Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change To Require Members To Report OTC Equity Transactions as Soon As Practicable, But No Later Than 10 Seconds, Following Execution, 9963-9966 [2013-03101]

Download as PDF Federal Register / Vol. 78, No. 29 / Tuesday, February 12, 2013 / Notices submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–BX– 2013–008 and should be submitted on or before March 5, 2013. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.9 Kevin M O’Neill, Deputy Secretary. [FR Doc. 2013–03099 Filed 2–11–13; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–68842; File No. SR–FINRA– 2013–013] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change To Require Members To Report OTC Equity Transactions as Soon As Practicable, But No Later Than 10 Seconds, Following Execution tkelley on DSK3SPTVN1PROD with NOTICES February 6, 2013. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on February 1, 2013, Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by FINRA. The Commission is publishing this notice to solicit 9 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Mar<15>2010 16:40 Feb 11, 2013 Jkt 229001 comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change FINRA is proposing to amend FINRA trade reporting rules to require that members report over-the-counter (‘‘OTC’’) transactions in NMS stocks and OTC Equity Securities,3 and cancellations of such transactions, to FINRA as soon as practicable, but no later than 10 seconds, following execution (or cancellation, as applicable). The text of the proposed rule change is available on FINRA’s Web site at https://www.finra.org, at the principal office of FINRA, on the Commission’s Web site at https://www.sec.gov, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, FINRA included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. FINRA has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose FINRA trade reporting rules require that members report OTC transactions in NMS stocks and OTC Equity Securities that are executed during the hours that the FINRA Facilities are open within 30 seconds of execution.4 In addition, members must report the cancellation of a trade within 30 seconds of the time of cancellation if the trade is both executed and cancelled on 3 OTC transactions in NMS stocks, as defined in SEC Rule 600(b) of Regulation NMS, are reported through the Alternative Display Facility (‘‘ADF’’) or a Trade Reporting Facility (‘‘TRF’’), and transactions in ‘‘OTC Equity Securities,’’ as defined in FINRA Rule 6420 (i.e., non-NMS stocks such as OTC Bulletin Board and OTC Market securities), are reported through the OTC Reporting Facility (‘‘ORF’’). The ADF, TRFs and ORF are collectively referred to herein as the ‘‘FINRA Facilities.’’ 4 See, e.g., FINRA Rules 6282(a), 6380A(a), 6380B(a) and 6622(a). The TRFs and ORF are open between 8:00 a.m. and 8:00 p.m., and the ADF is open between 8:00 a.m. and 6:30 p.m. PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 9963 the same day during normal market hours.5 Under current FINRA guidance, members are expected to report transactions as soon as practicable and should not withhold trade reports, e.g., by programming their systems to delay reporting until the last permissible second.6 FINRA is proposing to amend its trade reporting rules to require members to report OTC trades in NMS stocks and OTC Equity Securities as soon as practicable, but no later than 10 seconds, following execution and to report trade cancellations as soon as practicable, but no later than 10 seconds, after the time of cancellation.7 Under the proposed rule change, all transactions not reported within 10 seconds will be marked late (unless expressly subject to a different reporting requirement 8 or excluded from the trade reporting rules altogether). FINRA understands that there will be isolated instances where a member is unable to report trades within the time period prescribed by rule, and FINRA will continue to look for a pattern and practice 9 of unexcused late trade reporting before taking action against a member. Pursuant to Rules 6181 and 6623, unexcused late reporting occurs when there are ‘‘repeated reports of executions submitted after the required time period without reasonable justification or exceptional circumstances.’’ The rules also provide that ‘‘[e]xceptional circumstances will be determined on a case-by-case basis and may include instances of system failure by a member or service bureau, or unusual market conditions, such as extreme volatility in a security, or in the market as a whole.’’ FINRA also is proposing to adopt Supplementary Material to clarify the requirement that members report trades and trade cancellations ‘‘as soon as 5 See, e.g., FINRA Rules 6282(j)(2)(A), 6380A(g)(2)(A), 6380B(f)(2)(A) and 6622(f)(2)(A). Members must report all cancellations of previously reported trades to FINRA; however, where the trade is executed or canceled outside of normal market hours, the 30-second requirement does not apply to the reporting of the cancellation. 6 See Regulatory Notice 10–24 (April 2010). 7 FINRA also is proposing conforming changes to replace the reference to 30 seconds with 10 seconds in the rules relating to the reporting of stop stock and ‘‘prior reference price’’ transactions. See FINRA Rules 6282(a)(4), 6380A(a)(5), 6380B(a)(5) and 6622(a)(5). 8 For example, the proposed rule change will not amend the reporting requirements applicable to transactions in Restricted Equity Securities, as defined in Rule 6420, effected under Securities Act Rule 144A, which transactions currently are not subject to the 30-second reporting requirement. See Rule 6622(a)(3). 9 The Commission notes that FINRA Rules refer to ‘‘a pattern or practice.’’ See, e.g., FINRA Rule 6282 (emphasis added). E:\FR\FM\12FEN1.SGM 12FEN1 9964 Federal Register / Vol. 78, No. 29 / Tuesday, February 12, 2013 / Notices tkelley on DSK3SPTVN1PROD with NOTICES practicable.’’ Specifically, the proposed Supplementary Material provides that members must adopt policies and procedures reasonably designed to comply with this requirement and must implement systems that commence the trade reporting process without delay upon execution (or cancellation, as applicable). Where a member has such reasonably designed policies, procedures and systems in place, the member generally will not be viewed as violating the ‘‘as soon as practicable’’ requirement because of delays in trade reporting that are due to external factors where the member does not purposely intend to delay the reporting of the trade. The proposed Supplementary Material also expressly prohibits members from purposely withholding trade reports, e.g., by programming their systems to delay reporting until the last permissible second. FINRA notes that members that engage in a pattern and practice 10 of unexcused late reporting (i.e., reporting later than 10 seconds after execution) may be charged with violating FINRA rules, notwithstanding that they have policies and procedures that contemplate commencing the trade reporting process without delay. Timely reporting has become even more critical with the implementation of the Single Stock Circuit Breaker trading pause rules and the upcoming implementation of the NMS Plan to Address Extraordinary Market Volatility (or ‘‘Limit Up/Limit Down’’) this year. For example, the price bands under Limit Up/Limit Down will be a certain percentage away from a ‘‘reference price,’’ which is generally the average price of regular way, last-sale eligible trades for a security over the immediately preceding five-minute period. All regular way, last sale eligible trades reported within the time frame prescribed by rule (i.e., that are not reported late) will be included in the calculation of the reference price.11 Given how quickly the price for a security can change, a trade executed and reported in 30 seconds potentially may no longer reflect the current market and could improperly impact the calculation of reference prices or, at an extreme, trigger a single stock circuit breaker (which will remain in effect for certain NMS stocks during the phased implementation of Limit Up/Limit 10 Id. 11 By its terms, Limit Up/Limit Down will be implemented on a one-year pilot basis in two phases. Phase I is currently scheduled to begin on April 8, 2013 in select NMS stocks. Although the proposed rule change, if approved, will not be in place at the commencement of Phase I, FINRA believes it ultimately will be beneficial to the operation of Limit Up/Limit Down. VerDate Mar<15>2010 16:40 Feb 11, 2013 Jkt 229001 Down). In addition, trade reports received 30 seconds after execution are more likely to appear to market participants as violations of Limit Up/ Limit Down (i.e., executions outside of the price bands), as well as the Regulation NMS Order Protection Rule (i.e., trading at a price worse than the best displayed bid or offer, commonly referred to as a ‘‘trade-through’’).12 Even though the vast majority of OTC trades are reported within 10 seconds today,13 market participants have no certainty whether a particular trade reflects the immediate current market. This is because today, when FINRA disseminates OTC trades to the consolidated ‘‘tapes,’’ 14 it does not distinguish between a trade reported one second after execution and a trade reported 30 seconds after execution, as both are considered timely under FINRA rules. FINRA believes that reducing the reporting time and codifying current guidance requiring that members report trades as soon as practicable and not hold back trade reports is necessary to promote consistent and timely reporting by all members. In addition, FINRA believes that the proposed rule change will help ensure that members are attentive to transaction reporting standards. FINRA believes that very few members would be unable to comply with the proposed rule change today. For the one-week period cited in footnote 11 herein, 288 member firms reported one or more OTC trades to FINRA. Of these firms, only 12 were unable to report any of their trades within 10 seconds. Of the 25,251,098 last sale eligible trades reported during this period, the total number of trades reported by these 12 firms was 21 (0.0000831% of the total number of trades). In addition, there were only 22 member firms that were unable to report at least 50% of their last sale eligible 12 For example, if a trade is not disseminated until 30 seconds after execution, the best displayed market could have changed dramatically between the time of execution and ultimate dissemination of the trade, giving the appearance of a trade-through of the then-current market. 13 For example, during the period of July 9 through July 13, 2012, 99.96% of last-sale eligible trades were reported within 10 seconds of execution (with a breakdown of 99.97% of OTC trades in NMS stocks and 99.04% of OTC trades in OTC Equity Securities). 14 Trades reported for public dissemination purposes are transmitted to three ‘‘tapes’’ based on the listing venue of the security: New York Stock Exchange securities (Tape A), NYSE Arca, NYSE MKT and other regional exchange securities (Tape B), and Nasdaq Stock Market securities (Tape C). Tape A and Tape B are governed by the Consolidated Tape Association Plan (CTA Plan) and Tape C is governed by the Nasdaq Unlisted Trading Privileges Plan (UTP Plan). PO 00000 Frm 00082 Fmt 4703 Sfmt 4703 trades within 10 seconds (this number includes the 12 firms mentioned above). The total number of trades reported by these 22 firms was 899 (0.0035602% of the total number of trades). FINRA contacted more than half of the 22 firms to discuss their trade reporting protocols and the potential impact that the proposed rule change might have on them. The majority of the firms that FINRA spoke to indicated that their business model is not to execute and report trades, but instead to route most of their orders to other firms for execution,15 while a few other firms indicated that, as a more general matter, they do not trade equities very frequently. Accordingly, FINRA believes that the burden of the proposed rule change should be minimal, particularly since, as noted above, FINRA looks to a pattern and practice 16 of late trade reporting and typically does not charge a member for isolated instances of late reporting. FINRA originally considered a requirement that members report transactions ‘‘immediately,’’ but no later than 10 seconds, following execution. FINRA staff discussed the proposed rule change with several of its industry advisory committees in developing its approach. While these committees were generally supportive of the proposal, they indicated the need for (1) a sufficient implementation period so that members can make any necessary systems changes (as noted above, FINRA is proposing a 120 to 180 day implementation period following Commission approval); (2) revision of the standard from ‘‘immediately’’ to ‘‘as soon as practicable’’ and a request to provide additional clarity on the interpretation and application of the ‘‘as soon as practicable’’ requirement (FINRA further clarified this as part of the proposed Supplementary Material); and (3) additional guidance for situations where delays could result from queuing of data into the FINRA Facilities (given that the vast majority of trades today are reported within 10 seconds, FINRA does not believe that the proposed rule change will cause any queuing issues into the FINRA 15 FINRA notes that members, particularly smaller members, that route their orders to another member for handling or execution do not have the trade reporting obligation under FINRA rules. For transactions between members, the ‘‘executing party’’ (which is defined as the member that receives an order for handling or execution or is presented an order against its quote, does not subsequently re-route the order, and executes the transaction) has the obligation to report the trade to FINRA. See Rules 6282(b), 6380A(b), 6380B(b) and 6622(b); see also Regulatory Notice 09–08 (January 2009). 16 See, supra note 9. E:\FR\FM\12FEN1.SGM 12FEN1 Federal Register / Vol. 78, No. 29 / Tuesday, February 12, 2013 / Notices Facilities). Finally, the committees asked for guidance on how the rule would apply to late reporting during periods of market stress, e.g., high volatility days such as the Russell index rebalancing, where compliance rates could be impacted. As noted above, extraordinary market volatility is taken into consideration currently, and would continue to be considered under the proposed reporting time frame, in determining whether exceptional circumstances exist to excuse late trade reporting. FINRA also notes that its staff reviewed members’ compliance rates on the date of Russell index rebalancing in 2012 and determined that there was no appreciable decrease in the percentage of trades reported within 10 seconds of execution on that day. FINRA will announce the effective date of the proposed rule change in a Regulatory Notice. As discussed above, a small number of members currently are unable to report trades within 10 seconds and may need to make systems changes to comply with the proposed rule change. While the vast majority of members have automated their trade reporting systems and are already reporting within the proposed time frame, even these members may need to make programming adjustments (e.g., to modify the trigger for appending the late modifier, as required under FINRA rules, from 30 seconds to 10 seconds after execution of the trade). To allow sufficient time to make the necessary systems changes, FINRA is proposing that the implementation date will be between 120 and 180 days following the date of Commission approval. tkelley on DSK3SPTVN1PROD with NOTICES 2. Statutory Basis FINRA believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act,17 which requires, among other things, that FINRA rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. For the reasons discussed above, FINRA believes that the proposed rule change will enhance market transparency and price discovery, promote more consistent trade reporting by members and facilitate implementation and further the goals of the Single Stock Circuit Breaker trading pause rules and the NMS Plan to Address Extraordinary Market Volatility. 17 15 U.S.C. 78o–3(b)(6). VerDate Mar<15>2010 16:40 Feb 11, 2013 Jkt 229001 B. Self-Regulatory Organization’s Statement on Burden on Competition FINRA does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. FINRA believes the vast majority of firms that engage in equities transactions have automated their trade reporting systems so that the proposed rule change will not have an economic impact.18 Furthermore, FINRA believes that the proposed rule change will not have a competitive impact on smaller members that may rarely have a trade reporting obligation, given the policies and procedures approach to determining compliance with the ‘‘as soon as practicable’’ requirement, and the pattern and practice 19 nature of FINRA’s late trade reporting surveillance and enforcement. While smaller members will be expected to adopt policies and procedures that contemplate reporting any trades for which they have the reporting obligation as soon as practicable, their infrequent instances of trade reporting likely would never rise to the level of a pattern and practice 20 of late reporting. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove such proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. 18 This is supported by a review of member trade reporting statistics. As previously noted, during the period of July 9 through July 13, 2012, 99.96% of last-sale eligible trades were reported within 10 seconds of execution. For that same period, 99.71% and 94.31% of trades were reported within 5 seconds and 2 seconds of execution, respectively. 19 See, supra note 9. 20 Id. PO 00000 Frm 00083 Fmt 4703 Sfmt 4703 9965 IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rulecomments@sec.gov. Please include File No. SR–FINRA–2013–013 on the subject line. Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File No. SR–FINRA–2013–013. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal office of FINRA. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File No. SR–FINRA– 2013–013 and should be submitted on or before March 5, 2013. 21 17 E:\FR\FM\12FEN1.SGM CFR 200.30–3(a)(12). 12FEN1 9966 Federal Register / Vol. 78, No. 29 / Tuesday, February 12, 2013 / Notices For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.21 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2013–03101 Filed 2–11–13; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–68841; File No. SR– NASDAQ–2013–020] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Establish the Limit Locator Service Offered at No Cost to Subscribing Members February 6, 2013. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on January 28, 2013, The NASDAQ Stock Market LLC (‘‘NASDAQ’’ or ‘‘Exchange’’), filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to establish the Limit Locator service offered at no cost to subscribing members beginning February 4, 2013. The text of the proposed rule change is below. Proposed new language is italicized. tkelley on DSK3SPTVN1PROD with NOTICES 7061. Limit Locator Limit Locator is a tool to assist a member firm in monitoring its trades reported into the FINRA/NASDAQ TRF for compliance with the requirements of the National Market System Plan to Address Extraordinary Market Volatility. The service provides a subscribing member firm with an overview of its trades reported at, or outside of, a designated Limit Up/Limit Down pricing band. The service will provide a total count of the subscribing member firm’s trades in each category as well as present this information graphically, on a rolling month basis. A subscribing member firm is able to create custom emails alerts to notify users when a trade is reported at, or outside of, a Limit Up/Limit Down pricing band. Limit Locator is accessed through the NASDAQ 1 15 2 17 U.S.C. 78s(b)(1). CFR 240.19b–4. VerDate Mar<15>2010 16:40 Feb 11, 2013 Jkt 229001 Workstation or Weblink ACT 2.0 and is offered at no cost at this time. 1. Purpose The Exchange is proposing to adopt a new add on tool to the NASDAQ Workstation and/or Weblink ACT 2.0, Limit Locator, to assist a member firm in monitoring its trades reported into the FINRA/NASDAQ TRF (‘‘TRF’’) for compliance with the requirements of the National Market System Plan to Address Extraordinary Market Volatility (the ‘‘Plan’’).3 The Plan provides a limit up/ limit down mechanism designed to prevent trades in NMS securities from occurring outside of specified price bands. The bands will be set a percentage level above and below the average reference price of the security over the immediately preceding fiveminute period, and are calculated on a continuous basis during regular trading hours. If the National Best Offer (‘‘NBO’’) equals the lower price band without crossing the NBO, or National Best Bid (‘‘NBB’’) equals the upper price band without crossing the NBB, then the stock will enter a limit state quotation period of 15 seconds during which no new reference prices or price bands will be calculated. A stock will exit the limit state when the entire size of all quotations are either executed or cancelled. If the limit state exists and trading continues to occur at the price band, or no trading occurs within the price band, for more than 15 second then a five minute trading pause will be enacted. The Plan requires that member firms establish, maintain, and enforce written policies and procedures that are reasonably designed to comply with the limit up-limit down and trading pause requirements specified in the Plan. NASDAQ is proposing to offer Limit Locator to member firms to assist them in monitoring compliance with the Plan by tracking trades reported to the TRF that occur at, or outside of, the limit up/ limit down bands and providing notice thereof.4 A record will be displayed if Limit Locator finds that a trade was reported: at lower price band; at higher price band; outside lower price band; or outside lower price band [sic]. The service will provide a subscribing member firm with both daily trade data and 30 days of historical data, which will be available for export in CSV format. The information provided by the service is presented numerically as a running intra-day count of all trades that fit within each of the four categories, and presented graphically as daily totals on a rolling month basis. A subscribing member firm will also have the option to receive email alerts when a trade is reported to the TRF at, or outside of, a limit up/limit down band. On April 8, 2013, Phase I of the Plan will go into effect. Phase I of the Plan will apply only to Tier 1 NMS Stocks. To assist firms in preparing for the implementation of Phase I, the Security [sic] Information Processors will begin disseminating limit up/limit down information in select stocks on a test basis beginning February 4, 2013. Accordingly, NASDAQ is proposing to offer Limit Locator on February 4, 2013 so that member firms may begin to use the tool concurrent with the availability of the limit up/limit down test data. The Exchange is proposing to offer Limit Locator at no cost to members at this time, but may assess a fee in the future. Any such fee would be filed with the Commission. 3 On April 5, 2011, the Exchange, together with other self-regulatory organizations, filed with the Commission a national market system plan to adopt a market-wide limit up/limit down system to reduce the negative impacts of sudden, unanticipated price movements in NMS Stocks, like that which was experienced on May 6, 2010. Securities Exchange Act Release No. 64547 (May 25, 2011), 76 FR 31647 (June 1, 2011) (File No. 4– 631). The Plan was approved by the Commission on a pilot basis on May 31, 2012. Securities Exchange Act Release No. 67091 (May 31, 2012), 77 FR 33498 (June 6, 2012). 4 Limit Locator will help a subscribing member firm to identify trades reported to the TRF that occurred at or outside of the limit up/limit down bands, but will not prevent such trades from occurring. A member firm may use the information provided by Limit Locator to prevent additional violations of the Plan from occurring by taking corrective action, but use of Limit Locator does not satisfy a member firm’s obligation under the Plan to establish, maintain, and enforce written policies and procedures that are reasonably designed to comply with the limit up/limit down and trading pause requirements. * * * * * II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change PO 00000 Frm 00084 Fmt 4703 Sfmt 4703 E:\FR\FM\12FEN1.SGM 12FEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 78, Number 29 (Tuesday, February 12, 2013)]
[Notices]
[Pages 9963-9966]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-03101]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68842; File No. SR-FINRA-2013-013]

Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change To Require
Members To Report OTC Equity Transactions as Soon As Practicable, But
No Later Than 10 Seconds, Following Execution

February 6, 2013.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on February 1, 2013, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by FINRA. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------

\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

FINRA is proposing to amend FINRA trade reporting rules to require
that members report over-the-counter (``OTC'') transactions in NMS
stocks and OTC Equity Securities,\3\ and cancellations of such
transactions, to FINRA as soon as practicable, but no later than 10
seconds, following execution (or cancellation, as applicable).
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\3\ OTC transactions in NMS stocks, as defined in SEC Rule
600(b) of Regulation NMS, are reported through the Alternative
Display Facility (``ADF'') or a Trade Reporting Facility (``TRF''),
and transactions in ``OTC Equity Securities,'' as defined in FINRA
Rule 6420 (i.e., non-NMS stocks such as OTC Bulletin Board and OTC
Market securities), are reported through the OTC Reporting Facility
(``ORF''). The ADF, TRFs and ORF are collectively referred to herein
as the ``FINRA Facilities.''
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The text of the proposed rule change is available on FINRA's Web
site at https://www.finra.org, at the principal office of FINRA, on the
Commission's Web site at https://www.sec.gov, and at the Commission's
Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change

1. Purpose
FINRA trade reporting rules require that members report OTC
transactions in NMS stocks and OTC Equity Securities that are executed
during the hours that the FINRA Facilities are open within 30 seconds
of execution.\4\ In addition, members must report the cancellation of a
trade within 30 seconds of the time of cancellation if the trade is
both executed and cancelled on the same day during normal market
hours.\5\ Under current FINRA guidance, members are expected to report
transactions as soon as practicable and should not withhold trade
reports, e.g., by programming their systems to delay reporting until
the last permissible second.\6\
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\4\ See, e.g., FINRA Rules 6282(a), 6380A(a), 6380B(a) and
6622(a).
The TRFs and ORF are open between 8:00 a.m. and 8:00 p.m., and
the ADF is open between 8:00 a.m. and 6:30 p.m.
\5\ See, e.g., FINRA Rules 6282(j)(2)(A), 6380A(g)(2)(A),
6380B(f)(2)(A) and 6622(f)(2)(A).
Members must report all cancellations of previously reported
trades to FINRA; however, where the trade is executed or canceled
outside of normal market hours, the 30-second requirement does not
apply to the reporting of the cancellation.
\6\ See Regulatory Notice 10-24 (April 2010).
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FINRA is proposing to amend its trade reporting rules to require
members to report OTC trades in NMS stocks and OTC Equity Securities as
soon as practicable, but no later than 10 seconds, following execution
and to report trade cancellations as soon as practicable, but no later
than 10 seconds, after the time of cancellation.\7\ Under the proposed
rule change, all transactions not reported within 10 seconds will be
marked late (unless expressly subject to a different reporting
requirement \8\ or excluded from the trade reporting rules altogether).
FINRA understands that there will be isolated instances where a member
is unable to report trades within the time period prescribed by rule,
and FINRA will continue to look for a pattern and practice \9\ of
unexcused late trade reporting before taking action against a member.
Pursuant to Rules 6181 and 6623, unexcused late reporting occurs when
there are ``repeated reports of executions submitted after the required
time period without reasonable justification or exceptional
circumstances.'' The rules also provide that ``[e]xceptional
circumstances will be determined on a case-by-case basis and may
include instances of system failure by a member or service bureau, or
unusual market conditions, such as extreme volatility in a security, or
in the market as a whole.''
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\7\ FINRA also is proposing conforming changes to replace the
reference to 30 seconds with 10 seconds in the rules relating to the
reporting of stop stock and ``prior reference price'' transactions.
See FINRA Rules 6282(a)(4), 6380A(a)(5), 6380B(a)(5) and 6622(a)(5).
\8\ For example, the proposed rule change will not amend the
reporting requirements applicable to transactions in Restricted
Equity Securities, as defined in Rule 6420, effected under
Securities Act Rule 144A, which transactions currently are not
subject to the 30-second reporting requirement. See Rule 6622(a)(3).
\9\ The Commission notes that FINRA Rules refer to ``a pattern
or practice.'' See, e.g., FINRA Rule 6282 (emphasis added).
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FINRA also is proposing to adopt Supplementary Material to clarify
the requirement that members report trades and trade cancellations ``as
soon as

[[Page 9964]]

practicable.'' Specifically, the proposed Supplementary Material
provides that members must adopt policies and procedures reasonably
designed to comply with this requirement and must implement systems
that commence the trade reporting process without delay upon execution
(or cancellation, as applicable). Where a member has such reasonably
designed policies, procedures and systems in place, the member
generally will not be viewed as violating the ``as soon as
practicable'' requirement because of delays in trade reporting that are
due to external factors where the member does not purposely intend to
delay the reporting of the trade. The proposed Supplementary Material
also expressly prohibits members from purposely withholding trade
reports, e.g., by programming their systems to delay reporting until
the last permissible second. FINRA notes that members that engage in a
pattern and practice \10\ of unexcused late reporting (i.e., reporting
later than 10 seconds after execution) may be charged with violating
FINRA rules, notwithstanding that they have policies and procedures
that contemplate commencing the trade reporting process without delay.
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\10\ Id.
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Timely reporting has become even more critical with the
implementation of the Single Stock Circuit Breaker trading pause rules
and the upcoming implementation of the NMS Plan to Address
Extraordinary Market Volatility (or ``Limit Up/Limit Down'') this year.
For example, the price bands under Limit Up/Limit Down will be a
certain percentage away from a ``reference price,'' which is generally
the average price of regular way, last-sale eligible trades for a
security over the immediately preceding five-minute period. All regular
way, last sale eligible trades reported within the time frame
prescribed by rule (i.e., that are not reported late) will be included
in the calculation of the reference price.\11\ Given how quickly the
price for a security can change, a trade executed and reported in 30
seconds potentially may no longer reflect the current market and could
improperly impact the calculation of reference prices or, at an
extreme, trigger a single stock circuit breaker (which will remain in
effect for certain NMS stocks during the phased implementation of Limit
Up/Limit Down). In addition, trade reports received 30 seconds after
execution are more likely to appear to market participants as
violations of Limit Up/Limit Down (i.e., executions outside of the
price bands), as well as the Regulation NMS Order Protection Rule
(i.e., trading at a price worse than the best displayed bid or offer,
commonly referred to as a ``trade-through'').\12\ Even though the vast
majority of OTC trades are reported within 10 seconds today,\13\ market
participants have no certainty whether a particular trade reflects the
immediate current market. This is because today, when FINRA
disseminates OTC trades to the consolidated ``tapes,'' \14\ it does not
distinguish between a trade reported one second after execution and a
trade reported 30 seconds after execution, as both are considered
timely under FINRA rules.
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\11\ By its terms, Limit Up/Limit Down will be implemented on a
one-year pilot basis in two phases. Phase I is currently scheduled
to begin on April 8, 2013 in select NMS stocks. Although the
proposed rule change, if approved, will not be in place at the
commencement of Phase I, FINRA believes it ultimately will be
beneficial to the operation of Limit Up/Limit Down.
\12\ For example, if a trade is not disseminated until 30
seconds after execution, the best displayed market could have
changed dramatically between the time of execution and ultimate
dissemination of the trade, giving the appearance of a trade-through
of the then-current market.
\13\ For example, during the period of July 9 through July 13,
2012, 99.96% of last-sale eligible trades were reported within 10
seconds of execution (with a breakdown of 99.97% of OTC trades in
NMS stocks and 99.04% of OTC trades in OTC Equity Securities).
\14\ Trades reported for public dissemination purposes are
transmitted to three ``tapes'' based on the listing venue of the
security: New York Stock Exchange securities (Tape A), NYSE Arca,
NYSE MKT and other regional exchange securities (Tape B), and Nasdaq
Stock Market securities (Tape C). Tape A and Tape B are governed by
the Consolidated Tape Association Plan (CTA Plan) and Tape C is
governed by the Nasdaq Unlisted Trading Privileges Plan (UTP Plan).
---------------------------------------------------------------------------

FINRA believes that reducing the reporting time and codifying
current guidance requiring that members report trades as soon as
practicable and not hold back trade reports is necessary to promote
consistent and timely reporting by all members. In addition, FINRA
believes that the proposed rule change will help ensure that members
are attentive to transaction reporting standards.
FINRA believes that very few members would be unable to comply with
the proposed rule change today. For the one-week period cited in
footnote 11 herein, 288 member firms reported one or more OTC trades to
FINRA. Of these firms, only 12 were unable to report any of their
trades within 10 seconds. Of the 25,251,098 last sale eligible trades
reported during this period, the total number of trades reported by
these 12 firms was 21 (0.0000831% of the total number of trades). In
addition, there were only 22 member firms that were unable to report at
least 50% of their last sale eligible trades within 10 seconds (this
number includes the 12 firms mentioned above). The total number of
trades reported by these 22 firms was 899 (0.0035602% of the total
number of trades). FINRA contacted more than half of the 22 firms to
discuss their trade reporting protocols and the potential impact that
the proposed rule change might have on them. The majority of the firms
that FINRA spoke to indicated that their business model is not to
execute and report trades, but instead to route most of their orders to
other firms for execution,\15\ while a few other firms indicated that,
as a more general matter, they do not trade equities very frequently.
Accordingly, FINRA believes that the burden of the proposed rule change
should be minimal, particularly since, as noted above, FINRA looks to a
pattern and practice \16\ of late trade reporting and typically does
not charge a member for isolated instances of late reporting.
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\15\ FINRA notes that members, particularly smaller members,
that route their orders to another member for handling or execution
do not have the trade reporting obligation under FINRA rules. For
transactions between members, the ``executing party'' (which is
defined as the member that receives an order for handling or
execution or is presented an order against its quote, does not
subsequently re-route the order, and executes the transaction) has
the obligation to report the trade to FINRA. See Rules 6282(b),
6380A(b), 6380B(b) and 6622(b); see also Regulatory Notice 09-08
(January 2009).
\16\ See, supra note 9.
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FINRA originally considered a requirement that members report
transactions ``immediately,'' but no later than 10 seconds, following
execution. FINRA staff discussed the proposed rule change with several
of its industry advisory committees in developing its approach. While
these committees were generally supportive of the proposal, they
indicated the need for (1) a sufficient implementation period so that
members can make any necessary systems changes (as noted above, FINRA
is proposing a 120 to 180 day implementation period following
Commission approval); (2) revision of the standard from ``immediately''
to ``as soon as practicable'' and a request to provide additional
clarity on the interpretation and application of the ``as soon as
practicable'' requirement (FINRA further clarified this as part of the
proposed Supplementary Material); and (3) additional guidance for
situations where delays could result from queuing of data into the
FINRA Facilities (given that the vast majority of trades today are
reported within 10 seconds, FINRA does not believe that the proposed
rule change will cause any queuing issues into the FINRA

[[Page 9965]]

Facilities). Finally, the committees asked for guidance on how the rule
would apply to late reporting during periods of market stress, e.g.,
high volatility days such as the Russell index rebalancing, where
compliance rates could be impacted. As noted above, extraordinary
market volatility is taken into consideration currently, and would
continue to be considered under the proposed reporting time frame, in
determining whether exceptional circumstances exist to excuse late
trade reporting. FINRA also notes that its staff reviewed members'
compliance rates on the date of Russell index rebalancing in 2012 and
determined that there was no appreciable decrease in the percentage of
trades reported within 10 seconds of execution on that day.
FINRA will announce the effective date of the proposed rule change
in a Regulatory Notice. As discussed above, a small number of members
currently are unable to report trades within 10 seconds and may need to
make systems changes to comply with the proposed rule change. While the
vast majority of members have automated their trade reporting systems
and are already reporting within the proposed time frame, even these
members may need to make programming adjustments (e.g., to modify the
trigger for appending the late modifier, as required under FINRA rules,
from 30 seconds to 10 seconds after execution of the trade). To allow
sufficient time to make the necessary systems changes, FINRA is
proposing that the implementation date will be between 120 and 180 days
following the date of Commission approval.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\17\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest. For the reasons discussed above, FINRA believes that
the proposed rule change will enhance market transparency and price
discovery, promote more consistent trade reporting by members and
facilitate implementation and further the goals of the Single Stock
Circuit Breaker trading pause rules and the NMS Plan to Address
Extraordinary Market Volatility.
---------------------------------------------------------------------------

\17\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. FINRA believes the vast
majority of firms that engage in equities transactions have automated
their trade reporting systems so that the proposed rule change will not
have an economic impact.\18\ Furthermore, FINRA believes that the
proposed rule change will not have a competitive impact on smaller
members that may rarely have a trade reporting obligation, given the
policies and procedures approach to determining compliance with the
``as soon as practicable'' requirement, and the pattern and practice
\19\ nature of FINRA's late trade reporting surveillance and
enforcement. While smaller members will be expected to adopt policies
and procedures that contemplate reporting any trades for which they
have the reporting obligation as soon as practicable, their infrequent
instances of trade reporting likely would never rise to the level of a
pattern and practice \20\ of late reporting.
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\18\ This is supported by a review of member trade reporting
statistics. As previously noted, during the period of July 9 through
July 13, 2012, 99.96% of last-sale eligible trades were reported
within 10 seconds of execution. For that same period, 99.71% and
94.31% of trades were reported within 5 seconds and 2 seconds of
execution, respectively.
\19\ See, supra note 9.
\20\ Id.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File No. SR-FINRA-2013-013 on the subject line.

Paper Comments

Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File No. SR-FINRA-2013-013. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available
for inspection and copying at the principal office of FINRA. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File No. SR-FINRA-2013-013 and should be
submitted on or before March 5, 2013.
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\21\ 17 CFR 200.30-3(a)(12).

[[Page 9966]]

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For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\21\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-03101 Filed 2-11-13; 8:45 am]
BILLING CODE 8011-01-P

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