
[Federal Register Volume 81, Number 94 (Monday, May 16, 2016)]
[Notices]
[Pages 30395-30397]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-11409]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77798; File No. SR-FINRA-2016-010]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving a Proposed Rule Change To Adopt FINRA 
Rule 4554, Alternative Trading Systems--Recording and Reporting 
Requirements of Order and Execution Information for NMS Stocks

May 10, 2016.

I. Introduction

    On February 29, 2016, 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 require alternative trading systems (``ATSs'') 
to submit additional order information to FINRA. The proposed rule 
change was published for comment in the Federal Register on March 7, 
2016.\3\ The Commission received one comment letter on the proposal.\4\ 
On April 22, 2016, FINRA responded to the comment letter.\5\ 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. 77269 (March 1, 
2016), 81 FR 11851 (March 7, 2016) (``Notice''). On April 15, 2016, 
the Commission extended the time period for Commission action on the 
proposed rule change until June 3, 2016. See Securities Exchange Act 
Release No. 77635 (April 15, 2016), 81 FR 23536 (April 21, 2016).
    \4\ See Letter from Theodore R. Lazo, Managing Director and 
Associate General Counsel, Securities Industry and Financial Markets 
Association (``SIFMA''), dated April 1, 2016 (``SIFMA Letter'').
    \5\ See Letter from Andrew Madar, Associate General Counsel, 
FINRA, dated April 22, 2016 (``FINRA Response Letter'').
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II. Description of the Proposal

    FINRA proposed Rule 4554 to impose additional reporting 
requirements on trading venues that have filed a Form ATS with the 
Commission.\6\ The proposal is intended to enhance FINRA's order-based 
surveillance by requiring ATSs to report additional ATS-specific order 
information for NMS stocks.\7\ While ATSs submit order information to 
FINRA under the Order Audit Trail System (``OATS'') rules,\8\ there is 
order information not currently required to be reported to OATS, such 
as order re-pricing events and order display and reserve size 
information, which FINRA needs so that it can more fully reconstruct an 
ATS's order book and perform certain order-based surveillance.
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    \6\ See 17 CFR 242.300(a).
    \7\ See 17 CFR 242.600(b)(47).
    \8\ For example, upon receipt of an order, a member must report 
the number of shares to which the order applies, any limit or stop 
price prescribed in the order, special handling requests, and the 
time at which the order is received. See FINRA Rule 7440(b). Upon 
the modification or execution of an order, the member must report 
the time of modification or execution, whether the order was fully 
or partially executed, the number of unexecuted shares remaining if 
the order was only partially executed, and the execution price. See 
FINRA Rule 7440(d).
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    Specifically, proposed Rule 4554 sets forth four categories of 
reporting requirements: (1) Data to be reported by all ATSs at the time 
of order receipt; (2) data to be reported by all ATSs at the time of 
order execution; (3) data to be reported by ATSs that display 
subscriber orders; and (4) data to be reported by ATSs that are 
registered as ADF Trading Centers. The proposed requirements would 
apply to order and execution information for NMS stocks. ATSs would be 
required to report this information to FINRA consistent with current 
OATS reporting requirements.

Reporting Requirements for Receipt of Orders

    Proposed Rule 4554 would require, among other things, each ATS to 
indicate on all orders received whether it displays subscriber orders 
outside of the ATS (other than to ATS employees).\9\ This information 
will enable FINRA to distinguish between ATSs that display orders 
outside the ATS (``display ATS''), either to subscribers or through 
consolidated quote data, and ATSs that do not display orders outside 
the ATS (``non-display ATS'').\10\ A display ATS would also be required 
to indicate whether the order book is displayed to subscribers only, or 
distributed for publication in the consolidated quotation data.
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    \9\ The proposed requirements apply to any alternative trading 
system, as defined in Rule 300(a)(1) of SEC Regulation ATS, that has 
filed a Form ATS with the SEC and is subject to FINRA's OATS and 
equity trade reporting rules. See 17 CFR 242.300(a)(1).
    For purposes of this rule, the term ``order'' includes a broker-
dealer's proprietary quotes that are transmitted to an ATS.
    \10\ If an ATS meets the applicable volume thresholds, it is 
required to make its best bid and best offer available for 
publication in the consolidated quotation data. See 17 CFR 
242.301(b)(3).
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    Each ATS would also be required to indicate whether it is an ADF 
Trading Center as defined in Rule 6220, whether a specific order can be 
routed away from the ATS for execution, and whether there are any 
counter-party restrictions on the order. ATSs would also be required to 
provide FINRA with a

[[Page 30396]]

unique identifier representing the specific order type.\11\ ATSs will 
be required to provide FINRA with a list of all of their order types 
twenty days before the order types become effective, and if the ATS 
makes any subsequent changes to its order types, twenty days before the 
changes become effective, which will enable FINRA to map the identifier 
to a specific order type.\12\
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    \11\ This requirement would not apply to market and limit orders 
that have no other handling instructions.
    \12\ FINRA will provide a deadline prior to the implementation 
date by which current ATSs must submit lists of their existing order 
types. See Notice at 11851.
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    An ATS also would be required to report, for all orders, the NBBO 
(or relevant reference price) in effect at the time of order receipt 
and the timestamp of when the ATS captured the effective NBBO (or 
relevant reference price); as part of this report, the ATS must 
identify the market data feed it used to obtain the NBBO (or relevant 
reference price). These two data elements will enable FINRA to 
ascertain if the NBBO changed between the time of order receipt and the 
time the ATS captured the effective NBBO.\13\ Finally, each ATS would 
be required to provide the sequence number assigned to the order event 
by the ATS's matching engine.
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    \13\ See Notice at 11852.
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Reporting Requirements for Execution of Orders

    The second category of proposed changes applies to all ATSs when 
reporting the execution of an order to OATS. Specifically, each ATS 
must record and report the NBBO (or relevant reference price) in effect 
at the time of order execution, and the timestamp of when the ATS 
captured the effective NBBO (or relevant reference price). An ATS must 
identify the market data feed used by the ATS to obtain the NBBO (or 
other reference price).\14\
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    \14\ If for any reason, the ATS uses a feed other than the one 
that was reported on its ATS data submission, the ATS must notify 
FINRA via email of the fact that an alternative source was used, 
identify the alternative source, and specify the date(s), time(s) 
and securities for which the alternative source was used.
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Reporting Requirements for Display ATSs

    The third category of changes applies only to display ATSs and 
requires that those ATSs report the following order receipt 
information: (1) Whether the order is hidden or displayable; (2) 
display quantity; (3) reserve quantity, if applicable; (4) displayed 
price; and (5) the price entered. If the matching engine re-prices a 
displayed order or changes the display quantity of a displayed order, 
the ATS must report the time of the modification and the applicable new 
display price or size. FINRA stated that it needs this information from 
display ATSs to have an accurate, time sequenced audit trail to 
reconstruct the displayed market and noted that the pricing and size 
changes are being displayed to others.\15\
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    \15\ See Notice at 11852.
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Reporting Requirements for ADF Trading Centers

    Finally, FINRA proposed to require ADF Trading Centers to report 
the quote identifier provided to the ADF if a change to the displayed 
size or price of an order resulted in a new quote being transmitted to 
the ADF. If an order held by the ADF Trading Center becomes associated 
with a quote identifier based on an action by the matching engine 
related to a different order(s), (e.g., another order is cancelled 
making the order being held the best priced order in the matching 
engine), the ADF Trading Center must provide FINRA the new quote 
identifier.

III. Comment Letter

    The Commission received one comment letter \16\ on the proposal and 
a response to the comment letter from FINRA.\17\ The commenter 
suggested that FINRA amend the proposal to eliminate the requirement 
for ATSs to submit NBBO timestamp information to OATS.\18\ The 
commenter sought clarification that the proposal does not require an 
ATS to report the time it actually received the NBBO, but would require 
the time the ATS's matching engine took the action to evaluate the NBBO 
after receiving or executing an order. According to the commenter, many 
ATS matching engines receive only the price changes in the NBBO, and 
not volume changes, to avoid unnecessary trading latency. Therefore, a 
comparison of the time the NBBO was received to the time of order 
receipt or execution could show significant time lag, which the 
commenter believes could give FINRA the impression that an ATS is not 
regularly updating its quotes.\19\ In addition, with regard to the 
proposed requirement to identify the market data feed used by the ATS 
to record the NBBO (or other reference price), the commenter believes 
that FINRA should specify a list of market data feed types that should 
be used to populate the field, and that the best approach would be to 
designate general categories, such as ``SIP,'' ``direct,'' ``hybrid,'' 
and ``third party vendor.'' \20\
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    \16\ See supra, note 4.
    \17\ See supra, note 5.
    \18\ See SIFMA Letter at 1.
    \19\ See id. at 2.
    \20\ See id.
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    In its response to these comments, FINRA clarified that an ATS 
would comply with this NBBO timestamp requirement by reporting the time 
the ATS captured the NBBO, and not the time the ATS actually received 
the NBBO. In regard to the requirement to identify the market data feed 
used by the ATS to record the NBBO (or other reference price), FINRA 
stated that it will consider the commenter's suggestion when developing 
the technical specifications to implement the proposal.\21\
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    \21\ See FINRA Response Letter at 3.
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    The commenter also suggested that FINRA eliminate the requirement 
to submit order type information to OATS and the corresponding 
requirement for ATSs to provide FINRA with advance notice of order 
types and changes.\22\ The commenter stated that because the Commission 
has proposed new requirements for ATSs that trade NMS stocks,\23\ 
including a requirement to provide advance notice of changes to order 
types, ``FINRA should not use this proposal to get ahead of the 
Commission's final action.'' \24\
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    \22\ See SIFMA Letter at 3.
    \23\ See Securities and Exchange Release No. 76474 (November 18, 
2015), 80 FR 80998 (December 28, 2015). The Commission's proposal, 
among other things, would require ATSs to provide advance notice of 
material changes to the operation of an ATS, including changes to 
order types.
    \24\ See SIFMA Letter at 3.
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    In its response to these comments, FINRA noted that the order type 
requirement set forth in its proposal is independent of the 
Commission's proposed action with respect to order types, and that 
FINRA has fully explained and justified its requirement in the 
proposal. FINRA stated that the reference to the Commission's proposed 
action was solely for background purposes. In addition, FINRA believes 
that the 20-day advance notice requirement is consistent with current 
reporting obligations under Regulation ATS and thus would not increase 
the reporting burden on ATSs.\25\
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    \25\ See FINRA Response Letter at 3.
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    Finally, the commenter requested clarification on technical 
reporting aspects of counter-party restrictions and sequence 
numbers.\26\ Specifically, the commenter requested that FINRA clarify 
if ATSs must report counter-party restrictions on a ``yes/no'' basis or 
if specific counter-party restrictions must be reported. In addition, 
the commenter requested that FINRA clarify if ATSs must report the 
sequence number a

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specific ATS's matching engine assigns, or if all ATSs must adopt a 
uniform method of assigning sequence numbers.
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    \26\ See SIFMA Letter at 4.
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    In its response to these comments, FINRA clarified that the 
requirement to identify any counter-party restrictions is a yes or no 
response, and that the ATS would not be required to provide the 
specific counter-party restriction.\27\ In addition, FINRA clarified 
that it is not mandating a particular or uniform format by which ATSs 
must report sequence numbers, and that requiring an ATS to report the 
sequence number as it currently exists in the ATS will satisfy this 
requirement.\28\
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    \27\ See FINRA Response Letter at 4.
    \28\ See id. at 4-5.
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IV. Discussion and Commission Findings

    After careful review of the proposal, the comment letter received, 
and FINRA's response, the Commission finds that the proposed rule 
change 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 Section 15A(b)(6) of the Act,\30\ which 
requires, among other things, that FINRA rules be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, and in general, to protect investors and 
the public interest.
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    \29\ In approving this proposed rule change, the Commission has 
considered the proposed rule change's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \30\ 15 U.S.C. 78o-3(b)(6).
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    The Commission believes that the stated objectives of the 
proposal--to enhance FINRA's ability to surveil activity occurring 
within an ATS, and by extension FINRA's ability to surveil for 
potentially abusive algorithmic trading activity more generally across 
markets--are consistent with the purposes of the Act and with FINRA's 
responsibility to enforce compliance by its members with its rules and 
with the Act. The additional information provided by ATSs will better 
enable FINRA to reconstruct an ATS order book and more effectively 
conduct quotation-based surveillance. FINRA will integrate the 
additional information into its surveillance patterns to support the 
generation and analysis of alerts, which will increase FINRA's ability 
to detect a wide range of potential market-specific and cross-market 
manipulative activities.
    The Commission further believes that applying this proposal to NMS 
stocks is consistent with the Act because the potentially abusive 
trading activity that the proposal is designed to detect is of 
particular concern with respect to NMS stocks. The Commission believes 
that gaps in ATS order book data should be addressed in the near-term 
to ensure effective surveillance of ATSs and, by extension, abusive 
algorithmic trading activity more generally across markets. The 
Commission believes that FINRA adequately responded to the issues 
raised in the comment letter.
    Accordingly, for the reasons discussed above, the Commission finds 
that the proposed rule change is consistent with Section 15A of the 
Act.

V. Conclusion

    It Is Therefore Ordered pursuant to Section 19(b)(2) of the Act 
\31\ that the proposed rule change (SR-FINRA-2016-010) be and hereby is 
approved.
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    \31\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
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    \32\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-11409 Filed 5-13-16; 8:45 am]
 BILLING CODE 8011-01-P


