
[Federal Register Volume 79, Number 5 (Wednesday, January 8, 2014)]
[Notices]
[Pages 1414-1420]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-00068]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71224; File No. SR-FINRA-2013-054]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change Relating to 
a Capacity Management Plan

January 2, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 24, 2013, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    FINRA is proposing to adopt a new FINRA Capacity Management Plan 
(``Plan'') for the Alternative Display Facility (``ADF'') and amend the 
ADF Trading Center Certification Record (``Certification'') to, among 
other things, require ADF Trading Centers to comply with the Plan.
    A copy of the Plan was filed as Exhibit 3a. A copy of the revised 
Certification was filed as Exhibit 3b. The text of the proposed rule 
change is available on FINRA's Web site at http:// www.finra.org, at 
the principal office of FINRA and at the Commission's Public Reference 
Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The 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'')) \3\ the ability to post 
quotations, display orders and report transactions in NMS stocks \4\ 
for submission to the Securities Information Processors (``SIPs'') for 
consolidation and dissemination to vendors and other market 
participants. In addition, the ADF delivers real-time data to FINRA for 
regulatory purposes, including enforcement of requirements imposed by 
Regulation NMS.\5\
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    \3\ See Rule 6220(a)(3).
    \4\ See 17 CFR 242.600.
    \5\ See 17 CFR 242.600.
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    To become an ADF Market Participant, a member must apply to FINRA, 
which includes certifying the member's good standing with FINRA and 
demonstrating compliance with the net capital and other financial 
responsibility provisions of the Act.\6\ Before displaying quotations 
or orders on the ADF, an ADF Market Participant that is an ``ADF 
Trading Center'' \7\ must also execute and comply with a Certification 
Record to certify the ADF Trading Center's compliance efforts with its 
obligations under Regulation NMS.\8\
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    \6\ See Rule 6271(b). FINRA has submitted a proposed rule change 
to amend the ADF rules to, among other things, assess an ADF Deposit 
Amount on ADF Market Participants. See Securities Exchange Act 
Release No. 70048 (July 26, 2013), 78 FR 46652 (August 1, 2013) (SR-
FINRA-2013-031).
    \7\ An ``ADF Trading Center'' is a Registered Reporting ADF 
Market Maker or Registered Reporting ADF ECN that is a ``Trading 
Center,'' as defined in Rule 600(b)(78) of SEC Regulation NMS, and 
that is certified to display its quotations or orders through the 
ADF. See Rule 6220(a)(4); see also 17 CFR 242.600(b)(78).
    \8\ See Rules 6220(a)(5), 6250(a)(7); NASD Notice to Members 06-
67 (November 2006); see also SR-NASD-2006-091, Amendment No. 3, 
Exhibit 3.
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    Regulatory developments, such as the SEC's adoption of Regulation 
NMS in 2005, have resulted in a dramatic increase in quote and trade 
volume in the National Market System. The securities markets have 
experienced significant changes, evolving to a larger number and 
variety of trading centers that are almost completely automated, with 
sophisticated, rapid and interconnected systems. As a result of this 
increase in volume, self-regulatory organizations (``SROs'') and 
trading centers generally have sought to adopt increasingly robust 
capacity management plans to ensure that they are capable of processing 
quote and trade data during volume peaks.
    In addition, SROs have found it necessary to develop capacity 
management plans to mitigate the potential of being penalized for 
overrunning their volume projections submitted to the consolidated data 
plans. For example, the Consolidated Tape Association Plan (``CTA 
Plan'') and the Consolidated Quotation Plan (``CQ Plan''; together, 
``CTA/CQ Plans''), which serve as the consolidated data plans for 
securities listed on the New York Stock Exchange, BATS, NYSE Arca, NYSE 
MKT and other regional exchange-listed securities,\9\ currently enforce 
a strict ``pay-for-capacity'' methodology that includes monetary 
penalties for capacity overruns.\10\ Under this approach, SROs submit 
volume

[[Page 1415]]

projections for the coming planning period and are held to those 
projections. SROs that overrun their projections are subject to 
penalties that increase incrementally based on the number of trading 
days within a calendar month that the SRO overran its submitted 
projections and the amount by which the SRO exceeded its submitted 
projections. In some cases, based on the number of trading days that 
projections have been exceeded, SROs may be subject to mandatory 
commitments to buy additional capacity going forward.\11\
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    \9\ The CTA Plan governs the collection and dissemination of 
last sale price information for non-NASDAQ listed securities, while 
the CQ Plan governs the collection and dissemination of bid/ask 
quotation information for listed securities.
    \10\ See Exhibit A to the CTA Plan (October 1, 2013 composite), 
available at https://cta.nyxdata.com/CTA (Capacity Planning Process 
for The Consolidated Tape System); see also Exhibit A to the CQ Plan 
(October 1, 2013 composite), available at https://cta.nyxdata.com/CTA.
    \11\ Id.
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    Similar to the approach of the CTA/CQ Plans to capacity planning, 
FINRA is proposing to adopt the Plan for those FINRA members that opt 
to utilize the ADF for quoting and trade reporting. ADF Trading Centers 
would be required to agree to abide by the Plan as part of the 
Certification that ADF Trading Centers are required to execute and 
comply with to quote on and report trades to the ADF.\12\ The details 
of the Plan are set forth below.
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    \12\ If a firm is only reporting trades to the ADF and is not 
quoting on the ADF, the firm is not an ``ADF Trading Center'' and is 
not required to complete the Certification.
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Definitions
    The Plan defines ``CTA Securities'' as securities subject to the 
Consolidated Tape Association Plan (i.e., securities listed on the New 
York Stock Exchange, BATS Exchange Inc., NYSE MKT LLC or NYSE Arca 
LLC). The Plan defines ``UTP Securities'' as securities subject to the 
Unlisted Trading Privileges Plan (i.e., securities listed on the Nasdaq 
Stock Market, LLC).\13\ Finally, the Plan defines ``Certified 
Capacity'' as the maximum level of data (by message rate and message 
type) an ADF Trading Center is certified to submit to the ADF Platform 
following the quarterly certification volume test conducted by FINRA.
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    \13\ For purposes of this proposal, the CTA/CQ Plans and the 
Unlisted Trading Privileges Plan (``UTP Plan'') may be collectively 
referred to as the ``NMS data plans.''
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ADF Trading Center Capacity Certification
    Prior to commencing quoting or trade reporting through the ADF, the 
Plan requires that each ADF Trading Center complete an initial ADF 
Trading Center Capacity Certification process.\14\ As part of this 
process, an ADF Trading Center must test its connectivity to the ADF 
with FINRA Product Management. FINRA will provide estimates for the 
costs of such testing, and, upon receipt of these estimates, the ADF 
Trading Center may request in writing that FINRA proceed with 
connectivity testing. Regardless of whether an ADF Trading Center 
ultimately is certified and becomes an active ADF Trading Center, the 
ADF Trading Center will be responsible for the testing costs and will 
be invoiced accordingly.
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    \14\ Each ADF Trading Center also is required to complete an 
annual recertification.
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    The Plan also requires each ADF Trading Center to submit volume 
projections for current and future peak data reporting levels on a 
quarterly basis, and on demand from FINRA. ADF Trading Centers must 
submit volume projections separately for CTA Securities and UTP 
Securities, and they must project their volume for quotations, media 
trade reports, total trade reports, and order reports. An ADF Trading 
Center is not certified to submit quote, trade or order reporting data 
at its requested level simply because it has submitted its initial or 
final volume projections. Rather, prior to submitting quote, trade and 
order reporting data at its projected volume levels, FINRA staff may 
require an ADF Trading Center to successfully complete a test at the 
projected volume levels.
Capacity Projection Submission
    As part of both the initial certification process, and as part of 
its ongoing utilization of the ADF, an ADF Trading Center is required 
to provide quarterly volume projections that accurately reflect its 
anticipated capacity requirements for the next two quarters in order 
for FINRA to assess ADF system infrastructure requirements. Such 
anticipated capacity requirements must be submitted on the ADF Trading 
Center Volume Projections Form (``Form'') \15\ as required by FINRA 
Product Management and must be received by FINRA at least 45 calendar 
days prior to the end of each calendar quarter for the next two 
calendar quarters. Submissions are due by certain specified due dates. 
If a submission is not received by the specified due date, FINRA will 
make assumptions for ADF Trading Center projections based on prior 
certified activity levels. Certified capacities are established 
separately for UTP Securities and for CTA Securities in the following 
categories: (1) Quotations; (2) Media Trade Reports; (3) Total Trade 
Reports (i.e., media and non-media); and (4) Order Reports. This 
traffic must be provided on both a messages-per-second \16\ and 
transactions-per-day basis, on both a projected average day and on a 
projected peak day. The ADF Trading Center must also specify on the 
Form, for both CTA and UTP securities, the number of securities it will 
trade, the average number of securities it will trade, and the number 
of securities in which it will make a market (if applicable).
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    \15\ The ADF Trading Center Volume Projections Form is 
Attachment A to the Plan.
    \16\ FINRA notes that the SIPs recently adopted a 100 
millisecond projected peak capacity planning metric, and so FINRA 
reserves the ability to change this time metric through a proposed 
rule change to be filed with the Commission.
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    As set forth in the Plan, an ADF Trading Center submits its 
projections for the next two calendar quarters. Once an ADF Trading 
Center has submitted its projections for the following quarter, it may 
not adjust those projections; however, an ADF Trading Center will not 
be locked into its second quarter projections until the commencement of 
the planning process for that quarter, e.g., 60 calendar days before 
the end of the first quarter. FINRA will allow each ADF Trading Center 
to increase its projections for the second quarter, if necessary. An 
ADF Trading Center may also lower its projections by up to 10% for the 
second calendar quarter. Each ADF Trading Center will be subject to an 
Excess Capacity Usage Fee schedule (``Excess Fee'') and a Shortfall 
Capacity Usage Fee schedule (``Shortfall Fee''), which are discussed in 
greater detail below.
    The reason for limiting the extent to which an ADF Trading Center 
may lower its capacity projection for the second calendar quarter for 
quote and trade data is attributable to the manner in which FINRA 
incurs costs related to the NMS data plans, including the direct 
purchase of capacity pursuant to the CTA/CQ Plans.\17\ FINRA configures 
servers to support the capacity projections from ADF Trading Centers 
and purchases corresponding capacity from the SIPs. With respect to the 
CTA/CQ Plans, once FINRA has purchased capacity from the SIP, it cannot 
divest itself of such capacity unless there is another participant 
willing to acquire that capacity. By allowing ADF Trading Centers to 
lower their capacity projections by up to 10% for the second quarter, 
FINRA is providing ADF Trading Centers with some flexibility to 
formulate their capacity projections

[[Page 1416]]

while helping to ensure that ADF Trading Centers provide realistic 
capacity projections, thus defraying potential costs to FINRA. 
Similarly, although FINRA does not purchase SIP capacity for order 
reporting information, it does incur costs in purchasing the necessary 
hardware and software to support the intake and storage of such 
information.
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    \17\ Currently, FINRA directly purchases capacity under the CTA/
CQ Plans for quote and trade reporting. FINRA indirectly pays for 
capacity under the UTP Plan in connection with quote and trade 
reporting, as it pays an administrator fee and a processor fee under 
the UTP Plan that is deducted from the Plan's gross revenues, with 
FINRA receiving any distributions from the Plan's net revenues. Upon 
SEC approval of the relevant pending amendment to the UTP Plan, see 
Securities Exchange Act Release No. 62021 (April 30, 2010), 75 FR 
27010 (May 13, 2010) (File No. S7-24-89), FINRA will also directly 
purchase capacity under the UTP Plan.
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Capacity Planning Schedule
    The Plan sets forth a schedule to ensure that ADF Trading Centers 
provide timely and accurate volume projections which will enable FINRA 
to make an accurate assessment of system and capacity requirements. For 
example, on the first trading day of the second month of the planning 
cycle, FINRA will notify ADF Trading Centers via email that initial 
volume projections on the ADF Trading Center Volume Projections Form 
are due. ADF Trading Centers have ten business days following the 
initial FINRA notification to provide initial volume projections via 
email on the ADF Trading Center Volume Projections Form. Between the 
tenth and twentieth business day following the initial FINRA 
notification, FINRA advises ADF Trading Centers of the respective ADF 
Trading Center's Available Capacity based on the ADF Trading Center's 
projections and requests final volume projections. FINRA will also 
advise ADF Trading Centers of any necessary ADF system upgrades 
required to accommodate their volume requests. Between the twentieth 
and twenty-fifth business day following the initial FINRA notification, 
ADF Trading Centers are required to give their final volume projections 
to FINRA via email on the ADF Trading Center Volume Projections Form. 
To the extent that a capacity increase is required, the system test 
will be completed between the twentieth and fortieth business days 
following the initial FINRA request for projections.\18\
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    \18\ In the event that all of the ADF Trading Centers have no 
changes or de minimis changes to their projections from a previous 
quarter for which they were tested and certified, the Plan provides 
that FINRA may forego the quarterly certification system test and 
certify the parties for the coming quarter. If FINRA's Product 
Management team is unable to conduct the certification test prior to 
the start of the coming quarter, the Plan provides that the ADF 
Trading Center(s) will be conditionally certified at the previous 
quarter's levels and all Capacity Usage Fees will be suspended until 
Product Management is able to conduct a test and officially certify 
the ADF Trading Center(s).
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Capacity Allocations
    As set forth in the Plan, if an ADF Trading Center requests a 
certain amount of capacity, FINRA will honor such request and will 
build out capacity to support the ADF Trading Center's peak projected 
capacity requirements. Once an ADF Trading Center has formally 
requested capacity, the Plan provides that such request may not be 
rescinded. A request does not mean, however, that the ADF Trading 
Center is entitled to submit to the projected level; rather, each ADF 
Trading Center must still partake in quarterly volume tests before it 
is certified to its requested volume level.
    The Plan also provides that an ADF Trading Center is only 
authorized to submit increased volume after conducting a capacity test 
and receiving written notice from FINRA that the ADF Trading Center is 
certified for operation at the specified level.
    Finally, if an ADF Trading Center ceases posting quotes on the ADF 
or stops reporting trades to the ADF and becomes inactive (either under 
Rule 6250(g) or by voluntary withdrawal), the Plan provides that such 
Trading Center will be deemed to have surrendered any capacity to which 
it was previously certified. The ADF Trading Center is still liable for 
any Capacity Usage Fees it may have incurred while active.
Extraordinary Upgrades
    To the extent that an ADF Trading Center's volume overrun (either 
in message volume by category or in message per second throughput) 
threatens, in FINRA's sole discretion, its ability to meet its 
regulatory obligations, the Plan provides that FINRA has the right to 
make mid-quarter extraordinary system upgrades to accommodate higher 
message volume or higher message per second throughput. The costs for 
such new infrastructure investment will be borne by the ADF Trading 
Center that has exceeded its Certified Capacity, or, if multiple ADF 
Trading Centers have exceeded their Certified Capacity, will be 
allocated among such ADF Trading Centers. In all such instances, FINRA 
will provide notice to the affected ADF Trading Center(s) that FINRA is 
taking such actions.
    Notwithstanding FINRA's ability to implement a mid-quarter 
extraordinary system upgrade, to the extent that ADF message volume 
materially exceeds certified levels of operation, as determined by 
FINRA staff, the Plan provides that FINRA technical staff may 
reconfigure the ADF connection to ensure that data levels stay at or 
below reasonable levels of operation. Such reconfiguration may occur on 
an intra-day basis in proportion to the extent to which the higher ADF 
message volume threatens FINRA's system stability and/or the ability of 
FINRA to meet its regulatory obligations with respect to the operation 
of the ADF.
Infrastructure Costs
    The Plan provides that the costs associated with building and 
implementing the capacity and environments (including, but not limited 
to, labor, hardware, software, installation, testing, etc., as well as 
associated on-going operational costs) will be borne by FINRA (except 
in the event of an Extraordinary Upgrade).
    Should FINRA need to add capacity in order to accommodate 
additional capacity requests, the Plan provides that FINRA will notify 
the requesting ADF Trading Centers as to the maximum volumes they are 
permitted to submit until such time as the upgrades have been installed 
and tested and the ADF Trading Centers have been recertified at the 
requested level. Until such time that the upgrades are made, FINRA will 
suspend the application of all Capacity Usage Fees, as described in 
greater detail below.
Excess Fees
    If an ADF Trading Center exceeds its Certified Peak Transaction 
Volume (which is equivalent to the request on the ADF Trading Center 
Volume Projections Form for ``Transactions per Day'' for Projected Peak 
Days) in one or more categories on one or more days in a given calendar 
month, the Plan sets forth the following Excess Fees that will apply:

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                    Level                           Percentage exceeded            1-2 days           3-5 days          6-10 days           >10 days
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1...........................................  <25%..........................                N/A               $250               $500               $750
2...........................................  25%-<50%......................               $250                500                750              1,000
3...........................................  50% or more...................                500                750              1,000              2,000
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[[Page 1417]]

    All incidents for a calendar month will be assessed at the highest 
level rate that any incident in that month achieved and at the highest 
dollar amount based on the number of days.\19\ As described above, ADF 
Trading Centers submit separate volume projections for quote, media 
trade, total trade (i.e., media and non-media), and order reporting 
activity. These projections are broken out by NMS data plan, so the ADF 
Trading Center will submit separate projections in these categories for 
UTP Securities volume and for CTA Securities volume.\20\ For purposes 
of calculating the Excess Fee, accruals of incidents apply separately 
for quote, trade and order reporting activity and for each NMS data 
plan to determine whether multiple incidents result in Category 1, 2, 
or 3 level fees.\21\
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    \19\ For example, if in one month an ADF Trading Center has one 
Level 1 incident, one Level 2 incident, and one Level 3 incident in 
the same category, all three incidents will be treated as Level 3 
incidents, and a $750 fee would apply.
    In this and the following examples, each incident refers to a 
discrete time when the ADF Trading Center exceeded its capacity. In 
this example, three different incidents are treated as three days. 
Since one of these incidents was a Level 3 incident, the fee to be 
assessed would be for three days at Level 3, or $750.
    \20\ For purposes of calculating the Excess and Shortfall 
Capacity Usage Fees, the CTA and CQ Plans will both be considered 
for purposes of CTA Securities volume.
    \21\ For example, if in one month an ADF Trading Center has one 
Level 1 incident in UTP Securities for trade report volume, two 
Level 2 incidents in CTA Securities for quote volume, and three 
Level 3 incidents in CTA Securities for order report volume, there 
would be six total incidents carrying two different fees. One fee of 
$250 would be levied for the two Level 2 incidents in CTA Securities 
for quote volume. Another fee of $750 would be levied for the three 
Level 3 incidents in CTA Securities for order report volume. There 
would be no fee for the one Level 1 incident in UTP Securities for 
trade report volume as it is not applicable according to the fee 
schedule.
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    The Plan provides that, in assessing the Excess Fee, FINRA will (1) 
use its own metrics to determine if an ADF Trading Center has exceeded 
its Certified Capacity; (2) notify each ADF Trading Center as soon as 
possible after it has exceeded its Certified Capacity; and (3) notify 
each ADF Trading Center when it has incurred an Excess Fee. Any Excess 
Fee incurred during a month will appear on that month's invoice.
    As set forth in the Plan, FINRA will not assess the Excess Fee for 
the first quarter during which an ADF Trading Center begins operating 
on the ADF. If an ADF Trading Center begins operations mid-quarter, 
FINRA will waive the Excess Fee only for the remainder of that quarter.
Shortfall Fees
    If an ADF Trading Center does not achieve certain thresholds of 
both their Projected Average Transaction Volumes and their Certified 
Peak Transaction Volume in one or more categories on one or more days 
in a given calendar month, the Plan sets forth the following Shortfall 
Fees that will apply:
    For Projected Average Transaction Volume:

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                    Level                          Percentage shortfall            1-2 days           3-5 days          6-10 days           >10 days
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1...........................................  10-<15%.......................                N/A               $125               $250               $375
2...........................................  15%-<25%......................               $125                250                375                500
3...........................................  25% or more...................                250                375                500               1000
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    For Certified Peak Transaction Volume:

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                    Level                          Percentage shortfall            1-2 days           3-5 days          6-10 days           >10 days
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1...........................................  50-<60%.......................                N/A               $125               $250               $375
2...........................................  60%-<75%......................               $125                250                375                500
3...........................................  75% or more...................                250                375                500               1000
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    All incidents for a calendar month will be assessed at the highest 
level rate that any incident in that month achieved and at the highest 
dollar amount based on the number of days.\22\ As described above, ADF 
Trading Centers submit separate volume projections for quote, media 
trade, total (media and non-media) trade, and order reporting. These 
projections are broken out by NMS data plan, so the ADF Trading Center 
will submit separate projections for UTP Securities volume and for CTA 
Securities volume. For purposes of calculating Shortfall Fees, accruals 
of incidents apply separately for quote, total trade, and order 
reporting activity and for each NMS data plan to determine whether 
multiple incidents result in Category 1, 2, or 3 level fees.\23\
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    \22\ For example, if in one month an ADF Trading Center has one 
Level 1 incident, one Level 2 incident, and one Level 3 incident in 
the same category, all three incidents will be treated as Level 3 
incidents, and a $375 fee would apply.
    \23\ For example, if in one month an ADF Trading Center has one 
Level 1 incident in UTP Securities for trade report volume, two 
Level 2 incidents in CTA Securities for quote volume, and three 
Level 3 incidents in CTA Securities for order report volume, there 
would be six total incidents carrying two different fees. One fee of 
$125 would be levied for the two Level 2 incidents in CTA Securities 
for quote volume. Another fee of $375 would be levied for the three 
Level 3 incidents in CTA Securities for order report volume. There 
would be no fee for the one Level 1 incident in UTP Securities for 
trade report volume as it is not applicable according to the fee 
schedule. These fees would be assessed for shortfalls for both 
Projected Average Transaction Volume and Certified Peak Transaction 
Volume.
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    In assessing Shortfall Fees, FINRA will (1) use its own metrics to 
determine if an ADF Trading Center has fallen below the minimum 
threshold of activity; (2) provide weekly updates to each ADF Trading 
Center on their capacity usage; and (3) notify each ADF Trading Center 
when it has incurred a Shortfall Fee. Any Shortfall Fees incurred 
during a month will appear on that month's invoice.
    As set forth in the Plan, FINRA will not assess the Shortfall Fee 
for the first quarter during which an ADF Trading Center begins 
operating on the ADF. If an ADF Trading Center begins operations mid-
quarter, FINRA will waive the Shortfall Fee only for the remainder of 
that quarter.
SIP NMS Capacity Penalties
    In addition to making sure that the ADF platform has sufficient 
infrastructure capacity to handle an ADF Trading Center's message 
traffic, the Plan provides that FINRA is also responsible for 
purchasing appropriate levels of capacity in accordance with the NMS 
data plans. FINRA makes the capacity purchases based on the needs

[[Page 1418]]

and projections of the ADF Trading Center. FINRA will pass through any 
penalties incurred (under the SIP plans) and allocate them according to 
the ADF Trading Center that exceeds its projected message traffic. Each 
ADF Trading Center will be invoiced for its capacity penalties once 
FINRA has received its invoice from the SIP(s). In assessing SIP 
capacity penalties, FINRA will (1) use the SIP's metrics to determine 
if a penalty has been incurred and will use its own metrics to allocate 
the penalty to the appropriate ADF Trading Centers (in the event that 
more than one ADF Trading Center has exceeded its projections); and (2) 
notify each ADF Trading Center as soon as possible after it has 
exceeded its projections.
    As set forth in the Plan, FINRA will not assess any SIP penalties 
for the first quarter during which an ADF Trading Center begins 
operating on the ADF if it exceeds its projected message traffic during 
this time. If an ADF Trading Center begins operations mid-quarter, 
FINRA will waive any SIP capacity penalties only for the remainder of 
that quarter.
    FINRA is proposing to codify the Excess Fees set forth in the Plan 
as new FINRA Rule 7581, and the Shortfall Fees as new FINRA Rule 7582. 
FINRA also proposes to codify the provision in the Plan providing for 
the pass-through of any SIP penalties as new FINRA Rule 7583.\24\
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    \24\ FINRA notes that it has submitted proposed rule change SR-
FINRA-2013-053, which would, among other things, re-number Rule 7540 
through Rule 7570. See Securities Exchange Act Release No. 71147 
(December 19, 2013). FINRA will amend this filing and/or SR-FINRA-
2013-053, as necessary, to reflect Commission approval of either of 
the proposed rule changes.
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Session Terminations
    To the extent that an ADF Trading Center's data usage, in the sole 
discretion of FINRA staff, materially exceeds the ADF Trading Center's 
Certified Capacity, the Plan provides that FINRA Product Management may 
incrementally reduce the ADF Trading Center's data port sessions to 
ensure that data levels stay at or below reasonable levels. Such 
termination may occur on an intra-day basis and will be proportionate 
to the extent to which the data overage threatens the ADF system's 
stability and/or the ability of FINRA to meet its regulatory 
obligations with respect to the operation of the ADF.
ADF Certification
    As noted above, an ADF Trading Center also must execute and comply 
with a Certification, which certifies the ADF Trading Center's 
compliance efforts with its obligations under Regulation NMS.\25\ FINRA 
is proposing to amend the Certification to add an additional 
certification item; specifically, an acknowledgement that ADF Trading 
Centers must comply with the terms of the Plan with respect to the 
total volume of messages (quotations; trade reports; order reports) and 
peak transmission rates (in messages per second) that it will send to 
the ADF.
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    \25\ A copy of the Certification was previously filed with the 
Commission in 2006. See Securities Exchange Act Release No. 54277 
(August 4, 2006), 71 FR 46527 (August 14, 2006) (Notice of filing of 
SR-NASD-2006-091). FINRA subsequently submitted a revised 
Certification as part of Amendment No. 3 to that filing. See 
Securities Exchange Act Release No. 54537 (September 28, 2006), 71 
FR 59173 (October 6, 2006) (Order approving SR-NASD-2006-091). In 
2009, FINRA filed a revised version of the Certification as part of 
a proposed rule change. See SR-FINRA-2009-069 (October 14, 2009).
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    FINRA is also making other minor changes to the Certification. 
Specifically, for purposes in Item 10 of requiring that an ADF Trading 
Center provide sufficient public notice prior to displaying quotations 
through the ADF, FINRA is revising the means through which an ADF 
Trading Center may provide the requisite information to allow for 
reasonable means such as ADF Trading Center press releases, the FINRA 
Web site, and through other FINRA-sponsored information publication 
channels. FINRA also proposes to clarify that the information to be 
provided pursuant to this Item consists of relevant connectivity and 
access specifications. FINRA also proposes to delete the parenthetical 
language in Item 11 to better clarify the scope of that provision, 
which addresses instances where an ADF Trading Center ceases quoting 
and order reporting on the same day. FINRA also proposes to delete a 
reference in Item 4 to ``other ADF Trading Centers'', as that reference 
is duplicative of the reference in that Item to ``other FINRA 
members,'' as ADF Trading Centers are, by definition, FINRA members. 
FINRA is also changing obsolete references and provisions, including 
replacing references to ``NASD'' with ``FINRA''; changing references 
from ``ADF Operations'' to ``FINRA Market Operations,'' changing a 
reference from TRACS to the ADF, and deleting a provision relating to 
ADF Trading Centers that display quotations prior to the implementation 
of Regulation NMS that also seek to display quotations following the 
implementation of Regulation NMS. FINRA also proposes to make minor 
grammatical and stylistic changes, including changing ``Web site'' to 
``Web site'', changing ``with the respect'' to ``with respect'' in Item 
13, and denoting that certain rule references are to SEC rules. 
Finally, FINRA also proposes to add a signature block to the bottom of 
the Certification.
    The proposed rule change will be effective upon Commission 
approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\26\ which requires, among 
other things, 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, and Section 15A(b)(5) of the Act,\27\ which requires, 
among other things, that FINRA rules provide for the equitable 
allocation of reasonable dues, fees and other charges among members and 
issuers and other persons using any facility or system that FINRA 
operates or controls, and Section 15A(b)(9) of the Act,\28\ which 
requires that FINRA rules not impose any burden on competition that is 
not necessary or appropriate.
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    \26\ 15 U.S.C. 78o-3(b)(6).
    \27\ 15 U.S.C. 78o-3(b)(5).
    \28\ 15 U.S.C. 78o-3(b)(9).
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    FINRA believes that the Plan, and the proposed amendment to the 
Certification, are consistent with the Act because they provide an 
objective and transparent process for administering the capacity usage 
of the ADF in a manner that helps ensure that FINRA is able to maintain 
a high level of operability for the ADF, thereby meeting its regulatory 
obligations, while enhancing FINRA's ability to submit accurate volume 
projections to the consolidated data plans.
    Specifically, the Plan provides a timeframe by which ADF Trading 
Centers submit initial and final volume projections for the next two 
calendar quarters, with final volume projections tested and certified 
by FINRA in the event of a capacity upgrade. The Plan also provides ADF 
Trading Centers with the ability to increase and decrease their 
capacity projections for the second quarter in the event that their 
actual capacity usage deviates from their projected capacity usage. The 
Plan also sets forth fees for excess capacity usage and shortfall 
capacity usage, and provides that FINRA will pass through any penalties 
incurred under the NMS data plans, and will allocate those penalties 
among the ADF Trading Centers that exceed their projected message 
traffic. Finally, ADF Trading Centers must sign the Certification,

[[Page 1419]]

which requires the ADF Trading Center to certify that it will comply 
with the requirements of the Plan. By requiring that ADF Trading 
Centers submit reasonable volume projections for quoting and trading on 
the ADF, and assessing fees for certain excess or shortfall capacity 
usage, FINRA believes the Plan will enhance its ability to ensure that 
the ADF has sufficient capacity to handle the volume of quote, order, 
and trade data submitted to the ADF while also avoiding the need for 
FINRA to expend unnecessary resources to maintain data capacity that 
will not be used.
    The Plan also contains provisions that enable FINRA to meet its 
regulatory obligations to maintain a high level of operability for the 
ADF. For example, the Plan allows FINRA to make mid-quarter 
extraordinary system upgrades, and assess ADF Trading Centers for those 
costs accordingly, in the event that the ADF Trading Center's volume 
overrun threatens FINRA's ability to meet its regulatory obligations. 
The Plan also allows FINRA to incrementally terminate an ADF Trading 
Center's data port sessions in the event that the ADF Trading Center's 
data usage materially exceeds the ADF Trading Center's Certified 
Capacity, to the extent such overage threatens the ADF system's 
stability or the ability of FINRA to meet its regulatory obligations 
with respect to the operation of the ADF.
    Similarly, FINRA believes that the new requirement in the 
Certification that an ADF Trading Center certify that it will comply 
with the terms of the Plan will facilitate FINRA's ability to 
administer the ADF in a manner consistent with its regulatory 
obligations. The change to the Certification relating to the manner in 
which an ADF Trading Center will provide public notice of certain 
information will increase the means through which such notice may be 
provided, potentially reaching more market participants. FINRA believes 
that the remaining changes to the Certification will result in a more 
current, and therefore more accurate, document.
    With respect to the proposed Excess and Shortfall Fees, FINRA 
believes such fees provide for the equitable allocation of fees and 
other charges among ADF Trading Centers, and do not impose a burden on 
competition that it is not necessary or appropriate. FINRA notes that 
the methodology for calculating both the Excess and Shortfall Fees will 
apply equally to all ADF Trading Centers. Moreover, FINRA believes that 
the concept of an Excess Fee is reasonable and appropriate given the 
potential consequences of overrunning volume projections (e.g., the ADF 
is unable to process the message traffic and FINRA could incur 
increased costs by purchasing additional capacity to support the 
increased message traffic to the NMS data plans). FINRA also believes 
that the concept of the Shortfall Fee is reasonable and appropriate, as 
it provides incentives for ADF Trading Centers to furnish FINRA with 
meaningful capacity projections and minimizes the likelihood of FINRA 
``overbuilding'' capacity in response to unreasonably high and 
unrealistic capacity projections.
    FINRA also believes that it is reasonable and appropriate to assess 
the Excess and Shortfall Fees on quote, trade and order reporting 
activity. FINRA proposes to assess the Excess and Shortfall Fees both 
for quote and trade reporting activity because FINRA pays money under 
both the CTA/CQ and the UTP Plans for quote and trade reporting \29\ 
and, in the case of the Excess Fee, may be assessed a penalty under the 
CTA/CQ Plans if it exceeds its projections for either quote or trading 
activity. Although FINRA does not purchase capacity from the SIPs for 
purposes of order reporting, FINRA does incur costs in purchasing the 
necessary hardware and software to supporting the intake and storage of 
such information.
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    \29\ See supra note 17.
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    FINRA also believes that the methodology for assessing the Excess 
and Shortfall Fees is consistent with the Act. Similar to the CTA Plan, 
FINRA will calculate the Excess Fee by evaluating whether peak message 
volume in the three message categories (quotes, trade reporting, and 
order reporting) has exceeded its Certified Peak Transaction Volume, 
with the amount of the Excess Fee determined by the extent and duration 
of the ADF Trading Center's excess usage.\30\ As such, an ADF Trading 
Center that exceeds its Certified Peak Transaction Volume to a lesser 
extent or for a shorter duration than another ADF Trading Center will 
pay a proportionately lower Excess Fee. With respect to the Shortfall 
Fee, FINRA will calculate such fees by evaluating whether the ADF 
Trading Center's Projected Average Transaction Volumes and Certified 
Peak Transaction Volumes in the three message categories (quotes, trade 
reporting, and order reporting) have met certain thresholds.\31\ As 
such, an ADF Trading Center that does not meet its Projected Average 
Transaction Volumes and Certified Peak Transaction Volumes to a lesser 
extent or for a shorter duration than another ADF Trading Center will 
pay a proportionately lower Shortfall Fee. FINRA believes this 
methodology for imposing such fees provides for the equitable 
allocation of fees and other charges among ADF Trading Centers.
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    \30\ FINRA proposes a methodology for calculating Excess Fees 
that is similar to the methodology for assessing excess fees in the 
CTA Plan, with slight differences. For example, for purposes of 
assessing its excess usage fee, the CTA Plan measures peak messages 
on a one-message-per-second basis measured over five minutes, 
whereas FINRA proposes to measure peak messages for purposes of the 
Excess Fees on a daily basis. See Exhibit A to CTA Plan, supra note 
10. Both Plans measure the duration of a participant's excessive 
usage in assessing its excess fee, but FINRA examines the percentage 
by which the ADF Trading Center has exceeded its projections instead 
of in total. Id.
    \31\ FINRA notes that an ADF Trading Center may incur a 
Shortfall Fee based on its Projected Average Transaction Volume if 
its actual volumes for quote, trade and order reporting are no less 
than 10%-<15% below its Projected Average Transaction Volume, while 
it may incur a Shortfall Fee based on its Certified Peak Transaction 
Volume if its actual volumes for quote, trade and order reporting 
are no less than 50%-<60% below its Certified Peak Transaction 
Volume. FINRA is adopting a lower threshold for purposes of the 
Shortfall Fee based on Projected Average Transaction Volume because 
FINRA anticipates that an ADF Trading Center's actual daily volume 
should be closely in line with its projected average volume. In 
contrast, FINRA is adopting a higher threshold for purposes of the 
Shortfall Fee based on Certified Peak Transaction Volume because it 
anticipates that an ADF Trading Center may experience a greater 
variance between its actual daily volume and its projected peak 
volume.
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    FINRA also believes that the Excess Fees and Shortfall Fees are 
consistent with the Act because the methodology for assessing those 
fees will provide an element of certainty to ADF Trading Centers in 
calculating their potential Excess and Shortfall Fees. Excess and 
Capacity Fees will be charged for each message category (quotes, trade 
reporting, and order reporting) for both the CTA/CQ and UTP Plans. All 
incidents in the same category (e.g., trade reporting) will be assessed 
at the highest level rate that any incident in that category achieved 
in that month, and at the highest dollar amount based on the number of 
days. Accruals of incidents will apply separately for the three message 
categories, and for the CTA/CQ and UTP plans. As such, the maximum 
Excess Fee that an ADF Trading Center could be charged in any given 
calendar month would be $12,000 (3 categories of messages x 2 plans x 
$2,000 maximum day/level fee). Using the same calculation, the maximum 
Shortfall Fee that an ADF Trading Center could be charged in any given 
calendar month would be $12,000 (3 categories of messages x 2 plans x 2 
Shortfall Fees x $1,000 maximum day/level fee).
    FINRA also notes that it will not assess the Excess or Shortfall 
Fees on an

[[Page 1420]]

ADF Trading Center during its first quarter of operations on the ADF or 
portion thereof, and will also not assess any SIP penalties on an ADF 
Trading Center that exceeds its projected message traffic during this 
time. FINRA believes these provisions are consistent with the Act 
because they will provide a new ADF Trading Center with the opportunity 
to acquire data on its quote, order and trade reporting activity on the 
ADF prior to making capacity projections to which the fees and SIP 
penalties will apply.

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. FINRA notes that the Plan is 
designed to assist FINRA in meeting its regulatory obligations and 
maintaining the stability of the ADF while enhancing FINRA's ability to 
submit accurate volume projections to the consolidated data plans and 
minimizing the need for FINRA to expend unnecessary resources to 
maintain data capacity that will not be used. Given that the terms of 
the Plan, including the Excess and Shortfall Fees, are reasonably 
designed, in part, to assist FINRA in minimizing unnecessary 
expenditures in connection with ADF data capacity, FINRA does not 
believe that the Plan imposes an undue burden on competition on 
potential ADF Trading Centers or other FINRA members. In this regard, 
FINRA also notes that the proposed change would apply only to those 
members that choose to become ADF Trading Centers and use the ADF, and 
that the terms of the Plan, including the Excess and Shortfall Fees, 
would not apply to members that are not ADF Trading Centers. 
Additionally, following discussions with potential ADF Trading Centers, 
FINRA does not believe that the proposed rule change will impose a 
significant operational burden on such participants. Indeed, FINRA 
believes that certain aspects of the proposal, such as the methodology 
for assessing the Excess and Shortfall Fees, will provide ADF Trading 
Centers with an element of certainty in calculating the potential costs 
they might incur in connection with the ADF. In addition, while the 
Plan requires that ADF Trading Centers provide reasonable capacity 
estimates, it generally does not restrict ADF Trading Centers' ongoing 
activities if they exceed such estimates, except where the ADF system's 
stability or the ability of FINRA to meet its regulatory obligations 
with respect to the ADF are threatened.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

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 rule-comments@sec.gov. Please include 
File Number SR-FINRA-2013-054 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-2013-054. 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 such filing also will be available for inspection 
and copying at the principal offices 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 available publicly. All submissions 
should refer to File Number SR-FINRA-2013-054, and should be submitted 
on or before January 29, 2014.
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    \32\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-00068 Filed 1-7-14; 8:45 am]
BILLING CODE 8011-01-P


