[Federal Register Volume 79, Number 16 (Friday, January 24, 2014)]
[Notices]
[Pages 4213-4218]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-01395]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71341; File No. SR-FINRA-2013-042]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc; Notice of Filing of Amendment No. 1 and Order Granting
Accelerated Approval of a Proposed Rule Change, as Modified by
Amendment No. 1, To Require Alternative Trading Systems To Report
Volume Information to FINRA and Use Unique Market Participant
Identifiers
January 17, 2014.
I. Introduction
On September 30, 2013, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') 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 to require each alternative trading system
(``ATS'') to report transaction volume information to FINRA and to
obtain and use a unique market participant identifier (``MPID'') when
reporting trade information to FINRA. The proposed rule change was
published for comment in the Federal Register on October 22, 2013.\3\
The Commission received ten comments on the proposal.\4\
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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. 70676 (October 11,
2013), 78 FR 62862 (October 22, 2013) (``Notice of Original
Proposal'').
\4\ See Letters to the Commission from William White, Head of
Electronic Trading, Barclays Capital Inc., dated November 12, 2013
(``Barclays Letter''); Scott C. Goebel, Senior Vice President &
Deputy General Counsel, Fidelity Investments, dated November 12,
2013 (``Fidelity Letter''); Manisha Kimmel, Executive Director,
Financial Information Forum, dated November 12, 2013 (``FIF
Letter''); Donald Bollerman, Head of Market Operations, IEX
Services, LLC, dated November 11, 2013 (``IEX Letter''); Ari
Burstein, Senior Counsel, Investment Company Institute, dated
November 12, 2013 (``ICI Letter''); Elizabeth K. King, Global Head
of Regulatory Affairs, KCG Holdings, Inc., dated November 12, 2013
(``KCG Letter''); Howard Meyerson, General Counsel, Liquidnet, dated
November 12, 2013 (``Liquidnet Letter''); Janet McGinness, EVP &
Corporate Secretary, NYSE Euronext, dated November 15, 2013 (``NYSE
Letter''); Theodore R. Lazo, Managing Director & Associate General
Counsel, Securities Industry and Financial Markets Association,
dated November 11, 2013 (``SIFMA Letter''); and James Toes,
President & CEO, Securities Traders Association, dated November 12,
2013 (``STA Letter'').
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On December 4, 2013, FINRA granted the Commission an extension of
time to act on the proposal until January 20, 2014. On January 15,
2014, FINRA filed Amendment No. 1 with the Commission to respond to the
comment letters and to propose additional clarifying guidance,
including the addition of supplementary material to one of the proposed
rules.\5\ The Commission is publishing this notice and order to solicit
comments on Amendment No. 1 and to approve the proposed rule change, as
modified by Amendment No. 1, on an accelerated basis.
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\5\ See Letter to the Commission from Brant K. Brown, Associate
General Counsel, FINRA, dated January 15, 2014 (``FINRA Response
Letter''). The FINRA Response Letter was submitted into the public
comment file for SR-FINRA-2013-042.
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II. Description of the Proposal
Overview
FINRA filed the proposed rule change to impose certain reporting
requirements on trading venues that have filed a Form ATS with the
Commission.\6\ The purpose of the proposal is to make information about
ATS trading volume publicly available and thus more transparent. The
proposal is also meant to enhance FINRA's ability to monitor ATSs to
determine whether they are complying with the requirements of
Regulation ATS.
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\6\ Under Regulation ATS, an alternative trading system is
defined as ``any organization, association, person, group of
persons, or system: (1) That constitutes, maintains, or provides a
market place or facilities for bringing together purchasers and
sellers of securities or for otherwise performing with respect to
securities the functions commonly performed by a stock exchange
within the meaning of [Exchange Act Rule 3b-16]; and (2) That does
not: (i) Set rules governing the conduct of subscribers other than
the conduct of such subscribers' trading on such organization,
association, person, group of persons, or system; or (ii) Discipline
subscribers other than by exclusion from trading.'' 17 CFR
242.300(a). FINRA stated in its Notice of Original Proposal that the
proposed rule change would apply to any alternative trading system,
as that term is defined in Regulation ATS, that has filed a Form ATS
with the Commission.
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Specifically, FINRA states that the proposal would allow it to
better determine whether an ATS is subject to the provisions of
Regulation ATS that are triggered by exceeding certain volume
thresholds. For instance, Regulation ATS requires an ATS to provide to
a national securities exchange or association for display the prices
and sizes of orders at the ATS's highest buy price and lowest sell
price for any NMS stock, displayed to more than one person in the ATS,
with respect to which the ATS has had an average daily trading volume
of 5% or more of the aggregate average daily share volume for such NMS
stock during at least four of the preceding six calendar months.\7\
Regulation ATS also requires any such ATS to provide broker-dealers
with fair access to the
[[Page 4214]]
ATS's services to effect a transaction in any such NMS stock.\8\
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\7\ See 17 CFR 242.301(b)(3).
\8\ See 17 CFR 242.301(b)(5). The fair access requirement also
applies to other types of securities, including certain unlisted
equity securities, municipal securities, and corporate debt
securities. See id. Certain ATSs are excluded from the fair access
requirement. See 17 CFR 242.301(b)(5)(iii).
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To achieve these objectives, the proposal would impose two new
requirements on ATSs. First, ATSs would be required to report aggregate
weekly trade volume information to FINRA, some of which data FINRA
would then make publicly available. Second, the proposal would require
each ATS to obtain and use a unique MPID in its regulatory reporting to
FINRA.
Self-Reporting Requirement
Proposed Rule 4552 would require each FINRA member that operates an
ATS that has filed a Form ATS with the Commission to report to FINRA
its aggregate weekly volume information \9\ and number of trades, by
security, in securities subject to FINRA trade reporting requirements.
The self-reporting requirement would thus apply to any NMS stock,\10\
any OTC Equity Security,\11\ or any debt security subject to FINRA's
Trade Reporting and Compliance Engine (``TRACE'') rules (``TRACE-
Eligible Securities'').\12\ The proposed rule change would require this
information to be reported to FINRA on a security-by-security basis
within seven business days after the end of each calendar week. An ATS
that did not execute any trades in a given week would need to submit a
report that affirmatively indicated the ATS did not transact any volume
that week.
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\9\ Volume information for NMS stocks and OTC Equity Securities
means the aggregate number of shares traded in each security for the
week. Volume information for TRACE-Eligible Securities means the
aggregate par value of trades in each security for the week. See
proposed Rule 4552(d)(5).
\10\ See FINRA Rule 6110.
\11\ See FINRA Rule 6410.
\12\ See FINRA Rules 6710 and 6730(a).
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The proposed rule change contains guidance on how ATSs should
calculate their volumes to ensure consistency and to avoid potential
over-counting of volume. Proposed Rule 4552 provides that, ``[w]hen
calculating and reporting the volume of securities traded and the
number of trades, an alternative trading system shall include only
those trades executed within the alternative trading system. If two
orders are crossed by the alternative trading system, the volume shall
include only the number of shares or par value of bonds crossed as a
single trade (e.g., crossing a buy order of 1,000 shares with a sell
order of 1,000 shares would be calculated as a single trade of 1,000
shares of volume).'' Thus, for example, an ATS would be required to
report only trades executed within the ATS \13\ (not individual orders
routed out of the ATS that might be executed at another venue), and
only the volume of each executed trade once (not double-counting for
the buy and sell side of the trade).
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\13\ In response to comments, FINRA submitted Amendment No. 1 to
propose additional guidance, in the form of Supplementary Material
.01 to the rule, on what it means for a trade to be executed
``within the ATS.'' See infra Section III.
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In addition, FINRA would make some of this reported ATS trade data
available to the public. Specifically, FINRA would publish on its Web
site the trading information (volume and number of trades) reported for
each equity security, with appropriate disclosures that the information
is based on ATS-submitted reports and not on reports produced or
validated by FINRA. FINRA would do so on a delayed basis: aggregate
information concerning trades in NMS stocks in Tier 1 of the NMS Plan
to Address Extraordinary Market Volatility \14\ would be published on a
two-week delayed basis, and aggregate information on all other NMS
stocks and all OTC Equity Securities subject to FINRA trade reporting
requirements on a four-week delayed basis.\15\
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\14\ Tier 1 includes those NMS stocks in the S&P 500 Index or
the Russell 1000 Index and certain ETPs. See NMS Plan to Address
Extraordinary Market Volatility.
\15\ The delay would be from the week in which the trades
occurred, rather than the week the trades were reported to FINRA.
See Notice of Original Proposal, 78 FR at 62864 n.17.
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While the reporting obligations in the proposal would apply to
transactions in both equity securities (NMS stocks and OTC Equity
Securities) and debt securities (TRACE-Eligible Securities), FINRA
would not initially publish the data that it receives concerning
transaction volume in TRACE-Eligible Securities. FINRA stated that it
would not intend to begin publishing self-reported data for TRACE-
Eligible Securities ``until it has had the opportunity to evaluate the
data received from such ATSs and the differences between the existing
trade reporting regimes applicable to equity and debt securities.''
\16\
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\16\ Notice of Original Proposal, 78 FR at 62864.
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MPID Requirement
The proposed rule change also would require a member operating an
ATS to obtain for each such ATS a single, unique MPID that is
designated for exclusive use for reporting the ATS's transactions.
Members that operate multiple ATSs or engage in other lines of business
requiring the use of MPIDs would therefore be required to obtain and
use multiple MPIDs. A firm would not be permitted to use multiple MPIDs
for a single ATS, and if a firm operates multiple ATSs, each ATS would
be required to have its own MPID.
The proposal would prohibit a member from using a separate MPID
assigned to an ATS to report any transaction that is not executed
within the ATS and require members to have policies and procedures in
place to ensure that trades reported with a separate MPID obtained
under the rules are restricted to trades executed within the ATS. FINRA
noted that this feature of the proposal would be consistent with
obligations that already exist for ATSs, which are required by
Regulation ATS ``to have in place safeguards and procedures to . . .
separate alternative trading system functions from other broker-dealer
functions, including proprietary and customer trading.'' \17\
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\17\ Securities Exchange Act Release No. 40760 (December 8,
1998), 63 FR 70844, 70879 (December 22, 1998).
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FINRA currently has three rules that permit the use of multiple
MPIDs on FINRA facilities: Rule 6160 (Multiple MPIDs for Trade
Reporting Facility Participants), Rule 6170 (Primary and Additional
MPIDs for Alternative Display Facility Participants), and Rule 6480
(Multiple MPIDs for Quoting and Trading in OTC Equity Securities). All
three rules are permissive, and none of the rules currently requires
the use of multiple MPIDs. These three rules would be revised to
include language that affirmatively requires any participant of any of
these facilities that operates an ATS to obtain a unique MPID for each
ATS.\18\ In cases where a facility participant wished to use multiple
MPIDs, or was required to do so under the proposal, each rule would
require the facility participant to submit a written request to FINRA.
The three rules, which currently operate on a pilot basis, would also
be made permanent.
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\18\ FINRA also proposed to amend Rule 6720, which governs
reporting to TRACE, to include similar language.
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FINRA noted that member firms currently are required to notify
FINRA before changing the usage of the MPID in any way (for example,
repurposing an MPID from reflecting ATS activity to other trading
activity at the firm). After an ATS is provided its MPID, any reporting
by the ATS (either reporting trades to a FINRA TRF, the ADF, the ORF,
TRACE, or reporting orders to the Order Audit Trail System (``OATS''))
would need to include the MPID assigned to the particular ATS, and the
member would need to use the
[[Page 4215]]
particular MPID to report all transactions executed within the ATS to
the appropriate reporting facility.\19\
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\19\ OATS Reporting Members currently are required to include
MPIDs on OATS reports. See, e.g., FINRA Rule 7440(b)(3), (c)(1)(B),
(c)(2)(A)(ii), and (c)(2)(A)(iii). The proposed rule change would
not amend the OATS rules; however, current OATS guidance issued by
FINRA provides that ``[a]n order that is transferred between two
valid MPIDs within the same firm is also considered routed.'' See
OATS Reporting Technical Specifications, at 4-3 (ed. December 11,
2012). Consequently, FINRA noted, after the proposed rule change is
implemented, an order routed to an ATS would require the submission
of a Route Report, which must reflect the unique MPID of the ATS to
which the order was routed. See FINRA Rule 7440(c).
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FINRA noted further that it would leave in place a voluntary
program it adopted in 2010 that allows allow members operating an ATS
dark pool to have their daily aggregate trading data published by the
TRFs.\20\ FINRA believes that the program, which is set forth in
Supplementary Material .02 to Rule 6160(c), would largely be eclipsed
by the proposal, as all ATSs would now be subject to mandatory
reporting requirements. The voluntary program differs slightly from the
mandatory requirements of the proposal, however, because it provides
for the publication of aggregate daily--rather than weekly--trading
volume information. FINRA noted in its proposal that no member has
participated in the voluntary program yet.
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\20\ See Securities Exchange Act Release No. 61658 (March 5,
2010), 75 FR 11972 (March 12, 2010).
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Implementation Schedule
FINRA stated that it would announce the implementation date of the
proposed rule change in a Regulatory Notice to be published no later
than 30 days following Commission approval. The implementation date for
the self-reporting requirement would be no later than 90 days following
publication of the Regulatory Notice. The implementation date for the
MPID requirement would be no later than 270 days following publication
of the Regulatory Notice.
The Commission points out that, in the Notice of Original Proposal,
FINRA stated that it would announce the ``effective date'' of the
proposed rule change by Regulatory Notice within 30 days of Commission
approval. In Amendment No. 1, FINRA revised this language to clarify
its intent to specify that it will announce the ``implementation
date,'' rather than the ``effective date,'' of the proposed rule
change. FINRA clarified further that the proposed rule change will
become effective when it is approved by the Commission. Thus, rules
that permit FINRA members to use multiple MPIDs would immediately
convert from operating on a pilot to a permanent basis.
III. Summary of Comments, FINRA's Response, and Proposed Additional
Supplementary Material in Amendment No. 1
As noted above, the Commission received ten comment letters
concerning the proposal.\21\ Eight of the ten commenters expressed
general support for the purpose of the proposal--namely, to increase
transparency of ATS trade data.\22\ For instance, one commenter stated
that it ``encourage[d] efforts to standardize ATS transparency across
the industry and feel[s] that FINRA is well-positioned to do so.'' \23\
Another commenter expressed its belief ``that quantitative, publicly
available information regarding ATS trading can provide market
participants, regulators and policymakers a greater understanding of
the role ATSs play in the equity marketplace, as well as provide a
factual foundation for key discussions and decisions concerning equity
market structure issues.'' \24\
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\21\ See supra note 4.
\22\ See Barclays, Fidelity, IEX, ICI, KCG, NYSE, SIFMA, and STA
Letters.
\23\ Barclays Letter at 1.
\24\ Fidelity Letter at 1-2.
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Several of these commenters, in fact, expressed support for an even
broader proposal that would apply to all trading venues, rather than
only to ATSs.\25\ One such commenter argued that ``the proposal should
be expanded to include trade information for other off-exchange
executions and this information should be made public in the same
manner as proposed for ATS trade information.'' \26\ According to
another commenter, ``including the entire universe of non-exchange
trading is important because while ATSs make up approximately 14% of
volume, other dark trading venues account for over 22% of volume and
receive a significant portion of the retail order flow in the market.''
\27\ A different commenter, while supporting a broader effort that
would include off-exchange venues not limited to ATSs, stated that such
an effort should be coupled with an increase in the transparency of
information concerning executions that occur on exchanges against non-
displayed trading interest.\28\
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\25\ See Fidelity, ICI, KCG, and NYSE Letters.
\26\ Fidelity Letter at 2.
\27\ NYSE Letter at 1.
\28\ See KCG Letter at 5.
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In response to these comments concerning the scope of the proposal,
FINRA noted that it considered various alternatives and concluded that
ATS trade information was an appropriate first step toward increased
transparency in the off-exchange, OTC market. FINRA stated further that
it would consider additional steps, including those suggested by the
commenters, in the future.\29\
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\29\ See FINRA Response Letter at 5. FINRA noted however, that
any commenter's discussion of enhancing the transparency of on-
exchange, non-displayed interest was beyond FINRA's regulatory
jurisdiction.
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Some commenters voiced concern with certain elements of the
proposal or sought further guidance on how the new requirements would
be applied. Of these commenters, a majority argued that the self-
reporting requirement should be limited in some fashion because it
would soon become unnecessary in light of the proposal's MPID
requirement.\30\ For example, five commenters asked FINRA to make an
affirmative commitment that it will eliminate the reporting requirement
once the MPID requirement is fully implemented.\31\ Additionally, three
commenters suggested that FINRA align the proposal's reporting
requirement with Rule 605 of Regulation NMS, meaning that ATSs would
report monthly to FINRA rather than weekly.\32\ Lastly, four commenters
urged FINRA to facilitate compliance with the reporting requirement by
establishing a standard, simple format for data transmission.\33\
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\30\ See Barclays, Fidelity, FIF, KCG, SIFMA, and STA Letters.
No commenter appeared to take issue with the MPID requirement, and
four commenters expressly supported it. See Barclays, Fidelity, IEX,
and KCG Letters.
\31\ See Fidelity, FIF, KCG, SIFMA, and STA Letters.
\32\ See IEX, SIFMA, and STA Letters.
\33\ See FIF, Fidelity, IEX, and SIFMA Letters. The FIF Letter
additionally requested guidance on several other specific, technical
aspects concerning the proposal's implementation. FINRA noted in
response that, if the proposal were approved, it would issue
guidance that addressed technical details like and including those
raised by FIF.
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In its response to these comments, FINRA reiterated that it intends
to evaluate the necessity of the self-reporting requirement after the
MPID requirement is in place. However, FINRA noted that it would plan
to use, for comparison purposes, data reported by ATSs under the self-
reporting requirement even when those ATSs have unique MPIDs used
exclusively to report trades for the ATS. Moreover, FINRA said that the
self-reporting requirement would allow the proposal to more quickly
recognize its objective of enhancing ATS transparency. Accordingly,
FINRA believes that the self-reporting requirement is a necessary first
phase of the proposal. FINRA stated that it would eliminate the self-
reporting requirement for ATSs subject to FINRA trade reporting
requirements
[[Page 4216]]
if the MPID requirement is implemented and operating as
anticipated.\34\
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\34\ See FINRA Response at 6-7. FINRA noted that, under FINRA
rules, an ATS may be granted an exemption from its trade reporting
requirements. FINRA said that, in such a case, it would likely need
to continue requiring the ATS to self-report, even after the MPID
requirement were implemented, because the exempt ATS would not be
using the MPID to report its volume (due to its trade reporting
exemption). See id. at 7 n.13.
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Aside from the self-reporting requirement, several commenters also
expressed concern with FINRA's intent to charge a fee for professionals
to access and use the data.\35\ These comments ranged from questioning
the need for FINRA to charge a fee for data that it would not validate
to flatly opposing the imposition of any fee on the data. In response,
FINRA noted that it would make available for free on its Web site the
most recently reported data, as well as limited historic reports. FINRA
also reiterated its plan to charge profession users and data vendors a
fee to access professional, downloadable reports; however, FINRA stated
it would submit a separate filing to propose the specifics of this data
product.\36\
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\35\ See Barclays, Fidelity, FIF, IEX, ICI, Liquidnet, and STA
Letters.
\36\ See FINRA Response Letter at 8.
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Additionally, one commenter took the position that, if the proposal
is approved, FINRA should open up a second formal comment period one
year after the rule is implemented to allow for an empirical
``retrospective review'' of the proposal's costs and benefits.\37\ In
its response, FINRA disagreed and pointed to the Notice of the Original
Proposal, in which FINRA said it ``intends periodically to assess the
reporting and publication of information to consider whether
modifications to the scope of securities covered, the delay between the
activity and publication, or the frequency of publication of the
information are appropriate.'' \38\ Moreover, FINRA claimed that it
discussed the terms of the proposed rules with a number of ATS
operators prior to submitting the proposal, and ``continues to believe
that the burdens imposed by the Proposal will be minimal for many firms
and that the proposed delays in dissemination are sufficient to avoid
potentially damaging information leakage of trading information.'' \39\
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\37\ See STA Letter at 2-3.
\38\ FINRA Response Letter at 8. The Commission notes that this
quoted language in FINRA's response appears in the Notice of
Original Proposal, 78 FR at 62864.
\39\ FINRA Response Letter at 8-9.
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Lastly, one commenter questioned how the proposal would apply to
fixed income ATSs in light of the fact that trades from fixed income
ATSs may be reported to FINRA by one of the trade counterparties,
rather than by the ATS.\40\ In response, FINRA pointed out that various
of its equity and debt trade reporting rules impose a trade reporting
obligation on an ATS, as the ``executing party'' under FINRA rules,
where the transaction is executed by the ATS. FINRA also noted that,
under the proposal, it would not publish the trade data reported by
fixed income ATSs until it could evaluate the data for consistency.
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\40\ See KCG Letter at 4.
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Furthermore, FINRA submitted Amendment No. 1 to adopt supplementary
material to FINRA Rule 4552 to clarify when trades should be considered
to have occurred ``within an ATS.'' Specifically, the proposed
supplementary material would provide that a trade should be considered
to have occurred within the ATS for purposes of the rule ``if the ATS
(i) executes the trade; (ii) is considered the `executing party' to the
trade under FINRA rules; or (iii) otherwise matches orders constituting
the trade in a manner as contemplated by SEC Rule 3b-16 or SEC
Regulation ATS.'' \41\ So, for example, a trade would be considered to
have occurred ``within an ATS'' if the ATS ``uses established, non-
discretionary methods under which orders interact with each other, and
the buyers and sellers entering the orders agree to the terms of the
trade.'' \42\
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\41\ FINRA Response Letter at 10 (internal citations omitted).
\42\ Id.
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The proposed supplementary material would further provide a non-
exhaustive list of scenarios to illustrate how the ``within an ATS''
standard would be applied. The list would include: if the trade was
executed as a result of the ATS bringing together the purchaser and
seller on or through its systems; if the trade was executed by an ATS's
subscribers where the subscribers used the ATS system to negotiate the
trade, even if the ATS did not itself execute the trade; if the ATS
takes either side of the trade for clearance or settlement or in any
other way inserts itself into a trade. The supplementary material would
also provide that a trade would not be considered to have occurred
``within the ATS'' if an ATS were to route an order to another member
firm or execution venue for handling or execution where that initial
order matches against interest resident at the other venue.\43\
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\43\ The supplementary material would additionally state that
trades would still be considered to have occurred ``within an ATS''
for purposes of reporting volume under the proposal even if the ATS
has been granted an exemption from its trade reporting obligations
under FINRA Rules 6183, 6625, or 6731.
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml ); or
Send an email to [email protected]. Please include
File Number SR-FINRA-2013-042 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR--FINRA-2013-042.
This file number should be included on the subject line if email is
used. To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml ). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for Web site
viewing and printing in the Commission's Public Reference Room, 100 F
Street NE., Washington, DC 20549, on official business days between the
hours of 10:00 a.m. and 3:00 p.m. Copies of the filing will also be
available for inspection and copying at the principal office of FINRA.
All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make publicly
available. All submissions should refer to File Number SR-FINRA-2013-
042 and should be submitted on or before February 14, 2014.
V. Commission Findings
After carefully considering the proposed rule change, as modified
by
[[Page 4217]]
Amendment No. 1, the comments submitted, and FINRA's response to the
comments, the Commission finds that the proposed rule change, as
modified by Amendment No. 1, is consistent with the requirements of the
Act and the rules and regulations thereunder applicable to a national
securities association.\44\ In particular, the Commission finds that
the proposed rule change, as modified by Amendment No. 1, is consistent
with Section 15A(b)(6) of the Act,\45\ which requires, among other
things, that FINRA rules be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest.
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\44\ In approving this proposed rule change, the Commission has
considered the proposed rule change's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
\45\ 15 U.S.C. 78o-3(b)(6).
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The Commission believes that the stated objectives of the
proposal--to enhance FINRA's regulatory capabilities with respect to
ATSs and to increase public transparency with respect to ATS activity--
would further the purposes of the Act. By better enabling FINRA to
surveil ATSs for compliance with Regulation ATS, and the display and
fair access requirements applicable to ATSs that exceed certain volume
thresholds, the proposal is reasonably designed to help prevent
fraudulent and manipulative acts and practices and to protect investors
and the public interest. By collecting and publishing weekly volume
statistics (first, through the self-reporting requirement, and later,
potentially, through the MPID requirement), the proposal would increase
the amount of information that is publicly available concerning trades
that occur in equity ATSs. As many commenters noted, such added
transparency would allow regulators and the public to more fully
understand the role that equity ATSs play in the marketplace.
The Commission further believes that the proposal is reasonably
tailored to achieve these objectives. The self-reporting requirement,
which is meant to constitute the first phase of the proposal, will more
quickly deliver the benefits of the proposal, and also provide a
comparsion for the data that FINRA will receive once the MPID
requirement is fully in effect. While the Commission acknowledges that
some commenters took issue with the additional costs that could
potentially be incurred as a result of the weekly self-reporting
requirement, the Commission notes, as FINRA did in its Notice of
Original Proposal, that ATSs are already required by Regulation ATS to
maintain daily summaries of their trading activities.\46\
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\46\ See 17 CFR 242.301(b)(8); 17 CFR 242.302.
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In addition, the method of making the ATS trade data publicly
available--a two-week delay for Tier 1 NMS stocks and a four-week delay
for all other NMS stocks and OTC Equity Securities--appears reasonably
designed to balance the desire to inform the public about ATS trading
activity with the desire to protect the trading strategies of ATS
subscribers. The Commission notes that three commenters supported this
element of the proposal,\47\ and no commenter objected to the proposed
delays for publishing the trade data.\48\
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\47\ See Fidelity Letter at 3, ICI Letter at 2, and KCG Letter
at 3.
\48\ The Commission notes that one commenter that advocated
monthly, rather than weekly, reporting also recommended a two-week
publishing delay from the end of each month when the information is
reported. See STA Letter at 5.
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The Commission believes that requiring a member operating an ATS to
obtain for each such ATS a single, unique MPID that is designated for
exclusive use by the ATS is consistent with the Act. This aspect of the
proposal is reasonably designed to create a more reliable and
consistent audit trail for ATS activity, from the time an order is
received until the time it is executed or cancelled. This is especially
important for firms that conduct both ATS and other broker-dealer
activities. Currently, if a member uses a single MPID for both its ATS
activity and traditional broker-dealer activity, or uses a single MPID
to report the activity of two or more ATSs, it could be difficult if
not impossible to track the flow of orders through these systems. The
Commission agrees with FINRA's assessment that the fact that many firms
already use separate MPIDs in the manner now required by this proposed
rule change is evidence that the costs of using multiple MPIDs as
contemplated by the proposal is not unduly burdensome. Because the
proposal requires some firms to obtain and use multiple MPIDs, FINRA
has proposed to make permanent certain rules, currently operating on a
pilot basis, that allow firms to use multiple MPIDs. The Commission
also believes that it is consistent with the Act to make those rules
permanent.
Lastly, the Commission believes that the supplementary material
included in Amendment No. 1 is consistent with the Act. In response to
the initial proposal, one commenter questioned how the proposal would
apply to fixed income ATSs, where it is common practice for trades to
be given up to the broker-dealer counterparties.\49\ FINRA responded by
providing new Supplementary Material .01 to proposed Rule 4552
explaining when transactions are attributable to the ATS for purposes
of the proposal's volume reporting provisions. In general, the
supplementary material would require a transaction to be included in
its reporting to FINRA if the ATS executes the trade, is the
``executing party'' to the trade under FINRA rules,\50\ or if the ATS
otherwise matches orders constituting the trade in a manner
contemplated by Rule 3b-16 under the Exchange Act \51\ and Regulation
ATS. The Commission believes that it is consistent with the Act for
FINRA to attribute volume to an ATS when the transactions underlying
that volume would cause the entity itself to meet the criteria of Rule
3b-16.\52\
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\49\ See KCG Letter at 4.
\50\ See FINRA Rules 6282, 6830A, 6930B, and 6622. See also
FINRA Response Letter at 9-10 (discussing when an ATS is considered
an ``executing party'' to a trade under these rules).
\51\ 17 CFR 240.3b-16.
\52\ Meeting the criteria of Rule 3b-16 would in turn would
cause the entity to have to register with the Commission as a
national securities exchange or seek an alternative to exchange
registration, such as registering as a broker-dealer and complying
with Regulation ATS.
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VI. Accelerated Approval
The Commission finds good cause, pursuant to Section 19(b)(2) of
the Act,\53\ for approving the proposed rule change, as modified by
Amendment No. 1 thereto, prior to the 30th day after publication of
Amendment No. 1 in the Federal Register. The new supplementary material
proposed in Amendment No. 1 responds to a specific issue raised in one
comment letter received by the Commission in response to the Notice of
Original Proposal and clarifies when trading volume is attributed to an
ATS for purposes of this proposal's volume reporting requirements.
Amendment No. 1 also proposed a revision to the language describing the
timeframe for FINRA's implementation of the proposal; this revision is
technical in nature and better clarifies FINRA's original intent. The
Commission notes that, beyond two other minor technical revisions that
simply update statutory references,\54\ the rest of the proposed rule
change is not being amended and was subject to a full notice-and-
comment period. These revisions add clarity to the
[[Page 4218]]
proposal and do not raise any novel regulatory concerns. Accordingly,
the Commission finds that good cause exists to approve the proposal, as
modified by Amendment No. 1, on an accelerated basis.
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\53\ 15 U.S.C. 78s(b)(2).
\54\ Specifically, Amendment No. 1 would: (1) amend FINRA Rules
4552, 6160, 6170, 6480, and 6720 to replace ``SEA Rule 300'' with
``Rule 300 of SEC Regulation ATS''; and (2) amend proposed Rule 4552
to replace ``SEA Rule 600(b)(47)'' with ``Rule 600(b)(47) of SEC
Regulation NMS.
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VII. Conclusion
It is therefore ordered pursuant to Section 19(b)(2) of the Act
\55\ that the proposed rule change (SR-FINRA-2013-042), as modified by
Amendment No. 1, be and hereby is approved on an accelerated basis.
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\55\ 15 U.S.C. 78s(b)(2).
\56\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\56\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-01395 Filed 1-23-14; 8:45 am]
BILLING CODE 8011-01-P