Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Proposed Rule Change To Amend NASD Interpretive Material (IM) 2110-2 (Trading Ahead of Customer Limit Order), 80482-80483 [E8-31051]
Download as PDF
80482
Federal Register / Vol. 73, No. 251 / Wednesday, December 31, 2008 / Notices
control or for which it is responsible by
increasing DTC’s liquidity resources to
enable it to complete settlement in the
event of a failure of a financial family
of affiliated Participants.
IV. Conclusion
On the basis of the foregoing, the
Commission finds that the proposed
rule change, as amended, is consistent
with the requirements of the Act and in
particular Section 17A of the Act and
the rules and regulations thereunder. In
approving the proposed rule change, the
Commission considered the proposal’s
impact on efficiency, competition, and
capital formation.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act, that the
proposed rule change (File No. SR–
DTC–2008–12), as amended, be and
hereby is approved.
For the Commission by the Division of
Trading and Markets, pursuant to delegated
authority.11
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8–31048 Filed 12–30–08; 8:45 am]
BILLING CODE 8011–01–P
[Release No. 34–59138; File No. SR–FINRA–
2008–064]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Proposed
Rule Change To Amend NASD
Interpretive Material (IM) 2110–2
(Trading Ahead of Customer Limit
Order)
pwalker on PROD1PC71 with NOTICES
December 22, 2008.
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
17, 2008, Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) (f/k/a
National Association of Securities
Dealers, Inc. (‘‘NASD’’)) 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.
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
VerDate Aug<31>2005
17:41 Dec 30, 2008
Jkt 217001
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
SECURITIES AND EXCHANGE
COMMISSION
11 17
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
FINRA is proposing to amend NASD
Interpretive Material (IM) 2110–2
(Trading Ahead of Customer Limit
Order) to provide that, for the purpose
of determining the minimum price
improvement obligation where there is
no published current inside spread,
members may calculate a current inside
spread by contacting and obtaining
priced quotations from at least two
unaffiliated dealers.
The text of the proposed rule change
is attached as Exhibit 5.3
1. Purpose
NASD IM–2110–2 (commonly
referred to as the ‘‘Manning Rule’’)
generally prohibits a member from
trading for its own account at prices that
would satisfy a customer’s limit order
unless the member immediately
thereafter executes the customer limit
order at the price at which it traded for
its own account or at a better price. The
legal underpinnings for IM–2110–2 are
a firm’s basic fiduciary obligations
under agency law and the requirement
that it must, in the conduct of its
business, ‘‘observe high standards of
commercial honor and just and
equitable principles of trade.’’
On September 12, 2008, the SEC
approved amendments to the minimum
price-improvement standards in IM–
2110–2 to provide tiered standards that
vary according to the price of the
customer limit order.4 The amendments
3 The Commission notes that Exhibit 5 is attached
to the rule filing filed with the Commission but not
to this release. The text of the proposed rule change
is available at FINRA, on its Web site (http://
www.finra.org), and at the Commission’s Public
Reference Room.
4 See Securities Exchange Act Release No. 58532
(September 12, 2008), 73 FR 54649 (September 22,
2008) (order approving SR–NASD–2007–041).
PO 00000
Frm 00122
Fmt 4703
Sfmt 4703
became effective on November 11,
2008.5 Revised NASD IM–2110–2
prescribes detailed minimum levels of
price improvement that a member must
provide in order to trade ahead of an
unexecuted customer limit order
without triggering the protections
provided by the rule. In other words, the
price-improvement standards in IM–
2110–2 set forth the minimum amount
by which a member must trade, in
addition to the price of the customer
buy limit order (or less than the price of
a customer sell order), to avoid
triggering the protections provided by
IM–2110–2.
The minimum price improvement
tiers are as follows:
(1) For customer limit orders priced
greater than or equal to $1.00, the
minimum amount of price improvement
required is $0.01 for NMS stocks and
the lesser of $0.01 or one-half (1⁄2) of the
current inside spread for OTC equity
securities;
(2) For customer limit orders priced
greater than or equal to $.01 and less
than $1.00, the minimum amount of
price improvement required is the lesser
of $0.01 or one-half (1⁄2) of the current
inside spread;
(3) For customer limit orders priced
less than $.01 but greater than or equal
to $0.001, the minimum amount of price
improvement required is the lesser of
$0.001 or one-half (1⁄2) of the current
inside spread;
(4) For customer limit orders priced
less than $.001 but greater than or equal
to $0.0001, the minimum amount of
price improvement required is the lesser
of $0.0001 or one-half (1⁄2) of the current
inside spread;
(5) For customer limit orders priced
less than $.0001 but greater than or
equal to $0.00001, the minimum
amount of price improvement required
is the lesser of $0.00001 or one-half (1⁄2)
of the current inside spread;
(6) For customer limit orders priced
less than $.00001, the minimum amount
of price improvement required is the
lesser of $0.000001 or one-half (1⁄2) of
the current inside spread; and
(7) For customer limit orders priced
outside the best inside market, the
minimum amount of price improvement
required must either meet the
requirements set forth above or the
member must trade at a price at or
inside the best inside market for the
security.
Therefore, if a firm is holding a
customer limit order to buy priced at
$.75 and the applicable minimum price
improvement standard is $.01, the firm
would be permitted to buy at $.76 or
5 See
E:\FR\FM\31DEN1.SGM
Regulatory Notice 08–49 (September 2008).
31DEN1
pwalker on PROD1PC71 with NOTICES
Federal Register / Vol. 73, No. 251 / Wednesday, December 31, 2008 / Notices
higher without triggering the
requirements of IM–2110–2.
The proposed rule change is being
filed to provide members with an
alternative method of calculating the
minimum price improvement in cases
where a member receives a limit order
priced to sell an OTC equity security
below $1.00 and there is no quoted
market. The minimum priceimprovement standards are either a
fixed amount or one-half (1⁄2) of the
current inside spread. However, where
there is no current inside spread, the
minimum price-improvement standard
defaults to the fixed amount which, in
certain circumstances, can equal the
price of the customer limit order. For
example, where a member receives a
customer limit order priced at $.01 and
there is no current published inside
spread, the minimum priceimprovement standard would still be
equal to $.01, which would require the
member to sell at 0 ($.01 minus $.01) to
avoid triggering the customer limit
order. Thus, under the current rule, the
member is effectively prohibited from
selling while the customer limit order is
pending. FINRA believes that this result
is overly restrictive.
Thus FINRA is proposing to amend
IM–2110–2 to provide that, for the
purpose of determining the minimum
price improvement obligation where
there is no published current inside
spread, member firms may calculate a
current inside spread by contacting and
obtaining priced quotations from at least
two unaffiliated dealers. FINRA believes
that obtaining priced quotations from a
minimum of two unaffiliated dealers
provides an adequate proxy for an
inside spread typically displayed for an
OTC equity security, but members are
free to contact more than two
unaffiliated dealers. Once the member
has obtained bid and ask prices from at
least two unaffiliated dealers, the
highest bid and lowest offer obtained
must be used as the basis for calculating
the current inside spread for purposes of
determining the member’s minimum
price improvement obligation.
Additionally, where there is a onesided quote, the proposed rule change
would permit a member to determine
the current inside spread by using the
best price obtained from at least two
unaffiliated dealers on the other side of
the quote. Members must document (1)
the name of each dealer contacted and
(2) the quotations received that were
used as the basis for determining the
current inside spread. The proposed
rule change would apply solely to
minimum price-improvement
calculations under IM–2110–2 and
VerDate Aug<31>2005
17:41 Dec 30, 2008
Jkt 217001
would not implicate other rules or
requirements (e.g., Three Quote Rule).
The proposed rule change would
address the unintended effective
prohibition on selling while certain
customer limit orders are pending by
providing members with an alternative
means of determining the inside spread
for use as the basis for calculating its
minimum price-improvement
obligation.
2. Statutory Basis
FINRA believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(6) of the Act,6 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. FINRA believes that the
proposed rule change will address an
unintended consequence of the
minimum price-improvement standards
set forth in IM–2110–2 while continuing
to promote investor protection and
improving the treatment of customer
limit orders.
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.
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 35 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 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
6 15
PO 00000
U.S.C. 78o–3(b)(6).
Frm 00123
Fmt 4703
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 e-mail to rulecomments@sec.gov. Please include File
Number SR–FINRA–2008–064 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–2008–064. This file
number should be included on the
subject line if e-mail 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 inspection and copying in
the Commission’s Public Reference
Room, 100 F Street, NE., Washington,
DC 20549, on official business days
between the hours of 10 a.m. and 3 p.m.
Copies of the 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–
2008–064 and should be submitted on
or before January 21, 2009.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.7
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8–31051 Filed 12–30–08; 8:45 am]
BILLING CODE 8011–01–P
7 17
Sfmt 4703
80483
E:\FR\FM\31DEN1.SGM
CFR 200.30–3(a)(12).
31DEN1
Agencies
[Federal Register Volume 73, Number 251 (Wednesday, December 31, 2008)]
[Notices]
[Pages 80482-80483]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-31051]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-59138; File No. SR-FINRA-2008-064]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Proposed Rule Change To Amend NASD
Interpretive Material (IM) 2110-2 (Trading Ahead of Customer Limit
Order)
December 22, 2008.
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 17, 2008, Financial Industry Regulatory Authority, Inc.
(``FINRA'') (f/k/a National Association of Securities Dealers, Inc.
(``NASD'')) 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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to amend NASD Interpretive Material (IM) 2110-2
(Trading Ahead of Customer Limit Order) to provide that, for the
purpose of determining the minimum price improvement obligation where
there is no published current inside spread, members may calculate a
current inside spread by contacting and obtaining priced quotations
from at least two unaffiliated dealers.
The text of the proposed rule change is attached as Exhibit 5.\3\
---------------------------------------------------------------------------
\3\ The Commission notes that Exhibit 5 is attached to the rule
filing filed with the Commission but not to this release. The text
of the proposed rule change is available at FINRA, on its Web site
(http://www.finra.org), 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
NASD IM-2110-2 (commonly referred to as the ``Manning Rule'')
generally prohibits a member from trading for its own account at prices
that would satisfy a customer's limit order unless the member
immediately thereafter executes the customer limit order at the price
at which it traded for its own account or at a better price. The legal
underpinnings for IM-2110-2 are a firm's basic fiduciary obligations
under agency law and the requirement that it must, in the conduct of
its business, ``observe high standards of commercial honor and just and
equitable principles of trade.''
On September 12, 2008, the SEC approved amendments to the minimum
price-improvement standards in IM-2110-2 to provide tiered standards
that vary according to the price of the customer limit order.\4\ The
amendments became effective on November 11, 2008.\5\ Revised NASD IM-
2110-2 prescribes detailed minimum levels of price improvement that a
member must provide in order to trade ahead of an unexecuted customer
limit order without triggering the protections provided by the rule. In
other words, the price-improvement standards in IM-2110-2 set forth the
minimum amount by which a member must trade, in addition to the price
of the customer buy limit order (or less than the price of a customer
sell order), to avoid triggering the protections provided by IM-2110-2.
---------------------------------------------------------------------------
\4\ See Securities Exchange Act Release No. 58532 (September 12,
2008), 73 FR 54649 (September 22, 2008) (order approving SR-NASD-
2007-041).
\5\ See Regulatory Notice 08-49 (September 2008).
---------------------------------------------------------------------------
The minimum price improvement tiers are as follows:
(1) For customer limit orders priced greater than or equal to
$1.00, the minimum amount of price improvement required is $0.01 for
NMS stocks and the lesser of $0.01 or one-half (\1/2\) of the current
inside spread for OTC equity securities;
(2) For customer limit orders priced greater than or equal to $.01
and less than $1.00, the minimum amount of price improvement required
is the lesser of $0.01 or one-half (\1/2\) of the current inside
spread;
(3) For customer limit orders priced less than $.01 but greater
than or equal to $0.001, the minimum amount of price improvement
required is the lesser of $0.001 or one-half (\1/2\) of the current
inside spread;
(4) For customer limit orders priced less than $.001 but greater
than or equal to $0.0001, the minimum amount of price improvement
required is the lesser of $0.0001 or one-half (\1/2\) of the current
inside spread;
(5) For customer limit orders priced less than $.0001 but greater
than or equal to $0.00001, the minimum amount of price improvement
required is the lesser of $0.00001 or one-half (\1/2\) of the current
inside spread;
(6) For customer limit orders priced less than $.00001, the minimum
amount of price improvement required is the lesser of $0.000001 or one-
half (\1/2\) of the current inside spread; and
(7) For customer limit orders priced outside the best inside
market, the minimum amount of price improvement required must either
meet the requirements set forth above or the member must trade at a
price at or inside the best inside market for the security.
Therefore, if a firm is holding a customer limit order to buy
priced at $.75 and the applicable minimum price improvement standard is
$.01, the firm would be permitted to buy at $.76 or
[[Page 80483]]
higher without triggering the requirements of IM-2110-2.
The proposed rule change is being filed to provide members with an
alternative method of calculating the minimum price improvement in
cases where a member receives a limit order priced to sell an OTC
equity security below $1.00 and there is no quoted market. The minimum
price-improvement standards are either a fixed amount or one-half (\1/
2\) of the current inside spread. However, where there is no current
inside spread, the minimum price-improvement standard defaults to the
fixed amount which, in certain circumstances, can equal the price of
the customer limit order. For example, where a member receives a
customer limit order priced at $.01 and there is no current published
inside spread, the minimum price-improvement standard would still be
equal to $.01, which would require the member to sell at 0 ($.01 minus
$.01) to avoid triggering the customer limit order. Thus, under the
current rule, the member is effectively prohibited from selling while
the customer limit order is pending. FINRA believes that this result is
overly restrictive.
Thus FINRA is proposing to amend IM-2110-2 to provide that, for the
purpose of determining the minimum price improvement obligation where
there is no published current inside spread, member firms may calculate
a current inside spread by contacting and obtaining priced quotations
from at least two unaffiliated dealers. FINRA believes that obtaining
priced quotations from a minimum of two unaffiliated dealers provides
an adequate proxy for an inside spread typically displayed for an OTC
equity security, but members are free to contact more than two
unaffiliated dealers. Once the member has obtained bid and ask prices
from at least two unaffiliated dealers, the highest bid and lowest
offer obtained must be used as the basis for calculating the current
inside spread for purposes of determining the member's minimum price
improvement obligation.
Additionally, where there is a one-sided quote, the proposed rule
change would permit a member to determine the current inside spread by
using the best price obtained from at least two unaffiliated dealers on
the other side of the quote. Members must document (1) the name of each
dealer contacted and (2) the quotations received that were used as the
basis for determining the current inside spread. The proposed rule
change would apply solely to minimum price-improvement calculations
under IM-2110-2 and would not implicate other rules or requirements
(e.g., Three Quote Rule).
The proposed rule change would address the unintended effective
prohibition on selling while certain customer limit orders are pending
by providing members with an alternative means of determining the
inside spread for use as the basis for calculating its minimum price-
improvement obligation.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\6\ 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. FINRA believes that the proposed rule change will
address an unintended consequence of the minimum price-improvement
standards set forth in IM-2110-2 while continuing to promote investor
protection and improving the treatment of customer limit orders.
---------------------------------------------------------------------------
\6\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
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.
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 35 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 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 e-mail to rule-comments@sec.gov. Please include
File Number SR-FINRA-2008-064 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-2008-064. This
file number should be included on the subject line if e-mail 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 inspection
and copying in the Commission's Public Reference Room, 100 F Street,
NE., Washington, DC 20549, on official business days between the hours
of 10 a.m. and 3 p.m. Copies of the 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-2008-064 and should be
submitted on or before January 21, 2009.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\7\
---------------------------------------------------------------------------
\7\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-31051 Filed 12-30-08; 8:45 am]
BILLING CODE 8011-01-P