Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend FINRA Rule 6433 To Adopt the OTC Quotation Tier Pilot as Permanent, 20131-20137 [2018-09612]
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Federal Register / Vol. 83, No. 88 / Monday, May 7, 2018 / Notices
It is therefore ordered, pursuant to
Section 11A of the Act,38 and Rule 608
thereunder,39 that the Forty-Second
Amendment to the Nasdaq/UTP Plan
(File No. S7–24–89) be, and hereby is,
summarily abrogated. If the Participants
choose to re-file the Amendment, they
must do so pursuant to Section 11A of
the Act and the Amendment must be refiled in accordance with paragraph
(a)(1) of Rule 608 of Regulation NMS 40
for review in accordance with paragraph
(b)(2) of Rule 608 of Regulation NMS.41
By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2018–09580 Filed 5–4–18; 8:45 am]
BILLING CODE 8011–01–P
[Release No. 34–83129; File No. SR–FINRA–
2018–015]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a
Proposed Rule Change To Amend
FINRA Rule 6433 To Adopt the OTC
Quotation Tier Pilot as Permanent
April 30, 2018.
daltland on DSKBBV9HB2PROD with NOTICES
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 April 20,
2018, 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.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
FINRA is proposing to amend FINRA
Rule 6433 (Minimum Quotation Size
Requirements for OTC Equity
Securities) to adopt as permanent the
minimum quotation sizes for OTC
equity securities currently operating on
a pilot basis, scheduled to expire on
June 7, 2018.
The text of the proposed rule change
is available on FINRA’s website at
https://www.finra.org, at the principal
U.S.C. 78k–1.
CFR 242.608.
40 17 CFR 242.608(a)(1).
41 17 CFR 242.608(b)(2).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
39 17
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II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
FINRA included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. FINRA has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
SECURITIES AND EXCHANGE
COMMISSION
38 15
office of FINRA and at the
Commission’s Public Reference Room.
1. Purpose
FINRA proposes to amend Rule 6433
(Minimum Quotation Size Requirements
for OTC Equity Securities) (the ‘‘Rule’’)
to adopt as permanent the minimum
quotation sizes applicable to quotations
in OTC equity securities 3 that were
proposed pursuant to File No. SR–
FINRA–2011–058 and implemented on
a pilot basis on November 12, 2012
(‘‘Tier Size Pilot’’ or ‘‘Pilot’’).4 The Pilot
was initially approved for a one-year
term, has been extended ten times, and
currently is scheduled to expire on June
7, 2018.5
3 An
OTC equity security is an equity security
that is not an ‘‘NMS Stock’’ as defined in Rule
600(b)(47) of SEC Regulation NMS; provided,
however, that the term ‘‘OTC equity security’’ shall
not include any Restricted Equity Security. See
FINRA Rule 6420(f).
4 See Securities Exchange Act Release No. 65568
(October 14, 2011), 76 FR 65307 (October 20, 2011)
(Notice of Filing of File No. SR–FINRA–2011–058)
(‘‘Original Proposal’’).
5 See Securities Exchange Act Release No. 67208
(June 15, 2012), 77 FR 37458 (June 21, 2012) (Notice
of Filing of Amendment No. 2 and Order Granting
Accelerated Approval of a Proposed Rule Change,
as Modified by Amendment Nos. 1 and 2, To
Amend FINRA Rule 6433 (Minimum Quotation
Size Requirements for OTC Equity Securities))
(Order Approving File No. SR–FINRA–2011–058, as
amended); see also Securities Exchange Act Release
No. 70839 (November 8, 2013), 78 FR 68893
(November 15, 2013) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change
to Extend the Tier Size Pilot to November 14, 2014;
File No. SR–FINRA–2013–049); Securities
Exchange Act Release No. 73299 (October 3, 2014),
79 FR 61120 (October 9, 2014) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change
to Extend the Tier Size Pilot to February 13, 2015;
File No. SR–FINRA–2014–041); Securities
Exchange Act Release No. 74251 (February 11,
2015), 80 FR 8741 (February 18, 2015) (Notice of
Filing and Immediate Effectiveness of a Proposed
Rule Change to Extend the Tier Size Pilot to May
15, 2015; File No. SR–FINRA–2015–002); Securities
Exchange Act Release No. 74927 (May 12, 2015), 80
FR 28327 (May 18, 2015) (Notice of Filing and
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20131
The Pilot tiers were designed to: (1)
Simplify the structure of the minimum
quotation sizes; (2) facilitate the display
of customer limit orders under Rule
6460 (Display of Customer Limit Orders)
(‘‘limit order display rule’’); and (3)
expand the scope of the Rule to provide
for uniform treatment of the types and
sources of quotations that would be
subject to the Rule.6 FINRA believes the
Pilot has resulted in its intended
objectives, and particularly notes that
the Pilot has yielded a significant
positive result with regard to increased
display of customer limit orders. At the
same time, market quality measures
have been neutral (i.e., unchanged) or
slightly positive (i.e., slightly improved)
overall during the Pilot, as compared to
the pre-Pilot period, as discussed more
fully below. Accordingly, FINRA
believes it is appropriate and consistent
with the Act to adopt the Pilot tier sizes
on a permanent basis.
Objectives of the Pilot
FINRA Rule 6433 sets forth the
minimum quotation sizes applicable to
the display of quotations in OTC equity
securities on any inter-dealer quotation
system that permits quotation updates
on a real-time basis. The Rule provides
different minimum quotation sizes that
apply depending upon the price level of
the bid or offer in the security.
Prior to the Pilot, which has been in
effect since November 12, 2012,7 Rule
Immediate Effectiveness of a Proposed Rule Change
to Extend the Tier Size Pilot to August 14, 2015;
File No. SR–FINRA–2015–010); Securities
Exchange Act Release No. 75639 (August 7, 2015),
80 FR 48615 (August 13, 2015) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change
to Extend the Tier Size Pilot to December 11, 2015;
File No. SR–FINRA–2015–028); Securities
Exchange Act Release No. 76519 (November 24,
2015), 80 FR 75155 (December 1, 2015) (Notice of
Filing and Immediate Effectiveness of a Proposed
Rule Change to Extend the Tier Size Pilot to June
10, 2016; File No. SR–FINRA–2015–051); Securities
Exchange Act Release No. 77923 (May 26, 2016), 81
FR 35432 (June 2, 2016) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change
to Extend the Tier Size Pilot to December 9, 2016;
File No. SR–FINRA–2016–016); Securities
Exchange Act Release No. 79401 (November 25,
2016), 81 FR 86762 (December 1, 2016) (Notice of
Filing and Immediate Effectiveness of a Proposed
Rule Change to Extend the Tier Size Pilot to June
9, 2017; File No. SR–FINRA–2016–044); Securities
Exchange Act Release No. 80727 (May 18, 2017), 82
FR 23953 (May 24, 2017) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change
to Extend the Tier Size Pilot to December 8, 2017;
File No. SR–FINRA–2017–014); Securities
Exchange Act Release No. 82153 (November 22,
2017), 82 FR 56300 (November 28, 2017) (Notice of
Filing and Immediate Effectiveness of a Proposed
Rule Change to Extend the Tier Size Pilot to June
7, 2018; File No. SR–FINRA–2017–035).
6 See Order Approving File No. SR–FINRA–2011–
058, 77 FR at 37458.
7 Regulatory Notice 12–51 (November 2012); see
also Regulatory Notice 12–37 (August 2012).
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The Pilot tiers simplified the tier
structure by reducing the number of
tiers from nine to six. In addition, for
price points between $1.00 and $174.99,
the Pilot established a minimum
quotation size of 100 shares, which is
comparable to the minimums generally
applicable to quotations in securities on
equity exchanges. The Pilot also revised
the smallest price point from $0.00 to
$0.0001 to conform to the minimum
quotation increments under Rule 6434
(Minimum Pricing Increment for OTC
Equity Securities).9
Importantly, the Pilot was designed to
facilitate the display of customer limit
orders under FINRA’s limit order
display rule, which generally requires
that OTC market makers fully display
better-priced customer limit orders (or
same-priced customer limit orders that
are at the best bid or offer and that
increase the OTC market maker’s size by
more than a de minimis amount).
Pursuant to the limit order display rule,
OTC market makers are not required to
display a customer limit order on an
inter-dealer quotation system unless
doing so would comply with the
minimum quotation size applicable to
the price of the quotation under the
Rule. Therefore, although a customer
limit order may otherwise have been
required to be displayed under the limit
order display rule—for example,
because it improved price or the size
(more than a de minimis amount)—if
the order is less than the minimum
quotation size prescribed by Rule 6433,
the member is not required to display
the order. Thus, FINRA believed that
the revisions implemented by the Pilot
would improve overall display of
customer limit orders.
For example, because the Pilot would
reduce the minimum quotation size
from 2,500 to 100 shares for securities
priced at or above $1.00, FINRA
believed that competitively priced
customer limit orders, which tend to be
smaller-sized orders, would more likely
be displayed and potentially yield a
variety of benefits, including improved
price transparency, enhanced execution
of customer limit orders, and narrower
spreads. In addition, in a memorandum
on potential effects of the Pilot, SEC
staff economists noted that enhanced
visibility of customer limit orders could
reduce customers’ execution costs.10
An additional objective of the Pilot
was to expand the Rule’s scope to apply
to all member quotations on an interdealer quotation system. Prior to the
Pilot, the Rule applied only to market
makers’ proprietary quotes in OTC
equity securities on an inter-dealer
quotation system. Under the Pilot, the
minimum tier sizes apply to any
member quotations entered on an inter-
8 FINRA initially proposed six tiers, some of
which were different from those ultimately
adopted. However, in response to comments
received, FINRA amended the filing to increase the
minimum quotation size for most price points
between $0.02 and $1.00. FINRA stated that the
amended tiers were intended to facilitate the
display of additional liquidity by market makers.
See Securities Exchange Act Release No. 66819
(April 17, 2012), 77 FR 23770 (April 20, 2012)
(Amendment No. 1 to File No. SR–FINRA–2011–
058); see also Original Proposal.
9 Rule 6434, among other things, prohibits
members from displaying a bid or offer in an OTC
equity security in an increment smaller than $0.01
if the bid or offer is priced $1.00 or greater per
share, or in an increment smaller than $0.0001 if
the bid or offer is priced below $1.00.
10 See Memorandum to File No. SR–FINRA–
2011–058 re: FINRA Proposal to Reduce Minimum
Quotation Size in OTC Market Tiers from Division
of Risk, Strategy, and Financial Innovation, dated
June 1, 2012, available at: https://www.sec.gov/
comments/sr-finra-2011-058/finra2011058-13.pdf.
6433 provided for nine tier sizes that
applied only to market makers’
proprietary quotes. The pre-Pilot tiers
ranged in price points from $0.00
through $2,500.01, and are shown below
in Table 1.
TABLE 1
Price
(bid or offer)
$0 to $0.50 ...........................
$0.51 to $1.00 ......................
$1.01 to $10.00 ....................
$10.01 to $100.00 ................
$100.01 to $200.00 ..............
$200.01 to $500.00 ..............
$500.01 to $1,000.00 ...........
$1,000.01 to $2,500.00 ........
$2,500.01 + ..........................
Minimum
quote
size (# of
shares)
5,000
2,500
500
200
100
25
10
5
1
Under the Pilot, the number of tiers
was reduced from nine to six, and the
tiers apply to all quotations displayed
by market makers, whether representing
proprietary or customer interest, as well
as quotations displayed by non-market
makers (i.e., alternative trading systems
or any other member firm).8 The Pilot
tiers ultimately adopted are shown
below in Table 2.
TABLE 2
Price
(bid or offer)
daltland on DSKBBV9HB2PROD with NOTICES
$0.0001 to $0.0999 ..............
$0.10 to $0.1999 ..................
$0.20 to $0.5099 ..................
$0.51 to $0.9999 ..................
$1.00 to $174.99 ..................
$175.00 + .............................
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quote size (#
of shares)
10,000
5,000
2,500
1,000
100
1
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dealer quotation system (including
quotes representing customer interest
and quotations entered by non-market
makers).
Concerns Raised During the Proposal
Process and Data Commitment
The Commission received several
comments in response to FINRA’s Tier
Size Pilot proposal. Commenters
generally were supportive of the goal of
increased customer limit order
display; 11 however, commenters also
raised concerns regarding the impact of
revised tiers. Specifically, certain
commenters questioned whether the
Pilot might harm market quality by
permitting market makers to post quotes
representing minimum dollar value
commitments that are not financially
meaningful, or otherwise eroding
market maker liquidity in OTC equity
securities.12 In addition, some
commenters believed that there was not
sufficient data analysis to support the
proposed changes to the tier sizes.13
In response to commenters’ concerns,
FINRA filed Amendment No. 1 to the
Original Proposal to increase the
minimum quotation sizes for most price
points between $0.02 and $1.00, and
proposed that the revised tiers operate
as a one-year pilot instead of as a
permanent amendment. FINRA also
submitted Amendment No. 2 to the
Original Proposal to, among other
things, specify the items of data that
FINRA would collect and provide to the
Commission during the duration of the
Pilot; specifically:
1. The price of the first trade of each
trading day executed at or after 9:30:00
a.m., based on execution time.
2. The price of the last trade of each
trading day executed at or before 4:00:00
p.m., based on execution time.
3. Daily share volume.
4. Daily dollar volume.
5. Number of limit orders from
customers and in total.
6. Percentage of the day that the size
of the BBO equals the minimum quote
size.
7. Number of market makers actively
quoting.
8. Number of executions from a limit
order and number of limit orders at the
BBO or better by tier size from a
customer and in total.
9. Liquidity/BBO metrics
a. Time-weighted quoted spread.
b. Effective spread.
c. Time-weighted quoted depth
(number of shares) at the inside.
11 See Order Approving File No. SR–FINRA–
2011–058.
12 See id.
13 See id. at 37461–62.
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d. Time-weighted quoted depth
(dollar value of shares) at the inside.
FINRA also committed to submitting
an assessment, at least 60 days before
the end of the Pilot, that addressed the
impact of the Pilot, the concerns raised
by commenters during the rule filing
process, and whether the Pilot resulted
in the desired effects.14
Pilot Assessment
FINRA submitted its assessment on
the operation of the Tier Size Pilot on
September 13, 2013, which utilized
pilot data covering the period from
November 12, 2012 through June 30,
2013.15 The 2013 Assessment, discussed
in greater detail below, included a
recommendation, based on the
extensive analysis conducted, that the
Pilot tiers be adopted as permanent.
Nonetheless, FINRA extended the Pilot
duration to allow the effects of the Pilot
to be more thoroughly reviewed.16
During this extension, the Staff of the
Division of Economic and Risk Analysis
(‘‘DERA’’) of the SEC conducted a study,
which assessed the impact of the Pilot
on liquidity. The study was published
as a memorandum to file (‘‘DERA Memo
to File’’).17 And while the two studies
covered different time periods and
employed different methods, the DERA
Memo to File reported findings
consistent with those of the FINRA 2013
Assessment. In light of the 2013
Assessment, FINRA’s further
observations, and the DERA Memo to
File, FINRA continues to believe that it
is appropriate to permanently adopt the
tier sizes that have been in operation
since November 12, 2012, and is
proposing to do so at this time.
FINRA believes the 2013 Assessment
demonstrated that the Pilot
accomplished its objectives, including
increased customer limit order display,
and that key market quality indicators
have been unchanged or have slightly
improved overall. FINRA continued to
collect and provide Pilot data to the SEC
since the 2013 Assessment. In addition,
FINRA has continued to monitor the
impact of the operation of the Pilot on
market quality metrics for the over-thecounter marketplace, which FINRA
generally believes indicate positive
trends overall, providing continued
support for permanent adoption of the
Pilot tiers.18 Moreover, the DERA Memo
to File provided further evidence, in a
regression framework, that supports the
conclusion that the Pilot had a neutral
to positive impact on market quality.
Specifically, FINRA believes that the
2013 Assessment demonstrated that the
Pilot has resulted in a meaningful
increase in the display of customer limit
orders. Moreover, FINRA believes the
data collected during the Pilot also
supports that market quality has not
been harmed, as suggested by the
analysis of market quality measures
such as spreads and market depth.
(A) Enhanced Customer Limit Order
Display
When the Commission approved the
Pilot, it recognized the potential benefits
of enhancing customer limit order
display. Notably, the Commission found
that ‘‘[i]n the Commission’s view,
FINRA’s proposed revisions are
designed to protect investors by revising
the Rule’s tier thresholds such that a
larger percentage of customer limit
orders are reflected in quotations for
OTC equity securities, thereby
potentially improving the prices at
which customer limit orders will be
executed, consistent with the protection
of investors and the public interest.’’ 19
FINRA believes the Pilot clearly has
achieved the objective of increased
customer limit order display.
As noted in FINRA’s September 2013
Assessment, between November 1, 2012
and June 30, 2013, for all tier sizes
combined, there was a 13% increase in
the number of customer limit orders that
met the minimum quotation sizes to be
eligible for display under the Pilot tiers.
FINRA also observed a significant
increase in the number of customer
limit orders in securities priced between
$0.20 and $100.00 that became eligible
for display. This trend continued
through July 31, 2014. Specifically,
between July 1, 2013 and July 31, 2014,
FINRA observed, for all tier sizes
combined, an 18.45% increase in the
number of customer limit orders that
met the minimum quotation sizes and,
therefore, eligible for display—also with
the most significant increase observed
for securities priced between $0.20 and
$100.00.
Tables 3 and 4 below show the
percentage of customer limit orders that
were equal to or greater than the
minimum quotation size under both the
Pilot and pre-Pilot tier sizes for the
specified price ranges for the periods of
November 1, 2012 through June 30,
2013, and from July 1, 2013 through July
31, 2014, respectively.
TABLE 3
[November 1, 2012 through June 30, 2013]
Price range
Pilot tier size
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0.0001–0.0999 .................................................................................................
0.10–0.1999 .....................................................................................................
0.20–0.5099 .....................................................................................................
0.51–0.9999 .....................................................................................................
1.00–10.00 .......................................................................................................
10.01–100.00 ...................................................................................................
100.01–174.99 .................................................................................................
175.00–200.00 .................................................................................................
200.01–500.00 .................................................................................................
500.01–1,000.00 ..............................................................................................
1,000.00–2,500.00 ...........................................................................................
14 See Amendment No. 2 to File No. SR–FINRA–
2011–058, available at https://www.finra.org/file/
amendment-no-2-propose-rule-change.
15 FINRA engaged a third-party, Cornerstone
Research, to conduct an analysis of the impact of
the Pilot on OTC market quality. The 2013
assessment is part of the SEC’s comment file for
SR–FINRA–2011–058 and also is available on
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10,000
5,000
2,500
1,000
100
100
100
1
1
1
1
FINRA’s website at: https://www.finra.org/industry/
rule-filings/sr-finra-2011-058 (‘‘2013 Assessment’’).
16 See supra note 5.
17 See Memorandum to File No. SR–FINRA–
2011–058 re: FINRA’s Pilot Program Amending
Minimum Quotation Size Requirements for OTC
Equity Securities from DERA, dated July 28, 2017,
available at: https://www.sec.gov/files/otc_
tiersizepilot_memo.pdf.
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Customer limit
orders ≥ tier
size (%)
78.29
56.89
57.35
72.81
97.86
98.24
90.49
100
100
100
100
Pre-pilot tier
size
5,000
5,000
5,000
2,500
500
200
100
100
25
10
5
Customer limit
orders ≥ tier
size (%)
86.30
56.89
43.30
46.05
74.73
87.93
90.49
96.71
90.74
64.62
61.38
18 FINRA engaged in outreach with member firms
that are active in the market for OTC Equity
Securities regarding the operation of the Tier Size
Pilot, and the majority of those firms did not oppose
the permanent adoption of the Pilot.
19 See Order Approving File No. SR–FINRA–
2011–058, 77 FR at 37466. See also Memorandum
to file from Division of Risk, Strategy, and Financial
Innovation, dated June 1, 2012, supra note 10.
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TABLE 3—Continued
[November 1, 2012 through June 30, 2013]
Price range
Pilot tier size
2,500.00+ .........................................................................................................
Customer limit
orders ≥ tier
size (%)
1
Customer limit
orders ≥ tier
size (%)
Pre-pilot tier
size
100
1
100.00
TABLE 4
[July 1, 2013 through July 31, 2014]
Price range
Pilot tier size
daltland on DSKBBV9HB2PROD with NOTICES
0.0001–0.0999 .................................................................................................
0.10–0.1999 .....................................................................................................
0.20–0.5099 .....................................................................................................
0.51–0.9999 .....................................................................................................
1.00–10.00 .......................................................................................................
10.01–100.00 ...................................................................................................
100.01–174.99 .................................................................................................
175.00–200.00 .................................................................................................
200.01–500.00 .................................................................................................
500.01–1,000.00 ..............................................................................................
1,000.00–2,500.00 ...........................................................................................
2,500.00+ .........................................................................................................
As was noted in the 2013 Assessment,
of the 301,628,686 customer limit orders
in OTC equity securities reported to
FINRA’s Order Audit Trail System
(‘‘OATS’’) between November 1, 2012
and June 30, 2013, over 86.6% were
priced between $0.20 and $100.00. Of
particular note, 58.7 million customer
limit orders, or almost 20% of all
customer limit orders, were priced
between $1.00 and $10.00. This price
range experienced an increase of almost
24% in the number of customer limit
orders that met the minimum quotation
size to be eligible for display under the
Pilot. Further, 181.6 million customer
limit orders, or over 60% of all customer
limit orders, were priced between
$10.01 and $100.00. This price range
experienced an increase of over 10% in
the number of customer limit orders that
met the tier sizes and were eligible for
display under the Pilot tier sizes.
Consequently, the 2013 Assessment
found that an additional 32 million
customer limit orders priced between
$1.00 and $100.00 became eligible for
display during the Pilot that otherwise
would not have been eligible for
display.
The trends during the period since the
2013 Assessment are similar.
Specifically, of the 573,973,197
customer limit orders in OTC equity
securities reported to OATS between
July 1, 2013 and July 31, 2014, 81.4%
were priced between $0.20 and $100.00.
Of particular note, 114.5 million
customer limit orders, or almost 20% of
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10,000
5,000
2,500
1,000
100
100
100
1
1
1
1
1
all customer limit orders, were priced
between $1.00 and $10.00. From July 1,
2013 through July 31, 2014, this price
range experienced an increase of over
29% in the number of customer limit
orders that met the minimum quotation
size to be eligible for display under the
Pilot than would have been eligible in
the absence of the Pilot. Further, 312.1
million customer limit orders, or over
54% of all customer limit orders, were
priced between $10.01 and $100.00.
This price range experienced an
increase of over 19% in the number of
customer limit orders that met the tier
sizes and were eligible for display under
the Pilot tier sizes. Consequently, an
additional 94.9 million customer limit
orders priced between $1.00 and
$100.00 became eligible for display
during the Pilot between June 30, 2013
and July 31, 2014 than otherwise would
have been eligible for display.
Thus, with an aggregate overall
increase in displayed customer limit
orders in OTC equity securities over the
period from November 12, 2012 through
July 31, 2014 of 16.24%, representing
approximately 142 million additional
orders than otherwise would have been
eligible for display, FINRA believes that
the impact of the Pilot on limit order
display has clearly been positive, with
stronger than average results
concentrated in the price points ranging
from $10.01 and $100.00 (the range in
which the majority of all customer limit
orders fell (approximately 57%)).
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Sfmt 4703
Customer limit
orders ≥ tier
size (%)
78.29
56.89
57.35
72.81
97.86
98.24
90.49
100
100
100
100
100
Pre-pilot tier
size
5,000
5,000
5,000
2,500
500
200
100
100
25
10
5
1
Customer limit
orders ≥ tier
size (%)
88.70
57.78
42.31
42.10
68.36
78.03
90.60
91.94
89.41
66.65
65.58
100.00
(B) Impact on Market Quality
When the Commission approved the
Pilot, it acknowledged that the Pilot
may raise issues of ‘‘potentially
competing forces’’—enhanced customer
limit order display on the one hand, and
potential harm to OTC equity market
quality (liquidity, efficiency, and
volatility) on the other.20 On balance,
however, the Commission expressed the
view that ‘‘as well as increasing the
number of customer limit orders eligible
for display and the potential for better
executions, arguments can be made that
FINRA’s proposal will benefit the OTC
market by facilitating market making
activity, narrowing spreads and
increasing liquidity.’’ 21
FINRA believes that analysis of the
Pilot and pre-Pilot data generally shows
that the market quality measures the
Commission identified—i.e., market
maker activity, spreads and
liquidity 22—were unchanged to slightly
improved, and that, therefore, there has
been an overall neutral to positive
impact on OTC market quality for the
20 See Order Approving File No. SR–FINRA–
2011–058, 77 FR at 37467.
21 See Order Approving File No. SR–FINRA–
2011–058, 77 FR at 37467.
22 To the extent the Commission expressed
concern about volatility when it approved the Pilot,
its concern was premised on the Pilot’s impact on
liquidity. See, e.g., Order Approving File No. SR–
FINRA–2011–058, 77 FR at 37470 (‘‘[I]f the revised
tier sizes result in less activity by market makers,
overall liquidity in the marketplace could decline.
Such a decline could result in increased volatility
and less efficient pricing for OTC equity
securities.’’) (internal citation omitted).
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Federal Register / Vol. 83, No. 88 / Monday, May 7, 2018 / Notices
20135
The displayed depth decreased
slightly for most tiers, but a
consideration of depth beyond the BBO
demonstrated that any declines were
mostly statistically insignificant across
tiers in the first two years of the Pilot.
FINRA believes that consideration of
depth beyond the BBO is a useful
additional measure for assessing market
depth.
In addition, based on a data review
using the same methodology as was
employed for the 2013 Assessment,
subsequent to the completion of the
2013 Assessment, FINRA observed that
the price impact of hypothetical market
orders continued to remain lower
during the second year of the Pilot
period than during the pre-Pilot
period.30 For example, the following
two tables present the price impact for
hypothetical market buy and sell orders
with sizes five times larger than the
minimum size requirement for each tier.
The price impact associated with the
hypothetical orders is estimated to have
declined for all tiers, which is an
indication of improved market quality.
The decline is significant for all levels
except for Tiers 5b and 5c (for buy
trades) and Tier 1 (for sell trades).31
[Content of footnote 31: The t-statistic
is designed to measure whether the
price impact associated with a trade of
a given (relative) size is different
between the pre-Pilot and Pilot sample
periods. The difference is tested for
significance by calculating the twosample un-pooled Student’s t-statistic,
sample periods) is rejected at the 90%
and 95% confidence levels, if the t-
statistics are greater than 1.65 and 1.96,
respectively.]
23 FINRA notes that, from an analytical
perspective, changes in market quality measures
may not be attributable solely due to the Pilot, since
they may also be impacted by other
contemporaneous market factors.
24 For Tier 1 securities, the DERA Memo to File
finds that both quoted and effective spreads
increase between the pre-Pilot period (November
14, 2011 through October 31, 2012) and the Pilot
period (November 12, 2012 through November 28,
2014) covered by the analysis. However, the DERA
Memo to File does not find sufficient evidence that
these increases in spreads were caused by the Pilot,
as spreads started to widen at least six months prior
to the implementation of the Pilot.
25 The number of stocks quoted on the OTC
market remained stable at around 10,000
throughout the pre-Pilot period, and during the
period covered in the 2013 Assessment and
FINRA’s subsequent observations (November 1,
2012 through July 31, 2014).
26 There was an average of nine market-makers for
each symbol with no significant change in the
number between the pre-Pilot period, and during
the period covered in the 2013 Assessment and
FINRA’s subsequent observations (November 1,
2012 through July 31, 2014).
27 The daily number of trades executed during the
year prior to the Pilot is estimated at approximately
75,000, and reached around 250,000 trades by the
end of the first quarter in 2014.
28 The daily average number of trades was
approximately 100,000 by July 2014.
29 For stocks in price tiers where the minimum
quotation size requirement decreased, the DERA
Memo to File also finds that both quoted and
effective spreads decrease between the pre-Pilot
period (from November 14, 2011 to October 31,
2012) and the Pilot period (November 12, 2012 to
November 28, 2014) covered by the analysis.
Furthermore, the DERA Memo to File’s analysis
suggests that these decreases in spreads may reflect
causal effects of the Pilot. In contrast, for stocks in
price tiers where the minimum quotation size
requirement increased or remained the same, the
DERA Memo to File does not find sufficient
evidence that the Pilot had a causal impact on
spreads.
30 As discussed in the 2013 Assessment, the price
impact of hypothetical market orders is the effective
half spread for a hypothetical market ‘‘sweep’’ order
of a particular size. In other words, it is an estimate
of what the volume-weighted average effective half
spread would have been had a market order been
broken up and routed to the market makers based
on price priority.
31 [Content of footnote 31 moved to the body of
the text due to Federal Register requirements.]
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minimum required depth, evidenced by
executions at sizes greater than the
required minimums, which enabled the
execution of large trades in the OTC
market. For example, for Tier 1
securities where the minimum
quotation size increased, the number of
trades executed above the minimum
size increased by approximately 75%.
While there was virtually no change in
the frequency of trades above the
minimum size for Tiers 2 and 3, all the
other tiers experienced a positive
change. Trading in sizes greater than the
minimum quotation occurred
infrequently in these tiers both prior to
and during the pilot.
The analysis of data from the second
year of the Pilot also confirms FINRA’s
position that the impact of the change
in the minimum quotation size on the
market quality metrics is generally
positive. FINRA staff analyzed the
change in five measures to evaluate the
impact of the Pilot on market quality—
time-weighted quoted spreads, volumeweighted spreads, time-weighted quoted
depth at the BBO, time-weighted quoted
depth around the BBO, and price
impact. Time-weighted quoted spreads
continued to narrow during the first two
years of the Pilot and these positive
changes in time-weighted quoted
spreads between the pre-Pilot and the
first two years of the Pilot were
statistically significant for all tiers.29
Similarly, volume-weighted spreads
were unchanged (or slightly narrowed)
for all tiers between the pre-Pilot period
and the first two years of the Pilot when
accounting for the longer Pilot period.
The null hypothesis (i.e., that price
impact is unchanged between the two
daltland on DSKBBV9HB2PROD with NOTICES
majority of tiers as compared to the prePilot data.23
As noted in the 2013 Assessment,
where minimum quotation size
decreased under the Pilot, effective
spreads generally remained the same or
narrowed, quoted spreads narrowed,
and price impact generally decreased.
The 2013 Assessment also stated that
some of the market quality metrics
provided inconclusive results,
specifically for Tier 1 securities, where
the minimum quote size requirement
increased. The 2013 Assessment
documented that effective spreads had
widened, but with no significant
reduction in quoted depth.24
In the post-2013 Assessment period of
July 1, 2013 through July 31, 2014,
FINRA has observed that the number of
stocks quoted in the OTC market has
remained relatively constant 25 and
market makers continued to provide
liquidity.26 The number of BBO quotes
also significantly increased throughout
2014, the second year of the Pilot; as it
generally hovered around 2 million per
day during the Pre-Pilot period, but
steadily increased, reaching a high of
approximately 6 million per day in early
2014 and leveling off to an average of 5
million per day during the month of
July 2014. The average number of trades
per day was higher during the first two
years of the Pilot compared to the prePilot level, and more than tripled by
March 2014.27 However, trading activity
appears to have leveled-off in mid-2014,
albeit still at levels above the pre-Pilot
trading.28 Liquidity continued to be
provided at levels greater than the
20136
Federal Register / Vol. 83, No. 88 / Monday, May 7, 2018 / Notices
TABLE 5
[Price Impact for Hypothetical Large Market Buy Orders]
Pre-pilot
(10/2011–
10/2012)
Number of
stocks
Tier
Minimum quotation size change
1 ...........
2 ...........
3 ...........
4 ...........
5a .........
5b .........
5c .........
Increased ...........................................................
Maintained .........................................................
Decreased .........................................................
Decreased .........................................................
Decreased .........................................................
Decreased .........................................................
Maintained .........................................................
3,586
1,254
1,752
1,537
3,038
2,026
177
Pilot
(11/2012–
7/2014)
0.0055
0.0235
0.0506
0.0969
0.3295
1.1630
4.8322
0.0050
0.0197
0.0420
0.0810
0.2530
1.0661
4.7906
Difference
¥0.0005
¥0.0038
¥0.0086
¥0.0159
¥0.0765
¥0.0969
¥0.0416
t-statistic
(2.60)
(5.03)
(6.41)
(5.00)
(7.79)
(1.55)
(0.06)
TABLE 6
[Price Impact for Hypothetical Large Market Sell Orders]
Minimum quotation size change
1 ...........
2 ...........
3 ...........
4 ...........
5a .........
5b .........
5c .........
Increased ...........................................................
Maintained .........................................................
Decreased .........................................................
Decreased .........................................................
Decreased .........................................................
Decreased .........................................................
Maintained .........................................................
daltland on DSKBBV9HB2PROD with NOTICES
As noted above, the 2013 Assessment
was not conclusive as to the impact of
the Pilot on market quality for Tier 1
securities, the only tier where the
minimum quotation size increased. For
example, the 2013 Assessment indicated
that the time-weighted quoted spread
was unchanged for Tier 1 securities in
the Pilot period. However, from June 30,
2013 to July 2014, there was a
statistically significant narrowing of
time-weighted quoted spreads in this
tier. Evidence from the second year of
the Pilot suggests that volume-weighted
effective spreads and depth beyond the
BBO were unchanged from pre-Pilot
levels, but there was a statistically
significant increase in depth at the BBO.
Therefore, the updated analysis
provides reliable evidence that market
quality for Tier 1 securities has also
improved during the Pilot.32 The data
for other tiers, however, continue to
provide reliable evidence that market
quality has been unchanged or slightly
improved under the Pilot. Thus, because
the Pilot had a demonstrable positive
impact on customer limit order display,
and appears to have had an overall
neutral to positive impact on market
quality, FINRA believes it is appropriate
32 As noted in note 24, supra, the DERA Memo
to File finds that quoted and effective spreads for
Tier 1 securities increase between the pre-Pilot
period of November 14, 2011 to October 31, 2012
and the Pilot period of November 12, 2012 to
November 28, 2014 covered by the analysis, but it
does not find sufficient evidence that these
increases in spreads were caused by the Pilot.
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Pre-pilot
(10/2011–
10/2012)
Number of
stocks
Tier
3,931
1,483
1,787
1,676
3,059
2,145
288
0.0062
0.0233
0.0540
0.1214
0.4170
2.3563
14.8135
and in the best interest of investors to
adopt the Pilot tiers as permanent.
As noted in Item 2 of this filing,
because the filing would allow Rule
6433 to continue to operate without
interruption, if the Commission
approves the proposed rule change, the
implementation date of the proposed
rule change shall be the date of approval
by the Commission.
(C) Alternatives Considered
In developing the proposed rule
change, FINRA considered several
alternatives to the proposed rule change,
to ensure that it (1) simplifies the
structure of the minimum quotation
sizes; and (2) facilitates the display of
customer limit orders under Rule 6460
(Display of Customer Limit Orders)
(‘‘limit order display rule’’) without
having a negative impact on market
quality and the number of customer
limit orders that are eligible for display.
Accordingly, FINRA considered
alternative price points and minimum
quotation sizes in forming the tiers and
evaluated the number of customer limit
orders that would be eligible for display.
FINRA also assessed the potential
impact associated with alternative price
bands across multiple sample periods,
and concluded that the tier structure
that was adopted under the Pilot
resulted in the maximum number of
customer limit orders that would be
eligible for display without harming
competition in the OTC equity
securities market. In addition, FINRA
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Fmt 4703
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Pilot
(11/2012–
7/2014)
0.0059
0.0169
0.0311
0.0656
0.1500
0.4214
4.2683
Difference
¥0.0003
¥0.0064
¥0.0229
¥0.0558
¥0.2670
¥1.9349
¥10.5452
t-statistic
(1.60)
(3.41)
(4.87)
(4.95)
(6.01)
(6.79)
(3.13)
staff revised the smallest price point to
conform to the minimum quotation
increments under FINRA Rule 6434 and
increased the minimum quotation sizes
for most price points between $0.02 and
$1.00. FINRA believes that the pilot
tiers continue to be appropriate and
should be adopted on a permanent
basis.
2. Statutory Basis
FINRA believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(6) of the Act,33 which
requires, among other things, that
FINRA rules must be designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, and, in
general, to protect investors and the
public interest. FINRA also believes that
the proposed rule change is consistent
with the provisions of Section
15A(b)(11) of the Act.34 Section
15A(b)(11) requires that FINRA rules
include provisions governing the form
and content of quotations relating to
securities sold otherwise than on a
national securities exchange which may
be distributed or published by any
member or person associated with a
member, and the persons to whom such
quotations may be supplied.
FINRA believes that adopting the
Pilot tiers as permanent would promote
just and equitable principles of trade
33 15
34 15
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U.S.C. 78o–3(b)(11).
07MYN1
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Federal Register / Vol. 83, No. 88 / Monday, May 7, 2018 / Notices
and protect investors and the public
interest. The 2013 Assessment and
subsequent observations clearly
demonstrate that the Pilot has resulted
in increased display of customer limit
orders. The 2013 Assessment found a
13% increase in the number of customer
limit orders that met the minimum
quotation sizes to be eligible for display
across all Pilot tiers, and the updated
data through July 2014 shows an even
greater increase of 18.45% than
otherwise would have been eligible for
display. Notably, the increase in
customer limit orders eligible for
display was significant in tiers that
make up substantial percentages of the
overall volume transacted in OTC equity
securities.
FINRA further believes that any
concerns about market quality raised by
public commenters prior to the
Commission’s approval of Pilot have not
materialized. In fact, FINRA believes
that the Pilot has had a positive impact
on OTC market quality for the majority
of OTC equity securities and tiers. As
more fully detailed above, FINRA
believes the Pilot data shows overall a
slight reduction in spreads for most
OTC equity securities with no negative
(and perhaps a positive) impact on
liquidity.
As noted previously, when the
Commission approved the Pilot, it
emphasized the potential benefits of
increasing customer limit order display.
For instance, the Commission noted that
increased limit order display could
potentially improve the prices at which
customer limit orders will be executed,
consistent with the protection of
investors and the public interest.35 The
Commission also has stated its belief
that greater customer limit order display
could increase quote competition,
narrow spreads, and increase the
likelihood of price improvement for
OTC equity securities.36 The
Commission had maintained a
longstanding view that there are benefits
to promoting customer limit order
display.37
Accordingly, FINRA believes that the
Pilot accomplished its intended
objectives and realized benefits
anticipated in its adoption, including
greater customer limit order display. At
the same time, market quality indicators
during the Pilot suggest that the revised
tiers and greater customer limit order
display did not result in a harmful
reduction in liquidity for OTC equity
35 See
Order Approving File No. SR–FINRA–
2011–058, 77 FR at 37466.
36 See id. at 37469.
37 See id. at 37469 n.168 (citing, among other
things, the Commission’s 1996 Order Handling
Rules Release).
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17:38 May 04, 2018
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securities. As a result, FINRA believes it
is consistent with the Act to adopt the
Pilot tiers as permanent.
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. Despite some
initial concerns from commenters that
the Pilot may have negative effects on
market makers who quote OTC equity
securities, as the Pilot has progressed,
FINRA observed an overall increase in
the number of market makers quoting
OTC equity securities across the
duration of the Pilot. Accordingly, given
the increase in the number of market
makers quoting OTC equity securities,
as demonstrated by the analysis using
the first two years of data from the Pilot,
and the increased display of customer
limit orders, FINRA believes the Pilot
has generated evidence that support the
Commission’s preliminary view ‘‘that
the [Pilot] could enhance
competition.’’ 38
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:
38 See Order Approving File No. SR–FINRA–
2011–058, 77 FR at 37469.
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20137
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 Number SR–
FINRA–2018–015 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–FINRA–2018–015. 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 website (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 website 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 will also be available for
inspection and copying at the principal
office of FINRA. All comments received
will be posted without change. Persons
submitting comments are cautioned that
we do not redact or edit personal
identifying information from comment
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–FINRA–
2018–015 and should be submitted on
or before May 29, 2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.39
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–09612 Filed 5–4–18; 8:45 am]
BILLING CODE 8011–01–P
39 17
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]]>Agencies
[Federal Register Volume 83, Number 88 (Monday, May 7, 2018)]
[Notices]
[Pages 20131-20137]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-09612]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-83129; File No. SR-FINRA-2018-015]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend
FINRA Rule 6433 To Adopt the OTC Quotation Tier Pilot as Permanent
April 30, 2018.
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 April 20, 2018, 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.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to amend FINRA Rule 6433 (Minimum Quotation Size
Requirements for OTC Equity Securities) to adopt as permanent the
minimum quotation sizes for OTC equity securities currently operating
on a pilot basis, scheduled to expire on June 7, 2018.
The text of the proposed rule change is available on FINRA's
website at https://www.finra.org, at the principal office of FINRA and
at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
FINRA proposes to amend Rule 6433 (Minimum Quotation Size
Requirements for OTC Equity Securities) (the ``Rule'') to adopt as
permanent the minimum quotation sizes applicable to quotations in OTC
equity securities \3\ that were proposed pursuant to File No. SR-FINRA-
2011-058 and implemented on a pilot basis on November 12, 2012 (``Tier
Size Pilot'' or ``Pilot'').\4\ The Pilot was initially approved for a
one-year term, has been extended ten times, and currently is scheduled
to expire on June 7, 2018.\5\
---------------------------------------------------------------------------
\3\ An OTC equity security is an equity security that is not an
``NMS Stock'' as defined in Rule 600(b)(47) of SEC Regulation NMS;
provided, however, that the term ``OTC equity security'' shall not
include any Restricted Equity Security. See FINRA Rule 6420(f).
\4\ See Securities Exchange Act Release No. 65568 (October 14,
2011), 76 FR 65307 (October 20, 2011) (Notice of Filing of File No.
SR-FINRA-2011-058) (``Original Proposal'').
\5\ See Securities Exchange Act Release No. 67208 (June 15,
2012), 77 FR 37458 (June 21, 2012) (Notice of Filing of Amendment
No. 2 and Order Granting Accelerated Approval of a Proposed Rule
Change, as Modified by Amendment Nos. 1 and 2, To Amend FINRA Rule
6433 (Minimum Quotation Size Requirements for OTC Equity
Securities)) (Order Approving File No. SR-FINRA-2011-058, as
amended); see also Securities Exchange Act Release No. 70839
(November 8, 2013), 78 FR 68893 (November 15, 2013) (Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change to
Extend the Tier Size Pilot to November 14, 2014; File No. SR-FINRA-
2013-049); Securities Exchange Act Release No. 73299 (October 3,
2014), 79 FR 61120 (October 9, 2014) (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change to Extend the Tier Size
Pilot to February 13, 2015; File No. SR-FINRA-2014-041); Securities
Exchange Act Release No. 74251 (February 11, 2015), 80 FR 8741
(February 18, 2015) (Notice of Filing and Immediate Effectiveness of
a Proposed Rule Change to Extend the Tier Size Pilot to May 15,
2015; File No. SR-FINRA-2015-002); Securities Exchange Act Release
No. 74927 (May 12, 2015), 80 FR 28327 (May 18, 2015) (Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change to
Extend the Tier Size Pilot to August 14, 2015; File No. SR-FINRA-
2015-010); Securities Exchange Act Release No. 75639 (August 7,
2015), 80 FR 48615 (August 13, 2015) (Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change to Extend the Tier Size
Pilot to December 11, 2015; File No. SR-FINRA-2015-028); Securities
Exchange Act Release No. 76519 (November 24, 2015), 80 FR 75155
(December 1, 2015) (Notice of Filing and Immediate Effectiveness of
a Proposed Rule Change to Extend the Tier Size Pilot to June 10,
2016; File No. SR-FINRA-2015-051); Securities Exchange Act Release
No. 77923 (May 26, 2016), 81 FR 35432 (June 2, 2016) (Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change to
Extend the Tier Size Pilot to December 9, 2016; File No. SR-FINRA-
2016-016); Securities Exchange Act Release No. 79401 (November 25,
2016), 81 FR 86762 (December 1, 2016) (Notice of Filing and
Immediate Effectiveness of a Proposed Rule Change to Extend the Tier
Size Pilot to June 9, 2017; File No. SR-FINRA-2016-044); Securities
Exchange Act Release No. 80727 (May 18, 2017), 82 FR 23953 (May 24,
2017) (Notice of Filing and Immediate Effectiveness of a Proposed
Rule Change to Extend the Tier Size Pilot to December 8, 2017; File
No. SR-FINRA-2017-014); Securities Exchange Act Release No. 82153
(November 22, 2017), 82 FR 56300 (November 28, 2017) (Notice of
Filing and Immediate Effectiveness of a Proposed Rule Change to
Extend the Tier Size Pilot to June 7, 2018; File No. SR-FINRA-2017-
035).
---------------------------------------------------------------------------
The Pilot tiers were designed to: (1) Simplify the structure of the
minimum quotation sizes; (2) facilitate the display of customer limit
orders under Rule 6460 (Display of Customer Limit Orders) (``limit
order display rule''); and (3) expand the scope of the Rule to provide
for uniform treatment of the types and sources of quotations that would
be subject to the Rule.\6\ FINRA believes the Pilot has resulted in its
intended objectives, and particularly notes that the Pilot has yielded
a significant positive result with regard to increased display of
customer limit orders. At the same time, market quality measures have
been neutral (i.e., unchanged) or slightly positive (i.e., slightly
improved) overall during the Pilot, as compared to the pre-Pilot
period, as discussed more fully below. Accordingly, FINRA believes it
is appropriate and consistent with the Act to adopt the Pilot tier
sizes on a permanent basis.
---------------------------------------------------------------------------
\6\ See Order Approving File No. SR-FINRA-2011-058, 77 FR at
37458.
---------------------------------------------------------------------------
Objectives of the Pilot
FINRA Rule 6433 sets forth the minimum quotation sizes applicable
to the display of quotations in OTC equity securities on any inter-
dealer quotation system that permits quotation updates on a real-time
basis. The Rule provides different minimum quotation sizes that apply
depending upon the price level of the bid or offer in the security.
Prior to the Pilot, which has been in effect since November 12,
2012,\7\ Rule
[[Page 20132]]
6433 provided for nine tier sizes that applied only to market makers'
proprietary quotes. The pre-Pilot tiers ranged in price points from
$0.00 through $2,500.01, and are shown below in Table 1.
---------------------------------------------------------------------------
\7\ Regulatory Notice 12-51 (November 2012); see also Regulatory
Notice 12-37 (August 2012).
Table 1
------------------------------------------------------------------------
Minimum quote
Price (bid or offer) size (# of
shares)
------------------------------------------------------------------------
$0 to $0.50............................................. 5,000
$0.51 to $1.00.......................................... 2,500
$1.01 to $10.00......................................... 500
$10.01 to $100.00....................................... 200
$100.01 to $200.00...................................... 100
$200.01 to $500.00...................................... 25
$500.01 to $1,000.00.................................... 10
$1,000.01 to $2,500.00.................................. 5
$2,500.01 +............................................. 1
------------------------------------------------------------------------
Under the Pilot, the number of tiers was reduced from nine to six,
and the tiers apply to all quotations displayed by market makers,
whether representing proprietary or customer interest, as well as
quotations displayed by non-market makers (i.e., alternative trading
systems or any other member firm).\8\ The Pilot tiers ultimately
adopted are shown below in Table 2.
---------------------------------------------------------------------------
\8\ FINRA initially proposed six tiers, some of which were
different from those ultimately adopted. However, in response to
comments received, FINRA amended the filing to increase the minimum
quotation size for most price points between $0.02 and $1.00. FINRA
stated that the amended tiers were intended to facilitate the
display of additional liquidity by market makers. See Securities
Exchange Act Release No. 66819 (April 17, 2012), 77 FR 23770 (April
20, 2012) (Amendment No. 1 to File No. SR-FINRA-2011-058); see also
Original Proposal.
Table 2
------------------------------------------------------------------------
Minimum quote
Price (bid or offer) size (# of
shares)
------------------------------------------------------------------------
$0.0001 to $0.0999...................................... 10,000
$0.10 to $0.1999........................................ 5,000
$0.20 to $0.5099........................................ 2,500
$0.51 to $0.9999........................................ 1,000
$1.00 to $174.99........................................ 100
$175.00 +............................................... 1
------------------------------------------------------------------------
The Pilot tiers simplified the tier structure by reducing the
number of tiers from nine to six. In addition, for price points between
$1.00 and $174.99, the Pilot established a minimum quotation size of
100 shares, which is comparable to the minimums generally applicable to
quotations in securities on equity exchanges. The Pilot also revised
the smallest price point from $0.00 to $0.0001 to conform to the
minimum quotation increments under Rule 6434 (Minimum Pricing Increment
for OTC Equity Securities).\9\
---------------------------------------------------------------------------
\9\ Rule 6434, among other things, prohibits members from
displaying a bid or offer in an OTC equity security in an increment
smaller than $0.01 if the bid or offer is priced $1.00 or greater
per share, or in an increment smaller than $0.0001 if the bid or
offer is priced below $1.00.
---------------------------------------------------------------------------
Importantly, the Pilot was designed to facilitate the display of
customer limit orders under FINRA's limit order display rule, which
generally requires that OTC market makers fully display better-priced
customer limit orders (or same-priced customer limit orders that are at
the best bid or offer and that increase the OTC market maker's size by
more than a de minimis amount). Pursuant to the limit order display
rule, OTC market makers are not required to display a customer limit
order on an inter-dealer quotation system unless doing so would comply
with the minimum quotation size applicable to the price of the
quotation under the Rule. Therefore, although a customer limit order
may otherwise have been required to be displayed under the limit order
display rule--for example, because it improved price or the size (more
than a de minimis amount)--if the order is less than the minimum
quotation size prescribed by Rule 6433, the member is not required to
display the order. Thus, FINRA believed that the revisions implemented
by the Pilot would improve overall display of customer limit orders.
For example, because the Pilot would reduce the minimum quotation
size from 2,500 to 100 shares for securities priced at or above $1.00,
FINRA believed that competitively priced customer limit orders, which
tend to be smaller-sized orders, would more likely be displayed and
potentially yield a variety of benefits, including improved price
transparency, enhanced execution of customer limit orders, and narrower
spreads. In addition, in a memorandum on potential effects of the
Pilot, SEC staff economists noted that enhanced visibility of customer
limit orders could reduce customers' execution costs.\10\
---------------------------------------------------------------------------
\10\ See Memorandum to File No. SR-FINRA-2011-058 re: FINRA
Proposal to Reduce Minimum Quotation Size in OTC Market Tiers from
Division of Risk, Strategy, and Financial Innovation, dated June 1,
2012, available at: https://www.sec.gov/comments/sr-finra-2011-058/finra2011058-13.pdf.
---------------------------------------------------------------------------
An additional objective of the Pilot was to expand the Rule's scope
to apply to all member quotations on an inter-dealer quotation system.
Prior to the Pilot, the Rule applied only to market makers' proprietary
quotes in OTC equity securities on an inter-dealer quotation system.
Under the Pilot, the minimum tier sizes apply to any member quotations
entered on an inter-dealer quotation system (including quotes
representing customer interest and quotations entered by non-market
makers).
Concerns Raised During the Proposal Process and Data Commitment
The Commission received several comments in response to FINRA's
Tier Size Pilot proposal. Commenters generally were supportive of the
goal of increased customer limit order display; \11\ however,
commenters also raised concerns regarding the impact of revised tiers.
Specifically, certain commenters questioned whether the Pilot might
harm market quality by permitting market makers to post quotes
representing minimum dollar value commitments that are not financially
meaningful, or otherwise eroding market maker liquidity in OTC equity
securities.\12\ In addition, some commenters believed that there was
not sufficient data analysis to support the proposed changes to the
tier sizes.\13\
---------------------------------------------------------------------------
\11\ See Order Approving File No. SR-FINRA-2011-058.
\12\ See id.
\13\ See id. at 37461-62.
---------------------------------------------------------------------------
In response to commenters' concerns, FINRA filed Amendment No. 1 to
the Original Proposal to increase the minimum quotation sizes for most
price points between $0.02 and $1.00, and proposed that the revised
tiers operate as a one-year pilot instead of as a permanent amendment.
FINRA also submitted Amendment No. 2 to the Original Proposal to, among
other things, specify the items of data that FINRA would collect and
provide to the Commission during the duration of the Pilot;
specifically:
1. The price of the first trade of each trading day executed at or
after 9:30:00 a.m., based on execution time.
2. The price of the last trade of each trading day executed at or
before 4:00:00 p.m., based on execution time.
3. Daily share volume.
4. Daily dollar volume.
5. Number of limit orders from customers and in total.
6. Percentage of the day that the size of the BBO equals the
minimum quote size.
7. Number of market makers actively quoting.
8. Number of executions from a limit order and number of limit
orders at the BBO or better by tier size from a customer and in total.
9. Liquidity/BBO metrics
a. Time-weighted quoted spread.
b. Effective spread.
c. Time-weighted quoted depth (number of shares) at the inside.
[[Page 20133]]
d. Time-weighted quoted depth (dollar value of shares) at the
inside.
FINRA also committed to submitting an assessment, at least 60 days
before the end of the Pilot, that addressed the impact of the Pilot,
the concerns raised by commenters during the rule filing process, and
whether the Pilot resulted in the desired effects.\14\
---------------------------------------------------------------------------
\14\ See Amendment No. 2 to File No. SR-FINRA-2011-058,
available at https://www.finra.org/file/amendment-no-2-propose-rule-change.
---------------------------------------------------------------------------
Pilot Assessment
FINRA submitted its assessment on the operation of the Tier Size
Pilot on September 13, 2013, which utilized pilot data covering the
period from November 12, 2012 through June 30, 2013.\15\ The 2013
Assessment, discussed in greater detail below, included a
recommendation, based on the extensive analysis conducted, that the
Pilot tiers be adopted as permanent. Nonetheless, FINRA extended the
Pilot duration to allow the effects of the Pilot to be more thoroughly
reviewed.\16\ During this extension, the Staff of the Division of
Economic and Risk Analysis (``DERA'') of the SEC conducted a study,
which assessed the impact of the Pilot on liquidity. The study was
published as a memorandum to file (``DERA Memo to File'').\17\ And
while the two studies covered different time periods and employed
different methods, the DERA Memo to File reported findings consistent
with those of the FINRA 2013 Assessment. In light of the 2013
Assessment, FINRA's further observations, and the DERA Memo to File,
FINRA continues to believe that it is appropriate to permanently adopt
the tier sizes that have been in operation since November 12, 2012, and
is proposing to do so at this time.
---------------------------------------------------------------------------
\15\ FINRA engaged a third-party, Cornerstone Research, to
conduct an analysis of the impact of the Pilot on OTC market
quality. The 2013 assessment is part of the SEC's comment file for
SR-FINRA-2011-058 and also is available on FINRA's website at:
https://www.finra.org/industry/rule-filings/sr-finra-2011-058 (``2013
Assessment'').
\16\ See supra note 5.
\17\ See Memorandum to File No. SR-FINRA-2011-058 re: FINRA's
Pilot Program Amending Minimum Quotation Size Requirements for OTC
Equity Securities from DERA, dated July 28, 2017, available at:
https://www.sec.gov/files/otc_tiersizepilot_memo.pdf.
---------------------------------------------------------------------------
FINRA believes the 2013 Assessment demonstrated that the Pilot
accomplished its objectives, including increased customer limit order
display, and that key market quality indicators have been unchanged or
have slightly improved overall. FINRA continued to collect and provide
Pilot data to the SEC since the 2013 Assessment. In addition, FINRA has
continued to monitor the impact of the operation of the Pilot on market
quality metrics for the over-the-counter marketplace, which FINRA
generally believes indicate positive trends overall, providing
continued support for permanent adoption of the Pilot tiers.\18\
Moreover, the DERA Memo to File provided further evidence, in a
regression framework, that supports the conclusion that the Pilot had a
neutral to positive impact on market quality.
---------------------------------------------------------------------------
\18\ FINRA engaged in outreach with member firms that are active
in the market for OTC Equity Securities regarding the operation of
the Tier Size Pilot, and the majority of those firms did not oppose
the permanent adoption of the Pilot.
---------------------------------------------------------------------------
Specifically, FINRA believes that the 2013 Assessment demonstrated
that the Pilot has resulted in a meaningful increase in the display of
customer limit orders. Moreover, FINRA believes the data collected
during the Pilot also supports that market quality has not been harmed,
as suggested by the analysis of market quality measures such as spreads
and market depth.
(A) Enhanced Customer Limit Order Display
When the Commission approved the Pilot, it recognized the potential
benefits of enhancing customer limit order display. Notably, the
Commission found that ``[i]n the Commission's view, FINRA's proposed
revisions are designed to protect investors by revising the Rule's tier
thresholds such that a larger percentage of customer limit orders are
reflected in quotations for OTC equity securities, thereby potentially
improving the prices at which customer limit orders will be executed,
consistent with the protection of investors and the public interest.''
\19\ FINRA believes the Pilot clearly has achieved the objective of
increased customer limit order display.
---------------------------------------------------------------------------
\19\ See Order Approving File No. SR-FINRA-2011-058, 77 FR at
37466. See also Memorandum to file from Division of Risk, Strategy,
and Financial Innovation, dated June 1, 2012, supra note 10.
---------------------------------------------------------------------------
As noted in FINRA's September 2013 Assessment, between November 1,
2012 and June 30, 2013, for all tier sizes combined, there was a 13%
increase in the number of customer limit orders that met the minimum
quotation sizes to be eligible for display under the Pilot tiers. FINRA
also observed a significant increase in the number of customer limit
orders in securities priced between $0.20 and $100.00 that became
eligible for display. This trend continued through July 31, 2014.
Specifically, between July 1, 2013 and July 31, 2014, FINRA observed,
for all tier sizes combined, an 18.45% increase in the number of
customer limit orders that met the minimum quotation sizes and,
therefore, eligible for display--also with the most significant
increase observed for securities priced between $0.20 and $100.00.
Tables 3 and 4 below show the percentage of customer limit orders
that were equal to or greater than the minimum quotation size under
both the Pilot and pre-Pilot tier sizes for the specified price ranges
for the periods of November 1, 2012 through June 30, 2013, and from
July 1, 2013 through July 31, 2014, respectively.
Table 3
[November 1, 2012 through June 30, 2013]
----------------------------------------------------------------------------------------------------------------
Customer limit Customer limit
Price range Pilot tier orders >= tier Pre-pilot tier orders >= tier
size size (%) size size (%)
----------------------------------------------------------------------------------------------------------------
0.0001-0.0999................................... 10,000 78.29 5,000 86.30
0.10-0.1999..................................... 5,000 56.89 5,000 56.89
0.20-0.5099..................................... 2,500 57.35 5,000 43.30
0.51-0.9999..................................... 1,000 72.81 2,500 46.05
1.00-10.00...................................... 100 97.86 500 74.73
10.01-100.00.................................... 100 98.24 200 87.93
100.01-174.99................................... 100 90.49 100 90.49
175.00-200.00................................... 1 100 100 96.71
200.01-500.00................................... 1 100 25 90.74
500.01-1,000.00................................. 1 100 10 64.62
1,000.00-2,500.00............................... 1 100 5 61.38
[[Page 20134]]
2,500.00+....................................... 1 100 1 100.00
----------------------------------------------------------------------------------------------------------------
Table 4
[July 1, 2013 through July 31, 2014]
----------------------------------------------------------------------------------------------------------------
Customer limit Customer limit
Price range Pilot tier orders >= tier Pre-pilot tier orders >= tier
size size (%) size size (%)
----------------------------------------------------------------------------------------------------------------
0.0001-0.0999................................... 10,000 78.29 5,000 88.70
0.10-0.1999..................................... 5,000 56.89 5,000 57.78
0.20-0.5099..................................... 2,500 57.35 5,000 42.31
0.51-0.9999..................................... 1,000 72.81 2,500 42.10
1.00-10.00...................................... 100 97.86 500 68.36
10.01-100.00.................................... 100 98.24 200 78.03
100.01-174.99................................... 100 90.49 100 90.60
175.00-200.00................................... 1 100 100 91.94
200.01-500.00................................... 1 100 25 89.41
500.01-1,000.00................................. 1 100 10 66.65
1,000.00-2,500.00............................... 1 100 5 65.58
2,500.00+....................................... 1 100 1 100.00
----------------------------------------------------------------------------------------------------------------
As was noted in the 2013 Assessment, of the 301,628,686 customer
limit orders in OTC equity securities reported to FINRA's Order Audit
Trail System (``OATS'') between November 1, 2012 and June 30, 2013,
over 86.6% were priced between $0.20 and $100.00. Of particular note,
58.7 million customer limit orders, or almost 20% of all customer limit
orders, were priced between $1.00 and $10.00. This price range
experienced an increase of almost 24% in the number of customer limit
orders that met the minimum quotation size to be eligible for display
under the Pilot. Further, 181.6 million customer limit orders, or over
60% of all customer limit orders, were priced between $10.01 and
$100.00. This price range experienced an increase of over 10% in the
number of customer limit orders that met the tier sizes and were
eligible for display under the Pilot tier sizes. Consequently, the 2013
Assessment found that an additional 32 million customer limit orders
priced between $1.00 and $100.00 became eligible for display during the
Pilot that otherwise would not have been eligible for display.
The trends during the period since the 2013 Assessment are similar.
Specifically, of the 573,973,197 customer limit orders in OTC equity
securities reported to OATS between July 1, 2013 and July 31, 2014,
81.4% were priced between $0.20 and $100.00. Of particular note, 114.5
million customer limit orders, or almost 20% of all customer limit
orders, were priced between $1.00 and $10.00. From July 1, 2013 through
July 31, 2014, this price range experienced an increase of over 29% in
the number of customer limit orders that met the minimum quotation size
to be eligible for display under the Pilot than would have been
eligible in the absence of the Pilot. Further, 312.1 million customer
limit orders, or over 54% of all customer limit orders, were priced
between $10.01 and $100.00. This price range experienced an increase of
over 19% in the number of customer limit orders that met the tier sizes
and were eligible for display under the Pilot tier sizes. Consequently,
an additional 94.9 million customer limit orders priced between $1.00
and $100.00 became eligible for display during the Pilot between June
30, 2013 and July 31, 2014 than otherwise would have been eligible for
display.
Thus, with an aggregate overall increase in displayed customer
limit orders in OTC equity securities over the period from November 12,
2012 through July 31, 2014 of 16.24%, representing approximately 142
million additional orders than otherwise would have been eligible for
display, FINRA believes that the impact of the Pilot on limit order
display has clearly been positive, with stronger than average results
concentrated in the price points ranging from $10.01 and $100.00 (the
range in which the majority of all customer limit orders fell
(approximately 57%)).
(B) Impact on Market Quality
When the Commission approved the Pilot, it acknowledged that the
Pilot may raise issues of ``potentially competing forces''--enhanced
customer limit order display on the one hand, and potential harm to OTC
equity market quality (liquidity, efficiency, and volatility) on the
other.\20\ On balance, however, the Commission expressed the view that
``as well as increasing the number of customer limit orders eligible
for display and the potential for better executions, arguments can be
made that FINRA's proposal will benefit the OTC market by facilitating
market making activity, narrowing spreads and increasing liquidity.''
\21\
---------------------------------------------------------------------------
\20\ See Order Approving File No. SR-FINRA-2011-058, 77 FR at
37467.
\21\ See Order Approving File No. SR-FINRA-2011-058, 77 FR at
37467.
---------------------------------------------------------------------------
FINRA believes that analysis of the Pilot and pre-Pilot data
generally shows that the market quality measures the Commission
identified--i.e., market maker activity, spreads and liquidity \22\--
were unchanged to slightly improved, and that, therefore, there has
been an overall neutral to positive impact on OTC market quality for
the
[[Page 20135]]
majority of tiers as compared to the pre-Pilot data.\23\
---------------------------------------------------------------------------
\22\ To the extent the Commission expressed concern about
volatility when it approved the Pilot, its concern was premised on
the Pilot's impact on liquidity. See, e.g., Order Approving File No.
SR-FINRA-2011-058, 77 FR at 37470 (``[I]f the revised tier sizes
result in less activity by market makers, overall liquidity in the
marketplace could decline. Such a decline could result in increased
volatility and less efficient pricing for OTC equity securities.'')
(internal citation omitted).
\23\ FINRA notes that, from an analytical perspective, changes
in market quality measures may not be attributable solely due to the
Pilot, since they may also be impacted by other contemporaneous
market factors.
---------------------------------------------------------------------------
As noted in the 2013 Assessment, where minimum quotation size
decreased under the Pilot, effective spreads generally remained the
same or narrowed, quoted spreads narrowed, and price impact generally
decreased. The 2013 Assessment also stated that some of the market
quality metrics provided inconclusive results, specifically for Tier 1
securities, where the minimum quote size requirement increased. The
2013 Assessment documented that effective spreads had widened, but with
no significant reduction in quoted depth.\24\
---------------------------------------------------------------------------
\24\ For Tier 1 securities, the DERA Memo to File finds that
both quoted and effective spreads increase between the pre-Pilot
period (November 14, 2011 through October 31, 2012) and the Pilot
period (November 12, 2012 through November 28, 2014) covered by the
analysis. However, the DERA Memo to File does not find sufficient
evidence that these increases in spreads were caused by the Pilot,
as spreads started to widen at least six months prior to the
implementation of the Pilot.
---------------------------------------------------------------------------
In the post-2013 Assessment period of July 1, 2013 through July 31,
2014, FINRA has observed that the number of stocks quoted in the OTC
market has remained relatively constant \25\ and market makers
continued to provide liquidity.\26\ The number of BBO quotes also
significantly increased throughout 2014, the second year of the Pilot;
as it generally hovered around 2 million per day during the Pre-Pilot
period, but steadily increased, reaching a high of approximately 6
million per day in early 2014 and leveling off to an average of 5
million per day during the month of July 2014. The average number of
trades per day was higher during the first two years of the Pilot
compared to the pre-Pilot level, and more than tripled by March
2014.\27\ However, trading activity appears to have leveled-off in mid-
2014, albeit still at levels above the pre-Pilot trading.\28\ Liquidity
continued to be provided at levels greater than the minimum required
depth, evidenced by executions at sizes greater than the required
minimums, which enabled the execution of large trades in the OTC
market. For example, for Tier 1 securities where the minimum quotation
size increased, the number of trades executed above the minimum size
increased by approximately 75%. While there was virtually no change in
the frequency of trades above the minimum size for Tiers 2 and 3, all
the other tiers experienced a positive change. Trading in sizes greater
than the minimum quotation occurred infrequently in these tiers both
prior to and during the pilot.
---------------------------------------------------------------------------
\25\ The number of stocks quoted on the OTC market remained
stable at around 10,000 throughout the pre-Pilot period, and during
the period covered in the 2013 Assessment and FINRA's subsequent
observations (November 1, 2012 through July 31, 2014).
\26\ There was an average of nine market-makers for each symbol
with no significant change in the number between the pre-Pilot
period, and during the period covered in the 2013 Assessment and
FINRA's subsequent observations (November 1, 2012 through July 31,
2014).
\27\ The daily number of trades executed during the year prior
to the Pilot is estimated at approximately 75,000, and reached
around 250,000 trades by the end of the first quarter in 2014.
\28\ The daily average number of trades was approximately
100,000 by July 2014.
---------------------------------------------------------------------------
The analysis of data from the second year of the Pilot also
confirms FINRA's position that the impact of the change in the minimum
quotation size on the market quality metrics is generally positive.
FINRA staff analyzed the change in five measures to evaluate the impact
of the Pilot on market quality--time-weighted quoted spreads, volume-
weighted spreads, time-weighted quoted depth at the BBO, time-weighted
quoted depth around the BBO, and price impact. Time-weighted quoted
spreads continued to narrow during the first two years of the Pilot and
these positive changes in time-weighted quoted spreads between the pre-
Pilot and the first two years of the Pilot were statistically
significant for all tiers.\29\ Similarly, volume-weighted spreads were
unchanged (or slightly narrowed) for all tiers between the pre-Pilot
period and the first two years of the Pilot when accounting for the
longer Pilot period.
---------------------------------------------------------------------------
\29\ For stocks in price tiers where the minimum quotation size
requirement decreased, the DERA Memo to File also finds that both
quoted and effective spreads decrease between the pre-Pilot period
(from November 14, 2011 to October 31, 2012) and the Pilot period
(November 12, 2012 to November 28, 2014) covered by the analysis.
Furthermore, the DERA Memo to File's analysis suggests that these
decreases in spreads may reflect causal effects of the Pilot. In
contrast, for stocks in price tiers where the minimum quotation size
requirement increased or remained the same, the DERA Memo to File
does not find sufficient evidence that the Pilot had a causal impact
on spreads.
---------------------------------------------------------------------------
The displayed depth decreased slightly for most tiers, but a
consideration of depth beyond the BBO demonstrated that any declines
were mostly statistically insignificant across tiers in the first two
years of the Pilot. FINRA believes that consideration of depth beyond
the BBO is a useful additional measure for assessing market depth.
In addition, based on a data review using the same methodology as
was employed for the 2013 Assessment, subsequent to the completion of
the 2013 Assessment, FINRA observed that the price impact of
hypothetical market orders continued to remain lower during the second
year of the Pilot period than during the pre-Pilot period.\30\ For
example, the following two tables present the price impact for
hypothetical market buy and sell orders with sizes five times larger
than the minimum size requirement for each tier. The price impact
associated with the hypothetical orders is estimated to have declined
for all tiers, which is an indication of improved market quality. The
decline is significant for all levels except for Tiers 5b and 5c (for
buy trades) and Tier 1 (for sell trades).\31\
---------------------------------------------------------------------------
\30\ As discussed in the 2013 Assessment, the price impact of
hypothetical market orders is the effective half spread for a
hypothetical market ``sweep'' order of a particular size. In other
words, it is an estimate of what the volume-weighted average
effective half spread would have been had a market order been broken
up and routed to the market makers based on price priority.
\31\ [Content of footnote 31 moved to the body of the text due
to Federal Register requirements.]
---------------------------------------------------------------------------
[Content of footnote 31: The t-statistic is designed to measure
whether the price impact associated with a trade of a given (relative)
size is different between the pre-Pilot and Pilot sample periods. The
difference is tested for significance by calculating the two-sample un-
pooled Student's t-statistic,
[GRAPHIC] [TIFF OMITTED] TN07MY18.025
The null hypothesis (i.e., that price impact is unchanged between
the two sample periods) is rejected at the 90% and 95% confidence
levels, if the t-statistics are greater than 1.65 and 1.96,
respectively.]
[[Page 20136]]
Table 5
[Price Impact for Hypothetical Large Market Buy Orders]
----------------------------------------------------------------------------------------------------------------
Minimum quotation Number of Pre-pilot (10/ Pilot (11/2012-
Tier size change stocks 2011- 10/2012) 7/2014) Difference t-statistic
----------------------------------------------------------------------------------------------------------------
1............ Increased........ 3,586 0.0055 0.0050 -0.0005 (2.60)
2............ Maintained....... 1,254 0.0235 0.0197 -0.0038 (5.03)
3............ Decreased........ 1,752 0.0506 0.0420 -0.0086 (6.41)
4............ Decreased........ 1,537 0.0969 0.0810 -0.0159 (5.00)
5a........... Decreased........ 3,038 0.3295 0.2530 -0.0765 (7.79)
5b........... Decreased........ 2,026 1.1630 1.0661 -0.0969 (1.55)
5c........... Maintained....... 177 4.8322 4.7906 -0.0416 (0.06)
----------------------------------------------------------------------------------------------------------------
Table 6
[Price Impact for Hypothetical Large Market Sell Orders]
----------------------------------------------------------------------------------------------------------------
Minimum quotation Number of Pre-pilot (10/ Pilot (11/2012-
Tier size change stocks 2011- 10/2012) 7/2014) Difference t-statistic
----------------------------------------------------------------------------------------------------------------
1............ Increased........ 3,931 0.0062 0.0059 -0.0003 (1.60)
2............ Maintained....... 1,483 0.0233 0.0169 -0.0064 (3.41)
3............ Decreased........ 1,787 0.0540 0.0311 -0.0229 (4.87)
4............ Decreased........ 1,676 0.1214 0.0656 -0.0558 (4.95)
5a........... Decreased........ 3,059 0.4170 0.1500 -0.2670 (6.01)
5b........... Decreased........ 2,145 2.3563 0.4214 -1.9349 (6.79)
5c........... Maintained....... 288 14.8135 4.2683 -10.5452 (3.13)
----------------------------------------------------------------------------------------------------------------
As noted above, the 2013 Assessment was not conclusive as to the
impact of the Pilot on market quality for Tier 1 securities, the only
tier where the minimum quotation size increased. For example, the 2013
Assessment indicated that the time-weighted quoted spread was unchanged
for Tier 1 securities in the Pilot period. However, from June 30, 2013
to July 2014, there was a statistically significant narrowing of time-
weighted quoted spreads in this tier. Evidence from the second year of
the Pilot suggests that volume-weighted effective spreads and depth
beyond the BBO were unchanged from pre-Pilot levels, but there was a
statistically significant increase in depth at the BBO. Therefore, the
updated analysis provides reliable evidence that market quality for
Tier 1 securities has also improved during the Pilot.\32\ The data for
other tiers, however, continue to provide reliable evidence that market
quality has been unchanged or slightly improved under the Pilot. Thus,
because the Pilot had a demonstrable positive impact on customer limit
order display, and appears to have had an overall neutral to positive
impact on market quality, FINRA believes it is appropriate and in the
best interest of investors to adopt the Pilot tiers as permanent.
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\32\ As noted in note 24, supra, the DERA Memo to File finds
that quoted and effective spreads for Tier 1 securities increase
between the pre-Pilot period of November 14, 2011 to October 31,
2012 and the Pilot period of November 12, 2012 to November 28, 2014
covered by the analysis, but it does not find sufficient evidence
that these increases in spreads were caused by the Pilot.
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As noted in Item 2 of this filing, because the filing would allow
Rule 6433 to continue to operate without interruption, if the
Commission approves the proposed rule change, the implementation date
of the proposed rule change shall be the date of approval by the
Commission.
(C) Alternatives Considered
In developing the proposed rule change, FINRA considered several
alternatives to the proposed rule change, to ensure that it (1)
simplifies the structure of the minimum quotation sizes; and (2)
facilitates the display of customer limit orders under Rule 6460
(Display of Customer Limit Orders) (``limit order display rule'')
without having a negative impact on market quality and the number of
customer limit orders that are eligible for display. Accordingly, FINRA
considered alternative price points and minimum quotation sizes in
forming the tiers and evaluated the number of customer limit orders
that would be eligible for display. FINRA also assessed the potential
impact associated with alternative price bands across multiple sample
periods, and concluded that the tier structure that was adopted under
the Pilot resulted in the maximum number of customer limit orders that
would be eligible for display without harming competition in the OTC
equity securities market. In addition, FINRA staff revised the smallest
price point to conform to the minimum quotation increments under FINRA
Rule 6434 and increased the minimum quotation sizes for most price
points between $0.02 and $1.00. FINRA believes that the pilot tiers
continue to be appropriate and should be adopted on a permanent basis.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\33\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest. FINRA also believes that the proposed rule change is
consistent with the provisions of Section 15A(b)(11) of the Act.\34\
Section 15A(b)(11) requires that FINRA rules include provisions
governing the form and content of quotations relating to securities
sold otherwise than on a national securities exchange which may be
distributed or published by any member or person associated with a
member, and the persons to whom such quotations may be supplied.
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\33\ 15 U.S.C. 78o-3(b)(6).
\34\ 15 U.S.C. 78o-3(b)(11).
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FINRA believes that adopting the Pilot tiers as permanent would
promote just and equitable principles of trade
[[Page 20137]]
and protect investors and the public interest. The 2013 Assessment and
subsequent observations clearly demonstrate that the Pilot has resulted
in increased display of customer limit orders. The 2013 Assessment
found a 13% increase in the number of customer limit orders that met
the minimum quotation sizes to be eligible for display across all Pilot
tiers, and the updated data through July 2014 shows an even greater
increase of 18.45% than otherwise would have been eligible for display.
Notably, the increase in customer limit orders eligible for display was
significant in tiers that make up substantial percentages of the
overall volume transacted in OTC equity securities.
FINRA further believes that any concerns about market quality
raised by public commenters prior to the Commission's approval of Pilot
have not materialized. In fact, FINRA believes that the Pilot has had a
positive impact on OTC market quality for the majority of OTC equity
securities and tiers. As more fully detailed above, FINRA believes the
Pilot data shows overall a slight reduction in spreads for most OTC
equity securities with no negative (and perhaps a positive) impact on
liquidity.
As noted previously, when the Commission approved the Pilot, it
emphasized the potential benefits of increasing customer limit order
display. For instance, the Commission noted that increased limit order
display could potentially improve the prices at which customer limit
orders will be executed, consistent with the protection of investors
and the public interest.\35\ The Commission also has stated its belief
that greater customer limit order display could increase quote
competition, narrow spreads, and increase the likelihood of price
improvement for OTC equity securities.\36\ The Commission had
maintained a longstanding view that there are benefits to promoting
customer limit order display.\37\
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\35\ See Order Approving File No. SR-FINRA-2011-058, 77 FR at
37466.
\36\ See id. at 37469.
\37\ See id. at 37469 n.168 (citing, among other things, the
Commission's 1996 Order Handling Rules Release).
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Accordingly, FINRA believes that the Pilot accomplished its
intended objectives and realized benefits anticipated in its adoption,
including greater customer limit order display. At the same time,
market quality indicators during the Pilot suggest that the revised
tiers and greater customer limit order display did not result in a
harmful reduction in liquidity for OTC equity securities. As a result,
FINRA believes it is consistent with the Act to adopt the Pilot tiers
as permanent.
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. Despite some initial concerns
from commenters that the Pilot may have negative effects on market
makers who quote OTC equity securities, as the Pilot has progressed,
FINRA observed an overall increase in the number of market makers
quoting OTC equity securities across the duration of the Pilot.
Accordingly, given the increase in the number of market makers quoting
OTC equity securities, as demonstrated by the analysis using the first
two years of data from the Pilot, and the increased display of customer
limit orders, FINRA believes the Pilot has generated evidence that
support the Commission's preliminary view ``that the [Pilot] could
enhance competition.'' \38\
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\38\ See Order Approving File No. SR-FINRA-2011-058, 77 FR at
37469.
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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 [email protected]. Please include
File Number SR-FINRA-2018-015 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2018-015. 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 website (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 website 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 will also be available for inspection
and copying at the principal office of FINRA. All comments received
will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-FINRA-2018-015 and should be submitted
on or before May 29, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\39\
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\39\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-09612 Filed 5-4-18; 8:45 am]
BILLING CODE 8011-01-P
