein, all parties to the Outbound Routing Arrangement shall comply with Regulation SHO.
    
3. All parties to the Outbound Routing Arrangement shall maintain an audit trail of all trades effected under the Outbound Routing Arrangement, which is capable of being produced promptly upon request to Commission staff and other appropriate self-regulatory organizations.
    
4. NSX shall monitor transactions effected under the Outbound Routing Arrangement for compliance with Regulation SHO, including the "marking" requirement of Rule 200(g) and the locate requirement of Rule 203(b), and either take action with regard to entities where NSX is the appropriate self-regulatory organization or refer actions to the appropriate self-regulatory organization as necessary.

3. Regulation T

Based on the facts and representations set forth in your letter, the Staff will not recommend enforcement action to the Commission under Regulation T if the Dual Member treats NSX's account opened with it in connection with the Outbound Routing Arrangement as a "broker-dealer credit account" for purposes of Regulation T.

4. Section 15(b)(8) and Rule 15b9-1⁵

Based on the facts and representations set forth in your letter, the Staff will not recommend enforcement action to the Commission under Section 15(b)(8) against an NSX Member if the NSX Member treats income derived from transactions through the Outbound Routing Arrangement as "income derived from transactions... through the Intermarket Trading System" for purposes of the exemption provided in Exchange Act Rule 15b9-1.⁶

* * *

These positions concern enforcement action only, are based solely upon the representations you have made, and are limited strictly to the facts and circumstances described in your letter.⁷ Any different facts or circumstances, including any change to the operation of the Outbound Routing Arrangement, may require a different response. These positions are subject to modification or revocation if at any time the Staff determines that such action is necessary or appropriate in furtherance of the purposes of the Exchange Act.

In addition, your attention is directed to the anti-fraud and anti-manipulation provisions of the Exchange Act, particularly Sections 9(a) and 10(b), and Rule 10b-5 thereunder. Responsibility for compliance with these and any other applicable provisions of the federal securities laws must rest with NSX, the Dual Member, and the Originating Broker-Dealers. Finally, the Staff expresses no view with respect to any other questions that the proposed transactions may raise, including, but not limited to, the adequacy of the disclosure concerning, or the applicability of any federal or state laws or self-regulatory organization rules to, the proposed transactions.

Endnotes

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¹ 17 CFR 242.203(b)(1).

² 12 CFR 220.

³ The Staff notes that one NSX member is also a member of the NYSE Arca Inc. but not a member of NASD.

⁴ In taking this position, the Staff notes in particular that customers of the Originating Broker-Dealer (as defined in your letter) will receive confirmations in compliance with Rule 10b-10 from the Originating Broker-Dealer for Outbound Trades.

⁵ The Staff notes that you are requesting relief for a member who also is a member of another exchange but not a securities association. While Section 15(b)(8) and Rule 15b9-1 of the Exchange Act expressly apply to an SEC-registered broker-dealer who is a member of a "national securities exchange," the Staff interprets the Rule 15b9-1 safe harbor to apply to broker-dealers who are members of more than one exchange, but not a national securities association, provided that the broker-dealers otherwise meet the requirements of Rule 15b9-1.

⁶ In taking this position, the Staff notes in particular that the Outbound Routing Arrangement has been established by NSX pursuant to a proposed rule change filed with, and approved by, the Commission in order to comply with Rule 611 of Regulation NMS. The Securities and Exchange Commission noticed the related NSX rule filing (NSX-2006-15), which was immediately effective upon filing, on November 21, 2006.

⁷ The Staff notes that this relief does not extend to the future activities of NSX Securities LLC.

Incoming Letter:

The Incoming Letter is in Acrobat format.

http://www.sec.gov/divisions/marketreg/mr-noaction/nsx112806.htm