[Federal Register Volume 79, Number 25 (Thursday, February 6, 2014)]
[Notices]
[Pages 7245-7246]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-02503]
[[Page 7245]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71457; File No. SR-FINRA-2013-052]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving the Proposed Rule Change Relating to
Alternative Display Facility New Entrant
January 31, 2014.
I. Introduction
On December 2, 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 add a new entrant to the Alternative Display
Facility (the ``Proposal''). The Proposal was published for comment in
the Federal Register on December 17, 2013.\3\ The Commission received
no comments on the Proposal. This order approves the proposed rule
change.
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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. 71042 (December 11,
2013), 78 FR 76341 (``Notice'').
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II. Description of the Proposed Rule Change
The Alternative Display Facility (``ADF'') is a quotation
collection and trade reporting facility that provides ADF Market
Participants (i.e., ADF-registered market makers or electronic
communications networks (``ECNs'')) \4\ the ability to post quotations,
display orders and report transactions in NMS stocks \5\ for submission
to the Securities Information Processors for consolidation and
dissemination to vendors and other market participants.\6\ The ADF is
also designed to deliver real-time data to FINRA for regulatory
purposes, including enforcement of requirements imposed by Regulation
NMS.\7\
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\4\ See FINRA Rule 6220(a)(3).
\5\ See 17 CFR 242.600.
\6\ See Notice, 78 FR at 76341.
\7\ See 17 CFR 242.600.
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In particular, Rule 610 of Regulation NMS \8\ requires that a
trading center displaying quotations in an NMS stock through a self-
regulatory organization (``SRO'') display-only facility (such as the
ADF) ``provide a level and cost of access to such quotations that is
substantially equivalent to the level and cost of access to quotations
displayed by SRO trading facilities in that stock.'' \9\ Rule 610 also
requires that a trading center displaying quotations in an NMS stock
through an SRO display-only facility not impose unfairly discriminatory
terms that prevent or inhibit any person from obtaining efficient
access to such quotations through a member, subscriber, or customer of
the trading center.\10\ In articulating this standard, the Commission
noted that the level and cost of access would ``encompass both (1) the
policies, procedures, and standards that govern access to quotations of
the trading center, and (2) the connectivity through which market
participants can obtain access and the cost of such connectivity.''
\11\ The nature and cost of connections for market participants seeking
to access the ADF participant's quotations would need to be
substantially equivalent to the nature and cost of connections to SRO
trading facilities.\12\
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\8\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496 (June 29, 2005) (``NMS Adopting Release'').
\9\ 17 CFR 242.610(b)(1).
\10\ 17 CFR 242.610(b)(2).
\11\ NMS Adopting Release, 70 FR at 37549.
\12\ Id.
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In determining whether ADF participants have satisfied the access
standards under Rule 610, Regulation NMS also requires FINRA to submit
a proposed rule change under Section 19(b) of the Act in order to add a
new ADF participant.\13\ Accordingly, FINRA is proposing to add
LavaFlow (``FLOW'') as a new ADF Market Participant.\14\ FLOW provided
FINRA with a summary of its policies and procedures regarding access to
its quotations in an NMS stock displayed on the ADF, and a summary of
its proposed fees for such access.\15\ According to FINRA, FLOW has
proposed policies and procedures that are designed to ensure that the
level of access to its quotations is substantially equivalent to the
level of access to quotations displayed by SRO trading facilities, and
to ensure that FLOW does not impose unfairly discriminatory terms that
prevent or inhibit any person from obtaining efficient access to such
quotations.\16\
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\13\ See Notice, 78 FR at 76342.
\14\ According to FINRA, there have been no ADF Market
Participants since the second quarter of 2010. See id.
\15\ See Notice, 78 FR at 76341.
\16\ See Notice, 78 FR at 76342.
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In particular, FINRA states that FLOW allows firms to access its
liquidity in a variety of ways.\17\ FLOW also allows a subscriber to
determine its level of connectivity, and does not have any tiers or
rules regarding execution of orders based upon Market Participant
Identification.\18\ Additionally, the FLOW matching engine does not
give priority to any participant and is blind to a participant's
identity, with the exception of orders using the anti-internalization
feature.\19\ FLOW also maintains policies and procedures that require
FLOW to respond to orders by non-subscribers as promptly as it responds
to orders by subscribers, and allow for non-subscribers to be able to
automatically execute against quotations displayed by the system.\20\
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\17\ Firms that are FLOW subscribers may connect to FLOW via the
FLOW Smart Order Router, or through the FLOW Gateway. Non-FLOW
subscribers may connect via a third party vendor or connectivity
provider, or through an exchange or a third-party broker-dealer
subscriber. See id.
\18\ See id.
\19\ See id.
\20\ See id.
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In addition, FINRA states that FLOW has established, and regularly
maintains, policies and procedures designed to maintain a linkage with
at least one SRO trading facility, or SRO display-only facility
(together, ``SRO Facility'').\21\ FLOW also maintains policies and
procedures to transmit to such SRO Facility for display either the best
priced order of those orders entered by OTC market makers and exchange
market makers for those securities in which they make markets (or act
as specialists) or the best priced orders entered by all ECN
subscribers.\22\ Moreover, FLOW has represented to FINRA that it has
policies and procedures to provide, to any broker or dealer, access to
such orders that is functionally equivalent to the access that is
generally available for quotes displayed by an SRO Facility, at a level
and cost of access that is substantially similar to the level and cost
of access to quotations displayed by SRO trading facilities in that
stock.\23\ FLOW also has policies and procedures to conduct continuous
monitoring of its connections with SRO Facilities and regular periodic
system capacity reviews and tests to ensure future capacity and system
integrity.\24\
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\21\ See id.
\22\ See id.
\23\ See id.
\24\ See id.
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Furthermore, FINRA states that FLOW has policies and procedures
designed to ensure that the cost of access to its quotations is
substantially equivalent to the cost of access to quotations displayed
by SRO trading facilities, and that FLOW will not charge a fee for
accessing its quotations that exceeds the maximum fee permitted by Rule
610 of Regulation NMS.\25\ Specifically, the cost of accessing the
quotations of a trading center may involve several distinct
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costs, such as port fees,\26\ market data fees,\27\ general
connectivity fees,\28\ and transaction fees,\29\ and FLOW proposes to
assess costs in these respects that are substantially equivalent to the
costs assessed by SRO trading facilities.\30\
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\25\ See id.
\26\ FLOW charges port fees to subscribers based upon the number
of ports requested. Fee-eligible port connections may be charged
$400 per connection, per month. In comparison, exchange port fees on
average range from $100 to $1,000 per port, per month. See id.
\27\ According to FINRA, FLOW has represented that it does not
have any plans to charge its subscribers or non-subscribers for
access to FLOW's market data. In comparison, market data fees vary
by exchange, with some exchanges charging fees that range from under
$100 per month to $750 to $2,500, and some exchanges charging $5,000
for external distribution. See Notice, 78 FR at 76342-43.
\28\ According to FINRA, FLOW is connected in its production
environment to most outbound routers via intranets, cross connects
and other direct connections. FLOW has also represented to FINRA
that the cost to establish connections to FLOW for users of these
services and for individual firms not using these services should be
substantially the same as the costs to connect to an exchange. Both
FLOW subscribers and non-subscribers are responsible for paying for
their own external telecommunications costs to connect to FLOW. FLOW
has represented to FINRA that such fees would be equivalent to the
costs to connect to other trading center. See Notice, 78 FR at
76342.
\29\ Exchanges currently charge a range of other fees, including
but not limited to membership fees, trading rights fees, risk
gateway fees and other miscellaneous fees. According to FINRA, FLOW
has represented that it does not assess similar charges. See Notice,
78 FR at 76343.
\30\ See Notice, 78 FR at 76342.
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FINRA also notes that the FLOW fee structure is currently a maker-
taker model where FLOW pays a rebate for added executed liquidity and
charges a fee for removed liquidity.\31\ FLOW charges a standard rate
of $0.0030 to remove liquidity.\32\ Pricing is subject to change with
advance notice provided to subscribers, and for non-subscribers, notice
of a price change is published on the FLOW Web site in advance of such
price change.\33\ In addition, FLOW charges subscribers and non-
subscribers the same fees for utilizing its system, and monitors the
average fee charged to non-subscribers and compares it to the average
fee paid by subscribers in order to ensure the prices are the same.\34\
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\31\ See Notice, 78 FR at 76343.
\32\ FLOW also pays a current base rebate of $0.0024 per share
for added executed visible liquidity and $0.0010 per share of added
executed non-visible liquidity. There are increased rebate
incentives for FLOW subscribers that maintain higher volumes on a
daily basis. See Notice, 78 FR at 76343, n. 20.
\33\ See Notice, 78 FR at 76343.
\34\ FINRA states that in the event that FLOW makes a material
change to its policies and procedures governing access to FLOW,
including a change to its fees, FLOW will submit to FINRA, and FINRA
will post on its Web site, an amended description of FLOW's
policies, procedures and fees governing access. See Notice, 78 FR at
76343, n. 21.
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Finally, FINRA states that all members in good standing of an SRO
are eligible to become FLOW subscribers, and will be subject to credit
limits set by FLOW.\35\
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\35\ See Notice, 78 FR at 76343.
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III. Discussion and Commission Findings
After carefully considering the Proposal, the Commission finds that
the Proposal is consistent with the requirements of the Act and the
rules and regulations thereunder applicable to a national securities
association.\36\ In particular, the Commission finds that the proposed
rule change is consistent with the provisions of Section 15A(b)(6) of
the Act,\37\ which requires, in part, that FINRA rules must 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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\36\ In approving the proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
\37\ 15 U.S.C. 78o-3(b)(6).
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Specifically, the Commission believes that the Proposal is
consistent with Section 15A(b)(6) of the Act because the fees and the
policies and procedures governing access to protected quotations
displayed on the ADF by FLOW as described above should provide market
participants with fair and efficient access, and are not unfairly
discriminatory such that they would prevent a market participant from
obtaining efficient access to such quotations. All members in good
standing of an SRO are eligible to become FLOW subscribers, and both
subscribers and non-subscribers may access FLOW liquidity. FLOW offers
both subscribers and non-subscribers multiple options to access FLOW
liquidity. In addition, FLOW also has policies and procedures that
require FLOW to respond to orders by non-subscribers as promptly as it
responds to orders by subscribers, and allow for non-subscribers to be
able to automatically execute against quotations displayed by the
system. Finally, the Commission notes FINRA's representation that the
proposed level and cost of access is, in relative terms, substantially
equivalent to the level and cost of access provided by SRO trading
facilities.\38\
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\38\ See Notice at 78 FR at 76343 for a more detailed comparison
of FLOW fees against those of other SROs.
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For these reasons, the Commission believes that the proposed rule
change is consistent with the Act.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\39\ that the proposed rule change (SR-FINRA-2013-052), is hereby
approved.
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\39\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\40\
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\40\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-02503 Filed 2-5-14; 8:45 am]
BILLING CODE 8011-01-P