
[Federal Register Volume 79, Number 25 (Thursday, February 6, 2014)]
[Notices]
[Pages 7245-7246]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-02503]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71457; File No. SR-FINRA-2013-052]


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

January 31, 2014.

I. Introduction

    On December 2, 2013, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to add a new entrant to the Alternative Display 
Facility (the ``Proposal''). The Proposal was published for comment in 
the Federal Register on December 17, 2013.\3\ The Commission received 
no comments on the Proposal. This order approves the proposed rule 
change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 71042 (December 11, 
2013), 78 FR 76341 (``Notice'').
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II. Description of the Proposed Rule Change

    The Alternative Display Facility (``ADF'') is a quotation 
collection and trade reporting facility that provides ADF Market 
Participants (i.e., ADF-registered market makers or electronic 
communications networks (``ECNs'')) \4\ the ability to post quotations, 
display orders and report transactions in NMS stocks \5\ for submission 
to the Securities Information Processors for consolidation and 
dissemination to vendors and other market participants.\6\ The ADF is 
also designed to deliver real-time data to FINRA for regulatory 
purposes, including enforcement of requirements imposed by Regulation 
NMS.\7\
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    \4\ See FINRA Rule 6220(a)(3).
    \5\ See 17 CFR 242.600.
    \6\ See Notice, 78 FR at 76341.
    \7\ See 17 CFR 242.600.
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    In particular, Rule 610 of Regulation NMS \8\ requires that a 
trading center displaying quotations in an NMS stock through a self-
regulatory organization (``SRO'') display-only facility (such as the 
ADF) ``provide a level and cost of access to such quotations that is 
substantially equivalent to the level and cost of access to quotations 
displayed by SRO trading facilities in that stock.'' \9\ Rule 610 also 
requires that a trading center displaying quotations in an NMS stock 
through an SRO display-only facility not impose unfairly discriminatory 
terms that prevent or inhibit any person from obtaining efficient 
access to such quotations through a member, subscriber, or customer of 
the trading center.\10\ In articulating this standard, the Commission 
noted that the level and cost of access would ``encompass both (1) the 
policies, procedures, and standards that govern access to quotations of 
the trading center, and (2) the connectivity through which market 
participants can obtain access and the cost of such connectivity.'' 
\11\ The nature and cost of connections for market participants seeking 
to access the ADF participant's quotations would need to be 
substantially equivalent to the nature and cost of connections to SRO 
trading facilities.\12\
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    \8\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005) (``NMS Adopting Release'').
    \9\ 17 CFR 242.610(b)(1).
    \10\ 17 CFR 242.610(b)(2).
    \11\ NMS Adopting Release, 70 FR at 37549.
    \12\ Id.
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    In determining whether ADF participants have satisfied the access 
standards under Rule 610, Regulation NMS also requires FINRA to submit 
a proposed rule change under Section 19(b) of the Act in order to add a 
new ADF participant.\13\ Accordingly, FINRA is proposing to add 
LavaFlow (``FLOW'') as a new ADF Market Participant.\14\ FLOW provided 
FINRA with a summary of its policies and procedures regarding access to 
its quotations in an NMS stock displayed on the ADF, and a summary of 
its proposed fees for such access.\15\ According to FINRA, FLOW has 
proposed policies and procedures that are designed to ensure that the 
level of access to its quotations is substantially equivalent to the 
level of access to quotations displayed by SRO trading facilities, and 
to ensure that FLOW does not impose unfairly discriminatory terms that 
prevent or inhibit any person from obtaining efficient access to such 
quotations.\16\
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    \13\ See Notice, 78 FR at 76342.
    \14\ According to FINRA, there have been no ADF Market 
Participants since the second quarter of 2010. See id.
    \15\ See Notice, 78 FR at 76341.
    \16\ See Notice, 78 FR at 76342.
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    In particular, FINRA states that FLOW allows firms to access its 
liquidity in a variety of ways.\17\ FLOW also allows a subscriber to 
determine its level of connectivity, and does not have any tiers or 
rules regarding execution of orders based upon Market Participant 
Identification.\18\ Additionally, the FLOW matching engine does not 
give priority to any participant and is blind to a participant's 
identity, with the exception of orders using the anti-internalization 
feature.\19\ FLOW also maintains policies and procedures that require 
FLOW to respond to orders by non-subscribers as promptly as it responds 
to orders by subscribers, and allow for non-subscribers to be able to 
automatically execute against quotations displayed by the system.\20\
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    \17\ Firms that are FLOW subscribers may connect to FLOW via the 
FLOW Smart Order Router, or through the FLOW Gateway. Non-FLOW 
subscribers may connect via a third party vendor or connectivity 
provider, or through an exchange or a third-party broker-dealer 
subscriber. See id.
    \18\ See id.
    \19\ See id.
    \20\ See id.
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    In addition, FINRA states that FLOW has established, and regularly 
maintains, policies and procedures designed to maintain a linkage with 
at least one SRO trading facility, or SRO display-only facility 
(together, ``SRO Facility'').\21\ FLOW also maintains policies and 
procedures to transmit to such SRO Facility for display either the best 
priced order of those orders entered by OTC market makers and exchange 
market makers for those securities in which they make markets (or act 
as specialists) or the best priced orders entered by all ECN 
subscribers.\22\ Moreover, FLOW has represented to FINRA that it has 
policies and procedures to provide, to any broker or dealer, access to 
such orders that is functionally equivalent to the access that is 
generally available for quotes displayed by an SRO Facility, at a level 
and cost of access that is substantially similar to the level and cost 
of access to quotations displayed by SRO trading facilities in that 
stock.\23\ FLOW also has policies and procedures to conduct continuous 
monitoring of its connections with SRO Facilities and regular periodic 
system capacity reviews and tests to ensure future capacity and system 
integrity.\24\
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    \21\ See id.
    \22\ See id.
    \23\ See id.
    \24\ See id.
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    Furthermore, FINRA states that FLOW has policies and procedures 
designed to ensure that the cost of access to its quotations is 
substantially equivalent to the cost of access to quotations displayed 
by SRO trading facilities, and that FLOW will not charge a fee for 
accessing its quotations that exceeds the maximum fee permitted by Rule 
610 of Regulation NMS.\25\ Specifically, the cost of accessing the 
quotations of a trading center may involve several distinct

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costs, such as port fees,\26\ market data fees,\27\ general 
connectivity fees,\28\ and transaction fees,\29\ and FLOW proposes to 
assess costs in these respects that are substantially equivalent to the 
costs assessed by SRO trading facilities.\30\
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    \25\ See id.
    \26\ FLOW charges port fees to subscribers based upon the number 
of ports requested. Fee-eligible port connections may be charged 
$400 per connection, per month. In comparison, exchange port fees on 
average range from $100 to $1,000 per port, per month. See id.
    \27\ According to FINRA, FLOW has represented that it does not 
have any plans to charge its subscribers or non-subscribers for 
access to FLOW's market data. In comparison, market data fees vary 
by exchange, with some exchanges charging fees that range from under 
$100 per month to $750 to $2,500, and some exchanges charging $5,000 
for external distribution. See Notice, 78 FR at 76342-43.
    \28\ According to FINRA, FLOW is connected in its production 
environment to most outbound routers via intranets, cross connects 
and other direct connections. FLOW has also represented to FINRA 
that the cost to establish connections to FLOW for users of these 
services and for individual firms not using these services should be 
substantially the same as the costs to connect to an exchange. Both 
FLOW subscribers and non-subscribers are responsible for paying for 
their own external telecommunications costs to connect to FLOW. FLOW 
has represented to FINRA that such fees would be equivalent to the 
costs to connect to other trading center. See Notice, 78 FR at 
76342.
    \29\ Exchanges currently charge a range of other fees, including 
but not limited to membership fees, trading rights fees, risk 
gateway fees and other miscellaneous fees. According to FINRA, FLOW 
has represented that it does not assess similar charges. See Notice, 
78 FR at 76343.
    \30\ See Notice, 78 FR at 76342.
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    FINRA also notes that the FLOW fee structure is currently a maker-
taker model where FLOW pays a rebate for added executed liquidity and 
charges a fee for removed liquidity.\31\ FLOW charges a standard rate 
of $0.0030 to remove liquidity.\32\ Pricing is subject to change with 
advance notice provided to subscribers, and for non-subscribers, notice 
of a price change is published on the FLOW Web site in advance of such 
price change.\33\ In addition, FLOW charges subscribers and non-
subscribers the same fees for utilizing its system, and monitors the 
average fee charged to non-subscribers and compares it to the average 
fee paid by subscribers in order to ensure the prices are the same.\34\
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    \31\ See Notice, 78 FR at 76343.
    \32\ FLOW also pays a current base rebate of $0.0024 per share 
for added executed visible liquidity and $0.0010 per share of added 
executed non-visible liquidity. There are increased rebate 
incentives for FLOW subscribers that maintain higher volumes on a 
daily basis. See Notice, 78 FR at 76343, n. 20.
    \33\ See Notice, 78 FR at 76343.
    \34\ FINRA states that in the event that FLOW makes a material 
change to its policies and procedures governing access to FLOW, 
including a change to its fees, FLOW will submit to FINRA, and FINRA 
will post on its Web site, an amended description of FLOW's 
policies, procedures and fees governing access. See Notice, 78 FR at 
76343, n. 21.
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    Finally, FINRA states that all members in good standing of an SRO 
are eligible to become FLOW subscribers, and will be subject to credit 
limits set by FLOW.\35\
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    \35\ See Notice, 78 FR at 76343.
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III. Discussion and Commission Findings

    After carefully considering the Proposal, the Commission finds that 
the Proposal is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
association.\36\ In particular, the Commission finds that the proposed 
rule change is consistent with the provisions of Section 15A(b)(6) of 
the Act,\37\ which requires, in part, that FINRA rules must be designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, and, in general, to protect 
investors and the public interest.
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    \36\ In approving the proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \37\ 15 U.S.C. 78o-3(b)(6).
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    Specifically, the Commission believes that the Proposal is 
consistent with Section 15A(b)(6) of the Act because the fees and the 
policies and procedures governing access to protected quotations 
displayed on the ADF by FLOW as described above should provide market 
participants with fair and efficient access, and are not unfairly 
discriminatory such that they would prevent a market participant from 
obtaining efficient access to such quotations. All members in good 
standing of an SRO are eligible to become FLOW subscribers, and both 
subscribers and non-subscribers may access FLOW liquidity. FLOW offers 
both subscribers and non-subscribers multiple options to access FLOW 
liquidity. In addition, FLOW also has policies and procedures that 
require FLOW to respond to orders by non-subscribers as promptly as it 
responds to orders by subscribers, and allow for non-subscribers to be 
able to automatically execute against quotations displayed by the 
system. Finally, the Commission notes FINRA's representation that the 
proposed level and cost of access is, in relative terms, substantially 
equivalent to the level and cost of access provided by SRO trading 
facilities.\38\
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    \38\ See Notice at 78 FR at 76343 for a more detailed comparison 
of FLOW fees against those of other SROs.
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    For these reasons, the Commission believes that the proposed rule 
change is consistent with the Act.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\39\ that the proposed rule change (SR-FINRA-2013-052), is hereby 
approved.
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    \39\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
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    \40\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-02503 Filed 2-5-14; 8:45 am]
BILLING CODE 8011-01-P


