9386 Federal Register / Vol. 76, No. 33 / Thursday, February 17, 2011 / Notices 

17 15 U.S.C. 78s(b)(3)(a)(ii). 

18 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 61168 

(December 15, 2009); 74 FR 68084 (‘‘Notice’’). 

4See Letter to Elizabeth Murphy, Secretary, 

Commission, from Patrick Chi, Chief Compliance 

Officer, ITG, Inc., dated January 12, 2010 (‘‘ITG 

Letter’’); Letter to Elizabeth M. Murphy, Secretary, 

Commission, from R. Cromwell Coulson, Chief 

Executive Officer, Pink OTC Markets Inc., dated 

January 18, 2010 (‘‘Pink OTC Letter’’); Letter to 

Elizabeth M. Murphy, Secretary, Commission, from 

Ann Vlcek, Managing Director and Associate 

General Counsel, SIFMA, dated January 28, 2010 

(‘‘SIFMA Letter’’); and Letter to Elizabeth M. 

Murphy, Secretary, Commission, from Leonard J. 

Amoruso, General Counsel, Knight Capital Group, 

Inc. and Michael T. Corrao, Chief Compliance 

Officer, Knight Equity Markets, L.P., dated February 

22, 2010 (‘‘Knight Letter’’). 

5See Letter to Elizabeth M. Murphy, Secretary, 

Commission, from Racquel Russell, Assistant 

General Counsel, Regulatory Policy and Oversight, 

FINRA, dated August 31, 2010 (‘‘FINRA Letter’’). 

6Amendment No. 1 modifies the proposal to 

remove the requirement that a member assign and 

use a unique market participant identifier (MPID) 

for its market-making desks where the member 

structures its order handling practices in NMS 

stocks to permit its market-making desks to trade 

at prices that would satisfy customer orders held at 

a separate unit. The amendment also addresses the 

applicability of interpretive guidance previously 

issued in connection with NASD IM–2110–2 and 

NASD Rule 2111 to new FINRA Rule 5320. FINRA 

stated that, consistent with its existing policy, 

where a provision of FINRA Rule 5320 is not 

substantively different from NASD IM–2110–2 or 

NASD Rule 2111, previously issued interpretations 

generally will continue to apply (unless rescinded 

or updated by FINRA). The Commission expects 

FINRA to update, as soon as practicable, its 

interpretive guidance to reflect new FINRA Rule 

5320 and to rescind any previous interpretive 

guidance that is no longer applicable. The 

amendment also clarifies that, in the case of 

extended hours trading in foreign securities where 

currency fluctuations are possible, the price at 

which the proprietary transaction is executed, not 

the price of the proprietary order, is relevant in 

determining whether the customer order protection 

requirement has been triggered. Finally, 

Amendment No. 1 makes several non-substantive, 

technical changes to the rule text. 

7The current FINRA rulebook consists of: (1) 

FINRA Rules; (2) NASD Rules; and (3) rules 

incorporated from NYSE (‘‘Incorporated NYSE 

Rules’’). While the NASD Rules generally apply to 

all FINRA members, the Incorporated NYSE Rules 

apply only to those members of FINRA that are also 

members of the NYSE. The FINRA Rules apply to 

all FINRA members, unless such rules have a more 

limited application by their terms. For more 

information about the rulebook consolidation 

process, see Information Notice, March 12, 2008 

(Rulebook Consolidation Process). 

8Under Rule 600 of Regulation NMS, an NMS 

stock means any NMS security other than an 

19(b)(3)(A)(ii) of the Act.17 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: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number SR–NASDAQ–2011–022 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number SR–NASDAQ–2011–022. This 

file number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for Web site viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street, NE., 

Washington, DC 20549, on official 

business days between the hours of 10 

a.m. and 3 p.m. Copies of the filing also 

will be available for inspection and 

copying at the principal office of the 

Exchange. All comments received will 

be posted without change; the 

Commission does not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. All submissions 

should refer to File Number SR– 

NASDAQ–2011–022 and should be 

submitted on or before March 10, 2011. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.18

Cathy H. Ahn, 

Deputy Secretary. 

[FR Doc. 2011–3582 Filed 2–16–11; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–63895; File No. SR–FINRA– 

2009–090] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Notice of Filing of 

Amendment No. 1 to a Proposed Rule 

Change and Order Granting 

Accelerated Approval of a Proposed 

Rule Change, as Modified by 

Amendment No. 1, To Adopt FINRA 

Rule 5320 (Prohibition Against Trading 

Ahead of Customer Orders) in the 

Consolidated FINRA Rulebook 

February 11, 2011. 

I. Introduction 

On December 12, 2009, the Financial 

Industry Regulatory Authority, Inc. 

(‘‘FINRA’’) (f/k/a National Association of 

Securities Dealers, Inc. (‘‘NASD’’)) filed 

with the Securities and Exchange 

Commission (‘‘Commission’’), pursuant 

to Section 19(b)(1) of the Securities 

Exchange Act of 1934 (‘‘Act’’) 1 and Rule 

19b–4 thereunder,2 a proposed rule 

change to adopt FINRA Rule 5320 in 

FINRA’s new consolidated rulebook 

(‘‘Consolidated FINRA Rulebook’’). The 

proposed rule change was published for 

comment in the Federal Register on 

December 22, 2009.3 The Commission 

received four comment letters on the 

proposed rule change 4 and a letter from 

FINRA responding to the comment 

letters.5 On January 24, 2011, FINRA 

filed Amendment No. 1 to the proposed 

rule change.6 This order approves the 

proposed rule change, as amended by 

Amendment No. 1. 

II. Description of Proposed Rule Change 

and Summary of Comments 

As part of the process of developing 

the Consolidated FINRA Rulebook,7

FINRA proposes to adopt NASD IM– 

2110–2 (Trading Ahead of Customer 

Limit Order) and NASD Rule 2111 

(Trading Ahead of Customer Market 

Orders) with significant changes as new 

FINRA Rule 5320 (Prohibition Against 

Trading Ahead of Customer Orders). 

NASD IM–2110–2 generally prohibits a 

member from trading for its own 

account in an NMS stock, as defined in 

Rule 600(b)(47) of Regulation NMS,8 or 


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option. An NMS security means any security or 

class of securities for which transaction reports are 

collected, processed, and made available pursuant 

to an effective transaction reporting plan, or an 

effective national market system plan for reporting 

transactions in listed options. 17 CFR 242.600. 

9The Commission understands that prior 

interpretive guidance, such as Notices to Members, 

relating to FINRA’s customer order protection rules 

would still apply to the extent that such 

interpretive guidance does not conflict with new 

FINRA Rule 5320. 

10The Commission notes that, since the filing of 

the proposed rule change, FINRA’s definition of 

‘‘OTC Equity Security’’ was revised to mean any 

equity security that is not an ‘‘NMS stock’’ as that 

term is defined in Rule 600(b)(47) of Regulation 

NMS; provided, however, that the term ‘‘OTC 

Equity Security’’ shall not include any Restricted 

Equity Security. See FINRA Rule 6420. This 

definitional change was intended to clarify 

members’ trade reporting requirements for OTC 

equity securities and would not affect the 

applicability of FINRA Rule 5320. For information 

on this definitional change, see Securities Exchange 

Act Release No. 61979 (April 23, 2010), 75 FR 

23316 (May 3, 2010) (SR–FINRA–2010–003). 

11See ITG Letter and SIFMA Letter. SIFMA also 

sought clarification that FINRA Rule 5320 would 

not apply to securities that would not qualify as 

exchange-listed or OTC equity securities. FINRA, in 

response, clarified that FINRA Rule 5320 would 

apply to securities that meet the definition of ‘‘OTC 

Equity Security’’ as defined in FINRA Rule 6420, as 

well as securities that meet the definition of ‘‘NMS 

stock’’ as defined in Rule 600 of Regulation NMS. 

See FINRA Letter. 

12See FINRA Letter. 

13See SIFMA Letter. 

14See FINRA Letter. 

15 Id. 

16See FINRA Letter. See also Notice to Members 

97–57 (September 1997) and Notice to Members 95– 

43 (June 1995). 

17See FINRA Letter. See also Notice to Members 

97–57 (September 1997). 

18See FINRA Letter. 

19FINRA represents that, even when a customer 

has not opted in to the protections under FINRA 

Rule 5320, a member’s conduct must continue to be 

consistent with the guidance provided in the Notice 

to Members 05–51 (August 2005). In Notice to 

Members 05–51, FINRA, among other things, 

reminded members that adherence to just and 

equitable principles of trade as mandated by NASD 

Rule 2010 ‘‘requires that members handle and 

execute any order received from a customer in a 

Continued 

an OTC equity security, at a price that 

is equal to or better than an unexecuted 

customer limit order in that security, 

unless the member immediately, in the 

event it trades ahead, executes the 

customer limit order at the price at 

which it traded for its own account or 

better. Similarly, NASD Rule 2111 

generally prohibits a member that 

accepts and holds a customer market 

order in a Nasdaq or exchange-listed 

security from trading for its own 

account at prices that would satisfy a 

customer market order, unless the firm 

immediately thereafter executes the 

customer market order up to the size 

and at the same price at which it traded 

for its own account or better. At present, 

NASD Rule 2111 does not apply to OTC 

equity securities. 

While there is no Incorporated NYSE 

Rule counterpart to NASD IM–2110–2 

and NASD Rule 2111 (collectively, 

‘‘customer order protection rules’’), 

NYSE Rule 92 imposes similar 

requirements on NYSE members in 

NYSE-listed securities. NYSE Rule 92 

generally prohibits members or member 

organizations from knowingly entering 

proprietary orders ahead of, or along 

with, customer orders that are 

executable at the same price as the 

proprietary order. 

As discussed below, FINRA proposes 

several changes to the requirements set 

forth in NASD IM–2110–2 and NASD 

Rule 2111 to create a standard that 

incorporates elements from existing 

FINRA and NYSE Rules. Commenters 

generally favored FINRA’s effort to 

integrate the limit order protection rule 

and the market order protection rule 

into a single rule. However, as discussed 

below, some commenters raised 

concerns regarding the scope of the 

proposed rule and supported certain 

additional modifications. 

A. Integration of NASD IM–2110–2 and 

NASD Rule 2111 

FINRA proposes to integrate NASD 

IM–2110–2 and NASD Rule 2111 into a 

single rule, proposed FINRA Rule 5320, 

to govern members’ treatment of 

customer orders and apply the new 

FINRA Rule to all equity securities 

uniformly, other than with respect to 

the no-knowledge interpretation as 

detailed below.9 In addition, FINRA 

proposes to extend the application of 

NASD Rule 2111 to OTC equity 

securities.10 As noted above, NASD Rule 

2111 currently applies only to Nasdaq 

or exchange-listed securities, while 

NASD IM–2110–2 applies to both NMS 

stocks and OTC equity securities. 

Some commenters sought clarification 

about the application of the proposed 

rule to ‘‘not held’’ orders.11 Generally, a 

‘‘not held’’ order is an un-priced, 

discretionary order voluntarily 

categorized as such by the customer.12

One commenter stated that it is not 

appropriate to apply the proposed rule 

to ‘‘not held’’ orders because they are 

neither a market nor a limit order and, 

by definition, provide a broker-dealer 

with flexibility through a grant of price 

and time discretion to exercise its 

professional judgment in handling the 

order.13

The Commission notes that FINRA 

stated, in its response, that because the 

customer has given the member price 

and time discretion, the proposed rule 

would not be applicable to the order, 

given that there is not a specific price 

parameter limitation to apply to the 

member’s proprietary trading.14 FINRA 

noted that it previously has provided 

clarification regarding the application of 

the customer order protection rules to 

‘‘not held’’ orders.15 FINRA stated that a 

broker-dealer with such an order must 

use its judgment as a broker in the 

execution of the order and, if such 

judgment is properly exercised, the 

broker is relieved of its normal 

responsibilities with respect to the time 

of execution and the price or prices of 

execution of such an order.16 FINRA 

noted, however, that a member must 

clearly document its customer 

authorization to ‘‘work the order’’ and 

must disclose to customers that 

members may trade at the same price or 

better than that received by the 

discretionary order.17 FINRA further 

remarked that, because the customer has 

granted the member the discretion to 

‘‘work the order,’’ the member has a clear 

responsibility to endeavor to obtain the 

best fill for the customer, considering all 

of the terms agreed to with the customer 

and the market conditions surrounding 

the order.18

B. Large Orders and Institutional 

Accounts 

Currently, NASD IM–2110–2 and 

NASD Rule 2111 provide an exception 

to the customer order protection rules to 

permit members to negotiate terms and 

conditions on the acceptance of certain 

large-sized orders (orders of 10,000 

shares or more and greater than 

$100,000 in value) and orders from 

institutional accounts as defined in 

NASD Rule 3110(c) (collectively 

referred to as ‘‘Institutional/Large-Sized 

Orders’’). Such terms and conditions 

permit a member to continue to trade 

along side or ahead of such customer 

orders if the customer agrees. 

FINRA proposes to modify the steps 

necessary for a member to avail itself of 

the exception for Institutional/LargeSized Orders. Specifically, under FINRA 

Rule 5320, a member would be 

permitted to trade a security on the 

same side of the market for its own 

account at a price that would satisfy a 

customer order, provided that the 

member provides clear and 

comprehensive written disclosure to 

each customer at account opening and 

annually thereafter that: (a) The member 

may trade proprietarily at prices that 

would satisfy the customer order, and 

(b) provides the customer with a 

meaningful opportunity to opt in to the 

protections of FINRA Rule 5320 with 

respect to all or any portion of its 

order(s).19 If a customer does not opt in 


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manner that does not disadvantage the customer or 

place the member’s financial interests ahead of 

those of its customer.’’ See also NASD Rule 2320 

(Best Execution and Interpositioning). 

20FINRA represents that customers always retain 

the right to withdraw consent at any time. 

Therefore, a member’s reasonable conclusion that a 

customer has consented to the member trading 

along with such customer’s order is subject to 

further instruction and modification from the 

customer. 

21While a firm relying on this exception or any 

other exception must be able to provide evidence 

of its eligibility for and compliance with the 

exception, FINRA states that it believes that, when 

obtaining consent on an order-by-order basis, a 

member must, at a minimum, document not only 

the terms and conditions of the order (e.g., the 

relative price and size of the allocated order/ 

percentage split with the customer), but also the 

identity of the person at the customer who provided 

the consent. For example, the identity of the person 

must be noted in a manner that will enable 

subsequent contact with that person if a question 

as to the consent arises (i.e., first names only, 

initials, and nicknames will not suffice). 

22See Notices to Members 95–43 (June 1995), 03– 

74 (November 2003), and 06–03 (January 2006). 

23Under NYSE Rule 92, a firm may trade ahead 

of a customer order as long as the person entering 

the proprietary order has no knowledge of the 

unexecuted customer order. Under NYSE Rule 

92.10, a member or employee of a member or 

member organization is ‘‘presumed to have 

knowledge of a particular customer order unless the 

member organization has implemented a reasonable 

system of internal policies and procedures to 

prevent the misuse of information about customer 

orders by those responsible for entering proprietary 

orders.’’ 

24This proposed change would make FINRA Rule 

5320 consistent with NYSE Rule 92, because the 

NYSE rule does not preclude members from walling 

off their market-making desks. 

25See SIFMA Letter, Knight Letter, and Pink OTC 

Letter. Pink OTC stated that they agreed fully with 

the comments on the no-knowledge exception 

expressed by SIFMA. 

26See SIFMA Letter and Knight Letter. 27See SIFMA Letter. 28 Id. 29 Id. 30See SIFMA Letter and Knight Letter. 31See SIFMA Letter and Knight Letter. 32See SIFMA Letter. 33 Id. 34See SIFMA Letter and Knight Letter. 

with respect to all or any portion of its 

order(s), the member may reasonably 

conclude that such customer has 

consented to the member trading a 

security on the same side of the market 

for its own account at a price that would 

satisfy the customer’s order.20

In lieu of a member providing written 

disclosure to customers at account 

opening and annually thereafter, FINRA 

Rule 5320 would permit the member to 

provide clear and comprehensive oral 

disclosure to, and obtain consent from, 

a customer on an order-by-order basis, 

provided that the member documents 

who provided such consent and that 

such consent evidences the customer’s 

understanding of the terms and 

conditions of the order. In addition, 

where a customer has opted in to the 

protections of FINRA Rule 5320, a 

member may still obtain consent on an 

order-by-order basis to trade ahead of or 

along with an order from that customer, 

provided that the member documents 

who provided such consent and that 

such consent evidences the customer’s 

understanding of the terms and 

conditions of the order.21

The Commission believes that the 

change to the exception for 

Institutional/Large-Sized Orders is 

appropriate. Specifically, the 

requirement that members provide 

comprehensive written disclosure to 

each customer at account opening and 

annually, or, alternatively, provide clear 

and comprehensive oral disclosure to, 

and get consent from, customers on an 

order-by-order basis, will help ensure 

that customers are sufficiently informed 

with respect to their rights to opt in to 

the protections of FINRA Rule 5320. 

C. No-Knowledge Exception 

NASD IM–2110–2 and NASD Rule 

2111 provide another exception to the 

customer order protection rules. 

Specifically, if a firm implements and 

utilizes an effective system of internal 

controls, such as appropriate 

information barriers, that operate to 

prevent a non-market-making 

proprietary desk from obtaining 

knowledge of customer orders held at 

the firm’s market-making desk, those 

‘‘walled off’’ non-market-making 

proprietary desks are permitted to trade 

at prices that would satisfy the customer 

orders held by the market-making desk 

without any requirement that such 

proprietary executions trigger an 

obligation to fill pending customer 

orders at the same price.22 NYSE Rule 

92 has a similar, but not identical, ‘‘noknowledge’’ exception. NYSE Rule 92, 

by its terms, is limited to those 

circumstances where the firm 

knowingly trades ahead of its 

customer.23

FINRA Rule 5320 would expand the 

current no-knowledge interpretation to 

include market-making desks, but not 

with respect to OTC equity securities.24

To use the amended exception, a firm 

must structure its order handling 

practices in NMS stocks to wall off 

customer order flow from its marketmaking desks and disclose that fact to 

customers in writing. Such disclosure 

must include a description of the 

manner in which customer orders are 

handled and the circumstances under 

which the firm may trade proprietarily 

at its market-making desk at prices that 

would satisfy a customer order. Further, 

the disclosure is required at account 

opening and on an annual basis 

thereafter. 

Three commenters argued that the 

proposed rule should extend the noknowledge exception to market-making 

desks that trade OTC equity securities.25

Two of these commenters stated that the 

adoption of different standards for 

exchange-listed and OTC equity 

securities is inconsistent with the stated 

intention to harmonize FINRA and 

NYSE rules.26 Moreover, one 

commenter argued that having two sets 

of approaches to the no-knowledge 

exception would introduce unnecessary 

complexity, as well as compliance and 

programming inefficiencies.27 This 

commenter further argued that the OTC 

equity markets have evolved in a similar 

manner to the market for NMS stocks 

and therefore warrant similar 

treatment.28 The commenter noted that, 

as with exchange-listed securities, many 

firms may prefer to handle retail-sized 

customer orders in OTC equity 

securities on an automated basis, 

separate and apart from their 

proprietary trading desks, including 

market-making desks.29

Two commenters also objected to 

FINRA’s proposal to require firms that 

rely on the no-knowledge exception to 

obtain a unique MPID for their marketmaking desks.30 These commenters 

stated that an additional MPID would 

add unnecessary complexities to 

FINRA’s Order Audit Trail System and 

other regulatory reporting requirements 

and could create further technological 

and operational burdens.31 One of these 

commenters noted that firms may need 

to make related changes to their clearing 

systems and that new MPIDs may 

require certifications with existing 

clients for which firms clear and for all 

destinations to which firms route.32

This commenter further remarked that 

there would not be a commensurate 

benefit in light of the costs of obtaining 

and maintaining MPIDs, because other 

equally effective ways for firms to 

establish internal control systems to 

monitor information barriers currently 

exist.33 Both commenters suggested that 

FINRA consider giving firms the option 

to utilize a unique MPID for their 

market-making desks.34

In its response to these comments, 

FINRA stated that it continues to believe 

that OTC equity securities should not be 

included within the no-knowledge 

exception, because the degree of 

automation in the OTC equity market is 

not commensurate with the market for 

NMS stocks. FINRA pointed out that, 

because trades in the OTC equity market 

are not as susceptible to automated 

routing for best execution, members 

should not be permitted to utilize the 

no-knowledge exception. Instead, 


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35See supra note 4. 

36See FINRA Letter. 

37See e-mail from Racquel Russell, Assistant 

General Counsel, FINRA, to Nancy Burke-Sanow, 

Assistant Director, Commission, dated February 10, 

2011. 

38 Id. 

39For purposes of FINRA Rule 5320, FINRA 

represents that the definition of a ‘‘bona fide error’’ 

is commensurate with Regulation NMS’s exemption 

for error correction transactions. See Securities 

Exchange Act Release No. 55884 (June 8, 2007), 72 

FR 32926 (June 14, 2007) (Order Exempting Certain 

Error Correction Transactions from Rule 611 of 

Regulation NMS under the Securities Exchange Act 

of 1934). 

40See SIFMA Letter. 

41 Id. 

42 Id. 

43 Id. 

44See Pink OTC Letter and Knight Letter. 

45See Pink OTC Letter. 

46 Id. 

47See Pink OTC Letter. 

FINRA believed that, for these 

securities, interacting with the marketmaking desk is a critical source of 

liquidity for customer orders. With 

regard to commenters’ concerns about 

acquiring separate MPIDs for firms’ 

market-making desks, FINRA, as noted 

above, proposed to remove the 

requirement in Amendment No. 1.35

The Commission believes that the 

proposed change to the no-knowledge 

exception is appropriate. Although the 

OTC equity market may have become 

more automated in recent years, the 

Commission understands that the 

market for OTC equity securities is not 

as developed as the market for NMS 

stocks. The Commission concurs with 

FINRA that there is a continued benefit 

to retaining the current no-knowledge 

exception for OTC equity securities.36

Further, the Commission notes that, 

while it would be more efficient from 

FINRA’s perspective for the marketmaking unit of a firm to use a separate 

MPID, FINRA currently has the 

capability to surveil for violations of the 

customer order protection rules and will 

continue to use those mechanisms to 

surveil for violations of new FINRA 

Rule 5320, subject to necessary 

modifications to reflect the 

requirements of the new rule.37 In 

addition, FINRA has noted its intention 

to examine alternative means of 

achieving the objective of the proposed 

MPID requirement.38

D. Odd Lot and Bona Fide Error 

Exception 

FINRA proposes applying the 

customer order protection requirements 

to all customer orders but would 

provide an exception for a firm’s 

proprietary trade that: (1) Offsets a 

customer odd-lot order (i.e., an order 

less than one round lot, which is 

typically 100 shares); or (2) corrects a 

bona fide error.39 Currently, there is a 

blanket exclusion for odd lots from the 

customer order protection requirements. 

With respect to bona fide errors, 

member firms would be required to 

demonstrate and document the basis 

upon which a transaction meets the 

bona fide error exception. 

The Commission believes that 

FINRA’s proposal with respect to oddlot transactions and bona fide errors is 

appropriate. The Commission believes 

that the proposal is tailored to protect 

customer orders while allowing the 

market to operate efficiently. The 

Commission also believes that, by 

delineating exceptions for odd lots and 

bona fide errors, the proposal further 

clarifies market participants’ obligations 

with respect to the protection of 

customer orders. 

E. Trading Outside Normal Market 

Hours 

FINRA proposes expanding the 

customer order protection requirements 

to apply at all times that a customer 

order is executable by a member. 

Currently, the customer order protection 

requirements apply only during normal 

market hours (9:30 a.m. to 4 p.m.) and 

after hours (4 p.m. to 6:30 p.m.). 

One commenter objected to FINRA’s 

proposal to extend customer order 

protection requirements beyond regular 

market hours.40 The commenter pointed 

out that other rules relating to order 

handling, such as Regulation NMS, do 

not apply outside of regular trading 

hours and that there is no reason that 

those rules and the proposed FINRA 

rule should differ. According to the 

commenter, customers who send orders 

for extended-hours trading tend to be 

more sophisticated and therefore their 

orders should be handled like 

institutional orders, even if they are 

smaller in size or submitted by an 

individual investor.41 Finally, the 

commenter noted that the costs and 

burdens of applying customer order 

protection requirements during 

extended-hours trading may be 

particularly onerous for firms that 

execute transactions in foreign 

securities during that period in light of 

fluctuations in U.S. and non-U.S. 

currency exchange rates.42 The 

commenter stated that these currency 

fluctuations could inadvertently cause a 

member to trade ahead of customer 

orders.43

In Amendment No. 1, FINRA clarified 

that, as is the case during regular trading 

hours, during extended trading hours, 

Rule 5320 would continue to require 

that members fill executable customer 

orders whenever the member executes a 

proprietary transaction at a price that 

would satisfy the customer’s order (or at 

a price that does not satisfy the 

customer limit order but does not 

provide the minimum level of price 

improvement). FINRA stated that the 

price at which the proprietary 

transaction is executed, not the price of 

the proprietary order, is the relevant 

factor in determining whether the 

customer order protection requirement 

has been triggered. Therefore, if a 

member receives an execution in a 

foreign security at a price (in U.S. 

dollars) that would satisfy a customer’s 

order, the member must immediately 

thereafter execute the customer order up 

to the size and at the same or better 

price at which it traded for its own 

account. 

The Commission believes that 

FINRA’s proposal is appropriate and 

agrees that customer orders should be 

protected during after hours trading. 

Regardless of potential currency 

fluctuations in the price of foreign 

securities, customers should be able to 

receive an execution at the same or a 

better price as the member receives 

when it trades for its own account. 

F. Other Comments 

Two commenters commented on 

aspects of the current customer order 

protection rules that were not proposed 

to be amended by FINRA.44 One 

commenter stated that customer orders 

generally should only qualify for price 

improvement if they use defined 

quotation price increments.45 This 

commenter stated that, without such a 

rule, some customers could take unfair 

advantage of OTC market makers by 

submitting orders that are slightly 

higher than the market maker’s quote in 

increments that cannot be displayed by 

interdealer quotation systems for OTC 

equity securities, which orders are then 

unfairly entitled to price improvement 

when a market maker ‘‘lifts’’ a published 

quote.46 Further, the commenter stated 

that OTC market makers should not be 

required to provide price improvement 

for orders received while they are in the 

process of executing a trade for their 

own account and that market makers’ 

publicly displayed proprietary quotes 

should have time priority over orders 

received after the proprietary quote is 

published.47

The Commission notes that FINRA 

does not propose to revise in this filing 

its minimum price increments for OTC 

equity securities. Further, in response, 

FINRA stated that the Commission 

recently approved a FINRA proposed 


jlentini on DSKJ8SOYB1PROD with NOTICES
9390 Federal Register / Vol. 76, No. 33 / Thursday, February 17, 2011 / Notices 

48See FINRA Letter citing Securities Exchange 

Act Release No. 62359 (June 22, 2010), 75 FR 37488 

(June 29, 2010) (SR–FINRA–2009–054). 

49See FINRA Letter. 

50See Knight Letter. 

51See NASD IM–2110–2 and FINRA Rule 5320, 

Supplementary Material .06. 

52See Knight Letter. 

53 In approving this proposal, the Commission has 

considered the proposed rule’s impact on 

efficiency, competition, and capital formation. See 

15 U.S.C. 78c(f). 54 15 U.S.C. 78o–3(b)(6). 

55 15 U.S.C. 78s(b)(2). 

rule change that generally establishes a 

minimum increment of $0.01 for the 

display of orders in securities priced 

$1.00 or greater and $0.0001 for the 

display of orders in securities priced 

under $1.00.48 FINRA, therefore, does 

not believe that it is necessary to 

separately address price increments in 

the customer order protection context.49

Regarding the commenter’s second 

point, FINRA stated that, although 

FINRA Rules provide for an exception 

for member trading where the customer 

limit order is received after the member 

routed an intermarket sweep order 

(‘‘ISO’’), this exception is only available 

in connection with ISOs routed in 

compliance with Rule 600(b)(30)(ii) of 

Regulation NMS. FINRA believes, and 

the Commission agrees, that it is not 

appropriate to permit members to trade 

ahead of customer orders in the 

circumstances suggested by the 

commenter, other than in this narrow 

instance. 

Another commenter stated that the 

proposed rule regarding limit orders 

priced below $1.00 should be 

modified.50 Under the current rule and 

the proposed rule, for purposes of 

determining the minimum price 

improvement standards for customer 

limit orders in OTC equity securities 

priced below $1.00 where there is no 

published current inside spread, 

members may calculate a current inside 

spread by contacting and obtaining 

priced quotations from at least two 

unaffiliated dealers and using the 

highest bid and lowest offer obtained in 

calculating the current inside spread.51

The commenter stated that market 

makers should be able to include their 

own quotes in calculating minimum 

price improvement standards.52

The Commission notes that FINRA 

does not propose changes to its current 

treatment of limit orders priced below 

$1.00 as part of the instant proposed 

rule change. Further, FINRA stated, and 

the Commission agrees, that allowing 

market makers to include their own 

quotes in calculating minimum price 

improvement standards would 

undermine the safeguard of obtaining 

independent, unaffiliated quotes. 

III. Commission’s Findings 

After careful review of the proposed 

rule change as well as the comment 

letters and the FINRA Letter submitted 

with respect to the proposal, the 

Commission finds that the proposed 

rule change, as modified by Amendment 

No. 1, is consistent with the 

requirements of the Act and the rules 

and regulations thereunder applicable to 

a national securities association.53 In 

particular, the Commission finds that 

the proposed rule change is consistent 

with Section 15A(b)(6) of the Act,54

which requires, among other things, that 

FINRA rules be designed to prevent 

fraudulent and manipulative acts and 

practices, to promote just and equitable 

principles of trade, to remove 

impediments to and perfect the 

mechanism of a free and open market 

and a national market system, and, in 

general, to protect investors and the 

public interest. 

The Commission believes that the 

proposed rule change is designed to 

establish a single standard to protect 

customer orders from member firms 

trading ahead of those orders. By 

consolidating the current NASD and 

NYSE order protection rules, the 

Commission believes that the proposed 

rule change would reduce the 

complexity of the customer order 

protection rules for those firms subject 

to both sets of rules. Furthermore, the 

Commission believes that the proposed 

rule will help assure the protection for 

customer orders without imposing 

undue regulatory costs on industry 

participants. 

IV. Accelerated Approval 

The Commission finds good cause, 

pursuant to Section 19(b)(2) of the 

Exchange Act,55 for approving the 

proposed rule change, as modified by 

Amendment No. 1, prior to the 30th day 

after publication of Amendment No. 1 

in the Federal Register. The changes 

proposed in Amendment No. 1 respond 

to specific concerns raised by 

commenters and do not raise any new 

or novel issues. As noted above, the 

changes proposed by Amendment No. 1 

remove the proposed separate MPID 

requirement for market-making desks 

where the member structures its order 

handling practices in NMS stocks to 

permit its market-making desks to trade 

at prices that would satisfy customer 

orders held at a separate unit; addresses 

the applicability of interpretive 

guidance previously issued in 

connection with NASD IM–2110–2 and 

NASD Rule 2111 to new FINRA Rule 

5320; clarifies the applicability of the 

rule in the case of extended hours 

trading in foreign securities where 

currency fluctuations are possible; and 

makes several non-substantive, 

technical changes to the rule text. 

Accordingly, the Commission finds 

that good cause exists to approve the 

proposal, as modified by Amendment 

No. 1, on an accelerated basis. 

V. 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 Exchange 

Act. Comments may be submitted by 

any of the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number SR–FINRA–2009–090 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number SR–FINRA–2009–090. This file 

number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for Web site viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street, NE., 

Washington, DC 20549, on official 

business days between the hours of 

10 a.m. and 3 p.m. Copies of the filing 

also will be available for inspection and 

copying at the principal office of the 

Exchange. All comments received will 

be posted without change; the 

Commission does not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 


jlentini on DSKJ8SOYB1PROD with NOTICES
Federal Register / Vol. 76, No. 33 / Thursday, February 17, 2011 / Notices 9391 

56 15 U.S.C. 78s(b)(2). 

57 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3Changes are marked to the rules of The 

NASDAQ Stock Market LLC found at http:// 

nasdaq.cchwallstreet.com. 

4See Securities Exchange Act Release No. 63084 

(Oct. 13, 2010); 75 FR 64379 (Oct. 19, 20101) (SR– 

NASDAQ–2010–125). See also Securities Exchange 

Act Release No. 62908 (Sept. 14, 2010); 75 FR 57321 

(Sept. 20, 20101) (SR–NASDAQ–2010–111). 

5See Securities Exchange Act Release No. 59039 

(Dec. 2, 2008) at p. 41. 

6 Id. 

available publicly. All submissions 

should refer to File Number SR–FINRA– 

2009–090 and should be submitted on 

or before March 10, 2011. 

VI. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,56 that the 

proposed rule change (SR–FINRA– 

2009–090), as modified by Amendment 

No. 1, be, and hereby is, approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.57

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. 2011–3581 Filed 2–16–11; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–63892; File No. SR– 

NASDAQ–2011–021] 

Self-Regulatory Organizations; The 

NASDAQ Stock Market LLC; Notice of 

Filing and Immediate Effectiveness of 

Proposed Rule Change To Revise an 

Optional Depth Data Enterprise 

License Fee for Broker-Dealer 

Distribution of Depth-of-Book Data 

February 11, 2011. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’) 1 and Rule 19b–4 thereunder,2

notice is hereby given that, on February 

1, 2011, The NASDAQ Stock Market 

LLC (‘‘NASDAQ’’) filed with the 

Securities and Exchange Commission 

(the ‘‘Commission’’) the proposed rule 

change as described in Items I, II, and 

III below, which Items have been 

prepared by NASDAQ. 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 

NASDAQ proposes to revise an 

optional Depth Data Enterprise License 

Fee for broker-dealer distribution of 

depth-of-book data to non-professional 

users with which the firm has a 

brokerage relationship. 

The text of the proposed rule change 

is below. Proposed new language is 

italicized; proposed deletions are in 

[brackets].3

* * * * * 

7023. NASDAQ TotalView 

(a) TotalView Entitlement. 

The TotalView entitlement allows a 

subscriber to see all individual NASDAQ 

Market Center participant orders and quotes 

displayed in the system as well as the 

aggregate size of such orders and quotes at 

each price level in the execution 

functionality of the NASDAQ Market Center, 

including the NQDS feed. 

(1) 

(A)–(D) No change. 

(E) For a pilot period ending April 30, 

2011, as an alternative to (a)(1)(A), (B), and 

(C), a broker-dealer distributor may purchase 

an enterprise license at a rate of $325,000 for 

non-professional subscribers. The enterprise 

license entitles a distributor to provide NQDS 

(as set forth in Rule 7017), TotalView and 

OpenView to an unlimited number of nonprofessional subscribers with whom the firm 

has a brokerage relationship. The enterprise 

license shall not apply to relevant Level 1 

fees. The enterprise license shall not apply to 

Depth Distributor Fees. 

(2) 30-Day Free-Trial Offer. NASDAQ shall 

offer all new individual subscribers and 

potential new individual subscribers a 30- 

day waiver of the user fees for TotalView. 

This waiver shall not include the incremental 

fees assessed for the NQDS-only service, 

which are $30 for professional users and $9 

for non-professional users per month. This 

fee waiver period shall be applied on a 

rolling basis, determined by the date on 

which a new individual subscriber or 

potential individual subscriber is first 

entitled by a distributor to receive access to 

TotalView. A distributor may only provide 

this waiver to a specific individual subscriber 

once. 

For the period of the offer, the TotalView 

fee of $40 per professional user and $5 per 

non-professional user per month shall be 

waived. 

(b) No change. 

(c) No change. 

(d) No change. 

* * * * * 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, 

NASDAQ 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. 

NASDAQ has prepared summaries, set 

forth in Sections A, B, and C below, of 

the most significant aspects of such 

statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and the 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

Current Proposal. Effective February 

1, 2011, NASDAQ will begin offering a 

voluntary Enterprise License for nonprofessional usage of the National 

Quotation Dissemination Service or 

NQDS (Rule 7017) and TotalView and 

OpenView (Rule 7023) (collectively, 

‘‘NASDAQ Depth Data’’). The Depth 

Enterprise License will be identical to 

the program offered previously under 

SR–NASDAQ–2010–125 in that it will 

cost $325,000 per month and offer the 

same market data entitlement.4 The 

Depth Data Enterprise License is 

available only to broker-dealers 

registered under the Securities 

Exchange Act of 1934, and it covers all 

non professional usage fees to customers 

with whom the firm has a brokerage 

relationship with an allowance to 

distribute data to external professional 

subscribers with which the firm has a 

brokerage relationship. This Depth Data 

Enterprise License Fee includes nonprofessional usage fees, but does not 

include distributor fees. The Depth 

Enterprise License is a pilot program 

that will automatically sunset on April 

30, 2011. 

Background. NASDAQ disseminates 

market data feeds in two capacities. 

First, NASDAQ disseminates 

consolidated or ‘‘core’’ data in its 

capacity as Securities Information 

Processor (‘‘SIP’’) for the national market 

system plan governing securities listed 

on NASDAQ as a national securities 

exchange (‘‘NASDAQ UTP Plan’’).5

Second, NASDAQ separately 

disseminates proprietary or ‘‘non-core’’ 

data in its capacity as a registered 

national securities exchange. Non-core 

data is any data generated by the 

NASDAQ Market Center Execution 

System that is voluntarily disseminated 

by NASDAQ separate and apart from the 

consolidated data.6 NASDAQ has 

numerous proprietary data products, 

such as NASDAQ TotalView, NASDAQ 

Last Sale, and NASDAQ Basic. 

NASDAQ continues to seek broader 

distribution of non-core data and to 

reduce the cost of providing non-core 

data to larger numbers of investors. In 

the past, NASDAQ has accomplished 


jlentini on DSKJ8SOYB1PROD with NOTICES