[Federal Register Volume 80, Number 196 (Friday, October 9, 2015)]
[Notices]
[Pages 61246-61249]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-25703]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-76078: File No. SR-FINRA-2015-020]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving a Proposed Rule Change, as Amended by
Amendment No. 1, To Expand FINRA's Alternative Trading System
Transparency Initiative by Publishing OTC Equity Volume Executed
Outside ATSs
October 5, 2015.
I. Introduction
On June 23, 2015, 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 amend Rule 6110, Trading Otherwise than on an
Exchange and 6610 regarding the OTC Reporting Facility to expand
FINRA's alternative trading system (``ATS'') transparency initiative.
The changes would provide for publication of the remaining equity
volume executed over-the-counter (``OTC'') by FINRA members, including
activity in non-ATS electronic trading systems and internalized trades.
The proposed rule change was published for comment in the Federal
Register on July 9, 2015.\3\ The Commission received two comments on
the proposal.\4\ FINRA
[[Page 61247]]
responded to the comments and amended the proposed rule change on
September 22, 2015.\5\ This order approves the proposed rule change, as
amended.
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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. 75356 (July 2,
2015), 80 FR 39463 (``Notice''). The Notice contains a detailed
description of the proposal.
\4\ See letter from Kerry Baker Relf, Head of Content
Acquisition and Rights Management, Thomson Reuters to Brent J.
Fields, Secretary, Commission, dated July 20, 2015, (``Thomson
Reuters Letter'') and letter from Theodore R. Lazo, Managing
Director and Associate General Counsel, Securities Industry and
Financial Markets Association, to Brent J. Fields, Secretary,
Commission, dated July 30, 2015, (``SIFMA Letter'').
\5\ See letter from Lisa C. Horrigan, Associate General Counsel,
FINRA, to Robert W. Errett, Deputy Secretary, Commission, (``FINRA
Response Letter'').
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II. Description of the Proposed Rule Change
Under FINRA rules, each member operating an ATS must report its
weekly volume, by security, to FINRA.\6\ FINRA makes the reported
volume and trade count information for equity securities publicly
available on its Web site. FINRA is proposing to amend Rules 6110 and
6610 to make public the remaining OTC equity (``non-ATS'') volume by
member firm and security, which FINRA will publish.\7\ FINRA believes
the proposed rule change will make the OTC market more transparent and
will enable the public to better understand firms' off-exchange equity
trading activity as investors will be able to review the proposed non-
ATS volume together with the current ATS volume reports, which
effectively encompass all equity volume effected OTC.
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\6\ Notice, supra note 3, at 39464. See also FINRA Rule 4552.
\7\ Notice, supra note 3, at 39464.
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FINRA will derive a firm's non-ATS volume information from OTC
trades reported to its equity trade reporting facilities.\8\ FINRA will
base a firm's non-ATS volume on trades reported for dissemination
purposes (``tape reports'') on which the firm is identified as the
member with the trade reporting obligation.\9\
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\8\ Id. at 39464. There are four equity trade reporting
facilities: The Alternative Display Facility, the two Trade
Reporting Facilities (``TRFs''), and the OTC Reporting Facility.
Members report OTC transactions in NMS stocks to the ADF and the
TRFs. Members report transactions in ``OTC Equity Securities,'' as
well as transactions in Restricted Equity Securities, effected
pursuant to Rule 144A, under the Securities Act of 1933, to the OTC
Reporting Facility. Id. at 39464 n.5.
\9\ Id. at 39464. A firm's published trading volume information
would exclude trades for which the firm is the reported contra-party
and trades that are reported for regulatory or clearing purposes
only (``non-tape reports''). Id.
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FINRA will publish on its Web site weekly volume information
(number of trades and shares) by firm and security, with the exceptions
noted below, on a two-week or four-week delayed basis--the same time
frames specified for ATS volume publication.\10\ Specifically, volume
information would be published on a two-week delayed basis for NMS
stocks in Tier 1 under the NMS Plan to Address Extraordinary Market
Volatility \11\ and on a four-week delayed basis for all other NMS
stocks and OTC Equity Securities.\12\ FINRA also will publish aggregate
volume totals across all NMS stocks and aggregate volume totals across
all OTC Equity Securities for each calendar month, on a one-month
delayed basis.\13\
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\10\ Id. at 39464.
\11\ Tier 1 NMS stocks include those NMS stocks in the S&P 500
Index or the Russell 1000 Index and certain ETPs. See id. at 39464
n.8. FINRA will make changes to the Tier 1 NMS stocks in accordance
with the Indices. Id.
\12\ Non-ATS volume data will be displayed in the same format in
which ATS volume data is displayed today, i.e., aggregate volume for
each firm across all NMS stocks (Tier 1 and all other NMS stocks)
and OTC equity securities; aggregate volume for each security across
all firms; and volume for each security by each firm (except with
respect to the de minimis volume discussed below). See id. at 39464
n.9.
\13\ Id. at 39464.
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FINRA will publish non-ATS volume information at the firm level
rather than on an MPID-by-MPID basis \14\ because outside the ATS
context, not all firms have a separate MPID for each unique trading
center at the firm. Thus, publishing volume information at the MPID
level might not provide meaningful or consistent information to the
marketplace. For members that use more than one MPID for their non-ATS
trading, FINRA will aggregate and publish the non-ATS trading volume
for all non-ATS MPIDs belonging to the firm under a single ``parent''
identifier or firm name.\15\
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\14\ Under FINRA rules for ATS reporting, members must use an
MPID for reporting order and trade information. Id. An ``MPID'' is a
unique market participant identifier.
\15\ Id. at 39464. FINRA is able to identify all MPIDs belonging
to a given firm based on currently available information, and as
such, members will not have a new reporting obligation as a result
of this proposal. Id. at 39464 n.11. FINRA also notes that a firm's
ATS volume will continue to be published separately under the unique
MPID(s) for each ATS operated by the firm. Id. at 39464.
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FINRA does not believe that publishing volume information for each
firm that executed only a small number of trades or shares in any given
period would provide meaningful information to the marketplace.
Accordingly, FINRA will combine volume from all members that do not
meet a specified minimum threshold and publish the volume information
for those members on an aggregated basis. For example, if five firms
each execute 10 trades in the reporting period in a security, their 50
trades would be aggregated and published as a single line item; the
firms and their volume information would not be identified separately.
For a firm with more than one non-ATS MPID, the total volume across all
of its non-ATS MPIDs would be combined to determine whether the de
minimis threshold has been met.\16\
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\16\ Id.
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FINRA is proposing to establish a de minimis threshold of fewer
than on average 200 non-ATS transactions per day executed by the firm
across all securities (for displaying aggregate volume across all
securities by firm) or in a specific security (for displaying volume in
a particular security by firm) during the one-week reporting
period.\17\ Based on its review of a one-week period in June 2014,
FINRA states that absent this threshold, approximately 300 individual
firms would have had volume attributed by name, versus only 62 firms if
the threshold had been applied.\18\ Moreover, those 62 firms would
account for 98.99 percent of all trading volume.\19\ Thus, if a firm
averages fewer than 200 non-ATS transactions per day across all
securities during the reporting period, FINRA would aggregate the
firm's volume with that of similarly situated firms when displaying
aggregate volume across all securities by firm. Additionally, because
the published volume data would also be organized by security, if a
firm averaged fewer than 200 non-ATS transactions per day in a given
security during the reporting period, FINRA would aggregate the firm's
volume in that security with that of similarly situated firms, even if
the firm averages more than 200 non-ATS transactions per day across all
securities during the reporting period. Thus, FINRA would publish all
of the OTC volume, but volume for members meeting the de minimis
threshold would not be attributed by name.\20\ FINRA will not charge a
fee for the data published pursuant to the proposed rule change; it
will be publicly available on FINRA's Web site in a downloadable
format.\21\
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\17\ Id. FINRA states that it based this proposed threshold on
the level of trading activity used by the Commission to identify
``small market makers'' for purposes of exemptive relief from Rule
605 of Regulation NMS. Id. FINRA also proposes a technical change to
the proposed rule text to clarify that the de minimis threshold will
be applied for purposes of the monthly non-ATS volume information.
See FINRA Response Letter at 3-4, 7.
\18\ Id.
\19\ Id. at 39464-65.
\20\ Id.
\21\ Id.
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III. Discussion and Findings
After carefully considering the proposed rule change, the comments
submitted, and FINRA's response to the comments, the Commission finds
that the proposed rule change is consistent with the requirements of
the Act and the rules and regulations thereunder
[[Page 61248]]
applicable to a national securities association.\22\ In particular, the
Commission finds that the proposed rule change is consistent with
Section 15A(b)(6) of the Act,\23\ 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, because
the proposed rule change will make the OTC market more transparent by
providing trade and quotation information on non-ATS trading.
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\22\ 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).
\23\ 15 U.S.C. 78o-3(b)(6).
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The Commission received two comment letters expressing general
support for the proposal.\24\ The Thomson Reuters Letter supports the
proposal, noting that there is interest both on the buy-side and the
sell-side in ATS data and additional OTC data.\25\ The SIFMA Letter
supports the proposal but makes certain suggestions.\26\
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\24\ See supra note 4.
\25\ Id. The Thomson Reuters Letter also states that it
anticipates enhancing the granularity and timeliness of its market
share analytics product as a result of the proposal.
\26\ See SIFMA Letter, supra note 4. The SIFMA letter also
states that FINRA should eliminate the current requirement for ATSs
to report volume information to FINRA because it now has access
through its own systems to all ATS volume information without the
need for a separate reporting requirement. See SIFMA Letter, supra
note 4, at 3. FINRA stated that this will be addressed in a separate
proposed rule change. See Notice, supra note 3, at 39467.
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The Commission believes that the stated objectives of the
proposal--to expand transparency by publishing the remaining equity
volume executed OTC by FINRA members, including non-ATS electronic
trading systems and internalized trades--further the purposes of the
Act. By enhancing transparency concerning non-ATS OTC equity volume
information, the proposal is designed to help prevent fraudulent and
manipulative acts and practices and to protect investors and the public
interest. Publishing this weekly volume data, organized by firm and by
security, would increase the amount of information that is publicly
available concerning OTC equity trading occurring off of ATSs. As
commenters noted, such added transparency would facilitate better
understanding of OTC trading. Further, the proposal would not impose
any additional reporting requirements on firms because FINRA would
derive the non-ATS volume data from OTC trades reported to FINRA's
equity trade reporting facilities. Thus, costs to member firms as a
result of the proposal--if any--would be minimal.
SIFMA suggested that a four-week (rather than two-week) publication
timeframe for Tier 1 NMS stocks based on a concern that a two-week
timeframe may result in unintended information leakage.\27\ In this
regard, SIFMA suggested that, in cases where the firm is an active
market maker or is trading a large position on behalf of a customer--
especially in less liquid stocks--the two-week publication time frame
and weekly aggregation disclosure could allow reverse engineering of
trading.\28\
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\27\ See SIFMA Letter, supra note 4, at 3.
\28\ Id.
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In response, FINRA states that it considered the potential for
information leakage in developing its proposal and believes it has
taken adequate steps to mitigate that potential by, among other things,
proposing to publish non-ATS volume information on the same delayed
basis that is used for ATS volume data, as well as at the firm--rather
than MPID--level and not further segregating volume information by
trading capacity or trading desk.\29\ FINRA also states that there
would be nothing in the published non-ATS volume data to indicate
whether the executing firm was acting for its own proprietary account
or as agent or riskless principal on behalf of a customer or another
broker-dealer.\30\ FINRA further notes that the published non-ATS
volume data would identify only the executing party and not the contra
party to the trade.\31\ Thus, FINRA does not believe that users of the
published non-ATS volume data would reasonably be able to determine
with any certainty the identity of the actual parties to the
transaction or the capacity in which the executing firm is acting.\32\
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\29\ Notice, supra note 3, at 39467. FINRA also notes that firms
have not come to it with any complaints regarding information
leakage since it began publishing ATS volume information. Id. at
39465. In addition, FINRA notes that SIFMA did not provide any
specifics regarding how the information leakage might be manifested
in the published non-ATS volume data or how likely it is to actually
occur.
\30\ FINRA Response Letter, supra note 5, at 4.
\31\ Id. at 5.
\32\ Id. at 4-5.
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FINRA also notes that generally the more liquid NMS stocks are in
Tier 1 and that only volume information relating to non-ATS
transactions in Tier 1 NMS stocks would be published on a two-week
delay, while the non-ATS volume in remaining NMS stocks, as well as OTC
equity securities, would be published on a four-week delay. FINRA
believes it has taken appropriate steps to address firms' concerns
regarding information leakage by delaying publication of the
information and limiting the granularity of the published information
to firm and security.\33\ FINRA also notes that this approach is
similar to the approach it uses for ATS volume information, and that
firms have not complained to FINRA about information leakage.\34\ Thus,
FINRA believes that under the proposed rule change, the potential for
information leakage with respect to less liquid stocks already is
mitigated.\35\ However, FINRA states that it will consider whether
modifications are appropriate following implementation of the proposed
rule change.\36\
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\33\ See Notice, supra note 3, at 39465.
\34\ Id.
\35\ FINRA Response Letter, supra note 5, at 5.
\36\ See Notice, supra note 3, at 39465.
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FINRA also believes that aggregation of trading volumes on a
monthly, rather than weekly, basis would lessen the value and utility
of the published information.\37\ FINRA believes that, weekly
publication of non-ATS volume, together with the weekly ATS data, would
enable the public to understand a firm's trading volume off exchanges.
FINRA also states that it anticipates that the public would use the
published ATS and non-ATS volume information to better understand
issues such as the impact of ATS and non-ATS trading volumes on price
efficiency or order routing behavior. FINRA believes that the
publication of weekly data would enable the public to study those
trends at a relatively higher frequency and thus make more reliable
conclusions about historical trends. FINRA also believes that, given
the speed and frequency of information arrival in financial markets,
monthly data might mask the deviations in short-term routing trends and
render the published data less useful.\38\
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\37\ FINRA Response Letter, supra note 5, at 5. FINRA also noted
that the other commenter and commenters on the related Regulatory
Notice support the publication of weekly data. Id. at 6-7.
\38\ Id. at 7.
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The timeframe for making the non-ATS trade data publicly
available--on a two-week delayed basis for Tier 1 NMS stocks and a
four-week delayed basis for all other NMS stocks and OTC Equity
Securities--is designed to balance the desire to inform the public
about non-ATS trading activity with the desire to protect the trading
strategies of member firms. Although SIFMA advocated for a four-week
delay in publishing data on Tier 1 NMS stocks,\39\ the Commission
believes that that FINRA has adequately considered the risk of
information leakage in developing the proposal and
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has taken adequate steps to mitigate that risk.
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\39\ See SIFMA Letter, supra note 4, at 3.
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The Commission also believes that the proposal to publish non-ATS
trade data by firm, rather than by MPID, is appropriate. The Commission
notes FINRA's representation that not all firms have separate MPIDs for
unique trading centers at firms (outside the ATS context) and that
publishing non-ATS volume data at the MPID level may not provide
meaningful or consistent information to the marketplace. Therefore, the
Commission further believes that for members using more than one MPID
for their non-ATS trading, FINRA's proposal to aggregate and publish
non-ATS volume data for non-ATS MPIDs belonging to a firm under a
single parent identifier or firm name is appropriate.
Lastly, the Commission believes that the proposal to aggregate
volume for all members that do not meet a de minimis threshold of fewer
than on average 200 non-ATS transactions per day executed by the firm
across all securities (for displaying aggregate volume across all
securities by firm) or in a specific security (for displaying volume in
a particular security by firm) during the one-week reporting period is
appropriate. The Commission notes that FINRA's review of a one-week
period found that, absent this threshold, approximately 300 individual
firms would have had volume attributed by name, versus only 62 firms if
the threshold had been applied, and that those 62 firms would account
for 98.99 percent of all trading volume, representing a significant
improvement in the transparency of this segment of the market.
IV. Conclusion
It is therefore ordered pursuant to Section 19(b)(2) of the Act
\40\ that the proposed rule change (SR-FINRA-2015-020), as amended, be
and hereby is approved.
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\40\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\41\
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\41\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-25703 Filed 10-8-15; 8:45 am]
BILLING CODE 8011-01-P