
[Federal Register Volume 79, Number 21 (Friday, January 31, 2014)]
[Notices]
[Pages 5472-5476]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-01967]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71407; File Nos. SR-FINRA-2013-031]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving the Proposed Rule Change Relating to 
Participation on the Alternative Display Facility

January 27, 2014.

I. Introduction

    On July 18, 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 amend FINRA Rules 6271 and 6272 regarding the 
requirements for members seeking registration as FINRA Alternative 
Display Facility (``ADF'') Market Participants (the ``Proposal'').
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The Proposal was published for comment in the Federal Register on 
August 1, 2013.\3\ The Commission received three comment letters on the 
Proposal.\4\ FINRA responded to each of the three comment letters 
individually.\5\ On September 10, 2013, the Commission extended the 
time period in which to either approve, disapprove, or to institute 
proceedings to determine whether to approve or disapprove the Proposal, 
to October 30, 2013.\6\ On October 30, 2013, the Commission instituted 
proceedings to determine whether to approve or disapprove the 
Proposal.\7\ This order approves the proposed rule change.
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    \3\ See Securities Exchange Act Release No. 70048 (July 26, 
2013), 78 FR 46652 (``Notice'').
    \4\ See Letter to Elizabeth M. Murphy, Secretary, Commission, 
from David Harris, Chairman and CEO, National Stock Exchange, Inc., 
dated September 9, 2013 (``NSX Letter''), letter to Elizabeth M. 
Murphy, Secretary, Commission, from David Harris, Chairman and CEO, 
National Stock Exchange, Inc., dated November 26, 2013 (``NSX Letter 
II''), and letter to Elizabeth M. Murphy, Secretary, Commission, 
from Janet McGinness, Executive Vice President and Corporate 
Secretary, General Counsel, NYSE Markets, dated January 7, 2014 
(``NYSE Letter'').
    \5\ See Letter to Elizabeth M. Murphy, Secretary, Commission, 
from Stephanie M. Dumont, Senior Vice President and Director of 
Capital Markets Policy, FINRA, dated October 25, 2013 (``FINRA 
Response''); Letter to Elizabeth M. Murphy, Secretary, Commission, 
from Stephanie M. Dumont, Senior Vice President and Director of 
Capital Markets Policy, FINRA, dated December 11, 2013 (``FINRA 
Response II''); and letter to Elizabeth M. Murphy, Secretary, 
Commission, from Stephanie M. Dumont, Senior Vice President and 
Director of Capital Markets Policy, FINRA, dated January 23, 2014 
(``FINRA Response III'').
    \6\ See Securities Exchange Act Release No. 70358, 78 FR 56967 
(September 16, 2013) (SR-FINRA-2013-031).
    \7\ See Securities Exchange Act Release No. 70776, 78 FR 66405 
(November 5, 2013) (SR-FINRA-2013-031).
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II. Background

Current ADF Registration Requirements

    The ADF is a quotation collection and trade reporting facility. 
According to FINRA, the ADF provides (1) ADF market participants (i.e., 
ADF-registered market makers (``ADF Market Makers'') or electronic 
communications networks (``ECNs'' and, with ``ADF Market Makers'', 
``ADF Market Participants'')) with the ability to post quotations or 
display orders in NMS stocks and (2) all member firms that participate 
in the ADF the ability to view quotations and report transactions in 
NMS stocks to the Securities Information Processors (``SIPs'') for 
consolidation and dissemination of data to vendors and ADF Market 
Participants.\8\ FINRA states that the ADF is also designed to deliver 
real-time data to FINRA for regulatory purposes, including enforcement 
of

[[Page 5473]]

requirements imposed by Regulation NMS.\9\
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    \8\ See Notice, 78 FR at 46652. The ADF was initially approved 
by the Commission on July, 24, 2002, in connection with the SEC's 
approval of SuperMontage and Nasdaq's registration as a national 
securities exchange. See Securities Exchange Act Release No. 46249 
(July 24, 2002), 67 FR 49822 (July 31, 2002); see also NASD Notice 
to Members 02-45 (August 2002). At that time, the ADF was approved 
for Nasdaq-listed securities for a nine-month pilot period to 
provide FINRA members with an alternative to the Nasdaq systems for 
reporting quotations and transactions in Nasdaq UTP Plan securities. 
On September 28, 2006, the SEC approved amendments to extend the 
ADF's functionality to all NMS stocks. See Securities Exchange Act 
Release No. 54537 (September 28, 2006), 71 FR 59173 (October 6, 
2006); see also NASD Notice to Members 06-67 (November 2006). The 
ADF was approved on a permanent basis for NMS stocks on January 26, 
2007. See Securities Exchange Act Release No. 55181 (January 26, 
2007), 72 FR 5093 (February 2, 2007).
    \9\ See 17 CFR 242.600.
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    FINRA rules provide that ADF Market Participants (i.e., either 
registered reporting ADF Market Makers or registered reporting ADF 
ECNs) \10\ must register as ADF market makers or ECNs before making a 
market or displaying orders on the ADF.\11\ Members are required to 
register as ADF Market Participants by applying 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.\12\ Before displaying quotations 
or orders on the ADF, ADF Trading Centers \13\ must also execute and 
comply with a Certification Record to certify the ADF Trading Center's 
compliance efforts with its obligations under Regulation NMS.\14\
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    \10\ See FINRA Rule 6220(a)(3), (12), (13).
    \11\ See FINRA Rule 6271.
    \12\ See FINRA Rule 6271(b).
    \13\ 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 FINRA Rule 6220(a)(4); see also 17 CFR 242.600(b)(87).
    \14\ See FINRA Rules 6220(a)(5), 6250(a)(7); NASD Notice to 
Members 06-67 (November 2006); see also SR-NASD-2006-091, Exhibit 3.
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Status of the ADF and Other FINRA Transparency Facilities

    According to FINRA, no member has registered with FINRA as a 
registered reporting ADF Market Maker since the ADF was launched in 
2002, and there have been four members that, at various points in time, 
were registered as Registered Reporting ADF ECNs.\15\ Since the second 
quarter of 2010, FINRA states that there have been no ADF Market 
Participants.\16\
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    \15\ See Notice, 78 FR at 46653.
    \16\ See id.
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    FINRA states that in 2011, it began the process of updating and 
migrating all of its transparency facilities (including the FINRA Trade 
Reporting Facilities, the Trade Reporting and Compliance Engine 
(``TRACE''), and the ADF) off of independent technology platforms and 
onto a new, single, updated technology platform known as the Multi 
Product Platform (``MPP'').\17\ FINRA originally scheduled the 
migration of the ADF onto MPP last, anticipating onboarding of a new 
ADF Market Participant no sooner than mid-2014.\18\
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    \17\ See id.
    \18\ See id. After the ADF is migrated to MPP, however, FINRA 
claims that it will only have the ADF base infrastructure completed. 
FINRA estimates that it would take at least an additional six months 
to complete further specific build-outs necessary to accommodate an 
individual ADF Market Participant seeking to quote on or report 
trades to the ADF. To determine the specific build-outs necessary to 
support a new ADF Market Participant, a member would need to provide 
FINRA with estimated volume projections of quotation and trade 
reporting activity that would flow through the ADF. See id.
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    According to FINRA, several of its members have discussed the 
possibility with FINRA of becoming an ADF Market Participant, and some 
have asked whether the migration of the ADF to MPP could be 
accelerated.\19\ FINRA states that such acceleration requires delaying 
the migration of other FINRA facilities onto MPP, reallocating 
resources, shifting scheduling, and implementing ADF-specific 
enhancements and hosting in the new technology environment--all of 
which, in turn, impose significant costs on FINRA, including prolonging 
the substantially higher expenses associated with the legacy OTC Equity 
Trade Reporting Facility (``ORF'') infrastructure (i.e., legacy ORF 
support costs are significantly higher than the expected costs of 
supporting the ORF in the new MPP technology environment).\20\ In 
addition to the costs of accelerating the migration of the ADF onto 
MPP, FINRA claims that bringing the new ADF base infrastructure live in 
the MPP technology environment to accommodate an ADF Market Participant 
will impose significant direct costs on FINRA related to building and 
testing the new ADF component on the MPP infrastructure and also 
related to paying for SIP capacity usage allocations as well as various 
related costs.\21\ FINRA estimates that the MPP component re-sequencing 
necessary to accommodate ADF acceleration and the costs associated with 
bringing the ADF base infrastructure live will conservatively cost 
FINRA in excess of $3 million.\22\
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    \19\ See id.
    \20\ See id.
    \21\ See id.
    \22\ See id.
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Proposed Amendments to the ADF Rules

    FINRA proposes to consolidate into a single rule (FINRA Rule 6271) 
the existing requirements that a member must meet to register as an ADF 
Market Participant and introduce new requirements that potential ADF 
Market Participants must meet to participate on the ADF. According to 
FINRA, these new requirements are intended to mitigate the substantial 
financial risks to FINRA of accelerating the migration of the ADF onto 
MPP or of building out the ADF base platform to accommodate an ADF 
Market Participant.\23\
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    \23\ See id. For example, FINRA Rule 6271 would specify that a 
member seeking registration as an ADF Market Participant must file 
an application with FINRA, execute the Certification Record, and 
execute a Participant Agreement. Rule 6271(a)(1) would require a 
potential ADF Market Participant to file an application with FINRA 
in which the member would provide various specifications and 
certifications.
    The first three requirements of the application, which specify 
whether the member is seeking registration in Nasdaq and/or CQS 
securities, certify the member's good standing with FINRA, and 
demonstrate compliance with the net capital and other financial 
responsibility provisions of the Act, are the same as the 
requirements currently in Rule 6271(b). The Proposal would also 
codify other current requirements into a single rule. See id., 78 FR 
at 46654.
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ADF Deposit Amount

    The Proposal would, in part, add several new requirements into the 
application that members must complete to become ADF Market 
Participants. The new provisions require that a member seeking to 
become an ADF Market Participant: (i) Provide FINRA with reasonable 
monthly projections of the volume of data that the member anticipates 
submitting to the ADF; (ii) agree to submit the ADF Deposit Amount \24\ 
in

[[Page 5474]]

five equal installments into an escrow account at a bank mutually 
acceptable to the member and FINRA on a timetable as agreed to by the 
member and FINRA (the ``ADF Escrow Account''); (iii) agree that failing 
to submit quotes and report trades to the ADF for a two-year period 
(the ``ADF Quoting Term'') will result in the forfeiture of some or all 
of the ADF Deposit Amount; (iv) agree that failing to submit 75% of the 
member's trade and quote volume in NMS stocks to the ADF (the ``ADF 
Quoting Requirement'') will result in the forfeiture of some or all of 
the ADF Deposit Amount; and (v) agree to the other ADF Deposit Terms 
set forth in the rule.
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    \24\ The Proposal requires potential ADF Market Participants to 
agree to submit an ``ADF Deposit Amount'' in five equal installments 
into an escrow account. The proposed rule change defines the ``ADF 
Deposit Amount'' as $500,000 if the member requests that FINRA 
accelerate the ADF migration or if the member begins quoting on or 
reporting trades to the ADF within 90 calendar days after an ADF 
Market Participant that requested acceleration of the ADF migration 
begins quoting on or reporting trades to the ADF. For all other ADF 
Participants, the ADF Deposit Amount is $250,000. FINRA claims that 
this is designed to ensure that applicable volume commitments are 
met.
    FINRA is proposing to establish the two separate levels of the 
ADF Deposit Amount to reflect the differing costs FINRA claims it 
will incur under either of two scenarios. Because FINRA states that 
it will incur significantly higher costs if the migration of the ADF 
is accelerated at a member's request, FINRA has proposed an ADF 
Deposit Amount of $500,000 should the member request such 
acceleration. Additionally, to ensure that ADF Market Participants 
benefitting from an acceleration of the ADF onto MPP are treated 
equally, FINRA proposes to charge $500,000 to any member that begins 
quoting on or reporting trades to the ADF within ninety (90) days 
after an existing ADF Market Participant that requested acceleration 
of the ADF migration begins quoting on or reporting trades to the 
ADF. According to FINRA, this amount, which, as noted above, FINRA 
claims is substantially lower than the actual costs FINRA will incur 
by amending the current MPP migration schedule reflects an 
appropriate balance between ensuring that FINRA is able to recover a 
portion of the costs associated with an accelerated migration while 
not representing a significant financial barrier to participation on 
the ADF, particularly since members can potentially recover 100% of 
the ADF Deposit Amount over the two-year term and up to 80% of the 
ADF Deposit Amount in the first quarter of their participation on 
the ADF through the credit structure for market data revenue 
described below. Moreover, FINRA believes that permitting potential 
participants to earn back the entire deposit amount is more 
equitable than charging potential ADF Market Participants a one-time 
payment without the ability to recover some, or all, of the amount. 
The Proposal reduces the ADF Deposit Amount to $250,000 if the 
member has not requested an accelerated migration or does not become 
an ADF Market Participant within 90 days after another ADF Market 
Participant that had requested acceleration (i.e., paid an escrow 
amount of $500,000) begins quoting on or reporting trades to the 
ADF. According to FINRA, the lower amount reflects the fact that the 
costs to FINRA are significantly reduced under these circumstances 
because the ADF base platform will have already been migrated to 
MPP. However, although reduced, FINRA anticipates such costs will 
still be significantly higher than the $250,000 deposit amount in 
such a scenario based on costs related to possible additional 
hardware and software deployments, paying for SIP capacity usage 
allocations, and costs related to general staff labor, support and 
testing. See Notice, 78 FR at 46654-55.
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    FINRA contends that these new provisions are designed to ensure 
that FINRA can recover a portion of the costs associated with 
accelerating the migration of the ADF to MPP and bringing a new ADF 
Market Participant onto the ADF if the ADF Market Participant fails to 
participate on the ADF as anticipated. FINRA also argues that certain 
provisions of the application are designed to (1) provide FINRA the 
information necessary to ensure the ADF can accommodate the volume of 
data the member anticipates submitting to the ADF and (2) establish the 
basis upon which FINRA will be safeguarded by ensuring that the 
potential ADF Market Participant will bear some of the financial 
responsibility should FINRA undertake the efforts and incur the costs 
necessary to bring the ADF Market Participant onto the ADF, only to 
have the ADF Market Participant fail to participate at all or at the 
agreed level.\25\
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    \25\ The Proposal includes several required terms for the 
handling of the ADF Deposit Amount (referred to as ``ADF Deposit 
Terms''), including the methods for ADF Market Participants to 
recover some or all of the ADF Deposit Amount as a result of meeting 
its participation commitments (or due to FINRA's inability to meet 
its obligations) and methods for FINRA to receive the funds if 
commitments are not met. The proposed rule change retains some 
flexibility in the precise terms of any agreements between FINRA and 
potential ADF Market Participants to ensure that any unique 
circumstances can be addressed by permitting de minimis additions or 
qualifications to the ADF Deposit Terms, provided both FINRA and the 
member agree to those additions or qualifications. See Notice, 78 FR 
at 46655.
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ADF Market Data Rebate

    The Proposal includes a means for ADF Market Participants to earn 
back the ADF Deposit Amount (the ``ADF Market Data Rebate''). 
Specifically, the Proposal provides that for every $1.00 received by 
FINRA from the National Market System (``NMS'') SIP data plans 
associated with ADF activity attributable, as determined in FINRA's 
sole discretion, to the member's trading activity on the ADF, the 
member shall receive $0.50 out of the ADF Escrow Account. Thus, an ADF 
Market Participant could recover an amount equal to one-half of the SIP 
market data revenue generated by the ADF Market Participant's trading 
activity on the ADF. The ADF Market Data Rebate would be paid on a 
quarterly basis after FINRA has received its quarterly disbursement 
from the NMS SIP data plans.\26\ According to FINRA, this provides for 
a reasonable opportunity for FINRA to recover some of its costs of re-
sequencing the MPP rollout by virtue of the SIP market data revenue 
split.
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    \26\ Charges or credits as a result of SIP audit recoveries, 
which typically are de minimis as compared to the overall revenue 
paid, would not be included in the calculation. See id.
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    In addition, the Proposal provides that the ADF Market Participant 
is only entitled to receive an amount up to 80% of the ADF Deposit 
Amount pursuant to this provision and is not entitled to the remaining 
20% of the ADF Deposit Amount until the end of the ADF Quoting Term, 
assuming its trading activity has earned the requisite market data 
revenue from the SIPs. To the extent that the ADF Market Participant 
opts to stop participating on the ADF before the end of the ADF Quoting 
Term or stop meeting its ADF Quoting Requirement before the end of the 
ADF Quoting Term (i.e., chooses to quote or trade through another 
trading venue), it would be free to do so but could potentially forfeit 
some or all of the remaining ADF Deposit Amount.\27\
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    \27\ See id. If FINRA does not make the ADF available within 
nine months of an ADF Market Participant's first deposit of the ADF 
Deposit Amount into the ADF Escrow Account, one-fifth of the ADF 
Deposit Amount will be released from such ADF Escrow Account to the 
ADF Market Participant. An additional one-fifth of the initial ADF 
Deposit Amount will be released to the ADF Market Participant every 
month thereafter that FINRA has not made the ADF available, until 
all funds have been released from such ADF Escrow Account.
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    The Proposal also includes certain provisions designed to protect 
FINRA if a member requests that the ADF be migrated to MPP on an 
accelerated basis or if FINRA undertakes efforts to build out the 
system to support the member, and in either instance, the member fails 
to participate.\28\ The proposed rule change provides that one-fifth of 
the ADF Deposit Amount shall be released to FINRA if, in any calendar 
month beginning with the fourth calendar month following certification 
of the ADF Market Participant to quote on or report trades to the ADF, 
the ADF Market Participant fails to submit 75% of the member's quoting 
and trade reporting activity to the ADF.
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    \28\ In addition, if a member is sold (other than a sale to an 
entity that would otherwise meet the FINRA qualifications as an ADF 
Market Participant), goes out of business, otherwise does not meet 
its obligations, or fails to complete the process for becoming an 
ADF Market Participant, the member will forfeit the ADF Deposit 
Amount, or any lesser amount remaining in the ADF Escrow Account, 
and all funds will be released from the ADF Escrow Account to FINRA. 
See id.
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    Finally, the proposed rule change would make clear that a member 
would become an ADF Market Participant only after (i) the member 
received a notice of approval from FINRA that its application was 
accepted, (ii) the member executed the Certification Record, and (iii) 
FINRA executed the Participant Agreement.

III. Discussion and Findings

    After carefully considering the Proposal, the comments submitted, 
and FINRA's responses to the comments, for the reasons discussed below 
the Commission finds that FINRA responded appropriately to the concerns 
raised and that the Proposal is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to a national 
securities association.\29\ In particular, the Commission finds that 
the proposed rule change is consistent with the provisions of (1) 
Section 15A(b)(6) of the Act,\30\ 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, (2) Section 
15A(b)(5) of the Act,\31\ which requires, among other

[[Page 5475]]

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 (3) Section 15A(b)(9) \32\ of the Act, which requires, in 
part, that FINRA rules do not impose any burden on competition not 
necessary or appropriate in furtherance of the purposes of this title.
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    \29\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \30\ 15 U.S.C. 78o-3(b)(6).
    \31\ 15 U.S.C. 78o-3(b)(5).
    \32\ 15 U.S.C. 78o-3(b)(9).
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    The Commission received two comment letters from the same commenter 
in response to the Proposal.\33\ The commenter, NSX, contends that the 
Proposal is inconsistent with Sections 15A(b)(5), (6), and (9) of the 
Act.\34\ NSX generally argues that FINRA has not demonstrated that: (1) 
the proposed ADF Deposit Amount and credit provisions are reasonable or 
equitably allocated, and (2) the proposed ADF Deposit Amount, the 
accompanying credit provisions, and the proposed 75% quoting 
requirement impose an inappropriate burden on competition. The 
Commission also received a comment letter from NYSE Euronext (``NYSE'') 
that argues that the Proposal read in conjunction with FINRA's existing 
ADF fees, is not consistent with Section 15A(b)(9) of the Act.\35\
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    \33\ See NSX Letter and NSX Letter II.
    \34\ See NSX Letter at 1.
    \35\ NYSE Letter at 1.
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    Section 15A(b)(5) of the Act mandates that ``[t]he rules of the 
association provide for the equitable allocation of reasonable dues, 
fees, and other charges among members and issuers and other persons 
using any facility or system which the association operates or 
controls.'' \36\ NSX argues that that FINRA ``fails to meet its burden 
of adequately articulating and justifying the reasonableness of the ADF 
Participant fees.'' \37\ NSX questions whether it is consistent with 
the Act for FINRA to (1) charge the same ADF Deposit Amount regardless 
of a potential ADF Participant's use of the ADF and (2) offer the ADF 
at a cost which will be spread among all FINRA members and not just ADF 
Participants.\38\ NSX argues that charging the same ADF Deposit Amount 
for all ADF Market Participants ``appears to discriminate against 
smaller ADF Market Participants and may pose an unreasonable barrier of 
entry for them. . .'' \39\ NSX also contends that reasonableness of the 
ADF Deposit Amount and ADF Market Data Rebate can only be determined 
after analyzing total cost, projected volume, source of funds, and 
future fees. Accordingly, NSX argues, the Proposal is deficient as it 
does not disclose the specific percentage that the Deposit Amount is of 
total development costs.\40\ In its second letter, NSX reiterates these 
concerns, stating that the proposal fails to disclose the specific 
percentage of total development costs that the Proposed Participant Fee 
represents and how FINRA intends to cover the remaining development 
costs, and noting that the Proposal contains ``little to no information 
on the ADF operational costs and how FINRA intends to cover those 
associated costs.'' \41\
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    \36\ 15 U.S.C. 78o-3(b)(5).
    \37\ NSX Letter at 1.
    \38\ Id. at 3-4.
    \39\ NSX Letter II at 6.
    \40\ See NSX Letter at 2.
    \41\ NSX Letter II at 6.
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    In response, FINRA contends that it has provided enough information 
to demonstrate that the ADF Deposit Amount is reasonable.\42\ In 
particular, FINRA included detailed cost estimates regarding the 
accelerated ADF migration. In addition, FINRA notes in establishing the 
ADF Deposit Amount it considered its ability to recover costs and 
whether the ADF Deposit Amount would preclude potential ADF Market 
Participants from using the ADF.\43\ FINRA believes that the Deposit 
Amounts are reasonable because they represent a portion of the costs 
FINRA will incur and are recoverable wholly or in part by the ADF 
Market Participant.\44\ Finally, FINRA disputes NSX's argument that it 
is required to include a forecast of all future fees as part of its 
analysis of the reasonableness of the fees contemplated in the 
Proposal.\45\ FINRA also believes the additional information requested 
by NSX would be speculative and of limited utility.\46\
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    \42\ See FINRA Response at 2 and FINRA Response II at 4.
    \43\ See FINRA Response at 3-4.
    \44\ FINRA Response II at 5.
    \45\ Id. at 5 and FINRA Letter at 6. NSX also argues that the 
Proposal is not consistent with Section 15A(b)(6) of the Act, which 
provides that ``the rules of an association are designed . . . to 
protect investors and the public interest; and are not designed to 
permit unfair discrimination ``between customers, issuers, brokers, 
or dealers.'' 15 U.S.C. 78o-3(b)(5). Specifically, NSX claims that 
the Proposal may raise issues with respect to an ADF Participant's 
ability to comply with its best execution obligation. See NSX 
Letter, at 5. FINRA responds that this concern is misplaced since 
the Quoting Requirement relates to posting of quotes and the 
reporting of trades, whereas best execution obligation implicates a 
broker-dealer's handling of customer orders for execution. See FINRA 
Response, at 6 n. 11.
    \46\ See FINRA Response at 5 and FINRA Response II at 5.
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    With regard to NSX's argument that the proposed ADF Deposit Amount 
does not take into account the ADF Market Participant's total quotation 
or trading volume, FINRA responds the fixed ADF Deposit Amount is not 
tied to the amount of usage since costs of on-boarding each participant 
are fixed and do not vary by ADF Market Participant.\47\ In addition, 
FINRA claims that the ADF Deposit Amount is designed to defray costs 
but not cover costs entirely. Imposing all costs only on ADF Market 
Participants, FINRA argues, would discourage new ADF Market 
Participants from joining the ADF and reduce potential ADF revenue 
thereby increasing ADF-related losses.\48\ Further, FINRA notes that, 
absent the Proposal, FINRA would incur all of the costs regarding the 
migration and operation of the ADF without the potential to offset such 
costs.\49\ Finally, FINRA argues that the ADF Deposit Amount reflects 
an ``appropriate balance between helping to defray the costs of 
migrating and operating the ADF while not making participation in the 
ADF cost-prohibitive'' that is reasonable in light of projected $3 
million total costs cited in its Proposal and an equitable allocation 
among ADF Participants and its member firms.\50\
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    \47\ See FINRA Response at 3 and FINRA Response II at 5.
    \48\ FINRA Response at 3-4.
    \49\ FINRA Response at 3 n. 5 and FINRA Response II at 5.
    \50\ See FINRA Response at 4.
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    The Commission does not believe, as NSX suggests, that FINRA has 
presented an insufficient basis to determine the reasonableness of the 
ADF Deposit Amount and Market Data Rebate. Neither does the Commission 
accept NSX's argument that FINRA is necessarily required to disclose 
the total development and operation costs, projected volume, source of 
funds used to fund the ADF and any future fees. The Commission, 
furthermore, does not agree with NSX's claim that the Proposal 
establishes an inequitable allocation of fees among its members. 
Rather, the Commission believes that, by requiring individual members 
to provide a portion of the specific costs that FINRA would incur to 
accommodate a member's request to either accelerate the migration of 
the ADF or otherwise use the ADF, the Deposit Amount is a reasonable 
and equitable allocation of costs among FINRA's members. In addition, 
the ADF Deposit Amount and Market Data Rebate provide a fair and 
equitable way for FINRA to recover costs associated with onboarding a 
new ADF Participant while allowing an ADF Participant to earn back its 
deposit.

[[Page 5476]]

    Section 15A(b)(9) of the Act provides that ``[t]he rules of the 
association do not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of this title.'' \51\ NSX 
argues that FINRA fails to adequately address whether the Proposal 
imposes a burden on competition for other self-regulatory organization 
(``SRO''s) such as NSX.\52\ According to NSX, the Proposal is an unfair 
subsidy of FINRA's trading facility and that by charging ``below cost 
or subsidized rates to ADF Market Participants, FINRA would have an 
unfair advantage against other exchanges that are offering competitive 
alternatives.''\53\ NSX argues that ADF users should be required to 
self-fund the ADF platform.\54\ In addition, NSX claims that the ADF 
Deposit Amount and the requirement to send at least 75% of quotes and 
trades to FINRA amount to an unprecedented burden on competition 
because the ADF Quoting Requirement would make it economically 
unfeasible for any other SRO that provides order delivery functionality 
to compete with FINRA.\55\
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    \51\ 15 U.S.C. 78o-3(b)(9).
    \52\ NSX Letter at 5.
    \53\ NSX Letter II at 3.
    \54\ Id. at 3-4.
    \55\ Id. at 4.
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    FINRA responds that NSX's assertion that FINRA is either 
subsidizing the operation of the ADF or operating at a loss and that 
this results in an unfair competitive advantage against exchanges 
attempting to offer order delivery alternatives to the ADF is 
misleading.\56\ FINRA states that the ADF Deposit Amount is not an 
unfair subsidy; rather it is designed to recoup expenses it incurs in 
connection with the addition of new ADF Market Participants and the ADF 
Migration.\57\ FINRA notes that the Proposal is ``intended to avoid the 
need for FINRA to subsidize all of the costs associated with'' the 
ADF.\58\ Moreover, FINRA notes that the ADF Quoting Requirement is not 
an unnecessary or appropriate burden on competition because it is not a 
requirement to use the ADF, and is only a means to earn back the ADF 
Deposit Amount.\59\ According to FINRA, therefore, meeting the ADF 
Quoting Requirement is voluntary and at the discretion of an ADF Market 
Participant.\60\
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    \56\ FINRA Response II at 2-3.
    \57\ See FINRA Response at 6 and FINRA Response II at 3.
    \58\ FINRA Response II at 3.
    \59\ FINRA Response at 6.
    \60\ Id. at 6-7 and FINRA Response II at 3.
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    The Commission does not believe that the Proposal constitutes an 
unnecessary or inappropriate burden on competition. In addition, the 
Commission does not agree with NSX's argument that the Quoting 
Requirement would make it economically unfeasible for any other SRO 
that provides order delivery functionality to compete. To the extent 
that ECNs choose to use the ADF Platform because the ADF offers better 
facilities and a more favorable price structure, such a result is not 
an unnecessary or inappropriate burden on competition.
    In its comment letter, NYSE suggests that the combination of 
FINRA's existing ADF fee schedule contained in Rule 7510--in which the 
Quotation Update Charge to be paid by an ADF Market Participant varies 
commensurate with the number of trades reported through the ADF by that 
ADF Market Participant--and the fees contained in the Proposal is 
inconsistent with Section 15A(b)(9) because they make it economically 
prohibitive for an ADF Participant to quote on the ADF but trade report 
elsewhere.\61\
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    \61\ NYSE Letter at 1-2.
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    FINRA responds by reiterating that the proposed ADF Deposit Amount 
is designed to reasonably and equitably allow FINRA to recoup costs 
related to the ADF migration and the addition of a new ADF Market 
Participant that the provision by which an ADF Market Participant may 
earn back some or all of its ADF Deposit Amount is designed to provide 
an incentive for an ADF Market Participant to remain active on the ADF 
and to utilize the ADF capacity that FINRA has incurred costs to 
provide.\62\ FINRA states that this, in turn, will reduce the 
likelihood that FINRA will incur unnecessary expenditures in connection 
with the ADF migration, and will increase the probability of FINRA 
recouping a reasonable amount of the costs involved with launching a 
new ADF Market Participant from that ADF Market Participant rather than 
recover those costs from fees paid by all FINRA members.\63\ FINRA 
believes the only new issue raised by NYSE relates to FINRA's existing 
quotation fee structure in Rule 7510(b) rather than the Proposal 
itself.\64\ As an initial matter, FINRA believes that such comments are 
not appropriately directed to this filing, as Rule 7510 has been 
previously filed and made effective under the Act.\65\ FINRA further 
argues that both the proposed and existing fee structure fairly impose 
costs on those members whose quotation and trading activity creates 
system capacity demands, as well as provide incentives to quote and 
trade report to the ADF, which also generates revenue for FINRA to 
support the costs of operating the ADF.\66\ FINRA believes that an ADF 
Market Participant currently would consider both its quoting and 
trading activity when determining its desired level of activity on the 
ADF, and the Proposal, pursuant to which an ADF Market Participant 
would ascertain its ability to earn back some or all of its ADF Deposit 
Amount, is consistent with this analysis.\67\ The Commission believes 
that FINRA has satisfied its burden to demonstrate that the Proposal is 
consistent with the Act.
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    \62\ FINRA Response III at 3.
    \63\ Id.
    \64\ Id.
    \65\ Id.
    \66\ Id.
    \67\ Id.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\68\ that the proposed rule change (SR-FINRA-2013-031), is hereby 
approved.
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    \68\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\69\
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    \69\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-01967 Filed 1-30-14; 8:45 am]
BILLING CODE 8011-01-P


