Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change, as Modified by Amendment No. 1, To Establish in the Market for OTC Equity Securities Certain Regulatory Protections Derived From Certain Rules Adopted by the Commission in the Market for Listed Securities, 37488-37494 [2010-15707]
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37488
Federal Register / Vol. 75, No. 124 / Tuesday, June 29, 2010 / Notices
include the name of the proposed panel
member, the issues they are interested
in discussing, viewpoint(s) on the
issue(s), and affiliation (if any).
Roundtable panel participants will be
selected with the goal of providing
balanced viewpoints on each of the
various issues. Please see the DATES
section to submit nominations by
October 8, 2010.
We encourage previous participants
who attended, either as panel members
or attendees, the prior public workshop,
held on September 29–30, 2008, to also
participate in this meeting. Information
on the previous public meeting is
accessible at https://www.nrc.gov/
materials/miau/licensing.html#cesium.
Based on the comments received in
both written and electronic form, and at
the public meeting, the Commission
will then be in a better position to
proceed with the issuance of a final
Policy Statement. The final Policy
Statement, when issued by the
Commission, will be published in the
Federal Register.
Small Business Administration, 409 3rd
Street, SW., Suite 6050, Washington, DC
20416.
SUPPLEMENTARY INFORMATION: The notice
of the President’s major disaster
declaration for Private Non-Profit
organizations in the Commonwealth of
Kentucky, dated 05/11/2010, is hereby
amended to include the following areas
as adversely affected by the disaster.
Primary Counties: Ballard, Carlisle,
Clark, Hickman.
All other information in the original
declaration remains unchanged.
(Catalog of Federal Domestic Assistance
Numbers 59002 and 59008)
added, deleted or postponed, please
contact:
The Office of the Secretary at (202)
551–5400.
Dated: June 24, 2010.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010–15821 Filed 6–25–10; 11:15 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–62359; File No. SR–FINRA–
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Sunshine Act; Notice of Meeting
Dated at Rockville, Maryland, this 22 day
of June 2010.
For the Nuclear Regulatory Commission.
Cynthia Carpenter,
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[FR Doc. 2010–15734 Filed 6–28–10; 8:45 am]
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Kentucky Disaster Number KY–00033
Small Business Administration.
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AGENCY:
emcdonald on DSK2BSOYB1PROD with NOTICES4
ACTION:
SUMMARY: This is an amendment of the
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Incident: Severe Storms, Flooding,
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SECURITIES AND EXCHANGE
COMMISSION
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Order Approving a
Proposed Rule Change, as Modified by
Amendment No. 1, To Establish in the
Market for OTC Equity Securities
Certain Regulatory Protections Derived
From Certain Rules Adopted by the
Commission in the Market for Listed
Securities
June 22, 2010.
Notice is hereby given, pursuant to
the provisions of the Government in the
Sunshine Act, Public Law 94–409, that
the Securities and Exchange
Commission will hold a Closed Meeting
on Thursday, July 1, 2010 at 2 p.m.
Commissioners, Counsel to the
Commissioners, the Secretary to the
Commission, and recording secretaries
will attend the Closed Meeting. Certain
staff members who have an interest in
the matters also may be present.
The General Counsel of the
Commission, or his designee, has
certified that, in his opinion, one or
more of the exemptions set forth in 5
U.S.C. 552b(c)(3), (5), (7), 9(B) and (10)
and 17 CFR 200.402(a)(3), (5), (7), 9(ii)
and (10), permit consideration of the
scheduled matters at the Closed
Meeting.
Commissioner Casey, as duty officer,
voted to consider the items listed for the
Closed Meeting in a closed session.
The subject matter of the Closed
Meeting scheduled for Thursday, July 1,
2010 will be:
Institution and settlement of injunctive
actions;
Institution and settlement of
administrative proceedings;
Consideration of amicus participation;
An opinion; and
Other matters relating to enforcement
proceedings.
At times, changes in Commission
priorities require alterations in the
scheduling of meeting items.
For further information and to
ascertain what, if any, matters have been
I. Introduction
On August 7, 2009, 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 establish
certain regulatory protections for the
market for OTC Equity Securities 3 that
are similar to those established for
national market system securities by
Regulation NMS.4 The proposed rule
change was published for comment in
the Federal Register on August 26,
2009.5 The Commission received 12
comments on the Initial Notice.6 On
James E. Rivera,
Associate Administrator for Disaster
Assistance.
[FR Doc. 2010–15681 Filed 6–28–10; 8:45 am]
BILLING CODE 8025–01–P
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1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See FINRA Rule 6420(d) (defining OTC Equity
Security as ‘‘any non-exchange-listed security and
certain exchange-listed securities that do not
otherwise qualify for real-time trade reporting’’).
Pursuant to Securities Exchange Act Release No.
61979 (April 23, 2010), 75 FR 23316 (May 3, 2010),
effective June 28, 2010, the term OTC Equity
Security will be defined in FINRA Rule 6420(c) as
‘‘any equity security that is not an ‘NMS stock’ as
that term is defined in Rule 600(b)(47) of Regulation
NMS; provided, however, that the term ‘‘OTC
Equity Security’’ shall not include any Restricted
Equity Security.’’
4 17 CFR 242.600 et seq.
5 See Securities Exchange Act Release No. 60515
(August 17, 2009), 74 FR 43207 (‘‘Initial Notice’’).
6 See Submission via SEC WebForm from
anonymous, dated September 1, 2009; Letter to
Nancy M. Morris, Commission, from Janet M.
Kissane, Senior Vice President—Legal and
Corporate Secretary, NYSE Euronext, dated
September 23, 2009 (‘‘ArcaEdge Letter’’); Letter to
Elizabeth M. Murphy, Secretary, Commission, from
2 17
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Federal Register / Vol. 75, No. 124 / Tuesday, June 29, 2010 / Notices
March 1, 2010, FINRA filed Amendment
No. 1 to the proposed rule change. The
proposed rule change, as amended, was
published for comment in the Federal
Register on March 16, 2010.7 The
Commission received two comment
letters in response to the Amended
Notice.8 This order approves the
proposed rule change, as modified by
Amendment No. 1
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II. Description of the Proposed Rule
Change
With this proposed rule change,
FINRA proposes to establish certain
regulatory protections for the market for
OTC Equity Securities that are similar to
those established for national market
system securities by Regulation NMS.
First, FINRA proposes to adopt Rule
6434 (Minimum Pricing Increment for
OTC Equity Securities) to impose
restrictions on the display of quotes and
orders for OTC Equity Securities in subpenny increments similar to those in
Rule 612 of Regulation NMS.9 Rule 6434
would prohibit members from
Leonard J. Amoruso, General Counsel, Knight
Capital Group, Inc., and Michael T. Corrao, Chief
Compliance Officer, Knight Equity Markets, L.P.,
dated September 16, 2009 (‘‘Knight Letter’’); Letter
to Elizabeth M. Murphy, Secretary, Commission,
from William Assatly, Senior Vice President—
Trading, Mercator Associates, dated September 16,
2009 (‘‘Mercator Letter’’); Letter from Daniel Kanter,
President, and Craig Carlino, Chief Compliance
Officer, Monroe Securities, Inc., dated September
16, 2009 (‘‘Monroe Letter’’); Letter to Elizabeth M.
Murphy, Secretary, Commission, from R. Cromwell
Coulson, Chief Executive Officer, Pink OTC
Markets, Inc., dated September 23, 2009 (‘‘Pink OTC
Letter’’); Letter to Elizabeth M. Murphy, Secretary,
Commission, from R. Cromwell Coulson, Chief
Executive Officer, Pink OTC Markets, Inc., dated
January 6, 2010 (‘‘Pink OTC 2 Letter’’); Letter to
Elizabeth M. Murphy, Secretary, Commission, from
Ann L. Vlcek, Managing Director and Associate
General Counsel, Securities Industry and Financial
Markets Association, dated October 13, 2009
(‘‘SIFMA Letter’’); Letter to Elizabeth M. Murphy,
Secretary, Commission, from Kimberly Unger,
Executive Director, The Securities Traders
Association of New York, Inc., dated September 14,
2009 (‘‘STANY Letter’’); Letter to Elizabeth M.
Murphy, Secretary, Commission, from Kimberly
Unger, Executive Director, The Securities Traders
Association of New York, Inc., dated September 16,
2009 (‘‘STANY 2 Letter’’); Letter to Florence H.
Harmon, Deputy Secretary, Commission, from
Elaine M. Kaven, Chief Compliance Officer,
StockCross Financial Services, Inc., dated
September 16, 2009 (‘‘StockCross Letter’’); Letter to
Elizabeth M. Murphy, Secretary, Commission, from
Christopher Nagy, Managing Director Order
Strategy, Co-Head of Government Relations, TD
Ameritrade, Inc., dated October 5, 2009 (‘‘TD
Ameritrade Letter’’).
7 See Securities Exchange Act Release No. 61677
(March 9, 2010), 75 FR 12584 (‘‘Amended Notice’’).
8 See Letter from Daniel Kanter, President and
Craig Carlino, Chief Compliance Officer, Monroe
Securities, dated April 6, 2010 (‘‘Monroe 2 Letter’’);
Letter to Elizabeth M. Murphy, Commission, from
R. Cromwell Coulson, Chief Executive Officer, Pink
OTC Markets Inc., dated April 9, 2010 (‘‘Pink OTC
3 Letter’’).
9 17 CFR 242.612.
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displaying, ranking, or accepting from
any person a bid or offer, order, or
indication of interest in an OTC Equity
Security in an increment smaller than
$0.01 if the bid or offer, order, or
indication of interest is priced $1.00 or
greater per share. As initially filed,
FINRA proposed to prohibit members
from displaying, ranking, or accepting a
bid or offer, order, or an indication of
interest in an OTC Equity Security in an
increment smaller than: (1) $0.0001, if
the bid or offer, order, or indication of
interest were priced between $0.01 and
$1.00 per share; and (2) $0.000001, if
the bid or offer, order, or indication of
interest were priced less than $0.01 per
share.10 As discussed below, FINRA
subsequently amended the proposal to
prohibit members from displaying,
ranking, or accepting from any person a
bid or offer, order, or indication of
interest in an OTC Equity Security in an
increment smaller than $0.0001 for bids,
offers, orders, and indications of interest
priced below $1.00 per share. If an order
or indication of interest is priced less
than $0.0001 per share, a member may
rank or accept, but not display, that
order or indication of interest in an
increment of $0.000001 or greater.
Second, FINRA proposes to adopt
Rule 6437 (Prohibition from Locking or
Crossing Quotation in OTC Equity
Securities) to require that members
implement policies and procedures that
reasonably avoid the display of, or
engaging in a pattern or practice of
displaying, locking, or crossing
quotations in any OTC Equity Security
within the same inter-dealer quotation
system. This is similar to Rule 610(d) of
Regulation NMS.11
Third, FINRA is proposing a new
regulatory approach to fees for accessing
quotations in OTC Equity Securities.
FINRA is deleting its Rule 6540(c),
which provides that an alternative
trading system (‘‘ATS’’) or electronic
communications network (‘‘ECN’’) must
reflect non-subscriber access or posttransaction fees in the ATS’s or ECN’s
posted quote in the OTC Bulletin Board
montage. In addition, FINRA proposes
to allow market makers—as well as
ATSs and ECNs—to charge access fees.
As a result, market makers, ATSs, and
ECNs may charge access fees that are
not displayed in the quotation.
Simultaneously, however, FINRA
proposes to adopt new Rule 6450
(Restrictions on Access Fees) that would
establish a cap on non-subscriber access
and post-transaction fees in all OTC
Equity Securities, similar to Rule 610(c)
of Regulation NMS.12 Rule 6450 would
provide that, if the price of the
published quotation were $1.00 or more,
the fee or fees cannot exceed or
accumulate to more than $0.003 per
share. As initially filed, if the price of
the published quotation were less than
$1.00, the fee could not exceed 0.3% of
the published quotation price per share.
As discussed below, FINRA
subsequently amended this portion of
the proposal to provide that, if the price
of the published quotation were less
than $1.00 per share, fees cannot exceed
or accumulate to more than the lesser of
0.3% of the quotation price per share, or
30% of the minimum pricing increment
under Rule 6434.
Fourth, FINRA proposes to adopt Rule
6460 (Display of Customer Limit
Orders), similar to Rule 604 of
Regulation NMS.13 Under Rule 6460, a
market maker displaying a priced
quotation in an inter-dealer quotation
system would be required to
immediately display a customer limit
orders that it receives that (1) improves
the price of the bid or offer displayed by
the market maker; or (2) improves the
size of its bid or offer by more than a
de minimis amount, where it is priced
equal to the best bid or offer in the interdealer quotation system where the
market maker is quoting. Similar to Rule
604 of Regulation NMS, Rule 6460
excepts any customer limit order that (1)
is executed upon receipt of the order; (2)
is placed by a customer who expressly
requests that the order not be displayed;
(3) is an odd-lot order; (4) is a block size
order, unless a customer placing such
order requests that the order be
displayed; (5) is delivered immediately
upon receipt to a national securities
exchange or to an electronic
communications network that widely
disseminates such order and complies
with the Rule’s provisions relating to
such electronic communications
network; (6) is delivered immediately
upon receipt to another OTC market
maker that complies with the proposed
limit order display requirements with
respect to that order; or (7) is an all-ornone order. In Amendment No. 1,
FINRA proposed to add an exception for
customer limit orders that are priced
less than $0.0001 per share, consistent
with the revision to proposed Rule 6434
that allows a member to rank or accept,
but not display, an order or indication
of interest in an increment as small as
$0.000001, if the order or indication of
interest is priced less than $0.0001 per
share.
10 See
12 17
11 17
13 17
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Initial Notice, 74 FR at 43207.
CFR 242.610(d).
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37489
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CFR 242.610(c).
CFR 242.604.
29JNN1
37490
Federal Register / Vol. 75, No. 124 / Tuesday, June 29, 2010 / Notices
OTC equity markets trade at prices less
than $0.01.23 Another commenter
proposed that the minimum price
increment for securities priced between
$0.10 and $1.00 per share should be
III. Summary of Comments
$0.001, and that the minimum price
The Commission received 12
increment for securities priced below
comments regarding the Initial Notice 14 $0.01 per share should be $0.0001.24
and two comment letters regarding the
Locked and Crossed Markets. Three
Amended Notice. These comment
commenters supported this aspect of the
letters are summarized below.
proposal.25 One commenter stated that
Contemporaneously with filing Partial
the proposal would lead to a more fair
Amendment No. 1, FINRA submitted a
and orderly market, as it would enhance
response to the comments on the Initial
the usefulness of quotation information
Notice.
and decrease investor confusion.26
Minimum Quoting Increments. One
Three commenters noted, however, that
commenter supported this aspect of the
investors would be better served if the
proposal, stating that it would improve
proposal were extended across all interdepth and liquidity in the marketplace
dealer quotation systems, and not just
by mitigating potential harms associated within separate inter-dealer quotation
with sub-penny quoting, including
systems.27 One of these commenters
‘‘stepping ahead’’ of publicly displayed
stated that the duty to avoid locked and
orders.15 Other commenters stated that
crossed markets should be co-extensive
sub-penny quoting may produce
with the duty of best execution.28
16 or result in increased
flickering quotes
Two commenters stated that FINRA’s
quote traffic without providing any
proposal was unlikely to actually
discernable benefit to investors.17
prevent locked or crossed markets,29
Other commenters disagreed with the because market participants already
proposal as it relates to minimum
make reasonable efforts to avoid locked
quoting increments. While one
or crossed markets,30 and market
commenter supported restrictions on
participants most likely lock or cross the
sub-penny pricing in theory, it stated
market to avoid paying access fees.31
that the minimum quoting increments
One commenter supported FINRA’s
for shares priced below $1.00 per share
efforts to reduce locked and crossed
were not ‘‘meaningful’’ increments.18
markets, but stated that this proposal
Another commenter argued that certain
did not provide any data to support a
stocks priced above $1.00 per share
conclusion that locked and crossed
have benefited from the ability to trade
markets are occurring with sufficient
in sub-penny increments, and that
frequency to impact market quality.32
prohibiting sub-penny quoting could
Another commenter stated that the
thus negatively impact the integrity of
number of locked and crossed markets
the OTC equity market.19 Two
would increase if Rule 6450 were
commenters stated that securities traded adopted and if the requirement to
in sub-penny increments ‘‘have traded
display access fees in the quote were
efficiently for decades,’’ 20 one of which
eliminated.33
added that FINRA had offered no
Some commenters believed that the
empirical data to support its proposal.21 adoption of Rule 6450 would increase
One commenter stated that the
the incidence of locked and crossed
proposed minimum increments were
markets resulting from ‘‘access-fee’’
still small, and would not prevent
trading.34 One commenter noted that,
stepping ahead of customer orders or
since the proposed rule does not
flickering quotes.22 Another commenter prohibit locking/crossing across internoted that the initially proposed price
dealer quotation systems, market
increment of $0.000001 for stocks
participants can lock or cross across
priced below $0.01 per share would
23 See Knight Letter at 2.
create 10,000 price points below $0.01,
24 See ArcaEdge Letter at 2.
which could lead to ‘‘significant
25 See ArcaEdge Letter at 2; TD Ameritrade Letter
operational and market quality issues,’’
at 2; STANY Letter at 2.
especially since most securities in the
26 See TD Ameritrade Letter at 2.
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FINRA also proposed to make
conforming changes to certain of its
other rules to reflect the establishment
of these new rules.
14 See
supra note 6.
15 See TD Ameritrade Letter at 2.
16 See Pink OTC Letter at 8; STANY Letter at 2.
17 See STANY Letter at 2.
18 See Pink OTC Letter at 8.
19 See SIFMA Letter at 2.
20 Mercator Letter at 1; see also Knight Letter at
2.
21 See
22 See
Knight Letter at 2.
ArcaEdge Letter at 2.
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27 See Pink OTC Letter at 6; STANY Letter at 2;
TD Ameritrade Letter at 2.
28 See Pink OTC Letter at 7.
29 See Mercator Letter at 1; StockCross Letter at
2.
30 See Mercator Letter at 1.
31 See Mercator Letter at 2; see also StockCross
Letter at 2.
32 See Knight Letter at 3.
33 See SIFMA Letter at 3.
34 See Knight Letter at 3; StockCross Letter at 2.
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markets, while receiving ‘‘an instant,
virtually riskless profit’’ of the access
fee.35
Limit Order Display. Three
commenters endorsed proposed FINRA
Rule 6460.36 One of these commenters
stated that investors ‘‘gain enormous
benefits of added transparency when
market centers are required to display
limit orders that are better than that
market center’s current best bid or
offer.’’ 37 Another commenter stated that
the proposal would foster increased
quote competition and ultimately
narrow spreads, promote greater depth
and liquidity, and minimize investor
transaction costs.38
A few commenters believed that a
limit order display rule, without more,
could harm investors.39 One of these
commenters stated that the proposed
rule would likely be detrimental to
retail and institutional investors looking
to take sizeable positions in thinly
traded stocks, as the displaying of a
sizeable customer order will affect the
way competing markets will react to the
market.40 One commenter noted that a
limit order display rule could weaken
the pricing leverage of a customer, as
the displaying of an order ‘‘may well
scare away bids or offers, since in thinly
traded markets, many bids and offers are
at risk quotes by market makers which
are risking their own capital.’’ 41
Another commenter stated that this
proposal infringed upon the ‘‘experience
and judgment of markets participants’’
and the ‘‘nature of any free market
enterprise.’’ 42
One commenter believed that the
proposed rule would act as a
disincentive for broker-dealers to
display quotations in an inter-dealer
quotation system, because brokerdealers are free to withdraw from
publishing a quotation in an OTC Equity
Security at any time.43 This commenter
thus asserted that proposed Rule 6460
should be amended to require a brokerdealer that receives a customer limit
order in an OTC Equity Security to
execute the order, display the order in
an inter-dealer quotation system or
alternative trading system that makes its
quotes publicly available, or transmit
35 Knight
Letter at 3.
ArcaEdge Letter at 4; Knight Letter at 5; TD
Ameritrade Letter at 2.
37 TD Ameritrade Letter at 2.
38 See ArcaEdge Letter at 4.
39 See Mercator Letter at 1; STANY Letter at 2.
40 See Mercator Letter at 1.
41 Monroe Securities Letter at 1.
42 StockCross Letter at 1.
43 See Pink OTC 2 Letter at 3–4.
36 See
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Federal Register / Vol. 75, No. 124 / Tuesday, June 29, 2010 / Notices
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the order to another broker-dealer who
will display the order.44
A few commenters suggested
alternatives to the proposed limit order
display rule.45 One of these commenters
suggested permitting a broker-dealer to
post part of a limit order, because small
orders are more likely to be executed
than large orders.46 The other
commenter stated that, while market
makers should be required to display
only the price of an order, they should
have discretion over display of the size
of the order.47 Specifically, this
commenter believed that a broker
should have discretion with at least
50% of the aggregate order size, and
should not be required to display size
that is more than ten times the tier size
with respect to any order or aggregate of
orders at that price level.48
Some commenters took issue with the
proposed exceptions.49 One commenter
noted that, at a minimum, the proposed
definition of ‘‘block-size’’ should be
clarified, given the lack of liquidity of
OTC Equity Securities.50 Two
commenters indicated that the current
minimum quote size is a better standard
for the required display size,51 and one
commenter suggested that limit orders
of less than the minimum quotation size
for OTC Equity Securities should not be
required to be displayed.52
One commenter also proposed that
Rule 6460 be amended to require the
display of customer limit orders in OTC
debt securities.53
Access Fees. Some commenters
voiced their opposition to access fees in
general.54 One commenter stated that
such fees are especially harmful to the
OTC market, which is characterized by
relatively infrequent trading and less
natural liquidity.55 That commenter also
noted that market makers have operated
successfully without charging access
fees.56
Other commenters opposed the aspect
of the proposal that would result in
undisplayed access fees.57 One
44 See id. at 4. The commenter acknowledged that
its suggested change, however, would necessitate
modifications to Rule 15c2–11 under the Act. See
id.
45 See Pink OTC Letter at 11–12; STANY Letter
at 2.
46 See STANY Letter at 2.
47 See Pink OTC Letter at 11.
48 See id.
49 See Knight Letter at 5–6; Pink OTC Letter at 12;
SIFMA Letter at 4.
50 See SIFMA Letter at 4.
51 See Knight Letter at 5–6; SIFMA Letter at 4.
52 See Pink OTC Letter at 12.
53 See Pink OTC 2 Letter at 5.
54 See Mercator Letter at 2; STANY Letter at 2.
55 See Mercator Letter at 2.
56 See id.
57 See Knight Letter at 4; Pink OTC Letter at 4.
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commenter stated that FINRA should be
required to demonstrate that the benefits
of introducing ‘‘hidden’’ access fees
exceed the ‘‘recognized harm hidden
access fees cause to investor confidence
and market quality.’’ 58 Other
commenters stated that the current rule
offers greater transparency,59 and that
the proposal is ‘‘in effect a license for all
market participants to charge access fees
and keep those fees hidden from the
public quote.’’ 60 Another commenter
noted that access fees in OTC equity
markets constitute a significant
component of the price of a security,
and that removing the requirement to
display access fees would ‘‘distort
considerably the true market value of
the security.’’ 61 One commenter stated
that this proposal would force market
participants to pass fees on to the
customer or pay the fees themselves
when interacting with a displayed
quotation.62 Yet another commenter
stated that the proposal would result in
an unlevel playing field in the OTCBB
market, if only electronic
communications networks or alternative
trading systems could utilize
undisplayed access fees.63
Some commenters stated that the
proposal would result in fee-driven
gaming or the increased incidence of
locked and crossed markets.64 One such
commenter noted that access fees in
OTC equity markets constitute a
‘‘significant component’’ of the
transaction and market price for a
security, and that allowing the nondisplay of access fees would create ‘‘a
new natural hunting ground for rebate
trading’’ and large volumes that
otherwise would not occur.65 Market
participants would take advantage of
‘‘inter-venue access fee quote arbitrage,’’
with the result being fee disputes and
locked markets.66 Another commenter
stated that market participants have
little incentive to lock or cross markets
where non-displayed access fees are not
permitted, and that markets without
non-displayed access fees have lower
compliance costs.67 Another commenter
stated that eliminating the requirement
to display non-subscriber access fees
would also reduce displayed liquidity
OTC Letter at 5.
SIFMA Letter at 3.
60 STANY Letter at 2.
61 Knight Letter at 4.
62 See StockCross Letter at 2.
63 See SIFMA Letter at 3.
64 See Knight Letter at 4; Pink OTC Letter at 5;
STANY Letter at 2.
65 Knight Letter at 4–5.
66 Id. at 5.
67 See Pink OTC Letter at 5.
37491
and encourage ‘‘undisplayed sub-penny
price jumping.’’ 68
Two commenters supported the
proposed access fee cap.69 One
commenter stated that, by imposing a
uniform limitation of fees, this proposal
would contribute to an ‘‘accurate
evaluation of the actual quotations
displayed in the public markets.’’ 70 The
other commenter stated that this
requirement would foster a competitive
market by ‘‘leveling the playing field
amongst all market participants,’’ as the
current rule has ‘‘artificially supported a
dealer-driven market.’’ 71 That
commenter also noted that uniform
access fees would prevent access fee
gaming.72
Two commenters stated that the
proposed fee cap should be revised to
30% of the minimum quoting
increment,73 as access fees greater than
the quote increment are not, by
definition, de minimis.74 One
commenter also stated that FINRA
should consider rules requiring brokerdealers to charge equal access or post
transaction fees to all non-subscribers.75
IV. Amendment No. 1
In response to comments, FINRA filed
Amendment No. 1 that proposed two
substantive changes to its initial filing.
First, FINRA proposed to amend Rule
6434 (Minimum Pricing Increment for
OTC Equity Securities) to change the
minimum quoting increment for orders
and indications of interest priced under
$1.00 per share. Initially, FINRA
proposed to permit increments as small
as $0.0001 for orders and indications of
interest that were priced below $1.00
and equal to or greater than $0.01 per
share, and quoting increments of
$0.000001 for orders and indications of
interest priced below $0.01 per share.
As amended, FINRA proposed to permit
quoting increments of $0.0001 for orders
and indications of interest priced under
$1.00 and equal to or greater than
$0.0001 per share. FINRA also proposed
a limited exception for orders and
indications of interest priced less than
$0.0001 per share. Under this exception,
members would be permitted to rank or
accept (but not display) orders and
indications of interest in an increment
of $0.000001 or greater for orders and
indications of interest that are priced
58 Pink
59 See
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Fmt 4703
Sfmt 4703
68 SIFMA
69 See
Letter at 3.
ArcaEdge Letter at 3; TD Ameritrade Letter
at 2.
70 TD
Ameritrade Letter at 2.
Letter at 3.
72 See id. at 4.
73 See ArcaEdge Letter at 4; Pink OTC Letter at
10.
74 See Pink OTC Letter 9.
75 See ArcaEdge Letter at 4.
71 ArcaEdge
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under $0.0001 per share. FINRA stated
that this exception recognized the fact
that some OTC Equity Securities trade at
prices less than $0.0001, and that
restricting quoting in those securities to
increments of $0.0001 would effectively
eliminate trading in those securities.76
FINRA also noted that most systems
could not display pricing increments
smaller than four decimal places, and
that requiring securities priced under
$1.00 and equal to or greater than
$0.0001 per share to be quoted in
increments of $0.0001 would promote
uniformity in the OTC equity market at
this price level.77
Second, FINRA proposed to amend
Rule 6450 (Restrictions on Access Fees)
to revise the access fee cap on
quotations priced below $1.00 per share.
As revised, the cap would be the lesser
of 0.3% of the per-share quotation price,
or 30% of the minimum permissible
quotation increment. FINRA stated that
this revised method of calculating
access fees for securities priced under
$1.00 would ‘‘ensure that the access fee
is always less than the relevant
quotation increment.’’ 78
Finally, FINRA proposed to amend
Rule 6460 (Display of Customer Limit
Orders) to add an exception to the
display requirement for customer limit
orders priced less than $0.0001 per
share, to correspond with the revision to
proposed Rule 6434 permitting
members to rank or accept, but not
display, orders and indications of
interest priced below $0.0001 per share
in an increment as small as $0.000001.
emcdonald on DSK2BSOYB1PROD with NOTICES4
V. Summary of Comments on
Amendment No. 1
Two comments were submitted in
response to the Amended Notice. One
commenter reiterated its opposition to
the application of the proposed limit
order display rule, and requested that
the definition of ‘‘block size’’ for OTC
securities be defined as an order that is
‘‘of at least 10,000 shares or * * * has
a market value of at least $100,000.’’ 79
This commenter stated that the current
rule is designed for penny stocks only,
and that the proposed definition would
give larger orders in non-penny stocks
the benefit of the block-size
exemption.80
The second commenter reiterated its
concerns with both the proposed limit
order display requirement and the
proposed rule against locked and
76 See
Amended Notice, 75 FR at 12586.
id.
78 Id. at 12585.
79 Monroe 2 Letter at 1.
80 See id.
77 See
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crossed markets.81 This commenter
noted that the proposed limit order
display rule would not require the
publication of a customer limit order if
the broker-dealer handling the order
were not a market maker, as defined
under FINRA’s rules.82 In addition, the
commenter stated that the proposed rule
would not apply to market makers that
do not publish a quotation in an interdealer quotation system for the security
that is the subject of the customer limit
order.83 The commenter stated that the
rule would discourage broker-dealers
from making publicly displayed markets
in OTC Equity Securities.84
The commenter also criticized
FINRA’s amended proposal regarding
locked and crossed markets.85
According to the commenter, FINRA
stated in its amended proposal that it
would be unreasonable to require
broker-dealers to avoid locked and
crossed markets across inter-dealer
quotation systems because there is not
a mandated quotation mechanism for
OTC Equity Securities.86 The
commenter pointed out that it itself
‘‘currently disseminates a widely
accessible, consolidated national best
bid and offer for OTC Equity Securities’’
quoted in inter-dealer quotation
systems.87 The commenter stated that
these data should be used by brokerdealers in avoiding locking and crossing
markets across multiple inter-dealer
quotation systems, and that FINRA
should have purchased this market data
from the commenter.
Finally, the commenter stated that,
unlike in the market for NMS securities,
no business model in the market for
OTC Equity Securities depends on the
receipt of access fees among brokerdealers.88 As an alternative to the
proposed rule, the commenter suggested
that FINRA allow ECNs to trade on a
riskless principal basis with nonsubscriber broker-dealers.89
VI. FINRA’s Response to Comments on
Amendment No. 1
In response to comments on the
proposed limit order display rule,
FINRA reiterated its view that the
appropriate trigger for an obligation to
display a customer limit order is when
an OTC market maker already is
displaying a priced quotation for the
security in an inter-dealer quotation
81 See
Pink OTC 3 Letter at 1.
id. at 3.
83 See id. at 2.
84 See id. at 3.
85 See id. at 4.
86 See Pink OTC 3 Letter at 4.
87 Id. at 5.
88 See id. at 8.
89 See id.
82 See
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system (unless an exception applies).90
FINRA similarly reiterated its view that,
once triggered, the limit order display
requirement should apply to the full
size of a customer limit order.91 FINRA
noted that its approach was consistent
with the Commission’s determination
when it first proposed a limit order
display rule that the presumption
should be to display ‘‘unless such orders
are of block size, the customer requests
that its order not be displayed, or one
of the exceptions to the rule applies.’’ 92
FINRA also responded to the issue of
whether the prohibition on locked and
crossed markets should apply across
inter-dealer quotation systems. FINRA
stated that, at this time, the prohibition
on locked and crossed markets should
apply only within (and thus not across)
inter-dealer quotation systems ‘‘due to
the lack of an SRO-sponsored widely
accessible, consolidated national best
bid and offer for OTC equity
securities.’’ 93
FINRA also reiterated its position that
the proposed cap on access fees is the
fairest and most appropriate resolution
of the access fee issue, and that
proposed Rule 6450 ‘‘permits a
landscape where market forces can
drive the adoption of various business
models in the OTC market.’’ 94
VII. Discussion and Findings
After careful consideration of the
amended proposal, the comments
received, and FINRA’s responses
thereto, 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.95 In particular, the
Commission finds that the proposal is
consistent with Section 15A(b)(6) of the
Act,96 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; to foster
cooperation and coordination with
persons engaged in regulating, clearing,
settling, processing information with
respect to, and facilitating transactions
90 See letter to Elizabeth M. Murphy, Secretary,
Commission, dated June 22, 2010 from Racquel L.
Russell, Assistant General Counsel, Regulatory
Policy and Oversight (‘‘FINRA Response Letter’’).
91 See id.
92 See id. at 3 (citing Securities Exchange Act
Release No. 36310 (September 29, 1995) 60 FR
52792 (October 10, 1995)).
93 Id. at 3–4.
94 Id. at 4.
95 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).
96 15 U.S.C. 78o–3(b)(6).
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in securities; to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system; and, in general, to protect
investors and the public interest. The
Commission does not believe that any
comments have been raised that should
preclude approval of the proposal.
With this proposal, FINRA seeks to
introduce into the market for OTC
Equity Securities—over which it has
supervisory responsibilities 97—certain
regulatory protections that were
introduced by the Commission into the
market for exchange-listed securities by
Regulation NMS. The Commission
adopted Regulation NMS in 2005 to
‘‘modernize and strengthen the national
market system for equity securities.’’ 98
Among the elements of Regulation NMS
were: (1) A rule establishing a uniform
quoting increment of no less than one
penny for quotations in NMS stocks
equal to or greater than $1.00 per share,
to promote greater price transparency
and consistency; (2) a cap on fees for
accessing protected quotations, to
ensure the ‘‘fairness and accuracy of
displayed quotations by establishing an
outer limit on the cost of accessing such
quotations;’’ 99 and (3) a rule requiring
the exchanges and FINRA to require
their members reasonably to avoid
locking or crossing protected quotations.
Under the same authority used to
establish Regulation NMS, the
Commission had previously established
a rule that generally requires display of
customer limit orders.100 Many of the
same concerns expressed by the
Commission in adopting Regulation
NMS and the Limit Order Display Rule
for exchange-listed securities also apply
to the market in OTC Equity Securities.
The rules proposed here by FINRA
appear reasonably designed to address
these concerns, and follow closely the
regulatory approach set forth in the
Commission’s rules. Therefore, the
Commission believes that FINRA’s
proposal is consistent with the Act.
With respect to the proposal to restrict
sub-penny quoting, the Commission
97 See Section 15A(b)(11) of the Act, 15 U.S.C.
78o–3(b)(11) (rules of a national securities
association must ‘‘include provisions governing the
form and content of quotations relating to securities
sold otherwise than on a national securities
exchange’’).
98 Securities Exchange Act Release 51808 70 FR
37496, 37496 (June 29, 2005) (‘‘Reg NMS Adopting
Release’’).
99 Reg NMS Adopting Release, id., 70 FR at
37502.
100 See Securities Exchange Act Release No.
37619A (September 6, 1996), 61 FR 48290
(September 12, 1996) (adopting Rule 11Ac1–4
under the Act, which requires the display of
customer limit orders priced better than a
specialist’s or OTC market maker’s quote) (‘‘Limit
Order Display Release’’).
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agrees with FINRA that the same
concerns that were articulated in the
context of Regulation NMS also exist for
OTC Equity Securities. Such concerns
include ‘‘stepping ahead’’ of standing
limit orders by an economically
insignificant amount, which reduces
incentives to display limit orders and
provide liquidity to the markets, and the
increased incidence of ‘‘flickering
quotes’’ and the resulting regulatory
compliance and capacity burdens.101
Like Rule 612 of Regulation NMS,102
proposed FINRA Rule 6434 requires that
the minimum increment for bids, offers,
orders, and indications of interest
priced $1.00 or more per share is one
penny. Furthermore, like Rule 612,
proposed FINRA Rule 6434 requires that
the minimum increment for bids, offers,
orders, and indications of interest
priced between $1.00 and $0.0001 per
share is one hundredth of a penny.
Unlike Rule 612, however, proposed
FINRA Rule 6434 contains an additional
provision for bids, offers, orders, and
indications of interest priced below
$0.0001 per share. Under this provision,
a member may rank or accept (but not
display) an order or indication of
interest in an increment as small as
$0.000001.103 FINRA stated that this
exception recognizes the fact that some
OTC Equity Securities trade at prices
less than $0.0001, and that restricting
quoting in those securities to increments
of $0.0001 would effectively eliminate
trading in those securities.104
The Commission believes that
proposed Rule 6434 is consistent with
the Act because it adopts pricing
increments similar to those set forth in
Rule 612. Although the proposed rule
differs from Rule 612 in that it permits
acceptance of orders and indications of
interest priced below $0.0001 per share
in finer increments, the Commission
believes that this is a reasonable
accommodation given that certain OTC
Equity Securities currently trade at very
low prices.
With respect to FINRA’s proposal
regarding locking or crossing quotations,
the Commission agrees with FINRA that
many of the same concerns that were
articulated in the context of Regulation
NMS—namely, that locked and crossed
markets may confuse investors and
101 See Reg NMS Adopting Release, supra note
98, 70 FR at 37553.
102 17 CFR 242.612.
103 In the FINRA Response Letter, FINRA noted
that a member’s customer order protection
obligations under IM–2110–2 (Trading Ahead of
Customer Limit Order) continue to apply. See
FINRA Response Letter, supra note 90 at 2.
104 See Amended Notice, 75 FR at 12586.
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37493
create market inefficiencies 105—also
exist for OTC Equity Securities. In
response to commenters inquiring why
FINRA did not extend this rule across
inter-dealer quotation systems, FINRA
stated that it is not practicable to extend
locking and crossing restrictions across
inter-dealer markets due to the lack of
a widely accessible, consolidated
national best bid and offer for OTC
Equity Securities. The Commission
believes that FINRA’s proposal is
consistent with the Act and is a
reasonable first step to address problems
caused by locked and crossed markets,
while recognizing the market data
limitations for OTC Equity Securities.
The Commission also finds that
FINRA’s proposal regarding access fees
is consistent with the Act, for the same
reasons that the Commission adopted its
own rules regarding access fees. In the
Reg NMS Adopting Release, the
Commission noted that a flat access fee
was the ‘‘fairest and most appropriate
solution to what has been a
longstanding and contentious issue.’’ 106
The Commission noted that this fee
would apply equally to ECNs, market
makers, and other trading centers.107
The Commission also noted that, for
quotations to be fair and useful, ‘‘there
must be some limit on the extent to
which the true price can vary from the
displayed price,’’ and concluded that the
cap on access fees ‘‘harmoniz[ed]
quotation practices and preclude[ed] the
distortive effects of exorbitant fees.’’ 108
The Commission agrees with FINRA
that the same considerations apply here.
In capping the fees that may be charged
to access a quotation in an OTC Equity
Security, and in drafting the rule to
apply to ATSs, ECNs, and market
makers, the proposed rule is reasonably
designed to promote transparency and
fair competition in the market for OTC
Equity Securities.
As noted above, a number of
commenters argued that this access fee
provision applicable to sub-penny
quotations, as originally proposed,
could lead to certain gaming activity. In
response to these comments, FINRA
proposed in Amendment No. 1 to
modify the cap on access fees for subpenny quotations. Specifically, the
access fee cap would be the lesser of
0.3% of the published quotation price
on a per-share basis, or 30% of the
minimum allowable increment. The
Commission believes that the amended
105 See Reg NMS Adopting Release, supra note
98, 70 FR at 37547.
106 Reg NMS Adopting Release, supra note 98, 70
FR at 37545.
107 See id.
108 Id.
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emcdonald on DSK2BSOYB1PROD with NOTICES4
proposal is reasonably designed to
minimize access fee gaming, as it
prevents the access fee from exceeding
the minimum quoting increment.
Finally, the Commission finds that
FINRA’s proposal to adopt a limit order
display rule is consistent with the Act.
With certain exceptions, the proposal
requires a market maker displaying a
priced quote in an inter-dealer quotation
system to immediately display a
customer limit order that it receives that
(1) improves the price of the bid or offer
displayed by the market maker, or (2)
improves the size of its bid or offer by
more than a de minimis amount where
it is priced equal to the best bid or offer
in the inter-dealer quotation system
where the market maker is quoting. The
Commission believes that extending
limit order display requirements to OTC
Equity Securities is reasonably designed
to increase transparency in the market
for OTC Equity Securities. As it has
previously stated, the Commission
believes that limit orders are a valuable
component of price discovery, and that
uniformly requiring display of such
orders will encourage tighter, deeper,
and more efficient markets.109
Commenters generally supported the
proposed limit order display
requirement, although some
commenters requested certain
clarifications and modifications. In
response to comments, FINRA noted in
Amendment No. 1 that its proposed
limit order display rule would not
require display of customer orders that
would result in a violation of the
minimum quotation size tiers prescribed
in FINRA Rule 6450 (Minimum
Quotation Size Requirements For OTC
Equity Securities).110 FINRA also
proposed a new exception for limit
orders priced less than $0.0001 per
share, consistent with the changes made
to proposed FINRA Rule 6434
prohibiting the display of a bid or offer,
order, or indication of interest in any
OTC Equity Security priced less than
$0.0001 per share.111
One commenter expressed concern
that the proposed limit order display
rule would apply only to OTC marketmakers, rather than to all broker-dealers
displaying a priced quotation in an
inter-dealer quotation system or ECN,
which could lead to a reduction in
109 See Limit Order Display Release, supra note
100, 61 FR at 48294. Rule 11Ac1–4, which was
adopted prior to the approval of The Nasdaq Stock
Market as a national securities exchange, applied
generally to exchange specialists and Nasdaq
market makers. Rule 11Ac1–4 was subsequently
redesignated as Rule 604 under Regulation NMS.
See NMS Adopting Release, supra note 98.
110 See Amended Notice, supra note 7.
111 See id.
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quotation activity in OTC Equity
Securities. The Commission notes that
FINRA’s limit order display proposal
acknowledges the role that market
makers traditionally have played in
providing price discovery and liquidity
to the OTC Equity Securities market.
Further, in response to commenters’
concerns that market makers be
permitted greater discretion to display
only a portion of a customer limit order,
FINRA noted that, where the member
believes that a customer would be best
served by not displaying the full size of
a limit order, the member is free to
obtain the customer’s consent to refrain
from displaying such customer’s order,
as permitted by a proposed exception to
the limit order display requirement. As
it has previously stated, the Commission
believes that the presumption of limit
order display is the proper approach.112
The Commission further believes that
FINRA’s limit order display proposal
marks a positive step in efforts to
improve the transparency of OTC Equity
Securities and the handling of customer
limit orders in this market sector.
VIII. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act, that the
proposed rule change (SR–FINRA–
2009–054), as modified by Amendment
No. 1 thereto, be, and hereby is,
approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.113
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010–15707 Filed 6–28–10; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–62335; File No. SR–
NYSEArca–2010–58]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing of Proposed
Rule Change, as Modified by
Amendment No. 1, Amending NYSE
Arca Equities Rule 7.10 Relating to
Clearly Erroneous Executions
June 21, 2010.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on June 17,
2010, NYSE Arca, Inc. (the ‘‘Exchange’’
or ‘‘NYSE Arca’’) filed with the
Securities and Exchange Commission
(the ‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the self-regulatory
organization. On June 18, 2010, the
Exchange submitted Amendment No. 1
to the proposed rule change. The
Commission is publishing this notice to
solicit comments on the proposed rule
change, as amended, from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
NYSE Arca Equities Rule 7.10 relating
to clearly erroneous executions. The text
of the proposed rule change is available
at the Commission’s Web site at https://
www.sec.gov, at the Exchange, the
Commission’s Public Reference Room,
and https://www.nyse.com.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
112 See Limit Order Display Release, supra note
100, 61 FR at 48301 (stating ‘‘[t]he Commission
believes that the rule appropriately establishes a
presumption that limit orders should be displayed,
unless such orders are of block size, the customer
requests that its order not be displayed, or one of
the exceptions to the rule applies. The exception
allowing a customer to request that its limit order
not be displayed gives the customer ultimate
control in determining whether to trust the display
of the limit order to the discretion of a market
professional, or to display the order either in full,
or in part, to other potential market interest.’’).
113 17 CFR 200.30–3(a)(12).
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Fmt 4703
Sfmt 4703
In its filing with the Commission, the
self-regulatory organization 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 those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
1 15
U.S.C. 78s(b)(1).
U.S.C. 78a.
3 17 CFR 240.19b–4.
2 15
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]]>Agencies
[Federal Register Volume 75, Number 124 (Tuesday, June 29, 2010)]
[Notices]
[Pages 37488-37494]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-15707]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62359; File No. SR-FINRA-2009-054]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving a Proposed Rule Change, as Modified by
Amendment No. 1, To Establish in the Market for OTC Equity Securities
Certain Regulatory Protections Derived From Certain Rules Adopted by
the Commission in the Market for Listed Securities
June 22, 2010.
I. Introduction
On August 7, 2009, 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 establish certain regulatory protections for
the market for OTC Equity Securities \3\ that are similar to those
established for national market system securities by Regulation NMS.\4\
The proposed rule change was published for comment in the Federal
Register on August 26, 2009.\5\ The Commission received 12 comments on
the Initial Notice.\6\ On
[[Page 37489]]
March 1, 2010, FINRA filed Amendment No. 1 to the proposed rule change.
The proposed rule change, as amended, was published for comment in the
Federal Register on March 16, 2010.\7\ The Commission received two
comment letters in response to the Amended Notice.\8\ This order
approves the proposed rule change, as modified by Amendment No. 1
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See FINRA Rule 6420(d) (defining OTC Equity Security as
``any non-exchange-listed security and certain exchange-listed
securities that do not otherwise qualify for real-time trade
reporting''). Pursuant to Securities Exchange Act Release No. 61979
(April 23, 2010), 75 FR 23316 (May 3, 2010), effective June 28,
2010, the term OTC Equity Security will be defined in FINRA Rule
6420(c) as ``any equity security that is not an `NMS stock' as that
term is defined in Rule 600(b)(47) of Regulation NMS; provided,
however, that the term ``OTC Equity Security'' shall not include any
Restricted Equity Security.''
\4\ 17 CFR 242.600 et seq.
\5\ See Securities Exchange Act Release No. 60515 (August 17,
2009), 74 FR 43207 (``Initial Notice'').
\6\ See Submission via SEC WebForm from anonymous, dated
September 1, 2009; Letter to Nancy M. Morris, Commission, from Janet
M. Kissane, Senior Vice President--Legal and Corporate Secretary,
NYSE Euronext, dated September 23, 2009 (``ArcaEdge Letter'');
Letter to Elizabeth M. Murphy, Secretary, Commission, from Leonard
J. Amoruso, General Counsel, Knight Capital Group, Inc., and Michael
T. Corrao, Chief Compliance Officer, Knight Equity Markets, L.P.,
dated September 16, 2009 (``Knight Letter''); Letter to Elizabeth M.
Murphy, Secretary, Commission, from William Assatly, Senior Vice
President--Trading, Mercator Associates, dated September 16, 2009
(``Mercator Letter''); Letter from Daniel Kanter, President, and
Craig Carlino, Chief Compliance Officer, Monroe Securities, Inc.,
dated September 16, 2009 (``Monroe Letter''); Letter to Elizabeth M.
Murphy, Secretary, Commission, from R. Cromwell Coulson, Chief
Executive Officer, Pink OTC Markets, Inc., dated September 23, 2009
(``Pink OTC Letter''); Letter to Elizabeth M. Murphy, Secretary,
Commission, from R. Cromwell Coulson, Chief Executive Officer, Pink
OTC Markets, Inc., dated January 6, 2010 (``Pink OTC 2 Letter'');
Letter to Elizabeth M. Murphy, Secretary, Commission, from Ann L.
Vlcek, Managing Director and Associate General Counsel, Securities
Industry and Financial Markets Association, dated October 13, 2009
(``SIFMA Letter''); Letter to Elizabeth M. Murphy, Secretary,
Commission, from Kimberly Unger, Executive Director, The Securities
Traders Association of New York, Inc., dated September 14, 2009
(``STANY Letter''); Letter to Elizabeth M. Murphy, Secretary,
Commission, from Kimberly Unger, Executive Director, The Securities
Traders Association of New York, Inc., dated September 16, 2009
(``STANY 2 Letter''); Letter to Florence H. Harmon, Deputy
Secretary, Commission, from Elaine M. Kaven, Chief Compliance
Officer, StockCross Financial Services, Inc., dated September 16,
2009 (``StockCross Letter''); Letter to Elizabeth M. Murphy,
Secretary, Commission, from Christopher Nagy, Managing Director
Order Strategy, Co-Head of Government Relations, TD Ameritrade,
Inc., dated October 5, 2009 (``TD Ameritrade Letter'').
\7\ See Securities Exchange Act Release No. 61677 (March 9,
2010), 75 FR 12584 (``Amended Notice'').
\8\ See Letter from Daniel Kanter, President and Craig Carlino,
Chief Compliance Officer, Monroe Securities, dated April 6, 2010
(``Monroe 2 Letter''); Letter to Elizabeth M. Murphy, Commission,
from R. Cromwell Coulson, Chief Executive Officer, Pink OTC Markets
Inc., dated April 9, 2010 (``Pink OTC 3 Letter'').
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
With this proposed rule change, FINRA proposes to establish certain
regulatory protections for the market for OTC Equity Securities that
are similar to those established for national market system securities
by Regulation NMS. First, FINRA proposes to adopt Rule 6434 (Minimum
Pricing Increment for OTC Equity Securities) to impose restrictions on
the display of quotes and orders for OTC Equity Securities in sub-penny
increments similar to those in Rule 612 of Regulation NMS.\9\ Rule 6434
would prohibit members from displaying, ranking, or accepting from any
person a bid or offer, order, or indication of interest in an OTC
Equity Security in an increment smaller than $0.01 if the bid or offer,
order, or indication of interest is priced $1.00 or greater per share.
As initially filed, FINRA proposed to prohibit members from displaying,
ranking, or accepting a bid or offer, order, or an indication of
interest in an OTC Equity Security in an increment smaller than: (1)
$0.0001, if the bid or offer, order, or indication of interest were
priced between $0.01 and $1.00 per share; and (2) $0.000001, if the bid
or offer, order, or indication of interest were priced less than $0.01
per share.\10\ As discussed below, FINRA subsequently amended the
proposal to prohibit members from displaying, ranking, or accepting
from any person a bid or offer, order, or indication of interest in an
OTC Equity Security in an increment smaller than $0.0001 for bids,
offers, orders, and indications of interest priced below $1.00 per
share. If an order or indication of interest is priced less than
$0.0001 per share, a member may rank or accept, but not display, that
order or indication of interest in an increment of $0.000001 or
greater.
---------------------------------------------------------------------------
\9\ 17 CFR 242.612.
\10\ See Initial Notice, 74 FR at 43207.
---------------------------------------------------------------------------
Second, FINRA proposes to adopt Rule 6437 (Prohibition from Locking
or Crossing Quotation in OTC Equity Securities) to require that members
implement policies and procedures that reasonably avoid the display of,
or engaging in a pattern or practice of displaying, locking, or
crossing quotations in any OTC Equity Security within the same inter-
dealer quotation system. This is similar to Rule 610(d) of Regulation
NMS.\11\
---------------------------------------------------------------------------
\11\ 17 CFR 242.610(d).
---------------------------------------------------------------------------
Third, FINRA is proposing a new regulatory approach to fees for
accessing quotations in OTC Equity Securities. FINRA is deleting its
Rule 6540(c), which provides that an alternative trading system
(``ATS'') or electronic communications network (``ECN'') must reflect
non-subscriber access or post-transaction fees in the ATS's or ECN's
posted quote in the OTC Bulletin Board montage. In addition, FINRA
proposes to allow market makers--as well as ATSs and ECNs--to charge
access fees. As a result, market makers, ATSs, and ECNs may charge
access fees that are not displayed in the quotation. Simultaneously,
however, FINRA proposes to adopt new Rule 6450 (Restrictions on Access
Fees) that would establish a cap on non-subscriber access and post-
transaction fees in all OTC Equity Securities, similar to Rule 610(c)
of Regulation NMS.\12\ Rule 6450 would provide that, if the price of
the published quotation were $1.00 or more, the fee or fees cannot
exceed or accumulate to more than $0.003 per share. As initially filed,
if the price of the published quotation were less than $1.00, the fee
could not exceed 0.3% of the published quotation price per share. As
discussed below, FINRA subsequently amended this portion of the
proposal to provide that, if the price of the published quotation were
less than $1.00 per share, fees cannot exceed or accumulate to more
than the lesser of 0.3% of the quotation price per share, or 30% of the
minimum pricing increment under Rule 6434.
---------------------------------------------------------------------------
\12\ 17 CFR 242.610(c).
---------------------------------------------------------------------------
Fourth, FINRA proposes to adopt Rule 6460 (Display of Customer
Limit Orders), similar to Rule 604 of Regulation NMS.\13\ Under Rule
6460, a market maker displaying a priced quotation in an inter-dealer
quotation system would be required to immediately display a customer
limit orders that it receives that (1) improves the price of the bid or
offer displayed by the market maker; or (2) improves the size of its
bid or offer by more than a de minimis amount, where it is priced equal
to the best bid or offer in the inter-dealer quotation system where the
market maker is quoting. Similar to Rule 604 of Regulation NMS, Rule
6460 excepts any customer limit order that (1) is executed upon receipt
of the order; (2) is placed by a customer who expressly requests that
the order not be displayed; (3) is an odd-lot order; (4) is a block
size order, unless a customer placing such order requests that the
order be displayed; (5) is delivered immediately upon receipt to a
national securities exchange or to an electronic communications network
that widely disseminates such order and complies with the Rule's
provisions relating to such electronic communications network; (6) is
delivered immediately upon receipt to another OTC market maker that
complies with the proposed limit order display requirements with
respect to that order; or (7) is an all-or-none order. In Amendment No.
1, FINRA proposed to add an exception for customer limit orders that
are priced less than $0.0001 per share, consistent with the revision to
proposed Rule 6434 that allows a member to rank or accept, but not
display, an order or indication of interest in an increment as small as
$0.000001, if the order or indication of interest is priced less than
$0.0001 per share.
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\13\ 17 CFR 242.604.
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[[Page 37490]]
FINRA also proposed to make conforming changes to certain of its
other rules to reflect the establishment of these new rules.
III. Summary of Comments
The Commission received 12 comments regarding the Initial Notice
\14\ and two comment letters regarding the Amended Notice. These
comment letters are summarized below. Contemporaneously with filing
Partial Amendment No. 1, FINRA submitted a response to the comments on
the Initial Notice.
---------------------------------------------------------------------------
\14\ See supra note 6.
---------------------------------------------------------------------------
Minimum Quoting Increments. One commenter supported this aspect of
the proposal, stating that it would improve depth and liquidity in the
marketplace by mitigating potential harms associated with sub-penny
quoting, including ``stepping ahead'' of publicly displayed orders.\15\
Other commenters stated that sub-penny quoting may produce flickering
quotes \16\ or result in increased quote traffic without providing any
discernable benefit to investors.\17\
---------------------------------------------------------------------------
\15\ See TD Ameritrade Letter at 2.
\16\ See Pink OTC Letter at 8; STANY Letter at 2.
\17\ See STANY Letter at 2.
---------------------------------------------------------------------------
Other commenters disagreed with the proposal as it relates to
minimum quoting increments. While one commenter supported restrictions
on sub-penny pricing in theory, it stated that the minimum quoting
increments for shares priced below $1.00 per share were not
``meaningful'' increments.\18\ Another commenter argued that certain
stocks priced above $1.00 per share have benefited from the ability to
trade in sub-penny increments, and that prohibiting sub-penny quoting
could thus negatively impact the integrity of the OTC equity
market.\19\ Two commenters stated that securities traded in sub-penny
increments ``have traded efficiently for decades,'' \20\ one of which
added that FINRA had offered no empirical data to support its
proposal.\21\
---------------------------------------------------------------------------
\18\ See Pink OTC Letter at 8.
\19\ See SIFMA Letter at 2.
\20\ Mercator Letter at 1; see also Knight Letter at 2.
\21\ See Knight Letter at 2.
---------------------------------------------------------------------------
One commenter stated that the proposed minimum increments were
still small, and would not prevent stepping ahead of customer orders or
flickering quotes.\22\ Another commenter noted that the initially
proposed price increment of $0.000001 for stocks priced below $0.01 per
share would create 10,000 price points below $0.01, which could lead to
``significant operational and market quality issues,'' especially since
most securities in the OTC equity markets trade at prices less than
$0.01.\23\ Another commenter proposed that the minimum price increment
for securities priced between $0.10 and $1.00 per share should be
$0.001, and that the minimum price increment for securities priced
below $0.01 per share should be $0.0001.\24\
---------------------------------------------------------------------------
\22\ See ArcaEdge Letter at 2.
\23\ See Knight Letter at 2.
\24\ See ArcaEdge Letter at 2.
---------------------------------------------------------------------------
Locked and Crossed Markets. Three commenters supported this aspect
of the proposal.\25\ One commenter stated that the proposal would lead
to a more fair and orderly market, as it would enhance the usefulness
of quotation information and decrease investor confusion.\26\ Three
commenters noted, however, that investors would be better served if the
proposal were extended across all inter-dealer quotation systems, and
not just within separate inter-dealer quotation systems.\27\ One of
these commenters stated that the duty to avoid locked and crossed
markets should be co-extensive with the duty of best execution.\28\
---------------------------------------------------------------------------
\25\ See ArcaEdge Letter at 2; TD Ameritrade Letter at 2; STANY
Letter at 2.
\26\ See TD Ameritrade Letter at 2.
\27\ See Pink OTC Letter at 6; STANY Letter at 2; TD Ameritrade
Letter at 2.
\28\ See Pink OTC Letter at 7.
---------------------------------------------------------------------------
Two commenters stated that FINRA's proposal was unlikely to
actually prevent locked or crossed markets,\29\ because market
participants already make reasonable efforts to avoid locked or crossed
markets,\30\ and market participants most likely lock or cross the
market to avoid paying access fees.\31\ One commenter supported FINRA's
efforts to reduce locked and crossed markets, but stated that this
proposal did not provide any data to support a conclusion that locked
and crossed markets are occurring with sufficient frequency to impact
market quality.\32\ Another commenter stated that the number of locked
and crossed markets would increase if Rule 6450 were adopted and if the
requirement to display access fees in the quote were eliminated.\33\
---------------------------------------------------------------------------
\29\ See Mercator Letter at 1; StockCross Letter at 2.
\30\ See Mercator Letter at 1.
\31\ See Mercator Letter at 2; see also StockCross Letter at 2.
\32\ See Knight Letter at 3.
\33\ See SIFMA Letter at 3.
---------------------------------------------------------------------------
Some commenters believed that the adoption of Rule 6450 would
increase the incidence of locked and crossed markets resulting from
``access-fee'' trading.\34\ One commenter noted that, since the
proposed rule does not prohibit locking/crossing across inter-dealer
quotation systems, market participants can lock or cross across
markets, while receiving ``an instant, virtually riskless profit'' of
the access fee.\35\
---------------------------------------------------------------------------
\34\ See Knight Letter at 3; StockCross Letter at 2.
\35\ Knight Letter at 3.
---------------------------------------------------------------------------
Limit Order Display. Three commenters endorsed proposed FINRA Rule
6460.\36\ One of these commenters stated that investors ``gain enormous
benefits of added transparency when market centers are required to
display limit orders that are better than that market center's current
best bid or offer.'' \37\ Another commenter stated that the proposal
would foster increased quote competition and ultimately narrow spreads,
promote greater depth and liquidity, and minimize investor transaction
costs.\38\
---------------------------------------------------------------------------
\36\ See ArcaEdge Letter at 4; Knight Letter at 5; TD Ameritrade
Letter at 2.
\37\ TD Ameritrade Letter at 2.
\38\ See ArcaEdge Letter at 4.
---------------------------------------------------------------------------
A few commenters believed that a limit order display rule, without
more, could harm investors.\39\ One of these commenters stated that the
proposed rule would likely be detrimental to retail and institutional
investors looking to take sizeable positions in thinly traded stocks,
as the displaying of a sizeable customer order will affect the way
competing markets will react to the market.\40\ One commenter noted
that a limit order display rule could weaken the pricing leverage of a
customer, as the displaying of an order ``may well scare away bids or
offers, since in thinly traded markets, many bids and offers are at
risk quotes by market makers which are risking their own capital.''
\41\ Another commenter stated that this proposal infringed upon the
``experience and judgment of markets participants'' and the ``nature of
any free market enterprise.'' \42\
---------------------------------------------------------------------------
\39\ See Mercator Letter at 1; STANY Letter at 2.
\40\ See Mercator Letter at 1.
\41\ Monroe Securities Letter at 1.
\42\ StockCross Letter at 1.
---------------------------------------------------------------------------
One commenter believed that the proposed rule would act as a
disincentive for broker-dealers to display quotations in an inter-
dealer quotation system, because broker-dealers are free to withdraw
from publishing a quotation in an OTC Equity Security at any time.\43\
This commenter thus asserted that proposed Rule 6460 should be amended
to require a broker-dealer that receives a customer limit order in an
OTC Equity Security to execute the order, display the order in an
inter-dealer quotation system or alternative trading system that makes
its quotes publicly available, or transmit
[[Page 37491]]
the order to another broker-dealer who will display the order.\44\
---------------------------------------------------------------------------
\43\ See Pink OTC 2 Letter at 3-4.
\44\ See id. at 4. The commenter acknowledged that its suggested
change, however, would necessitate modifications to Rule 15c2-11
under the Act. See id.
---------------------------------------------------------------------------
A few commenters suggested alternatives to the proposed limit order
display rule.\45\ One of these commenters suggested permitting a
broker-dealer to post part of a limit order, because small orders are
more likely to be executed than large orders.\46\ The other commenter
stated that, while market makers should be required to display only the
price of an order, they should have discretion over display of the size
of the order.\47\ Specifically, this commenter believed that a broker
should have discretion with at least 50% of the aggregate order size,
and should not be required to display size that is more than ten times
the tier size with respect to any order or aggregate of orders at that
price level.\48\
---------------------------------------------------------------------------
\45\ See Pink OTC Letter at 11-12; STANY Letter at 2.
\46\ See STANY Letter at 2.
\47\ See Pink OTC Letter at 11.
\48\ See id.
---------------------------------------------------------------------------
Some commenters took issue with the proposed exceptions.\49\ One
commenter noted that, at a minimum, the proposed definition of ``block-
size'' should be clarified, given the lack of liquidity of OTC Equity
Securities.\50\ Two commenters indicated that the current minimum quote
size is a better standard for the required display size,\51\ and one
commenter suggested that limit orders of less than the minimum
quotation size for OTC Equity Securities should not be required to be
displayed.\52\
---------------------------------------------------------------------------
\49\ See Knight Letter at 5-6; Pink OTC Letter at 12; SIFMA
Letter at 4.
\50\ See SIFMA Letter at 4.
\51\ See Knight Letter at 5-6; SIFMA Letter at 4.
\52\ See Pink OTC Letter at 12.
---------------------------------------------------------------------------
One commenter also proposed that Rule 6460 be amended to require
the display of customer limit orders in OTC debt securities.\53\
---------------------------------------------------------------------------
\53\ See Pink OTC 2 Letter at 5.
---------------------------------------------------------------------------
Access Fees. Some commenters voiced their opposition to access fees
in general.\54\ One commenter stated that such fees are especially
harmful to the OTC market, which is characterized by relatively
infrequent trading and less natural liquidity.\55\ That commenter also
noted that market makers have operated successfully without charging
access fees.\56\
---------------------------------------------------------------------------
\54\ See Mercator Letter at 2; STANY Letter at 2.
\55\ See Mercator Letter at 2.
\56\ See id.
---------------------------------------------------------------------------
Other commenters opposed the aspect of the proposal that would
result in undisplayed access fees.\57\ One commenter stated that FINRA
should be required to demonstrate that the benefits of introducing
``hidden'' access fees exceed the ``recognized harm hidden access fees
cause to investor confidence and market quality.'' \58\ Other
commenters stated that the current rule offers greater
transparency,\59\ and that the proposal is ``in effect a license for
all market participants to charge access fees and keep those fees
hidden from the public quote.'' \60\ Another commenter noted that
access fees in OTC equity markets constitute a significant component of
the price of a security, and that removing the requirement to display
access fees would ``distort considerably the true market value of the
security.'' \61\ One commenter stated that this proposal would force
market participants to pass fees on to the customer or pay the fees
themselves when interacting with a displayed quotation.\62\ Yet another
commenter stated that the proposal would result in an unlevel playing
field in the OTCBB market, if only electronic communications networks
or alternative trading systems could utilize undisplayed access
fees.\63\
---------------------------------------------------------------------------
\57\ See Knight Letter at 4; Pink OTC Letter at 4.
\58\ Pink OTC Letter at 5.
\59\ See SIFMA Letter at 3.
\60\ STANY Letter at 2.
\61\ Knight Letter at 4.
\62\ See StockCross Letter at 2.
\63\ See SIFMA Letter at 3.
---------------------------------------------------------------------------
Some commenters stated that the proposal would result in fee-driven
gaming or the increased incidence of locked and crossed markets.\64\
One such commenter noted that access fees in OTC equity markets
constitute a ``significant component'' of the transaction and market
price for a security, and that allowing the non-display of access fees
would create ``a new natural hunting ground for rebate trading'' and
large volumes that otherwise would not occur.\65\ Market participants
would take advantage of ``inter-venue access fee quote arbitrage,''
with the result being fee disputes and locked markets.\66\ Another
commenter stated that market participants have little incentive to lock
or cross markets where non-displayed access fees are not permitted, and
that markets without non-displayed access fees have lower compliance
costs.\67\ Another commenter stated that eliminating the requirement to
display non-subscriber access fees would also reduce displayed
liquidity and encourage ``undisplayed sub-penny price jumping.'' \68\
---------------------------------------------------------------------------
\64\ See Knight Letter at 4; Pink OTC Letter at 5; STANY Letter
at 2.
\65\ Knight Letter at 4-5.
\66\ Id. at 5.
\67\ See Pink OTC Letter at 5.
\68\ SIFMA Letter at 3.
---------------------------------------------------------------------------
Two commenters supported the proposed access fee cap.\69\ One
commenter stated that, by imposing a uniform limitation of fees, this
proposal would contribute to an ``accurate evaluation of the actual
quotations displayed in the public markets.'' \70\ The other commenter
stated that this requirement would foster a competitive market by
``leveling the playing field amongst all market participants,'' as the
current rule has ``artificially supported a dealer-driven market.''
\71\ That commenter also noted that uniform access fees would prevent
access fee gaming.\72\
---------------------------------------------------------------------------
\69\ See ArcaEdge Letter at 3; TD Ameritrade Letter at 2.
\70\ TD Ameritrade Letter at 2.
\71\ ArcaEdge Letter at 3.
\72\ See id. at 4.
---------------------------------------------------------------------------
Two commenters stated that the proposed fee cap should be revised
to 30% of the minimum quoting increment,\73\ as access fees greater
than the quote increment are not, by definition, de minimis.\74\ One
commenter also stated that FINRA should consider rules requiring
broker-dealers to charge equal access or post transaction fees to all
non-subscribers.\75\
---------------------------------------------------------------------------
\73\ See ArcaEdge Letter at 4; Pink OTC Letter at 10.
\74\ See Pink OTC Letter 9.
\75\ See ArcaEdge Letter at 4.
---------------------------------------------------------------------------
IV. Amendment No. 1
In response to comments, FINRA filed Amendment No. 1 that proposed
two substantive changes to its initial filing. First, FINRA proposed to
amend Rule 6434 (Minimum Pricing Increment for OTC Equity Securities)
to change the minimum quoting increment for orders and indications of
interest priced under $1.00 per share. Initially, FINRA proposed to
permit increments as small as $0.0001 for orders and indications of
interest that were priced below $1.00 and equal to or greater than
$0.01 per share, and quoting increments of $0.000001 for orders and
indications of interest priced below $0.01 per share. As amended, FINRA
proposed to permit quoting increments of $0.0001 for orders and
indications of interest priced under $1.00 and equal to or greater than
$0.0001 per share. FINRA also proposed a limited exception for orders
and indications of interest priced less than $0.0001 per share. Under
this exception, members would be permitted to rank or accept (but not
display) orders and indications of interest in an increment of
$0.000001 or greater for orders and indications of interest that are
priced
[[Page 37492]]
under $0.0001 per share. FINRA stated that this exception recognized
the fact that some OTC Equity Securities trade at prices less than
$0.0001, and that restricting quoting in those securities to increments
of $0.0001 would effectively eliminate trading in those securities.\76\
FINRA also noted that most systems could not display pricing increments
smaller than four decimal places, and that requiring securities priced
under $1.00 and equal to or greater than $0.0001 per share to be quoted
in increments of $0.0001 would promote uniformity in the OTC equity
market at this price level.\77\
---------------------------------------------------------------------------
\76\ See Amended Notice, 75 FR at 12586.
\77\ See id.
---------------------------------------------------------------------------
Second, FINRA proposed to amend Rule 6450 (Restrictions on Access
Fees) to revise the access fee cap on quotations priced below $1.00 per
share. As revised, the cap would be the lesser of 0.3% of the per-share
quotation price, or 30% of the minimum permissible quotation increment.
FINRA stated that this revised method of calculating access fees for
securities priced under $1.00 would ``ensure that the access fee is
always less than the relevant quotation increment.'' \78\
---------------------------------------------------------------------------
\78\ Id. at 12585.
---------------------------------------------------------------------------
Finally, FINRA proposed to amend Rule 6460 (Display of Customer
Limit Orders) to add an exception to the display requirement for
customer limit orders priced less than $0.0001 per share, to correspond
with the revision to proposed Rule 6434 permitting members to rank or
accept, but not display, orders and indications of interest priced
below $0.0001 per share in an increment as small as $0.000001.
V. Summary of Comments on Amendment No. 1
Two comments were submitted in response to the Amended Notice. One
commenter reiterated its opposition to the application of the proposed
limit order display rule, and requested that the definition of ``block
size'' for OTC securities be defined as an order that is ``of at least
10,000 shares or * * * has a market value of at least $100,000.'' \79\
This commenter stated that the current rule is designed for penny
stocks only, and that the proposed definition would give larger orders
in non-penny stocks the benefit of the block-size exemption.\80\
---------------------------------------------------------------------------
\79\ Monroe 2 Letter at 1.
\80\ See id.
---------------------------------------------------------------------------
The second commenter reiterated its concerns with both the proposed
limit order display requirement and the proposed rule against locked
and crossed markets.\81\ This commenter noted that the proposed limit
order display rule would not require the publication of a customer
limit order if the broker-dealer handling the order were not a market
maker, as defined under FINRA's rules.\82\ In addition, the commenter
stated that the proposed rule would not apply to market makers that do
not publish a quotation in an inter-dealer quotation system for the
security that is the subject of the customer limit order.\83\ The
commenter stated that the rule would discourage broker-dealers from
making publicly displayed markets in OTC Equity Securities.\84\
---------------------------------------------------------------------------
\81\ See Pink OTC 3 Letter at 1.
\82\ See id. at 3.
\83\ See id. at 2.
\84\ See id. at 3.
---------------------------------------------------------------------------
The commenter also criticized FINRA's amended proposal regarding
locked and crossed markets.\85\ According to the commenter, FINRA
stated in its amended proposal that it would be unreasonable to require
broker-dealers to avoid locked and crossed markets across inter-dealer
quotation systems because there is not a mandated quotation mechanism
for OTC Equity Securities.\86\ The commenter pointed out that it itself
``currently disseminates a widely accessible, consolidated national
best bid and offer for OTC Equity Securities'' quoted in inter-dealer
quotation systems.\87\ The commenter stated that these data should be
used by broker-dealers in avoiding locking and crossing markets across
multiple inter-dealer quotation systems, and that FINRA should have
purchased this market data from the commenter.
---------------------------------------------------------------------------
\85\ See id. at 4.
\86\ See Pink OTC 3 Letter at 4.
\87\ Id. at 5.
---------------------------------------------------------------------------
Finally, the commenter stated that, unlike in the market for NMS
securities, no business model in the market for OTC Equity Securities
depends on the receipt of access fees among broker-dealers.\88\ As an
alternative to the proposed rule, the commenter suggested that FINRA
allow ECNs to trade on a riskless principal basis with non-subscriber
broker-dealers.\89\
---------------------------------------------------------------------------
\88\ See id. at 8.
\89\ See id.
---------------------------------------------------------------------------
VI. FINRA's Response to Comments on Amendment No. 1
In response to comments on the proposed limit order display rule,
FINRA reiterated its view that the appropriate trigger for an
obligation to display a customer limit order is when an OTC market
maker already is displaying a priced quotation for the security in an
inter-dealer quotation system (unless an exception applies).\90\ FINRA
similarly reiterated its view that, once triggered, the limit order
display requirement should apply to the full size of a customer limit
order.\91\ FINRA noted that its approach was consistent with the
Commission's determination when it first proposed a limit order display
rule that the presumption should be to display ``unless such orders are
of block size, the customer requests that its order not be displayed,
or one of the exceptions to the rule applies.'' \92\
---------------------------------------------------------------------------
\90\ See letter to Elizabeth M. Murphy, Secretary, Commission,
dated June 22, 2010 from Racquel L. Russell, Assistant General
Counsel, Regulatory Policy and Oversight (``FINRA Response
Letter'').
\91\ See id.
\92\ See id. at 3 (citing Securities Exchange Act Release No.
36310 (September 29, 1995) 60 FR 52792 (October 10, 1995)).
---------------------------------------------------------------------------
FINRA also responded to the issue of whether the prohibition on
locked and crossed markets should apply across inter-dealer quotation
systems. FINRA stated that, at this time, the prohibition on locked and
crossed markets should apply only within (and thus not across) inter-
dealer quotation systems ``due to the lack of an SRO-sponsored widely
accessible, consolidated national best bid and offer for OTC equity
securities.'' \93\
---------------------------------------------------------------------------
\93\ Id. at 3-4.
---------------------------------------------------------------------------
FINRA also reiterated its position that the proposed cap on access
fees is the fairest and most appropriate resolution of the access fee
issue, and that proposed Rule 6450 ``permits a landscape where market
forces can drive the adoption of various business models in the OTC
market.'' \94\
---------------------------------------------------------------------------
\94\ Id. at 4.
---------------------------------------------------------------------------
VII. Discussion and Findings
After careful consideration of the amended proposal, the comments
received, and FINRA's responses thereto, 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.\95\ In particular, the Commission finds that
the proposal is consistent with Section 15A(b)(6) of the Act,\96\ 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; to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions
[[Page 37493]]
in securities; to remove impediments to and perfect the mechanism of a
free and open market and a national market system; and, in general, to
protect investors and the public interest. The Commission does not
believe that any comments have been raised that should preclude
approval of the proposal.
---------------------------------------------------------------------------
\95\ 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).
\96\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
With this proposal, FINRA seeks to introduce into the market for
OTC Equity Securities--over which it has supervisory responsibilities
\97\--certain regulatory protections that were introduced by the
Commission into the market for exchange-listed securities by Regulation
NMS. The Commission adopted Regulation NMS in 2005 to ``modernize and
strengthen the national market system for equity securities.'' \98\
Among the elements of Regulation NMS were: (1) A rule establishing a
uniform quoting increment of no less than one penny for quotations in
NMS stocks equal to or greater than $1.00 per share, to promote greater
price transparency and consistency; (2) a cap on fees for accessing
protected quotations, to ensure the ``fairness and accuracy of
displayed quotations by establishing an outer limit on the cost of
accessing such quotations;'' \99\ and (3) a rule requiring the
exchanges and FINRA to require their members reasonably to avoid
locking or crossing protected quotations. Under the same authority used
to establish Regulation NMS, the Commission had previously established
a rule that generally requires display of customer limit orders.\100\
Many of the same concerns expressed by the Commission in adopting
Regulation NMS and the Limit Order Display Rule for exchange-listed
securities also apply to the market in OTC Equity Securities. The rules
proposed here by FINRA appear reasonably designed to address these
concerns, and follow closely the regulatory approach set forth in the
Commission's rules. Therefore, the Commission believes that FINRA's
proposal is consistent with the Act.
---------------------------------------------------------------------------
\97\ See Section 15A(b)(11) of the Act, 15 U.S.C. 78o-3(b)(11)
(rules of a national securities association must ``include
provisions governing the form and content of quotations relating to
securities sold otherwise than on a national securities exchange'').
\98\ Securities Exchange Act Release 51808 70 FR 37496, 37496
(June 29, 2005) (``Reg NMS Adopting Release'').
\99\ Reg NMS Adopting Release, id., 70 FR at 37502.
\100\ See Securities Exchange Act Release No. 37619A (September
6, 1996), 61 FR 48290 (September 12, 1996) (adopting Rule 11Ac1-4
under the Act, which requires the display of customer limit orders
priced better than a specialist's or OTC market maker's quote)
(``Limit Order Display Release'').
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With respect to the proposal to restrict sub-penny quoting, the
Commission agrees with FINRA that the same concerns that were
articulated in the context of Regulation NMS also exist for OTC Equity
Securities. Such concerns include ``stepping ahead'' of standing limit
orders by an economically insignificant amount, which reduces
incentives to display limit orders and provide liquidity to the
markets, and the increased incidence of ``flickering quotes'' and the
resulting regulatory compliance and capacity burdens.\101\
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\101\ See Reg NMS Adopting Release, supra note 98, 70 FR at
37553.
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Like Rule 612 of Regulation NMS,\102\ proposed FINRA Rule 6434
requires that the minimum increment for bids, offers, orders, and
indications of interest priced $1.00 or more per share is one penny.
Furthermore, like Rule 612, proposed FINRA Rule 6434 requires that the
minimum increment for bids, offers, orders, and indications of interest
priced between $1.00 and $0.0001 per share is one hundredth of a penny.
Unlike Rule 612, however, proposed FINRA Rule 6434 contains an
additional provision for bids, offers, orders, and indications of
interest priced below $0.0001 per share. Under this provision, a member
may rank or accept (but not display) an order or indication of interest
in an increment as small as $0.000001.\103\ FINRA stated that this
exception recognizes the fact that some OTC Equity Securities trade at
prices less than $0.0001, and that restricting quoting in those
securities to increments of $0.0001 would effectively eliminate trading
in those securities.\104\
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\102\ 17 CFR 242.612.
\103\ In the FINRA Response Letter, FINRA noted that a member's
customer order protection obligations under IM-2110-2 (Trading Ahead
of Customer Limit Order) continue to apply. See FINRA Response
Letter, supra note 90 at 2.
\104\ See Amended Notice, 75 FR at 12586.
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The Commission believes that proposed Rule 6434 is consistent with
the Act because it adopts pricing increments similar to those set forth
in Rule 612. Although the proposed rule differs from Rule 612 in that
it permits acceptance of orders and indications of interest priced
below $0.0001 per share in finer increments, the Commission believes
that this is a reasonable accommodation given that certain OTC Equity
Securities currently trade at very low prices.
With respect to FINRA's proposal regarding locking or crossing
quotations, the Commission agrees with FINRA that many of the same
concerns that were articulated in the context of Regulation NMS--
namely, that locked and crossed markets may confuse investors and
create market inefficiencies \105\--also exist for OTC Equity
Securities. In response to commenters inquiring why FINRA did not
extend this rule across inter-dealer quotation systems, FINRA stated
that it is not practicable to extend locking and crossing restrictions
across inter-dealer markets due to the lack of a widely accessible,
consolidated national best bid and offer for OTC Equity Securities. The
Commission believes that FINRA's proposal is consistent with the Act
and is a reasonable first step to address problems caused by locked and
crossed markets, while recognizing the market data limitations for OTC
Equity Securities.
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\105\ See Reg NMS Adopting Release, supra note 98, 70 FR at
37547.
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The Commission also finds that FINRA's proposal regarding access
fees is consistent with the Act, for the same reasons that the
Commission adopted its own rules regarding access fees. In the Reg NMS
Adopting Release, the Commission noted that a flat access fee was the
``fairest and most appropriate solution to what has been a longstanding
and contentious issue.'' \106\ The Commission noted that this fee would
apply equally to ECNs, market makers, and other trading centers.\107\
The Commission also noted that, for quotations to be fair and useful,
``there must be some limit on the extent to which the true price can
vary from the displayed price,'' and concluded that the cap on access
fees ``harmoniz[ed] quotation practices and preclude[ed] the distortive
effects of exorbitant fees.'' \108\ The Commission agrees with FINRA
that the same considerations apply here. In capping the fees that may
be charged to access a quotation in an OTC Equity Security, and in
drafting the rule to apply to ATSs, ECNs, and market makers, the
proposed rule is reasonably designed to promote transparency and fair
competition in the market for OTC Equity Securities.
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\106\ Reg NMS Adopting Release, supra note 98, 70 FR at 37545.
\107\ See id.
\108\ Id.
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As noted above, a number of commenters argued that this access fee
provision applicable to sub-penny quotations, as originally proposed,
could lead to certain gaming activity. In response to these comments,
FINRA proposed in Amendment No. 1 to modify the cap on access fees for
sub-penny quotations. Specifically, the access fee cap would be the
lesser of 0.3% of the published quotation price on a per-share basis,
or 30% of the minimum allowable increment. The Commission believes that
the amended
[[Page 37494]]
proposal is reasonably designed to minimize access fee gaming, as it
prevents the access fee from exceeding the minimum quoting increment.
Finally, the Commission finds that FINRA's proposal to adopt a
limit order display rule is consistent with the Act. With certain
exceptions, the proposal requires a market maker displaying a priced
quote in an inter-dealer quotation system to immediately display a
customer limit order that it receives that (1) improves the price of
the bid or offer displayed by the market maker, or (2) improves the
size of its bid or offer by more than a de minimis amount where it is
priced equal to the best bid or offer in the inter-dealer quotation
system where the market maker is quoting. The Commission believes that
extending limit order display requirements to OTC Equity Securities is
reasonably designed to increase transparency in the market for OTC
Equity Securities. As it has previously stated, the Commission believes
that limit orders are a valuable component of price discovery, and that
uniformly requiring display of such orders will encourage tighter,
deeper, and more efficient markets.\109\ Commenters generally supported
the proposed limit order display requirement, although some commenters
requested certain clarifications and modifications. In response to
comments, FINRA noted in Amendment No. 1 that its proposed limit order
display rule would not require display of customer orders that would
result in a violation of the minimum quotation size tiers prescribed in
FINRA Rule 6450 (Minimum Quotation Size Requirements For OTC Equity
Securities).\110\ FINRA also proposed a new exception for limit orders
priced less than $0.0001 per share, consistent with the changes made to
proposed FINRA Rule 6434 prohibiting the display of a bid or offer,
order, or indication of interest in any OTC Equity Security priced less
than $0.0001 per share.\111\
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\109\ See Limit Order Display Release, supra note 100, 61 FR at
48294. Rule 11Ac1-4, which was adopted prior to the approval of The
Nasdaq Stock Market as a national securities exchange, applied
generally to exchange specialists and Nasdaq market makers. Rule
11Ac1-4 was subsequently redesignated as Rule 604 under Regulation
NMS. See NMS Adopting Release, supra note 98.
\110\ See Amended Notice, supra note 7.
\111\ See id.
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One commenter expressed concern that the proposed limit order
display rule would apply only to OTC market-makers, rather than to all
broker-dealers displaying a priced quotation in an inter-dealer
quotation system or ECN, which could lead to a reduction in quotation
activity in OTC Equity Securities. The Commission notes that FINRA's
limit order display proposal acknowledges the role that market makers
traditionally have played in providing price discovery and liquidity to
the OTC Equity Securities market.
Further, in response to commenters' concerns that market makers be
permitted greater discretion to display only a portion of a customer
limit order, FINRA noted that, where the member believes that a
customer would be best served by not displaying the full size of a
limit order, the member is free to obtain the customer's consent to
refrain from displaying such customer's order, as permitted by a
proposed exception to the limit order display requirement. As it has
previously stated, the Commission believes that the presumption of
limit order display is the proper approach.\112\ The Commission further
believes that FINRA's limit order display proposal marks a positive
step in efforts to improve the transparency of OTC Equity Securities
and the handling of customer limit orders in this market sector.
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\112\ See Limit Order Display Release, supra note 100, 61 FR at
48301 (stating ``[t]he Commission believes that the rule
appropriately establishes a presumption that limit orders should be
displayed, unless such orders are of block size, the customer
requests that its order not be displayed, or one of the exceptions
to the rule applies. The exception allowing a customer to request
that its limit order not be displayed gives the customer ultimate
control in determining whether to trust the display of the limit
order to the discretion of a market professional, or to display the
order either in full, or in part, to other potential market
interest.'').
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VIII. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (SR-FINRA-2009-054), as modified by
Amendment No. 1 thereto, be, and hereby is, approved.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\113\
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\113\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-15707 Filed 6-28-10; 8:45 am]
BILLING CODE 8010-01-P
