
[Federal Register Volume 81, Number 245 (Wednesday, December 21, 2016)]
[Notices]
[Pages 93720-93722]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-30689]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79570; File No. SR-FINRA-2016-045]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to Rule 4554 Reporting Requirements for 
Alternative Trading Systems

December 15, 2016.
    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 8, 2016, 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. FINRA has 
designated the proposed rule change as constituting a ``non-
controversial'' rule change under paragraph (f)(6) of Rule 19b-4 under 
the Act,\3\ which renders the proposal effective upon receipt of this 
filing by the Commission.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
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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 amend Rule 4554 to require alternative 
trading systems (``ATSs'') to submit additional order information to 
FINRA.
    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
    FINRA proposes to amend Rule 4554 (Alternative Trading Systems--
Recording and Reporting Requirements of Order and Execution Information 
for NMS Stocks) to require ATSs to provide additional order sequence 
information on reports submitted to the Order Audit Trail System 
(``OATS''). In May 2016, the SEC approved Rule 4554 to further enhance 
FINRA's ability to reconstruct an ATS's order book and better perform 
its order-based surveillance, which includes surveillance for layering, 
quote spoofing and mid-point pricing manipulation. To accomplish this, 
Rule 4554 requires ATSs to report order information for each order they 
receive in an NMS stock beyond that set forth in the OATS rules, such 
as order re-pricing events (e.g., changes to an order that is pegged to 
the National Best Bid or Offer (``NBBO'')) and order display and 
reserve size information.\4\ 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 specific to ATSs that are registered as 
ADF Trading Centers.
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    \4\ See Securities Exchange Act Release No. 77798 (May 10, 
2016), 81 FR 30395 (May 16, 2016) (SR-FINRA-2016-010). With the 
exception of the requirement for ATSs to report sequence numbers, 
Rule 4554 was implemented on November 7, 2016. See Regulatory Notice 
16-28 (August 2016). FINRA delayed the implementation for the 
requirement to report sequence numbers until the requirement could 
be extended to apply to all OATS reports. See Securities Exchange 
Act Release No. 79289 (November 10, 2016), 81 FR 81202 (November 17, 
2016) (Notice of Filing and Immediate Effectiveness of SR-FINRA-
2016-041).
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    Rule 4554(b) requires that all ATSs report eight categories of 
information at the time of order receipt, including the sequence number 
assigned to the order event by the ATS's matching engine.\5\

[[Page 93721]]

After further evaluation of the need for the sequence number in other 
order events, FINRA proposes to amend this requirement to require ATSs 
to report a sequence number for all OATS event types, not just for 
order receipt, including reports for the execution of an order or the 
routing of an order away from the ATS.\6\ FINRA is proposing to extend 
the requirement to report a sequence number beyond order receipt 
because, without a sequence number on all order events, FINRA is unable 
to properly sequence events when a single ATS MPID reports order events 
in the same symbol with identical timestamps.\7\ Requiring ATSs to 
report a sequence number for all OATS order events, rather than just 
order receipt, will further enable FINRA to properly sequence order 
events within an ATS, which will allow FINRA to more fully reconstruct 
an ATS's order book and better perform order-based surveillance, 
including surveillance for layering, quote spoofing and mid-point 
pricing manipulation.
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    \5\ Rule 4554(b)(8). Rule 4554(b) also requires all ATSs, at the 
time of order receipt, to report: (1) Whether the ATS displays 
subscriber orders outside of the ATS and, if the ATS displays 
subscriber orders outside of the ATS, whether subscriber orders are 
displayed to subscribers only, or are distributed for publication in 
the consolidated quotation data; (2) whether the ATS is an ADF 
Trading Center as defined in FINRA Rule 6220; (3) whether the order 
can be routed away from the ATS for execution; (4) whether there are 
any counter-party restrictions on the order; (5) a unique identifier 
representing the specific order type other than market and limit 
orders that have no other special handling instructions; (6) 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); and (7) the market data feed the 
ATS used to obtain the NBBO (or relevant reference price).
    \6\ FINRA is proposing to move the provision into a separate 
paragraph to reflect this change.
    \7\ The occurrence of identical timestamps in these 
circumstances is not infrequent. For example, on a recent reporting 
day, over 13% of ATS order events within a single ATS MPID and 
symbol contained an identical timestamp.
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    FINRA notes that the expansion of the requirement to report a 
sequence number with all order events mirrors the proposed requirement 
from Regulatory Notice 14-51. As discussed in the filing for SR-FINRA-
2016-010, FINRA initially solicited comment on the proposal for ATSs to 
report order information to OATS in Regulatory Notice 14-51.\8\ As part 
of the proposal set forth in the Regulatory Notice, ATSs exceeding the 
proposed volume threshold would have been required to report certain 
order information and ``would provide, for every order, the ATS book 
sequence identifier and the associated OATS identifier, which would 
link information about that order to the related information and full 
lifecycle reported to OATS.'' \9\ None of the commenters on that 
proposal specifically addressed the provision of sequence numbers on 
order reports.
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    \8\ See Securities Exchange Act Release No. 77269 (March 1, 
2016), 81 FR 11851, 11854-55 (March 7, 2016).
    \9\ Regulatory Notice 14-51. The volume threshold proposed in 
the Regulatory Notice was removed as part of the proposed rule 
change approved by the Commission. See Securities Exchange Act 
Release No. 77269 (March 1, 2016), 81 FR 11851, 11854-55 (March 7, 
2016).
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    In response to a comment on the proposed rule change filed with the 
Commission, FINRA clarified that it was not mandating a particular or 
uniform format by which ATSs must report sequence numbers and that 
reporting sequence numbers as they currently exist in an ATS will 
satisfy the requirement.\10\ The same clarification is true with the 
expansion of the requirement beyond reporting order receipt (i.e., an 
ATS may report all sequence numbers as they currently exist in the ATS 
rather than in a particular or uniform format).
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    \10\ See Securities Exchange Act Release No. 77798 (May 10, 
2016), 81 FR 30395, 30397 (May 16, 2016).
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    FINRA has filed the proposed rule change for immediate 
effectiveness. FINRA will announce the implementation date of the 
proposed rule change no later than 30 days following Commission notice 
of the filing of the proposed rule change for immediate effectiveness. 
The implementation date will be no later than 145 days after the date 
of the filing.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\11\ 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)(9) of the Act,\12\ which requires 
that FINRA rules not impose any burden on competition that is not 
necessary or appropriate. FINRA believes that this proposed rule change 
is consistent with the Act because requiring sequence numbers on all 
OATS reports will further enhance FINRA's ability to surveil activity 
occurring within an ATS by providing FINRA with additional information 
that can be integrated into FINRA's surveillance patterns to support 
alert generation and analysis.
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    \11\ 15 U.S.C. 78o-3(b)(6).
    \12\ 15 U.S.C. 78o-3(b)(9).
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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. The proposed changes will apply 
equally to all similarly situated ATSs. FINRA also notes that the 
proposed rule change is designed to assist FINRA in meeting its 
regulatory obligations by enhancing its ability to efficiently surveil 
activity occurring within ATSs and across markets. FINRA believes that, 
because ATSs are already required to include sequence numbers on new 
order reports pursuant to Rule 4554 as approved by the Commission, 
including sequence numbers on additional order events will not be 
overly burdensome.
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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \13\ and Rule 19b-
4(f)(6) thereunder.\14\
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or 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-2016-045 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2016-045. This 
file

[[Page 93722]]

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 office 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-2016-045, and should 
be submitted on or before January 11, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016-30689 Filed 12-20-16; 8:45 am]
 BILLING CODE 8011-01-P


