Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend FINRA Rules 7610A and 7620A To Modify Certain Fees and Credits Applicable to FINRA/Nasdaq TRF Retail Participants, 67408-67416 [2018-28198]
Download as PDF
<![CDATA[
67408
Federal Register / Vol. 83, No. 248 / Friday, December 28, 2018 / Notices
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 also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. 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–NYSENAT–2018–26
and should be submitted on or before
January 18, 2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.17
Brent J. Fields,
Secretary.
[FR Doc. 2018–28192 Filed 12–27–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Proposed Collection; Comment
Request
Upon Written Request Copies Available
From: Securities and Exchange
Commission, Office of FOIA Services,
100 F Street NE, Washington, DC
20549–2736
amozie on DSK3GDR082PROD with NOTICES1
Extension:
Rules 6a–1 and 6a–2, Form 1, SEC File No.
270–0017, OMB Control No. 3235–0017
Notice is hereby given that pursuant
to the Paperwork Reduction Act of 1995
(‘‘PRA’’) (44 U.S.C. 3501 et seq.), the
Securities and Exchange Commission
(‘‘Commission’’) is soliciting comments
on the existing collection of information
provided for in Rule 6a–1 (17 CFR
240.6a–1), Rule 6a–2 (17 CFR 240.6a–2),
and Form 1 (17 CFR 249.1) under the
Securities Exchange Act of 1934
(‘‘Exchange Act’’) (15 U.S.C. 78a et seq.).
The Commission plans to submit this
existing collection of information to the
Office of Management and Budget
(‘‘OMB’’) for extension and approval.
The Exchange Act sets forth a
regulatory scheme for national securities
exchanges. Rule 6a–1 under the
17 17
CFR 200.30–3(a)(12).
VerDate Sep<11>2014
18:13 Dec 27, 2018
Jkt 247001
Exchange Act generally requires an
applicant for initial registration as a
national securities exchange to file an
application with the Commission on
Form 1. An exchange that seeks an
exemption from registration based on
limited trading volume also must apply
for such exemption on Form 1. Rule 6a–
2 under the Exchange Act requires
registered and exempt exchanges: (1) To
amend the Form 1 if there are any
material changes to the information
provided in the initial Form 1; and (2)
to submit periodic updates of certain
information provided in the initial Form
1, whether such information has
changed or not. The information
required pursuant to Rules 6a–1 and 6a–
2 is necessary to enable the Commission
to maintain accurate files regarding the
exchange and to exercise its statutory
oversight functions. Without the
information submitted pursuant to Rule
6a–1 on Form 1, the Commission would
not be able to determine whether the
respondent has met the criteria for
registration (or an exemption from
registration) set forth in Section 6 of the
Exchange Act. The amendments and
periodic updates of information
submitted pursuant to Rule 6a–2 are
necessary to assist the Commission in
determining whether a national
securities exchange or exempt exchange
is continuing to operate in compliance
with the Exchange Act.
Initial filings on Form 1 by
prospective exchanges are made on a
one-time basis. The Commission
estimates that it will receive
approximately one initial Form 1 filing
per year and that each respondent
would incur an average burden of 880
hours to file an initial Form 1 at an
average internal compliance cost per
response of approximately $335,984.
Therefore, the Commission estimates
that the annual burden for all
respondents to file the initial Form 1
would be 880 hours (one response/
respondent × one respondent × 880
hours/response) and an internal
compliance cost of $335,984 (one
response/respondent × one respondent x
$335,984/response).
There currently are 21 entities
registered as national securities
exchanges. The Commission estimates
that each registered or exempt exchange
files nine amendments or periodic
updates to Form 1 per year, incurring an
average burden of 25 hours to comply
with Rule 6a–2. The SEC estimates that
the average internal compliance cost for
a national securities exchange per
response would be approximately
$8,365. The Commission estimates that
the annual burden for all respondents to
file amendments and periodic updates
PO 00000
Frm 00198
Fmt 4703
Sfmt 4703
to the Form 1 pursuant to Rule 6a–2 is
4,725 hours (21 respondents × 25 hours/
response × 9 responses/respondent per
year) and an internal compliance cost of
$1,580,985 (21 respondents × $8,365/
response × 9 responses/respondent per
year).
Written comments are invited on: (a)
Whether the proposed collection of
information is necessary for the proper
performance of the functions of the
Commission, including whether the
information shall have practical utility;
(b) the accuracy of the Commission’s
estimates of the burden of the proposed
collection of information; (c) ways to
enhance the quality, utility, and clarity
of the information collected; and (d)
ways to minimize the burden of the
collection of information on
respondents, including through the use
of automated collection techniques or
other forms of information technology.
Consideration will be given to
comments and suggestions submitted in
writing within 60 days of this
publication.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
under the PRA unless it displays a
currently valid OMB control number.
Please direct your written comments
to: Charles Riddle, Acting Director/Chief
Information Officer, Securities and
Exchange Commission, c/o Candace
Kenner, 100 F Street NE, Washington,
DC 20549, or send an email to: PRA_
Mailbox@sec.gov.
Dated: December 21, 2018.
Brent J. Fields,
Secretary.
[FR Doc. 2018–28316 Filed 12–27–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–84901; File No. SR–FINRA–
2018–042]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend FINRA Rules
7610A and 7620A To Modify Certain
Fees and Credits Applicable to FINRA/
Nasdaq TRF Retail Participants
December 20, 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 December
1 15
2 17
E:\FR\FM\28DEN1.SGM
U.S.C. 78s(b)(1).
CFR 240.19b–4.
28DEN1
Federal Register / Vol. 83, No. 248 / Friday, December 28, 2018 / Notices
17, 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. FINRA has
designated the proposed rule change as
‘‘establishing or changing a due, fee or
other charge’’ under Section
19(b)(3)(A)(ii) of the Act 3 and Rule 19b–
4(f)(2) thereunder,4 which renders the
proposal effective upon receipt of this
filing by the Commission. 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
Rules 7610A and 7620A to modify
certain fees and credits applicable to
Retail Participants that use the FINRA/
Nasdaq Trade Reporting Facility
Carteret (the ‘‘FINRA/Nasdaq TRF
Carteret’’) and/or the FINRA/Nasdaq
Trade Reporting Facility Chicago (the
‘‘FINRA/Nasdaq TRF Chicago’’). Under
FINRA rules and as used herein, the
term ‘‘FINRA/Nasdaq TRF’’ means the
FINRA/Nasdaq TRF Carteret, the
FINRA/Nasdaq TRF Chicago, or both, as
applicable, depending on the facility or
facilities to which the participant elects
to report.
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.
amozie on DSK3GDR082PROD with NOTICES1
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
The FINRA/Nasdaq TRF is a facility
of FINRA that is operated by Nasdaq,
3 15
4 17
U.S.C. 78s(b)(3)(A)(ii).
CFR 240.19b–4(f)(2).
VerDate Sep<11>2014
18:13 Dec 27, 2018
Jkt 247001
Inc. (‘‘Nasdaq’’). In connection with the
establishment of the FINRA/Nasdaq
TRF, FINRA and Nasdaq entered into a
limited liability company agreement
(the ‘‘LLC Agreement’’). Under the LLC
Agreement, FINRA, the ‘‘SRO Member,’’
has sole regulatory responsibility for the
FINRA/Nasdaq TRF. Nasdaq, the
‘‘Business Member,’’ is primarily
responsible for the management of the
FINRA/Nasdaq TRF’s business affairs,
including establishing pricing for use of
the FINRA/Nasdaq TRF, to the extent
those affairs are not inconsistent with
the regulatory and oversight functions of
FINRA. Additionally, the Business
Member is obligated to pay the cost of
regulation and is entitled to the profits
and losses, if any, derived from the
operation of the FINRA/Nasdaq TRF.
Pursuant to the FINRA Rule 7600A
Series, FINRA/Nasdaq TRF participants
are charged fees, may qualify for fee
caps (Rule 7620A), and also may qualify
for revenue sharing payments for trade
reporting to the FINRA/Nasdaq TRF
(Rule 7610A). These rules are
administered by Nasdaq, in its capacity
as the Business Member and operator of
the FINRA/Nasdaq TRF on behalf of
FINRA,5 and Nasdaq collects all fees on
behalf of the FINRA/Nasdaq TRF.
Pursuant to Supplementary Material
.01 to FINRA Rule 7620A, a ‘‘Retail
Participant’’ 6 is a participant ‘‘for which
substantially all of its trade reporting
activity on the FINRA/Nasdaq Trade
Reporting Facility comprises Retail
Orders.’’ 7 Under FINRA Rule 7620A,
Retail Participants presently are subject
to four categories of transaction-based
fees, each of which is applicable to
transactions on the three Tapes: 8 (1)
5 FINRA’s oversight of this function performed by
the Business Member is conducted through a
recurring assessment and review of TRF operations
by an outside independent audit firm.
6 To qualify as a ‘‘Retail Participant’’ and for
special pricing under the Retail Participant fee
schedule, a participant must complete and submit
to Nasdaq, as the Business Member, an application.
The application form requires the participant to
attest to its qualifications as a Retail Participant on
the FINRA/Nasdaq TRF in which it is a participant
and for which it seeks Retail Participant pricing.
The participant must also attest to its reasonable
expectation that it will maintain its qualifications
for a one year period following the date of
attestation. Once a participant has been designated
as a Retail Participant, it must complete and submit
a written attestation to Nasdaq on an annual basis
to retain its status as such. A Retail Participant must
inform Nasdaq promptly if at any time it ceases to
qualify or it reasonably expects that it will cease to
qualify as a Retail Participant.
7 Pursuant to FINRA Rule 7260A.01, a ‘‘Retail
Order’’ means ‘‘an order that originates from a
natural person, provided that, prior to submission,
no change is made to the terms of the order with
respect to price or side of market and the order does
not originate from a trading algorithm or any other
computerized methodology.’’
8 Market data is transmitted to three tapes based
on the listing venue of the security: New York Stock
PO 00000
Frm 00199
Fmt 4703
Sfmt 4703
67409
Media/Executing Party; (2) Non-Media/
Executing Party; (3) Media/Contra Party;
and (4) Non-Media/Contra Party.9 Rule
7620A provides that for any of these
categories of fees, a Retail Participant
may qualify for a cap on the fees it
would otherwise pay to report trades to
a particular Tape during a given month,
provided that during the month, the
Retail Participant achieves a daily
average number of Media/Executing
Party trades of at least 2,500 in that
same Tape.10 The uncapped fee rates
and cap amounts that apply to Retail
Participants are different from those that
apply to non-Retail Participants under
the Rule.11
Under Rule 7610A, FINRA members
that report over-the-counter (‘‘OTC’’)
transactions in NMS stocks to a FINRA/
Nasdaq TRF for public dissemination or
‘‘media’’ purposes may receive quarterly
transaction credits that equal a
percentage of FINRA/Nasdaq TRF
revenues that are attributable to the
members’ transactions.12 The
percentage of attributable revenue that a
FINRA member may receive in the form
of a transaction credit varies depending
upon the extent of the member’s market
share on the FINRA/Nasdaq TRF.13 The
Exchange securities (‘‘Tape A’’), NYSE American
and regional exchange securities (‘‘Tape B’’), and
Nasdaq Stock Market securities (‘‘Tape C’’).
9 Media eligible trade reports are those that are
submitted to the FINRA/Nasdaq TRF for public
dissemination by the Securities Information
Processors (‘‘SIPs’’). By contrast, non-media trade
reports are not submitted to the FINRA/Nasdaq TRF
for public dissemination, but are submitted for
regulatory and/or clearance and settlement
purposes.
Pursuant to the Rule’s Supplementary Material,
the ‘‘Executing Party (EP)’’ is defined as the member
with the trade reporting obligation under FINRA
rules, and the ‘‘Contra (CP)’’ is defined as the
member on the contra side of a trade report.
10 Additionally, the Rule provides for a monthly
Participation Fee, from which Retail Participants
are exempt. It also provides for two special fee cap
programs—known as the ‘‘ATS Market Maker
Media/Contra Party Cap’’ and the ‘‘ATS Market
Maker Combined Media Activity Cap’’—for
participants that make markets in an alternative
trading system (‘‘ATS’’).
11 Retail Participants generally do not achieve
Executing Party activity sufficient to qualify for cap
programs due to the nature and scale of their retail
businesses. Retail orders that originate from natural
persons or from nonprofessional investors are not
produced in the same volumes or notional amounts
as are orders that originate from professional
executing broker firms. To date, only one Retail
Participant has achieved enough Executing Party
activity to qualify for a cap.
12 Under the Rule, a transaction is attributable to
a FINRA member if a trade report submitted to the
FINRA/Nasdaq TRF that the FINRA/Nasdaq TRF
then submits to either of the SIPs identifies the
FINRA member as the Executing Party on the
transaction.
13 For purposes of this Rule, the term ‘‘market
share’’ means a percentage calculated by dividing
the total number of shares represented by trades
reported by a FINRA member to the FINRA/Nasdaq
E:\FR\FM\28DEN1.SGM
Continued
28DEN1
67410
Federal Register / Vol. 83, No. 248 / Friday, December 28, 2018 / Notices
schedule of transaction credits is as
follows. (Presently, it does not
distinguish among categories of FINRA/
Nasdaq TRF participants.)
Percent of
attributable
revenue shared
Percentage market share
amozie on DSK3GDR082PROD with NOTICES1
Tape A:
Greater than or equal to 2% ........................................................................................................................................
Less than 2% but greater than or equal to 1% ............................................................................................................
Less than 1% but greater than or equal to 0.50% .......................................................................................................
Less than 0.50% but greater than or equal to 0.10% ..................................................................................................
Less than 0.10% ...........................................................................................................................................................
Tape B:
Greater than or equal to 2% ........................................................................................................................................
Less than 2% but greater than or equal to 1% ............................................................................................................
Less than 1% but greater than or equal to 0.35% .......................................................................................................
Less than 0.35% but greater than or equal to 0.10% ..................................................................................................
Less than 0.10% ...........................................................................................................................................................
Tape C:
Greater than or equal to 2% ........................................................................................................................................
Less than 2% but greater than or equal to 1% ............................................................................................................
Less than 1% but greater than or equal to 0.50% .......................................................................................................
Less than 0.50% but greater than or equal to 0.10% ..................................................................................................
Less than 0.10% ...........................................................................................................................................................
98
95
75
20
0
98
90
70
10
0
98
95
75
20
0
The Rule 7600A Series expressly
provides that the schedules of credits
and fees apply to reporting activity that
occurs on either or both of the FINRA/
Nasdaq TRFs and a participant’s
eligibility for any volume-based credits
or fee caps will be determined based
upon its aggregate reporting volume
between the two FINRA/Nasdaq TRFs.
Nasdaq, as the Business Member, has
determined to make several
amendments to the current schedules of
fees, caps, and credits. There is
substantial competition in the market
for OTC trade reporting between the
FINRA/Nasdaq TRF and the FINRA/
NYSE TRF, as evidenced by a recent
shift in market share between these
facilities.14 The proposed rule change
responds to these competitive forces by
reducing the fees that most Retail
Participants pay to the FINRA/Nasdaq
TRF. It also establishes a new
transaction credit program that will be
more accessible to Retail Participants
than is the existing credit program. The
proposed rule change also clarifies the
fee schedule and corrects a
typographical error in the existing fee
schedule. Each of these proposed
changes is described in detail below.
General Clarification and
Reorganization
First, the proposed rule change
clarifies Rule 7620A by adding roman
numerals to each of the headings in the
fee schedule and also letters and
numbers to its subheadings. These
proposed changes will render the fee
schedule easier to read and understand,
particularly when there is a need to
cross-reference the various fee programs
contained therein.
The proposed rule change also moves
the example of the operation of the fee
schedule, which presently appears
immediately under the heading ‘‘NonComparison/Accept (Non-Match/
Compare) Trade Report Fees and Caps
on Trade Report Fees’’ (to be numbered
‘‘II’’), to the subheading ‘‘Cap Qualifying
Activity (Requisite Daily Average
Media/Executing Party Trade Reporting
Activity for a Participant to Qualify for
Fee Caps in Paragraphs 1–4 Above)’’ (to
be relocated to follow subparagraphs 1
through 4 and numbered ‘‘II.A’’).
Movement of this example is necessary
because of other proposed changes to
the Rule, to be discussed below, which
will render the example applicable only
under the fee program set forth in
revised subparagraph II.A. As discussed
below, the proposed rule change adds
new examples that are tailored for the
new Retail Participant fee programs that
will be set forth in proposed
subparagraphs II.B and II.C.
Additionally, the proposed rule
change adds a clarifying sentence
beneath proposed paragraph II, which
states that a participant’s activity that
qualifies for more than one special fee
program under the Rule will
automatically receive the benefit of the
lowest applicable fee rate or cap. The
purpose of this sentence is to clarify
how the fee schedule operates where
multiple discounts or caps apply to the
same activity on the FINRA/Nasdaq
TRF. An example of the application of
this principle is included in the Rule
text, under proposed subparagraph II.C,
and below.
Lastly, the proposed rule change
amends the definition of a ‘‘Retail
Order,’’ in Supplementary Material .01
to Rule 7620A, to clarify that it includes
orders ‘‘on behalf of accounts that are
held in a corporate legal form, such as
an Individual Retirement Account,
Corporation, or a Limited Liability
Corporation that has been established
for the benefit of an individual or group
of related family members, provided
that the order is submitted by an
individual.’’ Although the existing
definition arguably implies that a Retail
Order already includes such orders,
TRF for media purposes during a given calendar
quarter by the total number of shares represented
by all trades reported to the Consolidated Tape
Association or the Nasdaq Securities Information
Processor, as applicable, during that quarter. Market
Share is calculated separately for each tape. See
Rule 7620A. The Rule notes, moreover, that if a
FINRA member reports trades to both FINRA/
Nasdaq TRFs during a given calendar quarter, then
‘‘market share’’ shall be calculated by dividing the
total number of shares represented by trades
reported by the member to both of the FINRA/
Nasdaq TRFs during that calendar quarter by the
total number of shares represented by all trades
reported to the Consolidated Tape Association or
the Nasdaq SIP, as applicable, during that quarter.
14 Nasdaq understands, based upon Retail
Participant feedback, that recent market share
changes are attributable to disparities in pricing
between the FINRA/Nasdaq TRF and the FINRA/
NYSE TRF. Due to pricing concerns, some Retail
Participants have instructed their executing
counterparties to shift their trade reporting activity
from the FINRA/Nasdaq TRF to the FINRA/NYSE
TRF. The proposed rule change seeks to lower
Retail Participant pricing on the FINRA/Nasdaq
TRF to render the FINRA/Nasdaq TRF a more
attractive trade reporting venue for this market
segment.
VerDate Sep<11>2014
18:13 Dec 27, 2018
Jkt 247001
PO 00000
Frm 00200
Fmt 4703
Sfmt 4703
E:\FR\FM\28DEN1.SGM
28DEN1
Federal Register / Vol. 83, No. 248 / Friday, December 28, 2018 / Notices
prospective Retail Participants have
requested the proposed clarification to
eliminate any uncertainty in this regard.
Special Pricing Programs for Retail
Participants
The proposed rule change will replace
the existing pricing programs for Retail
Participants with two new programs
that are intended to substantially
decrease the fees that many Retail
Participants pay to the FINRA/Nasdaq
TRF. The first new program is the Retail
Participant Contra Party Fee Discount
and Cap Program and the second one is
the Retail Participant Combined Cap
Program. These new pricing programs
are described below.15
Retail Participant Contra Party Fee
Discount and Cap Program
The first proposed pricing program,
which is set forth in a new
subparagraph II.B, will focus on a Retail
Participant’s Contra Party activity on the
FINRA/Nasdaq TRF. Most of the activity
in which Retail Participants engage on
the FINRA/Nasdaq TRF is Contra Party
activity, and this new program is
intended to reduce substantially the fees
that Retail Participants, and their
clients, pay for engaging in such
activity.
Presently, a Retail Participant that
engages in Contra Party activity on the
FINRA/Nasdaq TRF pays the following
fees. The monthly charge for a Retail
Participant that engages in Media/
Contra Party (Non-Media/Contra Party)
activity is $0.013 multiplied by the
number of Media/Contra Party (NonMedia/Contra Party) trades that the
participant reports to the FINRA/Nasdaq
TRF during the month. Retail
Participants qualify for a cap (on a per
Tape basis) on Media/Contra Party
(Non-Media/Contra Party) fees during a
given month if they report to the
FINRA/Nasdaq TRFs, on average, at
least 2,500 Media/Executing Party
trades per day in Tapes A, B, or C. If
capped, Media/Contra Party (NonMedia/Contra Party) fees for a Retail
Participant equal $0.013 multiplied by
2,500 multiplied by the number of
trading days during that month.
The proposed rule change will largely
replace this pricing scheme with a new
Tier
Discounted rate
(relative to standard
rate) to be used to calculate monthly charge, if
uncapped
50,000–100,000
100,001–200,000
200,001–300,000
>300,000
$0.0120
0.0072
0.0052
0.0050
15,000–30,000
30,001–60,000
60,001–100,000
>100,000
0.0120
0.0072
0.0052
0.0050
50,000–100,000
100,001–200,000
200,001–300,000
>300,000
0.0120
0.0072
0.0052
0.0050
activity for each Tape will be capped at
a maximum monthly amount if the
amozie on DSK3GDR082PROD with NOTICES1
Tape A:
1 ........................................................................................................................................
2 ........................................................................................................................................
VerDate Sep<11>2014
18:13 Dec 27, 2018
Jkt 247001
Retail Participant qualifies for Tier 4
pricing, as follows:
Daily average number of
executions during the
month needed to qualify
for tier
Tier
15 The proposed rule change would specify that
if a participant in the FINRA/Nasdaq TRF is
approved as a Retail Participant on or before the
twenty-second day of a month, such approval will
be deemed effective, for purposes of Rule 7620A,
as of the first day of that month, whereas an
approval that occurs after the twenty-second day of
the month will be deemed effective the first day of
one that will make it easier for Retail
Participants to qualify for discounts or
caps on their Contra Party activity.
Specifically, a Retail Participant will be
entitled to receive special tiered pricing
on its Contra Party activity even when
it has no corresponding Media/
Executing Party Activity. Under the
proposed program, a Retail Participant
will qualify for discounted or capped
fees to the extent that it achieves, during
a given month, a qualifying volume of
average daily Contra Party activity
(Media, Non-Media, or both) in a
particular Tape. Within each Tape, a
qualifying Retail Participant will receive
a volume-based discount on its monthly
uncapped Contra Party activity charges
relative to the standard rate.16 For both
Media/Contra Party and Non-Media/
Contra Party activity, the standard
uncapped rate is the number of Media/
Contra Party (Non-Media/Contra Party)
reports during the month multiplied by
$0.013, whereas the discounted rates
under the new program will be the
number of Media/Contra Party (NonMedia/Contra Party) reports multiplied
by the following:
Daily average number of
executions during the
month needed to qualify
for tier
Tape A:
1 ........................................................................................................................................
2 ........................................................................................................................................
3 ........................................................................................................................................
4 ........................................................................................................................................
Tape B:
1 ........................................................................................................................................
2 ........................................................................................................................................
3 ........................................................................................................................................
4 ........................................................................................................................................
Tape C:
1 ........................................................................................................................................
2 ........................................................................................................................................
3 ........................................................................................................................................
4 ........................................................................................................................................
In addition, monthly fees for a Retail
Participant’s qualifying Contra Party
the next month. If a participant in the FINRA/
Nasdaq TRF notifies Nasdaq, Inc. that it no longer
qualifies as a Retail Participant during a given
month, such notification shall be deemed effective,
for purposes of Rule 7620A, as of the first day of
the next month.
16 The structure of the proposed tiers differs
within each Tape. The tiers are structured to enable
PO 00000
Frm 00201
Fmt 4703
Sfmt 4703
67411
50,000–100,000
100,001–200,000
Maximum monthly
charge, if capped
n/a
n/a
Retail Participants to qualify for special pricing on
Contra Party activity beginning at lower volumes on
Tape B, where the FINRA/Nasdaq TRF has less
such activity, and at higher volumes on Tapes A
and C, where the FINRA/Nasdaq TRF has more
such activity.
E:\FR\FM\28DEN1.SGM
28DEN1
67412
Federal Register / Vol. 83, No. 248 / Friday, December 28, 2018 / Notices
Daily average number of
executions during the
month needed to qualify
for tier
Tier
3 ........................................................................................................................................
4 ........................................................................................................................................
Tape B:
1 ........................................................................................................................................
2 ........................................................................................................................................
3 ........................................................................................................................................
4 ........................................................................................................................................
Tape C:
1 ........................................................................................................................................
2 ........................................................................................................................................
3 ........................................................................................................................................
4 ........................................................................................................................................
amozie on DSK3GDR082PROD with NOTICES1
These caps will replace the existing cap
formulas that apply to Retail
Participants for their Media/Contra
Party and Non-Media Contra Party
reporting activity (proposed
subparagraphs II.3 and II.4).
Example 1
An example of the application of the
proposed program is as follows. If in a
given month with 20 trading days, a
Retail Participant achieves an average
daily execution volume on the FINRA/
Nasdaq TRF of 150,000 Media/Contra
Party trades in Tape A, 20,000 Media/
Contra Party Trades in Tape B, and
400,000 Media/Contra Party Trades in
Tape C, then the Retail Participant
would be entitled to receive the special
Media/Contra Party pricing set forth in
proposed subparagraph 3 with respect
to its activity in Tape A (Tier 2), Tape
B (Tier 1) and Tape C (Tier 4). As to
Tape A, the Retail Participant would
pay the uncapped discounted monthly
charges applicable to Tier 2 (($.0072) ×
(the number of Media/Contra Party
trades in Tape A during the month
(150,000)) × (20 trading days) = $21,600.
As to Tape B, the Retail Participant
would pay the uncapped discounted
monthly charges applicable to Tier 1,
which would be $4,800 (($.012) × (the
number of Media/Contra Party trades in
Tape B during the month (20,000)) × (20
trading days)). As to Tape C, the Retail
Participant would pay the lesser of the
uncapped discounted monthly charges
applicable to Tier 4 (($.005) × (the
number of Media/Contra Party trades in
Tape C during the month (400,000)) ×
(20 trading days) = $40,000) or the Tier
4 cap ($32,000), which would be
$32,000. Assuming that these Media/
Contra Party transactions comprised all
of the Retail Participant’s activity on the
FINRA/Nasdaq TRF, then the Retail
Participant’s total fees would be
$58,400.
By comparison, under the existing
program, the Retail Participant would
VerDate Sep<11>2014
18:13 Dec 27, 2018
Jkt 247001
not receive the benefit of any cap on its
Contra Party activity unless it also
achieves at least 2,500 average daily
Executing Party reports in each Tape
during the month. If the Retail
Participant does not achieve a cap on its
Contra Party activity—as has been the
case generally,17 then under the existing
program, the Retail Participant would
pay the standard rate. At the standard
rate, the same Contra Party activity
would cost the Retail Participant
$39,000 in Tape A ($0.013 × 150,000
average daily executions × 20 trading
days), $5,200 in Tape B ($.013 × 20,000
average daily executions × 20 trading
days), and $104,000 in Tape C ($.013 ×
400,000 average daily executions × 20
trading days), or a total of $148,200.
Thus, under the existing fee schedule,
the Retail Participant in this example
would pay roughly 2.45 times more for
its Contra Party activity on the FINRA/
Nasdaq TRF than it would under the
proposed rule change.
Retail Participant Combined Cap
Program
The second proposed pricing
program, which is set forth in a new
subparagraph II.C, is a Retail Participant
Combined Cap Program, which will
apply to Retail Participants that engage
in Media/Executing Party activity in
addition to Contra Party activity on the
FINRA/Nasdaq TRF.
Presently, a Retail Participant may
qualify for a cap on its Media (NonMedia)/Executing Party activity separate
and apart from the cap on its Contra
Party activity. For Media/Executing
Party (Non-Media/Executing Party) fees,
the monthly charge for a Retail
Participant is $0.018 multiplied by the
number of Media/Executing Party (NonMedia/Executing Party) trades that the
Retail Participant reports to the FINRA/
17 To date, only one Retail Participant has
achieved the requisite Executing Party activity to
also qualify it for a Contra Party cap.
PO 00000
Frm 00202
Fmt 4703
Sfmt 4703
Maximum monthly
charge, if capped
200,001–300,000
>300,000
n/a
$32,000
15,000–30,000
30,001–60,000
60,001–100,000
>100,000
n/a
n/a
n/a
11,000
50,000–100,000
100,001–200,000
200,001–300,000
>300,000
n/a
n/a
n/a
32,000
Nasdaq TRF during that month. Such
fees are capped once the Retail
Participant reports to the FINRA/Nasdaq
TRF, on average, at least 2,500 Media/
Executing Party trades per day in Tapes
A, B, or C during that month. If capped
for trades in a particular Tape, Media/
Executing Party (Non-Media/Executing
Party) fees for a Retail Participant equal
$0.018 multiplied by 2,500 multiplied
by the number of trading days during
that month.
The proposed rule change would
eliminate this cap program because it is
ill-suited for Retail Participants. The
existing Retail Participant Executing
Party pricing programs were adapted
from programs that were based on
Executing Party activity among nonRetail Participants, i.e., participants
whose activity on the FINRA/Nasdaq
TRF consists of Executing Party activity,
primarily, and Contra Party activity,
secondarily. However, Retail
Participants’ typical activity on the
FINRA/Nasdaq TRF is the opposite of
non-Retail Participants—it is almost
exclusively limited to Contra Party
activity. As such, the existing
programs—which require a Retail
Participant to engage in a threshold
level of Media/Executing Party activity
to qualify for a cap on either its
Executing Party or its Contra Party
activity—are ineffective. Indeed, only
one Retail Participant to date has
achieved enough Media/Executing Party
activity to qualify for a cap.
The proposed rule change would
replace the existing Executing Party
programs with a new Combined Activity
Cap that is tailored specifically to the
behavior of Retail Participants. That is,
for Retail Participants that engage
primarily in Contra Party activity on the
FINRA/Nasdaq TRF, the proposed
program would not disqualify them
from any special pricing—as does the
existing program—if they fail to engage
in Executing Party activity. For Retail
Participants that do engage in Executing
E:\FR\FM\28DEN1.SGM
28DEN1
Federal Register / Vol. 83, No. 248 / Friday, December 28, 2018 / Notices
Party activity, the proposed program
would cap their combined Executing
Party and Contra Party activity for the
month.
Specifically, the proposed rule change
would establish a new three-tiered
combined fee cap. Tier 1 would cap at
$50,000 a Retail Participant’s fees for its
total Executing Party and Contra Party
activity during a month. To qualify for
the Tier 1 cap, a Retail Participant
would need to achieve between 1,000
and 2,000 average daily Media/
Executing Party trades across all three
Tapes during the immediately preceding
three month period.18 (This qualifying
level of Media/Executing Party activity
is notably less than the existing
threshold requirement of 2,500 average
daily Media/Executing Party trades.)
Tier 2 would cap a Retail Participant’s
total monthly fees at $25,000. To qualify
for the Tier 2 cap, a Retail Participant
would need to achieve between 2,001
and 4,000 average daily Media/
Executing Party trades across all three
Tapes during the immediately preceding
three month period. Finally, Tier 3 of
the new program would cap a Retail
participant’s total monthly fees at
$15,000. To qualify for the Tier 3 cap,
a Retail Participant would need to
achieve more than 4,000 average daily
Media/Executing Party trades across all
three Tapes during the immediately
preceding three month period.
amozie on DSK3GDR082PROD with NOTICES1
Example 2
The following is an example of the
application of the Retail Participant
Combined Activity Cap. Assume that a
Retail Participant has the same level of
Contra Party activity during a month as
described in Example 1 above. Assume
also that, in addition to this Contra
Party activity, the Retail Participant also
achieves, during the immediately
preceding three month period, an
average of 1,500 Media/Executing Party
trade reports per day in Tape A, 500
Media/Executing Party trade reports per
day in Tape B, and 100 Media/
Executing Party trade reports per day in
Tape C. In this scenario, the Retail
Participant’s aggregate 2,100 average
18 Unlike the existing program, which measures a
Retail Participant’s average daily executions during
the prior month, the proposed program will
measure activity over the course of the immediately
preceding prior three months. Thus, to qualify for
the proposed program, Retail Participants will be
required to sustain their daily average activity level
for a longer period of time than they do presently.
This longer qualification period is intended to
ensure that the program applies to Retail
Participants that are maintaining or increasing
Executing party activity, rather than those that have
only episodic activity. This time period also aligns
with the schedules for dividend reinvestment
programs, which often are the basis for Executing
Party activity.
VerDate Sep<11>2014
18:13 Dec 27, 2018
Jkt 247001
daily Media/Executing Party trades
across all three Tapes would qualify it
for the Tier 2 Retail Participant
Combined Activity Cap of $25,000. The
capped fee would cover all of the Retail
Participant’s Executing Party and Contra
Party activity for the month. Thus, the
Retail Participant would pay the
$25,000 combined cap in lieu of paying
$58,400 for its Contra Party activity
under the proposed Retail Participant
Contra Party Fee Discount and Cap
Program (as described in Example 1).
This is because the Retail Participant
would receive the benefit of the lowest
applicable fee for its activity on the
FINRA/Nasdaq TRF.
Retail Participant Securities Transaction
Credit
The proposed rule change would
amend Rule 7610A to establish a new
category of transaction credits tailored
to Retail Participants. Much like the
existing fee program discussed above,
the existing transaction credit program
set forth in Rule 7610A was not
designed with Retail Participants in
mind because participants are entitled
to credits only to the extent that they
engage in substantial amounts of Media/
Executing Party activity. For example,
those participants with less than 0.10%
market share on the FINRA/Nasdaq TRF
presently receive no credits for any
revenue that is attributable to their
Media/Executing Party activity in any
Tape.
The proposed rule change would
make the transaction credit program
available to Retail Participants that
achieve even low levels of Media/
Executing Party activity during a given
quarter. Under the proposed rule
change, Retail Participants that achieve
less than 0.10 percent market share on
the FINRA/Nasdaq TRFs on any of the
three Tapes would be entitled to receive
credits equal to 75 percent of the
revenue that is attributable to their
Media/Executing Party activity in Tape
A and Tape C and credits equal to 70
percent of attributable revenue in Tape
B. Retail Participants that achieve a
market share of between 0.10 percent
and less than 0.50 percent in Tape A or
Tape C would receive credits equal to
75 percent of attributable revenue in
that Tape (versus 20 percent of
attributable revenue for other
participants). Retail Participants that
achieve a market share of between 0.10
percent and less than 0.35 percent in
Tape B would receive credits equal to
70 percent of attributable revenue in
that Tape (versus 10 percent of
attributable revenue for other
participants). For higher market shares,
Retail Participants in all Tapes would
PO 00000
Frm 00203
Fmt 4703
Sfmt 4703
67413
receive the same percentage shares of
attributable revenue as would other
participants.19
The proposal to tailor the transaction
credit program to Retail Participants
would provide another mechanism—in
addition to lower fees and fee caps—to
lower the overall costs to Retail
Participants of participating in the
FINRA/Nasdaq TRF, particularly for
Retail Participants with a greater scope
and volume of activity.
Clarification to ATS Market Maker
Media/Contra Party Cap
Lastly, the proposed rule change
would amend the ATS Market Maker
Media/Contra Party Cap, which
currently is set forth in subparagraph 5
and would be renumbered as
subparagraph D, to correct a
typographical error and also clarify the
provision. This cap program provides
for participants making markets in
alternative trading systems registered
pursuant to Regulation ATS to qualify
for a fee cap on all their trades in a
month if they meet three criteria.
Presently in the Rule, the second
criterion is that the ‘‘Participant must be
contra to a minimum of 1,000,000 trades
in Tape A, 500,000 trades in Tape C or
250,000 trades in Tape B.’’ Prior to the
reorganization of the fee schedule,
effective September 1, 2018, this
provision stated that to qualify for the
program, ‘‘Participant must be contra to
a minimum of 1,000,000 trades in Tape
A, 500,000 trades in Tape C and 250,000
trades in Tape B.’’ (Emphasis added.) 20
Upon reorganizing the fee schedule, the
‘‘and’’ in this provision was
inadvertently changed to ‘‘or.’’ The
proposed rule change corrects that
unintended error.
Additionally, the proposed rule
change further amends this criterion
due to concern that it could be
misinterpreted (as corrected above) to
mean that qualification for the cap
requires a participant to meet minimum
Contra Party trade reporting volumes in
all three Tapes. In fact, the criterion is
intended to mean that to qualify for the
cap with respect to trade reports in a
19 The proposed rule change would specify that
if a participant in the FINRA/Nasdaq TRF is
approved as a Retail Participant after the first day
of a calendar quarter, such approval will be deemed
effective, for purposes of Rule 7610A, as of the first
day of the next calendar quarter. Likewise, if a
participant in the FINRA/Nasdaq TRF notifies
Nasdaq, Inc. that it no longer qualifies as a Retail
Participant after the first day of a calendar quarter,
such notification shall be deemed effective, for
purposes of Rule 7610A, as of the first day of the
next calendar quarter.
20 See Securities Exchange Act Release No. 83866
(Aug. 16, 2018), 83 FR 42545 (Aug. 22, 2018)
(Notice of Filing and Immediate Effectiveness of
File No. SR–FINRA–2018–029).
E:\FR\FM\28DEN1.SGM
28DEN1
67414
Federal Register / Vol. 83, No. 248 / Friday, December 28, 2018 / Notices
particular Tape, a participant must meet
the minimum trade volume threshold
for that Tape. The proposed revised and
corrected text is as follows:
Participant must be contra to a minimum
number of trades during the month in a
particular Tape to qualify for a cap on trades
in that Tape. The minimum number of
monthly trades for each Tape are as follows:
1,000,000 trades in Tape A, 500,000 trades in
Tape C and 250,000 trades in Tape B.
amozie on DSK3GDR082PROD with NOTICES1
FINRA has filed the proposed rule
change for immediate effectiveness. The
operative date will be January 1, 2019.
2. Statutory Basis
FINRA believes that the proposed rule
changes [sic] are consistent with the
provisions of Section 15A(b)(5) of the
Act,21 which requires, among other
things, that FINRA rules provide for the
equitable allocation of reasonable dues,
fees and other charges among members
and issuers and other persons using any
facility or system that FINRA operates
or controls.
First, FINRA believes that the
proposed elimination of the existing
Retail Participant pricing programs
under Rule 7620A and adoption of new
programs that are better aligned with
and tailored to the behavioral profile of
Retail Participants is an equitable
allocation of reasonable fees. The
existing pricing programs for Retail
Participants were established by carving
Retail Participants out from the general
pricing programs applicable to all
participants. The existing pricing
programs were not designed with Retail
Participants in mind, but instead are
geared toward participants that engage
in Executing Party activity primarily,
and Contra Party activity secondarily.
The behavioral profile of Retail
Participants is the opposite of nonRetail Participants, such as ATS market
makers and wholesalers. Retail
Participants engage primarily, if not
exclusively, in Contra Party activity on
the FINRA/Nasdaq TRF. However, the
only aspect of the Retail Participant
programs that distinguishes them from
their non-Retail Participant counterparts
is the fact that their pricing is frozen at
pre-September 2018 levels. Because the
Retail Participant programs were
designed for non-Retail Participants, the
existing Retail Participant programs
have proven to be ineffective in
accomplishing their objectives of
lowering fees for Retail Participants and
their retail customers. That is, the
existing programs require Retail
Participants to achieve at least 2,500
average daily Media/Executing Party
trades to qualify for caps on either their
21 15
U.S.C. 78o–3(b)(5).
VerDate Sep<11>2014
18:13 Dec 27, 2018
Jkt 247001
Executing Party or their Contra Party
activity fees, but Retail Participants
generally do not generate enough
Executing Party activity to trigger the
caps. To date, only one Retail
Participant has qualified for a cap.
Moreover, the ineffectiveness of the
existing Retail Participant programs in
lowering fees has led certain Retail
Participants to direct their executing
counterparties to stop reporting their
trades to the FINRA/Nasdaq TRF and to
report them instead to the FINRA/NYSE
TRF, which does not charge Contra
Parties that are not also reporting
parties.
The two proposed Retail Participant
fee programs address the ineffectiveness
of the existing programs by aligning
fees, discounts, and caps with the
activities in which Retail Participants
engage on the FINRA/Nasdaq TRF. First
and foremost in this regard, the
proposed rule change introduces a
tiered system of caps—as well as
discounts, when caps are not
economical to the Retail Participant—
that become more favorable as the level
of the Retail Participant’s Contra Party
activity increases. The proposed rule
change also eliminates the requirement
that a Retail Participant must engage in
a threshold level of Media/Executing
Party activity to qualify for discounts or
caps on their Contra Party activity.
Moreover, the proposed rule change
introduces a Retail Participant
Combined Activity Cap that would
provide Retail Participants with a cap
on their combined monthly activity on
the FINRA/Nasdaq TRF to the extent
that they have Media/Executing Party
activity. This Combined Activity Cap in
many cases would be more favorable
than the Contra Activity cap for Retail
Participants that also have Executing
Party activity.
For similar reasons, FINRA believes
that the proposed rule change to
establish a new securities transaction
credit program under Rule 7610A that is
tailored to Retail Participants is an
equitable allocation of reasonable fees.
The existing securities transaction
program is generally inaccessible to
Retail Participants, insofar as they
generally engage in low levels of Media/
Executing Party activity. The proposed
rule change would enable Retail
Participants with even low levels of
Media/Executing Party activity to
receive credits for engaging in such
activity. It also would increase the
percentage of revenue sharing that
occurs at these low levels of activity
relative to the percentage that other
types of participants receive with the
same market shares. As such, the
proposed rule change would provide
PO 00000
Frm 00204
Fmt 4703
Sfmt 4703
another mechanism to lower the overall
costs to Retail Participants of
participating in the FINRA/Nasdaq TRF.
The proposed new programs to
benefit Retail Participants specifically
are not unfairly discriminatory.
Effective September 1, 2018, a distinct
category of Retail Participant pricing for
the FINRA/Nasdaq TRF was established
in recognition of the fact that customers
of Retail Participants generally include
individual investors who trade less
frequently than do other categories of
customers. Accordingly, Retail
Participants often report fewer trades to
the FINRA/Nasdaq TRF than other
participants. As such, the fees that
Retail Participants (and their customers)
pay should be better tailored to their
activity on the FINRA/Nasdaq TRF.22
However, the existing programs have
not achieved their objective of reducing
costs for Retail Participants.
Because the existing programs have
not succeeded in reducing costs to
Retail Participants relative to the
FINRA/NYSE TRF (which also
competes for Contra Party business and
does not charge Contra Parties that are
not also reporting parties), several Retail
Participants have requested that their
executing counterparties report their
trades to the FINRA/NYSE TRF rather
than the FINRA/Nasdaq TRF. The
proposed rule change is designed to
further reduce the costs to Retail
Participants on the FINRA/Nasdaq TRF
in an effort to stem, if not reverse, this
loss of retail business to the FINRA/
NYSE TRF.
The proposed changes also are not
unfairly discriminatory in that they will
be available to all FINRA members that
use the FINRA/Nasdaq TRF and meet
the threshold requirements to qualify for
the terms of the programs. The programs
themselves are designed to be accessible
to most, if not all, existing Retail
Participants, including those with both
low and high levels of activity on the
FINRA/Nasdaq TRF.
Additionally, the proposed rule
change would reorganize and clarify
Rule 7620A so that it is easier to
comprehend and presented in a more
logical order. The reorganization will
also ensure that examples of the
application of the Rule are placed in the
paragraphs where they will be
applicable going forward.
The proposed rule change also would
amend the definition of a ‘‘Retail Order’’
in Supplementary Material .01 to Rule
7620A to clarify that this term includes
22 See Securities Exchange Act Release No. 83866
(Aug. 16, 2018), 83 FR 42545 (Aug. 22, 2018)
(Notice of Filing and Immediate Effectiveness of
File No. SR–FINRA–2018–029).
E:\FR\FM\28DEN1.SGM
28DEN1
amozie on DSK3GDR082PROD with NOTICES1
Federal Register / Vol. 83, No. 248 / Friday, December 28, 2018 / Notices
orders that originate from accounts that
exist in corporate form for the benefit of
individuals, provided that individuals
submit the orders. Although it is
reasonable to interpret the existing
definition of a Retail Order to include
an order that originates from an
individual retirement account or
another corporate account that exists for
the benefit of an individual, the
proposed rule change will eliminate any
uncertainty in this regard. Moreover, the
proposed rule change will aid
prospective Retail Participants in
understanding their obligations as such.
The proposed clarifying language
derives from the definition of a
‘‘Designated Retail Order’’ in Nasdaq
Rule 7018 [sic], which is reasonable
because the concepts are similar. This
proposed change is equitable and not
unfairly discriminatory because it
merely makes a non-substantive
technical clarification to the meaning of
‘‘Retail Order.’’
Finally, the proposed rule change
would correct an unintended
typographical error that occurred when
Rule 7620A was reorganized effective
September 1, 2018. FINRA, Nasdaq, and
all FINRA/Nasdaq TRF participants
have an interest in FINRA maintaining
rules for its trade reporting facilities that
are accurate and free of errors. Likewise,
FINRA believes that clarifying the ATS
Market Maker Media/Contra Party Cap
will avoid confusion as to the number
of Contra Party trades in a particular
Tape that are required to qualify for the
cap for that Tape.
which is applicable to transactions on
the three Tapes: (1) Media/Executing
Party; (2) Non-Media/Executing Party;
(3) Media/Contra Party; (4) and NonMedia/Contra Party. The rule also
provides fee caps for Retail Participants
for a particular Tape during a given
month, provided that during the month,
the Retail Participant achieves a daily
average number of Media/Executing
Party trades of at least 2,500 in the same
Tape.
There are currently fifteen
participants who are either approved or
being considered for the Retail
Participant program, that cumulatively
represent approximately 25% of total
reporting activity in the FINRA/Nasdaq
TRF over the past 12 months. However,
due to the nature and scale of retail
businesses, to date, only one Retail
Participant had sufficient reporting
activity to qualify for a cap.
Also, pursuant to Rule 7610A, FINRA
members that report OTC transactions
in NMS stocks to a FINRA/Nasdaq TRF
for public dissemination or ‘‘media’’
purposes may receive quarterly
transaction credits that equal a
percentage of FINRA/Nasdaq TRF
revenues that are attributable to the
members’ transactions. However, the
current rule does not distinguish among
categories of FINRA/Nasdaq TRF
participants. Due to Retail Participants’
relatively smaller reporting activity
compared to that of non-Retail
Participants, Retail Participants have
not received transactions credits in the
past.
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.
Economic Impacts
The proposed rule change replaces
the existing retail Participant Pricing
Program with two new programs,
‘‘Retail Participant Contra Party Fee
Discount and Cap Program’’ and ‘‘Retail
Participant Combined Cap Program,’’
which are designed to reduce the fees
that most Retail Participants pay to the
FINRA/Nasdaq TRF.
As mentioned above, there are fifteen
current and prospective Retail
Participants that could potentially
benefit from the reduced fees under the
proposed Retail Participant programs.
While Example 1 above illustrates the
potential reduction in fees for a given
volume in all Tapes, the potential
reduction in fees in each Tape ranges
from a few hundred dollars to
approximately $50,000. The reduction
in fees could be larger if the Participant
qualifies for both the reduced fees and
the combined cap. Currently, only one
Retail Participant would have the
sufficient activity to qualify for the
Retail Participant Combined Cap
Program based on its historical activity.
Regulatory Need
Nasdaq, as the Business Member and
operator of the FINRA/Nasdaq TRF,
collects all fees on behalf of the FINRA/
Nasdaq TRF. As discussed above,
Nasdaq has observed an increase in
competition in the market for OTC trade
reporting, and in response to
competitive forces, determined to
reduce fees for most Retail Participants
that report trades to the FINRA/Nasdaq
TRFs and establish a new transaction
credit program that will be more
accessible to such participants.
Economic Baseline
As discussed above, pursuant to
FINRA Rule 7620A, Retail Participants
in the FINRA/Nasdaq TRF are currently
subject to four categories of fees, each of
VerDate Sep<11>2014
18:13 Dec 27, 2018
Jkt 247001
PO 00000
Frm 00205
Fmt 4703
Sfmt 4703
67415
Going forward, however, as a result of
the proposal, additional Retail
Participants may increase their
Executing Party activity on the FINRA/
Nasdaq TRF and potentially become
eligible for transaction credits or the
Retail Participant Combined Cap
Program.
FINRA analyzed data provided by
Nasdaq that contain monthly fees
incurred by fifteen current and
prospective Retail Participants that
reported OTC trades to FINRA/Nasdaq
TRF over a one year period from July
2017 through June 2018. The data
included the estimated reduction in fees
that would have occurred under the
proposed fee and cap schedule
assuming that the reporting behavior
would be the same under the current
and the proposed schedule. The
analysis demonstrated that there would
be no reduction in fees for ten of the
fifteen current and prospective Retail
Participants, since their level of
reporting activity would not qualify
them for the discounts (although such
Retail Participants would, at a
minimum, be exempt from the $350 per
month Participant Fee). The remaining
five participants would observe average
monthly reduction in fees that range
from $390 to $111,856.
The proposed rule change also opens
up the transaction credit program to
Retail Participants that achieve even
low levels of Executing Party activity
during a given quarter. In the four
quarters between July 2017 and June
2018, four Retail Participants would
have sufficient market share to qualify
for transaction credits. The quarterly
credits would range from $55 to $11,007
across all Tapes, with a median credit
of $4,749.
The potential net impact of the
proposed rule change depends on
whether participants alter their
reporting activity across TRFs to be
eligible for the fee caps. To the extent
that the proposed reduction in fees
provide [sic] net benefits, they may
choose to shift their reporting from
FINRA/NYSE TRF to FINRA/Nasdaq
TRF. The net impact would also depend
on whether the proposed fee caps create
an optimal reporting strategy to be
eligible for a specific cap to maximize
the overall savings for all trade types
reported to the FINRA/Nasdaq TRFs.
Finally, FINRA notes that the
proposed fee and fee cap changes occur
within the context of a competitive
environment in which the various trade
reporting facilities vie for market share.
The FINRA/NYSE TRF is free to adjust
its fees and fee cap programs in
response to the changes proposed herein
to render them more attractive relative
E:\FR\FM\28DEN1.SGM
28DEN1
67416
Federal Register / Vol. 83, No. 248 / Friday, December 28, 2018 / Notices
to the FINRA/Nasdaq TRF. If any
existing or prospective participant in
FINRA/Nasdaq TRF determines that the
new fees or fee cap thresholds are less
attractive or are unfavorable relative to
fees and fee cap programs applicable to
the FINRA/NYSE TRF, such
participants may choose to report to the
FINRA/NYSE TRF in lieu of the FINRA/
Nasdaq TRF, in which case the FINRA/
Nasdaq TRFs would lose market share.
However, the impact of differences in
fees and fee cap programs across the
TRFs on a participant’s decision to
prefer one TRF over the other may be
limited by the set of functionalities each
TRF provides.
Alternatives Considered
No other alternatives were considered
for the proposed rule change.
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
The foregoing rule change has become
effective pursuant to Section 19(b)(3)(A)
of the Act 23 and paragraph (f)(2) of Rule
19b–4 thereunder.24 At any time within
60 days of the filing of the proposed rule
change, the Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
amozie on DSK3GDR082PROD with NOTICES1
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–2018–042 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–2018–042. 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 also will 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–
2018–042, and should be submitted on
or before January 18, 2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.25
Brent J. Fields,
Secretary.
[FR Doc. 2018–28198 Filed 12–27–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Proposed Collection; Comment
Request
Upon Written Request Copies Available
From: Securities and Exchange
Commission, Office of FOIA Services,
100 F Street NE, Washington, DC
20549–2736.
Extension:
23 15
U.S.C. 78s(b)(3)(A).
24 17 CFR 240.19b–4(f)(2).
VerDate Sep<11>2014
18:13 Dec 27, 2018
25 17
Jkt 247001
PO 00000
CFR 200.30–3(a)(12).
Frm 00206
Fmt 4703
Sfmt 4703
Form ID. SEC File No. 270–291, OMB
Control No. 3235–0328
Notice is hereby given that, pursuant
to the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.), the Securities
and Exchange Commission
(‘‘Commission’’) is soliciting comments
on the collection of information
summarized below. The Commission
plans to submit this existing collection
of information to the Office of
Management and Budget for extension
and approval.
Form ID (OMB Control No. 3235–
0328; SEC File No. 270–291) is used by
companies and other entities to apply
for identification numbers and access
codes used in conjunction with the
EDGAR electronic filing system. The
information provided on Form ID is an
essential part of the security of the
EDGAR system. Form ID must be filed
every time a registrant or other person
obtains or changes an identification
number. Form ID is filed by all persons
that are required to file information
electronically on EDGAR, including but
not limited to, individuals, companies,
other for-profit organizations, or
governmental entities. We estimate that
approximately 46,842 filers file Form ID
annually and that it takes approximately
0.15 hours per response to prepare for
a total of 7,027 annual burden hours.
Written comments are invited on: (a)
Whether this proposed collection of
information is necessary for the proper
performance of the functions of the
agency, including whether the
information will have practical utility;
(b) the accuracy of the agency’s estimate
of the burden of the collection of
information; (c) ways to enhance the
quality, utility, and clarity of the
information collected; and (d) ways to
minimize the burden of the collection of
information on respondents, including
through the use of automated collection
techniques or other forms of information
technology. Consideration will be given
to comments and suggestions submitted
in writing within 60 days of this
publication.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a currently valid
control number.
Please direct your written comment to
Charles Riddle, Acting Director/Chief
Information Officer, Securities and
Exchange Commission, c/o Candace
Kenner, 100 F Street NE, Washington,
DC 20549 or send an email to: PRA_
Mailbox@sec.gov.
E:\FR\FM\28DEN1.SGM
28DEN1
]]>Agencies
[Federal Register Volume 83, Number 248 (Friday, December 28, 2018)]
[Notices]
[Pages 67408-67416]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-28198]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84901; File No. SR-FINRA-2018-042]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change To Amend FINRA Rules 7610A and 7620A To Modify
Certain Fees and Credits Applicable to FINRA/Nasdaq TRF Retail
Participants
December 20, 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 December
[[Page 67409]]
17, 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. FINRA has
designated the proposed rule change as ``establishing or changing a
due, fee or other charge'' under Section 19(b)(3)(A)(ii) of the Act \3\
and Rule 19b-4(f)(2) thereunder,\4\ which renders the proposal
effective upon receipt of this filing by the Commission. 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.
\3\ 15 U.S.C. 78s(b)(3)(A)(ii).
\4\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to amend FINRA Rules 7610A and 7620A to modify
certain fees and credits applicable to Retail Participants that use the
FINRA/Nasdaq Trade Reporting Facility Carteret (the ``FINRA/Nasdaq TRF
Carteret'') and/or the FINRA/Nasdaq Trade Reporting Facility Chicago
(the ``FINRA/Nasdaq TRF Chicago''). Under FINRA rules and as used
herein, the term ``FINRA/Nasdaq TRF'' means the FINRA/Nasdaq TRF
Carteret, the FINRA/Nasdaq TRF Chicago, or both, as applicable,
depending on the facility or facilities to which the participant elects
to report.
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
The FINRA/Nasdaq TRF is a facility of FINRA that is operated by
Nasdaq, Inc. (``Nasdaq''). In connection with the establishment of the
FINRA/Nasdaq TRF, FINRA and Nasdaq entered into a limited liability
company agreement (the ``LLC Agreement''). Under the LLC Agreement,
FINRA, the ``SRO Member,'' has sole regulatory responsibility for the
FINRA/Nasdaq TRF. Nasdaq, the ``Business Member,'' is primarily
responsible for the management of the FINRA/Nasdaq TRF's business
affairs, including establishing pricing for use of the FINRA/Nasdaq
TRF, to the extent those affairs are not inconsistent with the
regulatory and oversight functions of FINRA. Additionally, the Business
Member is obligated to pay the cost of regulation and is entitled to
the profits and losses, if any, derived from the operation of the
FINRA/Nasdaq TRF.
Pursuant to the FINRA Rule 7600A Series, FINRA/Nasdaq TRF
participants are charged fees, may qualify for fee caps (Rule 7620A),
and also may qualify for revenue sharing payments for trade reporting
to the FINRA/Nasdaq TRF (Rule 7610A). These rules are administered by
Nasdaq, in its capacity as the Business Member and operator of the
FINRA/Nasdaq TRF on behalf of FINRA,\5\ and Nasdaq collects all fees on
behalf of the FINRA/Nasdaq TRF.
---------------------------------------------------------------------------
\5\ FINRA's oversight of this function performed by the Business
Member is conducted through a recurring assessment and review of TRF
operations by an outside independent audit firm.
---------------------------------------------------------------------------
Pursuant to Supplementary Material .01 to FINRA Rule 7620A, a
``Retail Participant'' \6\ is a participant ``for which substantially
all of its trade reporting activity on the FINRA/Nasdaq Trade Reporting
Facility comprises Retail Orders.'' \7\ Under FINRA Rule 7620A, Retail
Participants presently are subject to four categories of transaction-
based fees, each of which is applicable to transactions on the three
Tapes: \8\ (1) Media/Executing Party; (2) Non-Media/Executing Party;
(3) Media/Contra Party; and (4) Non-Media/Contra Party.\9\ Rule 7620A
provides that for any of these categories of fees, a Retail Participant
may qualify for a cap on the fees it would otherwise pay to report
trades to a particular Tape during a given month, provided that during
the month, the Retail Participant achieves a daily average number of
Media/Executing Party trades of at least 2,500 in that same Tape.\10\
The uncapped fee rates and cap amounts that apply to Retail
Participants are different from those that apply to non-Retail
Participants under the Rule.\11\
---------------------------------------------------------------------------
\6\ To qualify as a ``Retail Participant'' and for special
pricing under the Retail Participant fee schedule, a participant
must complete and submit to Nasdaq, as the Business Member, an
application. The application form requires the participant to attest
to its qualifications as a Retail Participant on the FINRA/Nasdaq
TRF in which it is a participant and for which it seeks Retail
Participant pricing. The participant must also attest to its
reasonable expectation that it will maintain its qualifications for
a one year period following the date of attestation. Once a
participant has been designated as a Retail Participant, it must
complete and submit a written attestation to Nasdaq on an annual
basis to retain its status as such. A Retail Participant must inform
Nasdaq promptly if at any time it ceases to qualify or it reasonably
expects that it will cease to qualify as a Retail Participant.
\7\ Pursuant to FINRA Rule 7260A.01, a ``Retail Order'' means
``an order that originates from a natural person, provided that,
prior to submission, no change is made to the terms of the order
with respect to price or side of market and the order does not
originate from a trading algorithm or any other computerized
methodology.''
\8\ Market data is transmitted to three tapes based on the
listing venue of the security: New York Stock Exchange securities
(``Tape A''), NYSE American and regional exchange securities (``Tape
B''), and Nasdaq Stock Market securities (``Tape C'').
\9\ Media eligible trade reports are those that are submitted to
the FINRA/Nasdaq TRF for public dissemination by the Securities
Information Processors (``SIPs''). By contrast, non-media trade
reports are not submitted to the FINRA/Nasdaq TRF for public
dissemination, but are submitted for regulatory and/or clearance and
settlement purposes.
Pursuant to the Rule's Supplementary Material, the ``Executing
Party (EP)'' is defined as the member with the trade reporting
obligation under FINRA rules, and the ``Contra (CP)'' is defined as
the member on the contra side of a trade report.
\10\ Additionally, the Rule provides for a monthly Participation
Fee, from which Retail Participants are exempt. It also provides for
two special fee cap programs--known as the ``ATS Market Maker Media/
Contra Party Cap'' and the ``ATS Market Maker Combined Media
Activity Cap''--for participants that make markets in an alternative
trading system (``ATS'').
\11\ Retail Participants generally do not achieve Executing
Party activity sufficient to qualify for cap programs due to the
nature and scale of their retail businesses. Retail orders that
originate from natural persons or from nonprofessional investors are
not produced in the same volumes or notional amounts as are orders
that originate from professional executing broker firms. To date,
only one Retail Participant has achieved enough Executing Party
activity to qualify for a cap.
---------------------------------------------------------------------------
Under Rule 7610A, FINRA members that report over-the-counter
(``OTC'') transactions in NMS stocks to a FINRA/Nasdaq TRF for public
dissemination or ``media'' purposes may receive quarterly transaction
credits that equal a percentage of FINRA/Nasdaq TRF revenues that are
attributable to the members' transactions.\12\ The percentage of
attributable revenue that a FINRA member may receive in the form of a
transaction credit varies depending upon the extent of the member's
market share on the FINRA/Nasdaq TRF.\13\ The
[[Page 67410]]
schedule of transaction credits is as follows. (Presently, it does not
distinguish among categories of FINRA/Nasdaq TRF participants.)
---------------------------------------------------------------------------
\12\ Under the Rule, a transaction is attributable to a FINRA
member if a trade report submitted to the FINRA/Nasdaq TRF that the
FINRA/Nasdaq TRF then submits to either of the SIPs identifies the
FINRA member as the Executing Party on the transaction.
\13\ For purposes of this Rule, the term ``market share'' means
a percentage calculated by dividing the total number of shares
represented by trades reported by a FINRA member to the FINRA/Nasdaq
TRF for media purposes during a given calendar quarter by the total
number of shares represented by all trades reported to the
Consolidated Tape Association or the Nasdaq Securities Information
Processor, as applicable, during that quarter. Market Share is
calculated separately for each tape. See Rule 7620A. The Rule notes,
moreover, that if a FINRA member reports trades to both FINRA/Nasdaq
TRFs during a given calendar quarter, then ``market share'' shall be
calculated by dividing the total number of shares represented by
trades reported by the member to both of the FINRA/Nasdaq TRFs
during that calendar quarter by the total number of shares
represented by all trades reported to the Consolidated Tape
Association or the Nasdaq SIP, as applicable, during that quarter.
------------------------------------------------------------------------
Percent of
Percentage market share attributable revenue
shared
------------------------------------------------------------------------
Tape A:
Greater than or equal to 2%................ 98
Less than 2% but greater than or equal to 95
1%........................................
Less than 1% but greater than or equal to 75
0.50%.....................................
Less than 0.50% but greater than or equal 20
to 0.10%..................................
Less than 0.10%............................ 0
Tape B:
Greater than or equal to 2%................ 98
Less than 2% but greater than or equal to 90
1%........................................
Less than 1% but greater than or equal to 70
0.35%.....................................
Less than 0.35% but greater than or equal 10
to 0.10%..................................
Less than 0.10%............................ 0
Tape C:
Greater than or equal to 2%................ 98
Less than 2% but greater than or equal to 95
1%........................................
Less than 1% but greater than or equal to 75
0.50%.....................................
Less than 0.50% but greater than or equal 20
to 0.10%..................................
Less than 0.10%............................ 0
------------------------------------------------------------------------
The Rule 7600A Series expressly provides that the schedules of
credits and fees apply to reporting activity that occurs on either or
both of the FINRA/Nasdaq TRFs and a participant's eligibility for any
volume-based credits or fee caps will be determined based upon its
aggregate reporting volume between the two FINRA/Nasdaq TRFs. Nasdaq,
as the Business Member, has determined to make several amendments to
the current schedules of fees, caps, and credits. There is substantial
competition in the market for OTC trade reporting between the FINRA/
Nasdaq TRF and the FINRA/NYSE TRF, as evidenced by a recent shift in
market share between these facilities.\14\ The proposed rule change
responds to these competitive forces by reducing the fees that most
Retail Participants pay to the FINRA/Nasdaq TRF. It also establishes a
new transaction credit program that will be more accessible to Retail
Participants than is the existing credit program. The proposed rule
change also clarifies the fee schedule and corrects a typographical
error in the existing fee schedule. Each of these proposed changes is
described in detail below.
---------------------------------------------------------------------------
\14\ Nasdaq understands, based upon Retail Participant feedback,
that recent market share changes are attributable to disparities in
pricing between the FINRA/Nasdaq TRF and the FINRA/NYSE TRF. Due to
pricing concerns, some Retail Participants have instructed their
executing counterparties to shift their trade reporting activity
from the FINRA/Nasdaq TRF to the FINRA/NYSE TRF. The proposed rule
change seeks to lower Retail Participant pricing on the FINRA/Nasdaq
TRF to render the FINRA/Nasdaq TRF a more attractive trade reporting
venue for this market segment.
---------------------------------------------------------------------------
General Clarification and Reorganization
First, the proposed rule change clarifies Rule 7620A by adding
roman numerals to each of the headings in the fee schedule and also
letters and numbers to its subheadings. These proposed changes will
render the fee schedule easier to read and understand, particularly
when there is a need to cross-reference the various fee programs
contained therein.
The proposed rule change also moves the example of the operation of
the fee schedule, which presently appears immediately under the heading
``Non-Comparison/Accept (Non-Match/Compare) Trade Report Fees and Caps
on Trade Report Fees'' (to be numbered ``II''), to the subheading ``Cap
Qualifying Activity (Requisite Daily Average Media/Executing Party
Trade Reporting Activity for a Participant to Qualify for Fee Caps in
Paragraphs 1-4 Above)'' (to be relocated to follow subparagraphs 1
through 4 and numbered ``II.A''). Movement of this example is necessary
because of other proposed changes to the Rule, to be discussed below,
which will render the example applicable only under the fee program set
forth in revised subparagraph II.A. As discussed below, the proposed
rule change adds new examples that are tailored for the new Retail
Participant fee programs that will be set forth in proposed
subparagraphs II.B and II.C.
Additionally, the proposed rule change adds a clarifying sentence
beneath proposed paragraph II, which states that a participant's
activity that qualifies for more than one special fee program under the
Rule will automatically receive the benefit of the lowest applicable
fee rate or cap. The purpose of this sentence is to clarify how the fee
schedule operates where multiple discounts or caps apply to the same
activity on the FINRA/Nasdaq TRF. An example of the application of this
principle is included in the Rule text, under proposed subparagraph
II.C, and below.
Lastly, the proposed rule change amends the definition of a
``Retail Order,'' in Supplementary Material .01 to Rule 7620A, to
clarify that it includes orders ``on behalf of accounts that are held
in a corporate legal form, such as an Individual Retirement Account,
Corporation, or a Limited Liability Corporation that has been
established for the benefit of an individual or group of related family
members, provided that the order is submitted by an individual.''
Although the existing definition arguably implies that a Retail Order
already includes such orders,
[[Page 67411]]
prospective Retail Participants have requested the proposed
clarification to eliminate any uncertainty in this regard.
Special Pricing Programs for Retail Participants
The proposed rule change will replace the existing pricing programs
for Retail Participants with two new programs that are intended to
substantially decrease the fees that many Retail Participants pay to
the FINRA/Nasdaq TRF. The first new program is the Retail Participant
Contra Party Fee Discount and Cap Program and the second one is the
Retail Participant Combined Cap Program. These new pricing programs are
described below.\15\
---------------------------------------------------------------------------
\15\ The proposed rule change would specify that if a
participant in the FINRA/Nasdaq TRF is approved as a Retail
Participant on or before the twenty-second day of a month, such
approval will be deemed effective, for purposes of Rule 7620A, as of
the first day of that month, whereas an approval that occurs after
the twenty-second day of the month will be deemed effective the
first day of the next month. If a participant in the FINRA/Nasdaq
TRF notifies Nasdaq, Inc. that it no longer qualifies as a Retail
Participant during a given month, such notification shall be deemed
effective, for purposes of Rule 7620A, as of the first day of the
next month.
---------------------------------------------------------------------------
Retail Participant Contra Party Fee Discount and Cap Program
The first proposed pricing program, which is set forth in a new
subparagraph II.B, will focus on a Retail Participant's Contra Party
activity on the FINRA/Nasdaq TRF. Most of the activity in which Retail
Participants engage on the FINRA/Nasdaq TRF is Contra Party activity,
and this new program is intended to reduce substantially the fees that
Retail Participants, and their clients, pay for engaging in such
activity.
Presently, a Retail Participant that engages in Contra Party
activity on the FINRA/Nasdaq TRF pays the following fees. The monthly
charge for a Retail Participant that engages in Media/Contra Party
(Non-Media/Contra Party) activity is $0.013 multiplied by the number of
Media/Contra Party (Non-Media/Contra Party) trades that the participant
reports to the FINRA/Nasdaq TRF during the month. Retail Participants
qualify for a cap (on a per Tape basis) on Media/Contra Party (Non-
Media/Contra Party) fees during a given month if they report to the
FINRA/Nasdaq TRFs, on average, at least 2,500 Media/Executing Party
trades per day in Tapes A, B, or C. If capped, Media/Contra Party (Non-
Media/Contra Party) fees for a Retail Participant equal $0.013
multiplied by 2,500 multiplied by the number of trading days during
that month.
The proposed rule change will largely replace this pricing scheme
with a new one that will make it easier for Retail Participants to
qualify for discounts or caps on their Contra Party activity.
Specifically, a Retail Participant will be entitled to receive special
tiered pricing on its Contra Party activity even when it has no
corresponding Media/Executing Party Activity. Under the proposed
program, a Retail Participant will qualify for discounted or capped
fees to the extent that it achieves, during a given month, a qualifying
volume of average daily Contra Party activity (Media, Non-Media, or
both) in a particular Tape. Within each Tape, a qualifying Retail
Participant will receive a volume-based discount on its monthly
uncapped Contra Party activity charges relative to the standard
rate.\16\ For both Media/Contra Party and Non-Media/Contra Party
activity, the standard uncapped rate is the number of Media/Contra
Party (Non-Media/Contra Party) reports during the month multiplied by
$0.013, whereas the discounted rates under the new program will be the
number of Media/Contra Party (Non-Media/Contra Party) reports
multiplied by the following:
---------------------------------------------------------------------------
\16\ The structure of the proposed tiers differs within each
Tape. The tiers are structured to enable Retail Participants to
qualify for special pricing on Contra Party activity beginning at
lower volumes on Tape B, where the FINRA/Nasdaq TRF has less such
activity, and at higher volumes on Tapes A and C, where the FINRA/
Nasdaq TRF has more such activity.
----------------------------------------------------------------------------------------------------------------
Discounted rate
Daily average number of (relative to standard
Tier executions during the rate) to be used to
month needed to qualify calculate monthly
for tier charge, if uncapped
----------------------------------------------------------------------------------------------------------------
Tape A:
1......................................................... 50,000-100,000 $0.0120
2......................................................... 100,001-200,000 0.0072
3......................................................... 200,001-300,000 0.0052
4......................................................... >300,000 0.0050
Tape B:
1......................................................... 15,000-30,000 0.0120
2......................................................... 30,001-60,000 0.0072
3......................................................... 60,001-100,000 0.0052
4......................................................... >100,000 0.0050
Tape C:
1......................................................... 50,000-100,000 0.0120
2......................................................... 100,001-200,000 0.0072
3......................................................... 200,001-300,000 0.0052
4......................................................... >300,000 0.0050
----------------------------------------------------------------------------------------------------------------
In addition, monthly fees for a Retail Participant's qualifying
Contra Party activity for each Tape will be capped at a maximum monthly
amount if the Retail Participant qualifies for Tier 4 pricing, as
follows:
----------------------------------------------------------------------------------------------------------------
Daily average number of
executions during the Maximum monthly charge,
Tier month needed to qualify if capped
for tier
----------------------------------------------------------------------------------------------------------------
Tape A:
1......................................................... 50,000-100,000 n/a
2......................................................... 100,001-200,000 n/a
[[Page 67412]]
3......................................................... 200,001-300,000 n/a
4......................................................... >300,000 $32,000
Tape B:
1......................................................... 15,000-30,000 n/a
2......................................................... 30,001-60,000 n/a
3......................................................... 60,001-100,000 n/a
4......................................................... >100,000 11,000
Tape C:
1......................................................... 50,000-100,000 n/a
2......................................................... 100,001-200,000 n/a
3......................................................... 200,001-300,000 n/a
4......................................................... >300,000 32,000
----------------------------------------------------------------------------------------------------------------
These caps will replace the existing cap formulas that apply to Retail
Participants for their Media/Contra Party and Non-Media Contra Party
reporting activity (proposed subparagraphs II.3 and II.4).
Example 1
An example of the application of the proposed program is as
follows. If in a given month with 20 trading days, a Retail Participant
achieves an average daily execution volume on the FINRA/Nasdaq TRF of
150,000 Media/Contra Party trades in Tape A, 20,000 Media/Contra Party
Trades in Tape B, and 400,000 Media/Contra Party Trades in Tape C, then
the Retail Participant would be entitled to receive the special Media/
Contra Party pricing set forth in proposed subparagraph 3 with respect
to its activity in Tape A (Tier 2), Tape B (Tier 1) and Tape C (Tier
4). As to Tape A, the Retail Participant would pay the uncapped
discounted monthly charges applicable to Tier 2 (($.0072) x (the number
of Media/Contra Party trades in Tape A during the month (150,000)) x
(20 trading days) = $21,600. As to Tape B, the Retail Participant would
pay the uncapped discounted monthly charges applicable to Tier 1, which
would be $4,800 (($.012) x (the number of Media/Contra Party trades in
Tape B during the month (20,000)) x (20 trading days)). As to Tape C,
the Retail Participant would pay the lesser of the uncapped discounted
monthly charges applicable to Tier 4 (($.005) x (the number of Media/
Contra Party trades in Tape C during the month (400,000)) x (20 trading
days) = $40,000) or the Tier 4 cap ($32,000), which would be $32,000.
Assuming that these Media/Contra Party transactions comprised all of
the Retail Participant's activity on the FINRA/Nasdaq TRF, then the
Retail Participant's total fees would be $58,400.
By comparison, under the existing program, the Retail Participant
would not receive the benefit of any cap on its Contra Party activity
unless it also achieves at least 2,500 average daily Executing Party
reports in each Tape during the month. If the Retail Participant does
not achieve a cap on its Contra Party activity--as has been the case
generally,\17\ then under the existing program, the Retail Participant
would pay the standard rate. At the standard rate, the same Contra
Party activity would cost the Retail Participant $39,000 in Tape A
($0.013 x 150,000 average daily executions x 20 trading days), $5,200
in Tape B ($.013 x 20,000 average daily executions x 20 trading days),
and $104,000 in Tape C ($.013 x 400,000 average daily executions x 20
trading days), or a total of $148,200. Thus, under the existing fee
schedule, the Retail Participant in this example would pay roughly 2.45
times more for its Contra Party activity on the FINRA/Nasdaq TRF than
it would under the proposed rule change.
---------------------------------------------------------------------------
\17\ To date, only one Retail Participant has achieved the
requisite Executing Party activity to also qualify it for a Contra
Party cap.
---------------------------------------------------------------------------
Retail Participant Combined Cap Program
The second proposed pricing program, which is set forth in a new
subparagraph II.C, is a Retail Participant Combined Cap Program, which
will apply to Retail Participants that engage in Media/Executing Party
activity in addition to Contra Party activity on the FINRA/Nasdaq TRF.
Presently, a Retail Participant may qualify for a cap on its Media
(Non-Media)/Executing Party activity separate and apart from the cap on
its Contra Party activity. For Media/Executing Party (Non-Media/
Executing Party) fees, the monthly charge for a Retail Participant is
$0.018 multiplied by the number of Media/Executing Party (Non-Media/
Executing Party) trades that the Retail Participant reports to the
FINRA/Nasdaq TRF during that month. Such fees are capped once the
Retail Participant reports to the FINRA/Nasdaq TRF, on average, at
least 2,500 Media/Executing Party trades per day in Tapes A, B, or C
during that month. If capped for trades in a particular Tape, Media/
Executing Party (Non-Media/Executing Party) fees for a Retail
Participant equal $0.018 multiplied by 2,500 multiplied by the number
of trading days during that month.
The proposed rule change would eliminate this cap program because
it is ill-suited for Retail Participants. The existing Retail
Participant Executing Party pricing programs were adapted from programs
that were based on Executing Party activity among non-Retail
Participants, i.e., participants whose activity on the FINRA/Nasdaq TRF
consists of Executing Party activity, primarily, and Contra Party
activity, secondarily. However, Retail Participants' typical activity
on the FINRA/Nasdaq TRF is the opposite of non-Retail Participants--it
is almost exclusively limited to Contra Party activity. As such, the
existing programs--which require a Retail Participant to engage in a
threshold level of Media/Executing Party activity to qualify for a cap
on either its Executing Party or its Contra Party activity--are
ineffective. Indeed, only one Retail Participant to date has achieved
enough Media/Executing Party activity to qualify for a cap.
The proposed rule change would replace the existing Executing Party
programs with a new Combined Activity Cap that is tailored specifically
to the behavior of Retail Participants. That is, for Retail
Participants that engage primarily in Contra Party activity on the
FINRA/Nasdaq TRF, the proposed program would not disqualify them from
any special pricing--as does the existing program--if they fail to
engage in Executing Party activity. For Retail Participants that do
engage in Executing
[[Page 67413]]
Party activity, the proposed program would cap their combined Executing
Party and Contra Party activity for the month.
Specifically, the proposed rule change would establish a new three-
tiered combined fee cap. Tier 1 would cap at $50,000 a Retail
Participant's fees for its total Executing Party and Contra Party
activity during a month. To qualify for the Tier 1 cap, a Retail
Participant would need to achieve between 1,000 and 2,000 average daily
Media/Executing Party trades across all three Tapes during the
immediately preceding three month period.\18\ (This qualifying level of
Media/Executing Party activity is notably less than the existing
threshold requirement of 2,500 average daily Media/Executing Party
trades.) Tier 2 would cap a Retail Participant's total monthly fees at
$25,000. To qualify for the Tier 2 cap, a Retail Participant would need
to achieve between 2,001 and 4,000 average daily Media/Executing Party
trades across all three Tapes during the immediately preceding three
month period. Finally, Tier 3 of the new program would cap a Retail
participant's total monthly fees at $15,000. To qualify for the Tier 3
cap, a Retail Participant would need to achieve more than 4,000 average
daily Media/Executing Party trades across all three Tapes during the
immediately preceding three month period.
---------------------------------------------------------------------------
\18\ Unlike the existing program, which measures a Retail
Participant's average daily executions during the prior month, the
proposed program will measure activity over the course of the
immediately preceding prior three months. Thus, to qualify for the
proposed program, Retail Participants will be required to sustain
their daily average activity level for a longer period of time than
they do presently. This longer qualification period is intended to
ensure that the program applies to Retail Participants that are
maintaining or increasing Executing party activity, rather than
those that have only episodic activity. This time period also aligns
with the schedules for dividend reinvestment programs, which often
are the basis for Executing Party activity.
---------------------------------------------------------------------------
Example 2
The following is an example of the application of the Retail
Participant Combined Activity Cap. Assume that a Retail Participant has
the same level of Contra Party activity during a month as described in
Example 1 above. Assume also that, in addition to this Contra Party
activity, the Retail Participant also achieves, during the immediately
preceding three month period, an average of 1,500 Media/Executing Party
trade reports per day in Tape A, 500 Media/Executing Party trade
reports per day in Tape B, and 100 Media/Executing Party trade reports
per day in Tape C. In this scenario, the Retail Participant's aggregate
2,100 average daily Media/Executing Party trades across all three Tapes
would qualify it for the Tier 2 Retail Participant Combined Activity
Cap of $25,000. The capped fee would cover all of the Retail
Participant's Executing Party and Contra Party activity for the month.
Thus, the Retail Participant would pay the $25,000 combined cap in lieu
of paying $58,400 for its Contra Party activity under the proposed
Retail Participant Contra Party Fee Discount and Cap Program (as
described in Example 1). This is because the Retail Participant would
receive the benefit of the lowest applicable fee for its activity on
the FINRA/Nasdaq TRF.
Retail Participant Securities Transaction Credit
The proposed rule change would amend Rule 7610A to establish a new
category of transaction credits tailored to Retail Participants. Much
like the existing fee program discussed above, the existing transaction
credit program set forth in Rule 7610A was not designed with Retail
Participants in mind because participants are entitled to credits only
to the extent that they engage in substantial amounts of Media/
Executing Party activity. For example, those participants with less
than 0.10% market share on the FINRA/Nasdaq TRF presently receive no
credits for any revenue that is attributable to their Media/Executing
Party activity in any Tape.
The proposed rule change would make the transaction credit program
available to Retail Participants that achieve even low levels of Media/
Executing Party activity during a given quarter. Under the proposed
rule change, Retail Participants that achieve less than 0.10 percent
market share on the FINRA/Nasdaq TRFs on any of the three Tapes would
be entitled to receive credits equal to 75 percent of the revenue that
is attributable to their Media/Executing Party activity in Tape A and
Tape C and credits equal to 70 percent of attributable revenue in Tape
B. Retail Participants that achieve a market share of between 0.10
percent and less than 0.50 percent in Tape A or Tape C would receive
credits equal to 75 percent of attributable revenue in that Tape
(versus 20 percent of attributable revenue for other participants).
Retail Participants that achieve a market share of between 0.10 percent
and less than 0.35 percent in Tape B would receive credits equal to 70
percent of attributable revenue in that Tape (versus 10 percent of
attributable revenue for other participants). For higher market shares,
Retail Participants in all Tapes would receive the same percentage
shares of attributable revenue as would other participants.\19\
---------------------------------------------------------------------------
\19\ The proposed rule change would specify that if a
participant in the FINRA/Nasdaq TRF is approved as a Retail
Participant after the first day of a calendar quarter, such approval
will be deemed effective, for purposes of Rule 7610A, as of the
first day of the next calendar quarter. Likewise, if a participant
in the FINRA/Nasdaq TRF notifies Nasdaq, Inc. that it no longer
qualifies as a Retail Participant after the first day of a calendar
quarter, such notification shall be deemed effective, for purposes
of Rule 7610A, as of the first day of the next calendar quarter.
---------------------------------------------------------------------------
The proposal to tailor the transaction credit program to Retail
Participants would provide another mechanism--in addition to lower fees
and fee caps--to lower the overall costs to Retail Participants of
participating in the FINRA/Nasdaq TRF, particularly for Retail
Participants with a greater scope and volume of activity.
Clarification to ATS Market Maker Media/Contra Party Cap
Lastly, the proposed rule change would amend the ATS Market Maker
Media/Contra Party Cap, which currently is set forth in subparagraph 5
and would be renumbered as subparagraph D, to correct a typographical
error and also clarify the provision. This cap program provides for
participants making markets in alternative trading systems registered
pursuant to Regulation ATS to qualify for a fee cap on all their trades
in a month if they meet three criteria. Presently in the Rule, the
second criterion is that the ``Participant must be contra to a minimum
of 1,000,000 trades in Tape A, 500,000 trades in Tape C or 250,000
trades in Tape B.'' Prior to the reorganization of the fee schedule,
effective September 1, 2018, this provision stated that to qualify for
the program, ``Participant must be contra to a minimum of 1,000,000
trades in Tape A, 500,000 trades in Tape C and 250,000 trades in Tape
B.'' (Emphasis added.) \20\ Upon reorganizing the fee schedule, the
``and'' in this provision was inadvertently changed to ``or.'' The
proposed rule change corrects that unintended error.
---------------------------------------------------------------------------
\20\ See Securities Exchange Act Release No. 83866 (Aug. 16,
2018), 83 FR 42545 (Aug. 22, 2018) (Notice of Filing and Immediate
Effectiveness of File No. SR-FINRA-2018-029).
---------------------------------------------------------------------------
Additionally, the proposed rule change further amends this
criterion due to concern that it could be misinterpreted (as corrected
above) to mean that qualification for the cap requires a participant to
meet minimum Contra Party trade reporting volumes in all three Tapes.
In fact, the criterion is intended to mean that to qualify for the cap
with respect to trade reports in a
[[Page 67414]]
particular Tape, a participant must meet the minimum trade volume
threshold for that Tape. The proposed revised and corrected text is as
---------------------------------------------------------------------------
follows:
Participant must be contra to a minimum number of trades during
the month in a particular Tape to qualify for a cap on trades in
that Tape. The minimum number of monthly trades for each Tape are as
follows: 1,000,000 trades in Tape A, 500,000 trades in Tape C and
250,000 trades in Tape B.
FINRA has filed the proposed rule change for immediate
effectiveness. The operative date will be January 1, 2019.
2. Statutory Basis
FINRA believes that the proposed rule changes [sic] are consistent
with the provisions of Section 15A(b)(5) of the Act,\21\ which
requires, among other things, that FINRA rules provide for the
equitable allocation of reasonable dues, fees and other charges among
members and issuers and other persons using any facility or system that
FINRA operates or controls.
---------------------------------------------------------------------------
\21\ 15 U.S.C. 78o-3(b)(5).
---------------------------------------------------------------------------
First, FINRA believes that the proposed elimination of the existing
Retail Participant pricing programs under Rule 7620A and adoption of
new programs that are better aligned with and tailored to the
behavioral profile of Retail Participants is an equitable allocation of
reasonable fees. The existing pricing programs for Retail Participants
were established by carving Retail Participants out from the general
pricing programs applicable to all participants. The existing pricing
programs were not designed with Retail Participants in mind, but
instead are geared toward participants that engage in Executing Party
activity primarily, and Contra Party activity secondarily. The
behavioral profile of Retail Participants is the opposite of non-Retail
Participants, such as ATS market makers and wholesalers. Retail
Participants engage primarily, if not exclusively, in Contra Party
activity on the FINRA/Nasdaq TRF. However, the only aspect of the
Retail Participant programs that distinguishes them from their non-
Retail Participant counterparts is the fact that their pricing is
frozen at pre-September 2018 levels. Because the Retail Participant
programs were designed for non-Retail Participants, the existing Retail
Participant programs have proven to be ineffective in accomplishing
their objectives of lowering fees for Retail Participants and their
retail customers. That is, the existing programs require Retail
Participants to achieve at least 2,500 average daily Media/Executing
Party trades to qualify for caps on either their Executing Party or
their Contra Party activity fees, but Retail Participants generally do
not generate enough Executing Party activity to trigger the caps. To
date, only one Retail Participant has qualified for a cap. Moreover,
the ineffectiveness of the existing Retail Participant programs in
lowering fees has led certain Retail Participants to direct their
executing counterparties to stop reporting their trades to the FINRA/
Nasdaq TRF and to report them instead to the FINRA/NYSE TRF, which does
not charge Contra Parties that are not also reporting parties.
The two proposed Retail Participant fee programs address the
ineffectiveness of the existing programs by aligning fees, discounts,
and caps with the activities in which Retail Participants engage on the
FINRA/Nasdaq TRF. First and foremost in this regard, the proposed rule
change introduces a tiered system of caps--as well as discounts, when
caps are not economical to the Retail Participant--that become more
favorable as the level of the Retail Participant's Contra Party
activity increases. The proposed rule change also eliminates the
requirement that a Retail Participant must engage in a threshold level
of Media/Executing Party activity to qualify for discounts or caps on
their Contra Party activity.
Moreover, the proposed rule change introduces a Retail Participant
Combined Activity Cap that would provide Retail Participants with a cap
on their combined monthly activity on the FINRA/Nasdaq TRF to the
extent that they have Media/Executing Party activity. This Combined
Activity Cap in many cases would be more favorable than the Contra
Activity cap for Retail Participants that also have Executing Party
activity.
For similar reasons, FINRA believes that the proposed rule change
to establish a new securities transaction credit program under Rule
7610A that is tailored to Retail Participants is an equitable
allocation of reasonable fees. The existing securities transaction
program is generally inaccessible to Retail Participants, insofar as
they generally engage in low levels of Media/Executing Party activity.
The proposed rule change would enable Retail Participants with even low
levels of Media/Executing Party activity to receive credits for
engaging in such activity. It also would increase the percentage of
revenue sharing that occurs at these low levels of activity relative to
the percentage that other types of participants receive with the same
market shares. As such, the proposed rule change would provide another
mechanism to lower the overall costs to Retail Participants of
participating in the FINRA/Nasdaq TRF.
The proposed new programs to benefit Retail Participants
specifically are not unfairly discriminatory. Effective September 1,
2018, a distinct category of Retail Participant pricing for the FINRA/
Nasdaq TRF was established in recognition of the fact that customers of
Retail Participants generally include individual investors who trade
less frequently than do other categories of customers. Accordingly,
Retail Participants often report fewer trades to the FINRA/Nasdaq TRF
than other participants. As such, the fees that Retail Participants
(and their customers) pay should be better tailored to their activity
on the FINRA/Nasdaq TRF.\22\ However, the existing programs have not
achieved their objective of reducing costs for Retail Participants.
---------------------------------------------------------------------------
\22\ See Securities Exchange Act Release No. 83866 (Aug. 16,
2018), 83 FR 42545 (Aug. 22, 2018) (Notice of Filing and Immediate
Effectiveness of File No. SR-FINRA-2018-029).
---------------------------------------------------------------------------
Because the existing programs have not succeeded in reducing costs
to Retail Participants relative to the FINRA/NYSE TRF (which also
competes for Contra Party business and does not charge Contra Parties
that are not also reporting parties), several Retail Participants have
requested that their executing counterparties report their trades to
the FINRA/NYSE TRF rather than the FINRA/Nasdaq TRF. The proposed rule
change is designed to further reduce the costs to Retail Participants
on the FINRA/Nasdaq TRF in an effort to stem, if not reverse, this loss
of retail business to the FINRA/NYSE TRF.
The proposed changes also are not unfairly discriminatory in that
they will be available to all FINRA members that use the FINRA/Nasdaq
TRF and meet the threshold requirements to qualify for the terms of the
programs. The programs themselves are designed to be accessible to
most, if not all, existing Retail Participants, including those with
both low and high levels of activity on the FINRA/Nasdaq TRF.
Additionally, the proposed rule change would reorganize and clarify
Rule 7620A so that it is easier to comprehend and presented in a more
logical order. The reorganization will also ensure that examples of the
application of the Rule are placed in the paragraphs where they will be
applicable going forward.
The proposed rule change also would amend the definition of a
``Retail Order'' in Supplementary Material .01 to Rule 7620A to clarify
that this term includes
[[Page 67415]]
orders that originate from accounts that exist in corporate form for
the benefit of individuals, provided that individuals submit the
orders. Although it is reasonable to interpret the existing definition
of a Retail Order to include an order that originates from an
individual retirement account or another corporate account that exists
for the benefit of an individual, the proposed rule change will
eliminate any uncertainty in this regard. Moreover, the proposed rule
change will aid prospective Retail Participants in understanding their
obligations as such. The proposed clarifying language derives from the
definition of a ``Designated Retail Order'' in Nasdaq Rule 7018 [sic],
which is reasonable because the concepts are similar. This proposed
change is equitable and not unfairly discriminatory because it merely
makes a non-substantive technical clarification to the meaning of
``Retail Order.''
Finally, the proposed rule change would correct an unintended
typographical error that occurred when Rule 7620A was reorganized
effective September 1, 2018. FINRA, Nasdaq, and all FINRA/Nasdaq TRF
participants have an interest in FINRA maintaining rules for its trade
reporting facilities that are accurate and free of errors. Likewise,
FINRA believes that clarifying the ATS Market Maker Media/Contra Party
Cap will avoid confusion as to the number of Contra Party trades in a
particular Tape that are required to qualify for the cap for that Tape.
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.
Regulatory Need
Nasdaq, as the Business Member and operator of the FINRA/Nasdaq
TRF, collects all fees on behalf of the FINRA/Nasdaq TRF. As discussed
above, Nasdaq has observed an increase in competition in the market for
OTC trade reporting, and in response to competitive forces, determined
to reduce fees for most Retail Participants that report trades to the
FINRA/Nasdaq TRFs and establish a new transaction credit program that
will be more accessible to such participants.
Economic Baseline
As discussed above, pursuant to FINRA Rule 7620A, Retail
Participants in the FINRA/Nasdaq TRF are currently subject to four
categories of fees, each of which is applicable to transactions on the
three Tapes: (1) Media/Executing Party; (2) Non-Media/Executing Party;
(3) Media/Contra Party; (4) and Non-Media/Contra Party. The rule also
provides fee caps for Retail Participants for a particular Tape during
a given month, provided that during the month, the Retail Participant
achieves a daily average number of Media/Executing Party trades of at
least 2,500 in the same Tape.
There are currently fifteen participants who are either approved or
being considered for the Retail Participant program, that cumulatively
represent approximately 25% of total reporting activity in the FINRA/
Nasdaq TRF over the past 12 months. However, due to the nature and
scale of retail businesses, to date, only one Retail Participant had
sufficient reporting activity to qualify for a cap.
Also, pursuant to Rule 7610A, FINRA members that report OTC
transactions in NMS stocks to a FINRA/Nasdaq TRF for public
dissemination or ``media'' purposes may receive quarterly transaction
credits that equal a percentage of FINRA/Nasdaq TRF revenues that are
attributable to the members' transactions. However, the current rule
does not distinguish among categories of FINRA/Nasdaq TRF participants.
Due to Retail Participants' relatively smaller reporting activity
compared to that of non-Retail Participants, Retail Participants have
not received transactions credits in the past.
Economic Impacts
The proposed rule change replaces the existing retail Participant
Pricing Program with two new programs, ``Retail Participant Contra
Party Fee Discount and Cap Program'' and ``Retail Participant Combined
Cap Program,'' which are designed to reduce the fees that most Retail
Participants pay to the FINRA/Nasdaq TRF.
As mentioned above, there are fifteen current and prospective
Retail Participants that could potentially benefit from the reduced
fees under the proposed Retail Participant programs. While Example 1
above illustrates the potential reduction in fees for a given volume in
all Tapes, the potential reduction in fees in each Tape ranges from a
few hundred dollars to approximately $50,000. The reduction in fees
could be larger if the Participant qualifies for both the reduced fees
and the combined cap. Currently, only one Retail Participant would have
the sufficient activity to qualify for the Retail Participant Combined
Cap Program based on its historical activity. Going forward, however,
as a result of the proposal, additional Retail Participants may
increase their Executing Party activity on the FINRA/Nasdaq TRF and
potentially become eligible for transaction credits or the Retail
Participant Combined Cap Program.
FINRA analyzed data provided by Nasdaq that contain monthly fees
incurred by fifteen current and prospective Retail Participants that
reported OTC trades to FINRA/Nasdaq TRF over a one year period from
July 2017 through June 2018. The data included the estimated reduction
in fees that would have occurred under the proposed fee and cap
schedule assuming that the reporting behavior would be the same under
the current and the proposed schedule. The analysis demonstrated that
there would be no reduction in fees for ten of the fifteen current and
prospective Retail Participants, since their level of reporting
activity would not qualify them for the discounts (although such Retail
Participants would, at a minimum, be exempt from the $350 per month
Participant Fee). The remaining five participants would observe average
monthly reduction in fees that range from $390 to $111,856.
The proposed rule change also opens up the transaction credit
program to Retail Participants that achieve even low levels of
Executing Party activity during a given quarter. In the four quarters
between July 2017 and June 2018, four Retail Participants would have
sufficient market share to qualify for transaction credits. The
quarterly credits would range from $55 to $11,007 across all Tapes,
with a median credit of $4,749.
The potential net impact of the proposed rule change depends on
whether participants alter their reporting activity across TRFs to be
eligible for the fee caps. To the extent that the proposed reduction in
fees provide [sic] net benefits, they may choose to shift their
reporting from FINRA/NYSE TRF to FINRA/Nasdaq TRF. The net impact would
also depend on whether the proposed fee caps create an optimal
reporting strategy to be eligible for a specific cap to maximize the
overall savings for all trade types reported to the FINRA/Nasdaq TRFs.
Finally, FINRA notes that the proposed fee and fee cap changes
occur within the context of a competitive environment in which the
various trade reporting facilities vie for market share. The FINRA/NYSE
TRF is free to adjust its fees and fee cap programs in response to the
changes proposed herein to render them more attractive relative
[[Page 67416]]
to the FINRA/Nasdaq TRF. If any existing or prospective participant in
FINRA/Nasdaq TRF determines that the new fees or fee cap thresholds are
less attractive or are unfavorable relative to fees and fee cap
programs applicable to the FINRA/NYSE TRF, such participants may choose
to report to the FINRA/NYSE TRF in lieu of the FINRA/Nasdaq TRF, in
which case the FINRA/Nasdaq TRFs would lose market share. However, the
impact of differences in fees and fee cap programs across the TRFs on a
participant's decision to prefer one TRF over the other may be limited
by the set of functionalities each TRF provides.
Alternatives Considered
No other alternatives were considered for the proposed rule change.
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
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \23\ and paragraph (f)(2) of Rule 19b-4
thereunder.\24\ At any time within 60 days of the filing of the
proposed rule change, the Commission summarily may temporarily suspend
such rule change if it appears to the Commission that such action is
necessary or appropriate in the public interest, for the protection of
investors, or otherwise in furtherance of the purposes of the Act. If
the Commission takes such action, the Commission shall institute
proceedings to determine whether the proposed rule should be approved
or disapproved.
---------------------------------------------------------------------------
\23\ 15 U.S.C. 78s(b)(3)(A).
\24\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-FINRA-2018-042 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-2018-042. 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 also will 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-2018-042, and should be submitted
on or before January 18, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
---------------------------------------------------------------------------
\25\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Brent J. Fields,
Secretary.
[FR Doc. 2018-28198 Filed 12-27-18; 8:45 am]
BILLING CODE 8011-01-P
