Document ID: SEC-2015-1983-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2015-11-25T05:00Z

[Federal Register Volume 80, Number 227 (Wednesday, November 25, 2015)]
[Notices]
[Pages 73858-73865]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-29931]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76484; File No. SR-FINRA-2015-048]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Adopt 
FINRA Rule 6191(b) and Amend FINRA Rule 7440 To Implement the Data 
Collection Requirements of the Regulation NMS Plan To Implement a Tick 
Size Pilot Program

November 19, 2015.
    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 November 13, 2015, Financial Industry Regulatory

[[Page 73859]]

Authority, Inc. (``FINRA'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by FINRA. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to adopt FINRA Rule 6191 and amend Rule 7440 to 
implement the Regulation NMS Plan to Implement a Tick Size Pilot 
Program (Plan).
    The text of the proposed rule change is available on FINRA's Web 
site at http://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
    On August 25, 2014, NYSE Group, Inc., on behalf of BATS Exchange, 
Inc., BATS Y-Exchange, Inc., Chicago Stock Exchange, Inc., EDGA 
Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory 
Authority, Inc. (``FINRA''), NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, 
the Nasdaq Stock Market LLC, New York Stock Exchange LLC (``NYSE''), 
NYSE MKT LLC, and NYSE Arca, Inc. (collectively ``Participants''), 
filed with the Commission, pursuant to Section 11A of the Act \3\ and 
Rule 608 of Regulation NMS thereunder,\4\ the Plan to Implement a Tick 
Size Pilot Program (``Pilot'').\5\ The Participants filed the Plan to 
comply with an order issued by the Commission on June 24, 2014.\6\ The 
Plan\7\ was published for comment in the Federal Register on November 
7, 2014, and approved by the Commission, as modified, on May 6, 
2015.\8\
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    \3\ 15 U.S.C. 78k-1.
    \4\ 17 CFR 242.608.
    \5\ See Letter from Brendon J. Weiss, Vice President, 
Intercontinental Exchange, Inc., to Secretary, Commission, dated 
August 25, 2014.
    \6\ See Securities Exchange Act Release No. 72460 (June 24, 
2014), 79 FR 36840 (June 30, 2014).
    \7\ Unless otherwise specified, capitalized terms used in this 
rule filing are based on the defined terms of the Plan.
    \8\ See Securities Exchange Act Release No. 74892 (May 6, 2015), 
80 FR 27513 (May 13, 2015) (``Approval Order'').
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    The Plan is designed to allow the Commission, market participants, 
and the public to study and assess the impact of increment conventions 
on the liquidity and trading of the common stocks of small-
capitalization companies. Each Participant is required to comply, and 
to enforce compliance by its member organizations, as applicable, with 
the provisions of the Plan. As is described more fully below, the 
proposed rules would require member organizations to comply with the 
applicable data collection requirements of the Plan.
    The Pilot will include stocks of companies with $3 billion or less 
in market capitalization, an average daily trading volume of one 
million shares or less, and a volume weighted average price of at least 
$2.00 for every trading day. The Pilot will consist of a control group 
of approximately 1400 Pilot Securities and three test groups with 400 
Pilot Securities in each (selected by a stratified random sampling 
process).\9\ During the pilot, Pilot Securities in the control group 
will be quoted at the current tick size increment of $0.01 per share 
and will trade at the currently permitted increments. Pilot Securities 
in the first test group (``Test Group One'') will be quoted in $0.05 
minimum increments but will continue to trade at any price increment 
that is currently permitted.\10\ Pilot Securities in the second test 
group (``Test Group Two'') will be quoted in $0.05 minimum increments 
and will trade at $0.05 minimum increments subject to a midpoint 
exception, a retail investor order exception, and a negotiated trade 
exception.\11\ Pilot Securities in the third test group (``Test Group 
Three'') will be subject to the same quoting and trading increments as 
Test Group Two and also will be subject to the ``Trade-at'' requirement 
to prevent price matching by a market participant that is not 
displaying at a Trading Center's ``Best Protected Bid'' or ``Best 
Protected Offer,'' unless an enumerated exception applies.\12\ In 
addition to the exceptions provided under Test Group Two, an exception 
for Block Size orders and exceptions that mirror those under Rule 611 
of Regulation NMS \13\ will apply to the Trade-at requirement.
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    \9\ See Section V of the Plan for identification of Pilot 
Securities, including criteria for selection and grouping.
    \10\ See Section VI(B) of the Plan.
    \11\ See Section VI(C) of the Plan.
    \12\ See Section VI(D) of the Plan.
    \13\ 17 CFR 242.611.
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    In approving the Plan, the Commission noted that the Trading Center 
data reporting requirements would facilitate an analysis of the effects 
of the Pilot on liquidity (e.g., transaction costs by order size), 
execution quality (e.g., speed of order executions), market maker 
activity, competition between trading venues (e.g., routing frequency 
of market orders), transparency (e.g., choice between displayed and 
hidden orders), and market dynamics (e.g., rates and speed of order 
cancellations).\14\ The Commission noted that Market Maker 
profitability data would assist the Commission in evaluating the 
effect, if any, of a widened tick increment on market marker profits 
and any corresponding changes in the liquidity of small-capitalization 
securities.\15\
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    \14\ See Approval Order, 80 FR at 27543.
    \15\ See Approval Order, 80 FR at 27543.
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Compliance With the Data Collection Requirements of the Plan
    The Plan contains requirements for collecting and transmitting data 
to the Commission and to the public. Specifically, Appendix B.I to the 
Plan (Market Quality Statistics) requires Trading Centers \16\ to 
submit variety of market quality statistics, including information 
about an order's original size, whether the order was displayable or 
not, the cumulative number of orders, the cumulative number of shares 
of orders, and the cumulative number of shares executed within specific 
time increments, e.g., from 30 seconds to less than 60 seconds after 
the time of order receipt. This information shall be categorized by 
security, order type, original order size, hidden status, and coverage 
under Rule 605.\17\ Appendix B.I to the Plan also contains additional 
requirements for market orders and marketable limit orders, including 
the share-weighted average effective spread for executions of orders; 
the cumulative number of shares of orders executed

[[Page 73860]]

with price improvement; and, for shares executed with price 
improvement, the share-weighted average amount per share that prices 
were improved.
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    \16\ The Plan incorporates the definition of a ``Trading 
Center'' from Rule 600(b)(78) of Regulation NMS. Regulation NMS 
defines a ``Trading Center'' as ``a national securities exchange or 
national securities association that operates an SRO trading 
facility, an alternative trading system, an exchange market maker, 
an OTC market maker, or any other broker or dealer that executes 
orders internally by trading as principal or crossing orders as 
agent.'' See 17 CFR 242.600(b)(78).
    \17\ 17 CFR 242.605.
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    Appendix B.II to the Plan (Market and Marketable Limit Order Data) 
requires Trading Centers to submit information relating to market 
orders and marketable limit orders, including the time of order 
receipt, order type, the order size, the National Best Bid and National 
Best Offer (``NBBO'') quoted price, the NBBO quoted depth, the average 
execution price-share-weighted average, and the average execution time-
share-weighted average.
    The Plan requires Appendix B.I and B.II data to be submitted by 
Participants that operate a Trading Center, and by members of the 
Participants that operate Trading Centers. The Plan provides that each 
Participant that is the Designated Examining Authority (``DEA'') for a 
member of Participant that operates a Trading Center shall collect such 
data in a pipe delimited format, beginning six months prior to the 
Pilot Period and ending six months after the end of the Pilot Period. 
The Plan also requires the Participant, operating as DEA, to transmit 
this information to the SEC within 30 calendar days following month 
end.
    FINRA is therefore proposing Rule 6191(b) to set forth the 
requirements for the collection and transmission of data pursuant to 
Appendix B.I and B.II of the Plan. Proposed Rule 6191(b)(1) requires 
that a member that operates a Trading Center shall establish, maintain 
and enforce written policies and procedures that are reasonably 
designed to comply with the data collection and transmission 
requirements of Items I and II to Appendix B of the Plan, and a member 
that is a Market Maker shall establish, maintain and enforce written 
policies and procedures that are reasonably designed to comply with the 
data collection and transmission requirements of Item IV of Appendix B 
to the Plan and Item I of Appendix C of the Plan.
    Rule 6191(b)(2) requires that a member that operates a Trading 
Center subject to the Plan and for which FINRA is the DEA shall collect 
and transmit to FINRA the data described in Items I and II of Appendix 
B of the Plan with respect to each Pre-Pilot Data Collection Security 
for the period beginning six months prior to the Pilot Period through 
the trading day immediately preceding the Pilot Period; and each Pilot 
Security for the period beginning on the first day of the Pilot Period 
through six months after the end of the Pilot Period.
    Section IV of the Plan (Policies and Procedures) provides that each 
Participant that is the DEA of a member of a Participant operating a 
Trading Center is required to develop appropriate policies and 
procedures for collecting and reporting the data described in Items I 
and II of Appendix B, as applicable, to the DEA Participant. FINRA has 
determined that much of the data required by Appendix B.I and B.II to 
the Plan currently is reported to FINRA through the Order Audit Trail 
System (``OATS''). In the interest of increasing the efficiency of the 
data collection process and the consistency of that data to be 
collected under the Plan, FINRA proposes to use OATS as the vehicle 
through which Trading Centers must comply with their reporting 
obligations pursuant to Appendix B.I and B.II.
    Accordingly, proposed Rule 6191(b)(2) provides that members that 
operate Trading Centers that are subject to the Plan, and for which 
FINRA serves as the DEA, shall meet the data collection and reporting 
requirements in Items I and II of Appendix B by reporting the necessary 
order information in Pilot Securities and Pre-Pilot Data Collection 
Securities to OATS; however, because the current OATS reports do not 
contain all of the information required by Appendix B to the Plan, the 
proposed rule change adds four new fields to OATS to capture the 
necessary information for Pilot Securities and Pre-Pilot Data 
Collection Securities.\18\ Specifically, the proposed rule change would 
require OATS Reporting Members \19\ that operate a Trading Center to 
record and report the following information for orders involving Pilot 
Securities and Pre-Pilot Data Collection Securities if FINRA serves as 
the member's DEA:
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    \18\ In addition to adding the new fields in the proposed rule 
change, FINRA will add additional values to existing fields that are 
necessitated by the Tick Size Pilot. These new values will be 
described fully in the OATS Reporting Technical Specifications. 
FINRA anticipates that, for order receipt or origination as well as 
on Desk Reports, there would be new Special Handling Codes, 
including one for slides and for counterparty restrictions. FINRA 
also will provide additional guidance in the OATS Reporting 
Technical Specifications regarding the use of existing values that 
may be affected by members participating in the Tick Size Pilot.
    \19\ Rule 7410(o) generally defines ``Reporting Member'' as a 
member that receives or originates an order and has an obligation to 
record and report information under Rules 7440 and 7450.
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     Whether the member is a Trading Center in either a Pilot 
Security or a Pre-Pilot Data Collection Security and, if the member is 
a participant on the Alternative Display Facility (``ADF''), the 
display size of the order;
     Whether the order is routable; and
     Whether the member is relying on the retail investor order 
exception with respect to the order.
    As an initial matter, only those OATS Reporting Members that 
operate a Trading Center and for which FINRA is the DEA are required to 
make any changes to their OATS reporting. OATS Reporting Members that 
do not operate Trading Centers or that have another self-regulatory 
organization as DEA will be permitted to leave the new fields blank 
(i.e., they are not required to populate the new Trading Center field 
to affirmatively indicate that they are not a Trading Center). OATS 
Reporting Members that operate Trading Centers will be required to 
indicate their status as a Trading Center on all OATS reports for new 
orders involving Pre-Pilot Data Collection Securities and Pilot 
Securities, including new order reports, combined order/route reports, 
combined order execution reports, and cancel/replace reports. In 
addition, OATS Reporting Members that operate Trading Centers and that 
also are ADF Market Participants \20\ will be required to indicate 
their status as an ADF Market Participant and must indicate the display 
size of the order so that OATS can capture the information required by 
Appendix B regarding hidden and displayed size.\21\
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    \20\ Rule 6220(a)(3) defines ``ADF Market Participant'' or 
``Market Participant'' as a Registered Reporting ADF Market Maker, 
as defined in Rule 6220(a)(13), or a Registered Reporting ADF ECN, 
as defined in Rule 6220(a)(12).
    \21\ Sections I(a)(5), (29), and (30) of Appendix B to the Plan 
all require that hidden (i.e., non-displayed) order information be 
provided to the SEC.
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    As described above, the proposed rule change adds new OATS fields 
to capture whether an order in a Pre-Pilot Data Collection Security or 
a Pilot Security received by an OATS Reporting Member that operates a 
Trading Center is routable and whether the member is relying on the 
retail investor order exception in the Plan with respect to the order. 
These additional fields are necessary so that OATS can capture the 
information required by Item II(n) and II(o) of Appendix B to the Plan. 
This information will be required on all OATS reports for new orders, 
including New Order Reports, Combined Order/Route Reports, Combined 
Order/Execution Reports, and Cancel/Replace Reports.
    In addition to information on new orders, the proposed rule change 
requires OATS Reporting Members that operate Trading Centers and for 
which FINRA is the DEA to report executions in Pre-Pilot Data 
Collection Securities and Pilot Securities when the order, or

[[Page 73861]]

any part of the order, is executed on a venue that does not provide 
execution information to FINRA. Currently, OATS Reporting Members 
report to OATS the routing of any order to a non-FINRA member, which 
includes orders routed to a national securities exchange.\22\ For those 
exchanges that provide FINRA with execution information, FINRA is able 
to link the route to any executions occurring on the exchange. OATS 
data, however, does not currently link to executions occurring on 
venues that do not provide this information to FINRA (e.g., foreign 
exchanges). To provide the execution information required by Items I 
and II of Appendix B to the Plan, FINRA must collect the execution 
information, either from the venue to which the order was routed, or 
from the firm routing the order to the venue, to match the routed order 
to the execution. Because some venues do not provide execution data to 
FINRA, the proposed rule change would require members that route orders 
in a Pre-Pilot Data Collection Security or a Pilot Security to a venue 
that does not provide execution information to FINRA to report any 
execution on such venue through an OATS Execution Report or Combined 
Order/Execution Report.
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    \22\ See Rule 7440(c)(6).
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    To facilitate compliance with this provision, FINRA will identify 
in the OATS Reporting Technical Specifications those exchanges for 
which these reports are not necessary; thus, for orders routed to those 
identified exchanges, OATS Reporting Members would continue to report 
only routes to those exchanges rather than any executions occurring on 
those exchanges. For orders routed to a venue that is not identified, 
OATS Reporting Members would be required to report any executions on 
that venue in an OATS Execution Report or Combined Order/Execution 
Report.
    As set forth in Section VII of the Plan (Collection of Pilot Data), 
proposed Rule 6191(b)(2)(B) provides that FINRA shall transmit this 
data collected by Trading Centers required by Items I and II of 
Appendix B to the Plan, and collected pursuant to paragraph (b)(2)(A), 
to the SEC in a pipe delimited format on a disaggregated basis by 
Trading Center within 30 calendar days following month end. FINRA also 
shall make such data publicly available on the FINRA Web site on a 
monthly basis at no charge and will not identify the Trading Center 
that generated the data.
    Appendix B.IV (Daily Market Maker Participation Statistics) 
requires a Participant to collect data related to Market Maker 
participation from each Market Maker \23\ engaging in trading activity 
on a Trading Center operated by the Participant. FINRA is therefore 
proposing Rule 6191(b)(3) to gather data about a Market Maker's 
participation in Pilot Securities and Pre-Pilot Data Collection 
Securities. Proposed Rule 6191(b)(3)(A) provides that a member that is 
a Market Maker for which FINRA is the DEA shall collect and transmit to 
FINRA data relating to Item IV of Appendix B to the Plan with respect 
to activity conducted on any Trading Center in Pilot Securities and 
Pre-Pilot Data Collection Securities in furtherance of its status as a 
registered Market Maker, including a Trading Center that executes 
trades otherwise than on a national securities exchange, for 
transactions that have settled or reached settlement date. The proposed 
rule requires Market Makers to transmit such data in a pipe delimited 
format, by 12 p.m. EST on T+4 for (1) transactions in each Pre-Pilot 
Data Collection Security for the period beginning six months prior to 
the Pilot Period through the trading day immediately preceding the 
Pilot Period; and (2) for transactions in each Pilot Security for the 
period beginning on the first day of the Pilot Period through six 
months after the end of the Pilot Period.
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    \23\ The Plan defines a Market Maker as ``a dealer registered 
with any self-regulatory organization, in accordance with the rules 
thereof, as (i) a market maker or (ii) a liquidity provider with an 
obligation to maintain continuous, two-sided trading interest.''
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    Proposed Rule 6191(b)(3)(B) provides that FINRA shall transmit the 
data relating to Market Maker activity required by Item IV of Appendix 
B to the Plan, and collected pursuant to paragraph (b)(3)(A) above, to 
the Participant operating the Trading Center on which such activity 
occurred in a pipe delimited format on a disaggregated basis by Market 
Maker during the Pre-Pilot and within 15 calendar days following month 
end during the Pilot Period.
    As required by the Plan, proposed Rule 6191(b)(3)(C) provides that 
FINRA shall transmit the data relating to Market Maker activity 
conducted otherwise than on a national securities exchange required by 
Item IV of Appendix B to the Plan, and collected pursuant to paragraph 
(b)(3)(A), to the SEC in a pipe delimited format, on a disaggregated 
basis by Trading Center, within 30 calendar days following month end. 
FINRA shall also make such data publicly available on the FINRA Web 
site on a monthly basis at no charge and will not identify the Trading 
Center that generated the data.\24\
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    \24\ FINRA notes that Appendix B.III, which requires a 
Participant that is a national securities exchange to collect daily 
Market Maker registration statistics, does not apply to FINRA. 
Accordingly, FINRA is not proposing a rule to implement this aspect 
of the Plan.
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    Appendix C.I (Market Maker Profitability) requires a Participant to 
collect data related to Market Maker profitability from each Market 
Maker for which it is the DEA. Specifically, the Participant is 
required to collect the total number of shares of orders executed by 
the Market Maker, the raw Market Maker realized trading profits, and 
the raw Market Maker unrealized trading profits. Data shall be 
collected for dates starting six months prior to the Pilot Period 
through six months after the end of the Pilot Period. This data shall 
be collected on a monthly basis, to be provided in a pipe delimited 
format to the Participant, as DEA, within 30 calendar days following 
month end. Appendix C.II (Aggregated Market Maker Profitability) 
requires the Participant, as DEA, to aggregate the Appendix C.I data, 
and to categorize this data by security as well as by the control group 
and each Test Group. That aggregated data shall contain information 
relating to total raw Market Maker realized trading profits, volume-
weighted average of raw Market Maker realized trading profits, the 
total raw Market Maker unrealized trading profits, and the volume-
weighted average of Market Maker unrealized trading profits.
    FINRA is therefore proposing Rule 6191(b)(4) to set forth the 
requirements for the collection and transmission of data pursuant to 
Appendix C.I and of the Plan. Proposed Rule 6191(b)(4)(A) requires that 
a member that is a Market Maker, and for which FINRA is the DEA, shall 
collect and transmit to FINRA the data described in Item I of Appendix 
C to the Plan, as modified by Paragraph (b)(5) with respect to 
executions in Pilot Securities that have settled or reached settlement 
date that were executed on any Trading Center. The proposed rule also 
requires members to provide such data in a pipe delimited format by 12 
p.m. EST on T+4 for (1) for executions during and outside of Regular 
Trading Hours in each Pre-Pilot Data Collection Security for the period 
beginning six months prior to the Pilot Period through the trading day 
immediately preceding the Pilot Period; and (2) for executions during 
and outside of Regular Trading Hours in each Pilot Security for the 
period beginning on the first day of the Pilot Period through six 
months after the end of the Pilot Period.
    Proposed Rule 6191(b)(4)(B) provides that FINRA shall collect this 
data and, on a monthly basis, transmit such data,

[[Page 73862]]

categorized by the control group and each Test Group, to the SEC in a 
pipe delimited format; provided, however, that the data transmitted to 
the SEC shall include the profitability statistics categorized by 
Market Maker and by security. In calculating unrealized trading 
profits, FINRA shall also report the number of excess (deficit) shares 
held by the Market Maker, the volume weighted average price of that 
excess (deficit) and the closing price of the security as reported by 
the primary listing exchange used in reporting unrealized profit. The 
proposed rule also provides that FINRA shall make this aggregated data, 
categorized by the control group and each Test Group, publicly 
available on the FINRA Web site on a monthly basis at no charge and 
will not identify the Market Makers that generated the data or the 
individual securities.
    FINRA also is proposing a rule setting forth the manner in which 
Market Maker participation and profitability will be calculated. 
Proposed Rule 6191(b)(5) provides that a member that is a Market Maker 
subject to the requirements of proposed Rule 6191(b)(3)(A) and 
(b)(4)(A) in a Pre-Pilot Data Collection Security or a Pilot Security, 
and for which FINRA is the DEA, shall be deemed to have satisfied the 
requirements of proposed Rule 6191(b)(3)(A) and (b)(4)(A), in addition 
to the requirements of Appendix B.IV and Item I of Appendix C, if such 
Market Maker submits to FINRA the specified data for any principal 
trade, not including riskless principal, in a Pre-Pilot Data Collection 
Security or a Pilot Security executed in furtherance of its status as a 
Market Maker on any Trading Center. The proposed rule requires Market 
Makers to submit (1) Ticker Symbol; (2) Trading Center where the trade 
was executed, or if not known, the destination where the order 
originally was routed for further handling and execution; (3) Time of 
execution; (4) Price; (5) Size; (6) Buy/sell; (7) for trades executed 
away from the Market Maker, a unique identifier, as specified by the 
Market Maker's DEA, that will allow the trade to be associated with the 
Trading Center where the trade was executed; and (8) for trades 
cancelled or corrected beyond T+3, whether the trade represents a 
cancellation or correction.
    FINRA is also proposing, through Supplementary Material, to clarify 
other aspects of the data collection requirements.\25\ Proposed 
Supplementary Material .02 relates to the use of the retail investor 
order flag for purposes of Appendix B.II(n) reporting. The Plan 
currently states that market and marketable limit orders shall include 
a ``yes/no'' field relating to the Retail Investor Order flag. FINRA is 
proposing Supplementary Material .02 to clarify that, for purposes of 
the reporting requirement in Appendix B.II(n), a Trading Center shall 
report ``y'' where it is relying upon the Retail Investor Order 
exception to Test Groups Two and Three, and ``n'' for all other 
instances. FINRA believes that requiring the identification of a Retail 
Investor Orders only where the exception may apply (i.e., Pilot 
Securities in Test Groups Two and Three) is consistent with Appendix 
B.II(n).
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    \25\ FINRA is also proposing Supplementary Material .01 to Rule 
6191 to clarify that certain enumerated terms used throughout Rule 
6191 shall have the same meaning as set forth in the Plan.
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    Supplementary Material .03 requires that members populate a field 
to identify whether an order is affected by the bands in place pursuant 
to the National Market System Plan to Address Extraordinary Market 
Volatility.\26\ Pursuant to the Limit-Up Limit-Down Plan, between 9:30 
a.m. and 4:00 p.m., the Securities Information Processor (``SIP'') 
calculates a lower price band and an upper price band for each NMS 
stock. These price bands represent a specified percentage above or 
below the stock's reference price, which generally is calculated based 
on reported transactions in that stock over the preceding five minutes. 
When one side of the market for an individual security is outside the 
applicable price band, the SIP identifies that quotation as non-
executable. When the other side of the market reaches the applicable 
price band (e.g., the offer reaches the lower price band), the security 
enters a Limit State. The stock would exit a Limit State if, within 15 
seconds of entering the Limit State, all Limit State Quotations were 
executed or canceled in their entirety. If the security does not exit a 
Limit State within 15 seconds, then the primary listing exchange 
declares a five-minute trading pause, which would be applicable to all 
markets trading the security.
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    \26\ See National Market System Plan to Address Extraordinary 
Market Volatility, Securities Exchange Act Release No. 67091 (May 
31, 2012), 77 FR 33498 (June 6, 2012) (File No. 4-631) (``Limit-Up 
Limit-Down Plan'').
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    FINRA and the other Participants have determined that it is 
appropriate to create a new flag for reporting orders that are affected 
by the Limit-Up Limit-Down bands. Accordingly, a Trading Center shall 
report a value of ``Y'' when the ability of an order to execute has 
been affected by the Limit-Up Limit-Down bands in effect at the time of 
order receipt. A Trading Center shall report a value of ``N'' when the 
ability of an order to execute has not been affected by the Limit-Up 
Limit-Down bands in effect at the time of order receipt.
    Supplementary Material .03 also requires, for dually-listed 
securities, that the Participant indicate whether the order was handled 
domestically, or routed to a foreign venue. Accordingly, the 
Participant will indicate, for purposes of Appendix B.I, whether the 
order was: (1) Fully executed domestically, or (2) fully or partially 
executed on a foreign market. For purposes of Appendix B.II, the 
Participant will classify all orders in dually-listed Pilot and Pre-
Pilot Securities as: (1) Directed to a domestic venue for execution; 
(2) may only be directed to a foreign venue for execution; or (3) was 
fully or partially directed to a foreign venue at the discretion of the 
member. FINRA believes that this proposed flag will better identify 
orders in dually-listed securities, as such orders that were executed 
in foreign venues would not be subject to the Plan's quoting and 
trading requirements, and could otherwise compromise the integrity of 
the data.
    Supplementary Material .04 relates to the time ranges specified in 
Appendix B.I.a(14), B.I.a(15), B.I.a(21) and B.I.a(22).\27\ FINRA and 
the other Participants have determined that it is appropriate to change 
the reporting times in these provisions to require more granular 
reporting for these categories. Accordingly, FINRA proposes to add 
Appendix B.I.a(14A), which will require Trading Centers to report the 
cumulative number of shares of orders executed from 100 microseconds to 
less than 1 millisecond after the time of order receipt. Appendix 
B.I.a(15) will be changed to require the cumulative number of shares of 
orders executed from 1 millisecond to less than 100 milliseconds after 
the time of order receipt. FINRA also proposes to add Appendix 
B.I.a(21A), which will require Trading Centers to report the

[[Page 73863]]

cumulative number of shares of orders canceled from 100 microseconds to 
less than 1 millisecond after the time of order receipt. Appendix 
B.I.a(22) will be changed to require the cumulative number of shares of 
orders canceled from 1 millisecond to less than 100 milliseconds after 
the time of order receipt. FINRA believes that these new reporting 
requirements will contribute to a meaningful analysis of the Pilot by 
producing more granular data on these points.\28\
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    \27\ Specifically, Appendix B.I.a(14) requires reporting of the 
cumulative number of shares of orders executed from 0 to less than 
100 microseconds after the time of order receipt; Appendix B.I.a(15) 
requires reporting of the cumulative number of shares of orders 
executed from 100 microseconds to less than 100 milliseconds after 
the time of order receipt; Appendix B.I.a(21) requires reporting of 
the cumulative number of shares of orders cancelled from 0 to less 
than 100 microseconds after the time of order receipt; and Appendix 
B.I.a(22) requires reporting of the cumulative number of shares of 
orders cancelled from 100 microseconds to less than 100 milliseconds 
after the time of order receipt.
    \28\ FINRA notes that it intends to file an exemptive request 
seeking relief from certain of the Plan's data collection 
requirements, including the requirements that Trading Centers report 
information in either microseconds or milliseconds, as not all 
Trading Centers currently capture and report orders in either 
microseconds or milliseconds.
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    Supplementary Material .05 relates to the requirement in Appendix 
B.I.a(33) requiring the share-weighted average BBO Spread of the 
reporting exchange as part of the market quality statistics to be 
reported. FINRA and the other Participants have determined that this 
requirement should apply to both the reporting exchange and to a 
Trading Center that displays such quote on the ADF, and is proposing to 
make this clarification through Supplementary Material .05.
    Supplementary Material .06 relates to the relevant measurement for 
purposes of Appendix B.I.a(31)-(33) reporting. Currently, the Plan 
states that this data shall be reported as of the time of order 
execution. FINRA and the other Participants believe that this 
information should more properly be captured at the time of order 
receipt, as evaluating share-weighted average prices at the time of 
order receipt is more consistent with the goal of observing the effect 
of the Pilot on the liquidity of Pilot Securities. FINRA is therefore 
proposing to make this change through Supplementary Material .06.\29\ 
This change will make these provisions consistent with the remainder of 
the statistics in Appendix B.I.a, which are all based on order receipt.
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    \29\ This proposed change is also part of an exemptive request 
that FINRA and the other Participants will be submitting to the SEC 
pursuant to Rule 608(e) of Regulation NMS.
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    Supplementary Material .07 clarifies that, for purposes of Appendix 
B.I.a(33), only a Trading Center that is displaying in its own name as 
a Trading Center when executing an order shall enter a value in this 
field. FINRA believes that the Appendix B.I.a(33) reporting requirement 
is only relevant for a Trading Center that is a display venue and not 
Trading Centers that may display through other Trading Centers (such as 
a market maker displaying a quote on a national securities exchange).
    Supplementary Material .08 addresses the status of not-held and 
auction orders for purposes of Appendix B.I reporting. Currently, 
Appendix B.I sets forth eight categories of orders, including market 
orders, marketable limit orders, and inside-the-quote resting limit 
orders, for which daily market quality statistics must be reported. 
Currently, Appendix B.I does not provide a category for not held 
orders, clean cross orders, auction orders, or orders received when the 
NBBO is crossed. FINRA and the other Participants have determined that 
it is appropriate to include separate categories both not held orders 
and auction orders for purposes of Appendix B reporting. FINRA is 
therefore proposing Supplementary Material .07 to provide that not held 
orders shall be included as an order type for purposes of Appendix B 
reporting, and shall be assigned the number (18). Clean cross orders 
shall be included as an order type for purposes of Appendix B 
reporting, and shall be assigned the number (19); auction orders shall 
be included an as order type for purposes of Appendix B reporting, and 
shall be assigned the number (20); and orders that cannot be otherwise 
be classified, including, for example, orders received when the NBBO is 
crossed shall be included as an order type for purposes of Appendix B 
reporting, and shall be assigned the number (21). All of these orders 
already are included in the scope of Appendix B; however, without this 
proposed change, these order types would be categorized with other 
orders, such as regular held orders, that should be able to be fully 
executed upon receipt, which would compromise the value of this data.
    FINRA is proposing Supplementary Material .09 to clarify the scope 
of the Plan as it relates to members that only execute orders for 
limited purposes. Specifically, FINRA and the other Participants 
believe that a member that only executes orders otherwise than on a 
national securities exchange for the purpose of (1) correcting a bona 
fide error related to the execution of a customer order; (2) purchasing 
a security from a customer at a nominal price solely for purposes of 
liquidating the customer's position; or (3) completing the fractional 
share portion of an order \30\ shall not be deemed a Trading Center for 
purposes of Appendix B to the Plan. FINRA is therefore proposing 
Supplementary Material .09 to make this clarification.
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    \30\ FINRA notes that where a member purchases a fractional 
share from a customer, the Trading Center that executes the 
remaining whole shares of that customer order would be subject to 
Appendix B of the Plan.
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    FINRA is proposing Supplementary Material .10 to clarify that, for 
purposes of the Plan, Trading Centers must begin the data collection 
required pursuant to Appendix B.I.a(1) through B.II.(y) to the Plan and 
Item I of Appendix C to the Plan on April 4, 2016. While FINRA will 
provide the information required by Appendix B and C to the Plan to the 
SEC during the Pre-Pilot period, the requirement that FINRA, as DEA, 
provide information to the SEC within 30 calendar days following month 
end and make such data publicly available on its Web site pursuant to 
Appendix B and C to the Plan shall commence as of the beginning of the 
Pilot Period.\31\
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    \31\ In its order approving the Plan, the SEC noted that the 
Pilot shall be implemented within one year of the date of 
publication of its order, e.g., by May 6, 2016. See Approval Order, 
80 FR at 27545. However, on November 6, 2015, the SEC extended the 
implementation date approximately five months to October 3, 2016. 
See Securities Exchange Act Release No. 76382 (November 6, 2015), 80 
FR 70284 (November 13, 2015).
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    FINRA is proposing Supplementary Material .11 to address the 
requirement in Appendix C.I(b) to the Plan that the calculation of raw 
Market Maker realized trading profits utilize a last in, first out 
(``LIFO'')-like method to determine which share prices shall be used in 
that calculation. FINRA and the other Participants believe that is more 
appropriate to utilize a methodology that yields LIFO-like results, 
rather than utilizing a LIFO-like method, and FINRA is therefore 
proposing Supplementary Material .11 to make this change.\32\ FINRA is 
proposing that, for purposes of Item I of Appendix C, the Participants 
shall calculate daily Market Maker realized profitability statistics 
for each trading day on a daily LIFO basis using reported trade price 
and shall include only trades executed on the subject trading day. The 
daily LIFO calculation shall not include any positions carried over 
from previous trading days. For purposes of Item I.c of Appendix C, the 
Participants shall calculate daily Market Maker unrealized 
profitability statistics for each trading day on an average price 
basis.

[[Page 73864]]

Specifically, the Participants must calculate the volume weighted 
average price of the excess (deficit) of buy volume over sell volume 
for the current trading day using reported trade price. The gain (loss) 
of the excess (deficit) of buy volume over sell volume shall be 
determined by using the volume weighted average price compared to the 
closing price of the security as reported by the primary listing 
exchange. In reporting unrealized trading profits, the Participant 
shall also report the number of excess (deficit) shares held by the 
Market Maker, the volume weighted average price of that excess 
(deficit) and the closing price of the security as reported by the 
primary listing exchange used in reporting unrealized profit.
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    \32\ Appendix C.I currently requires Market Maker profitability 
statistics to include (1) the total number of shares of orders 
executed by the Market Maker; (2) raw Market Maker realized trading 
profits, which is the difference between the market value of Market 
Maker shares and the market value of Market Maker purchases, using a 
LIFO-like method; and (3) raw Market Maker unrealized trading 
profits, which is the difference between the purchase or sale price 
of the end-of-day inventory position of the Market Maker and the 
Closing Price. In the case of a short position, the Closing Price 
from the sale will be subtracted; in the case of a long position, 
the purchase price will be subtracted from the Closing Price.
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    FINRA is proposing Supplementary Material .12 to address the 
securities that will be used for data collection purposes prior to the 
commencement of the Pilot. FINRA and the other Participants have 
determined that it is appropriate to collect data for a group of 
securities that is larger, and using different quantitative thresholds, 
than the group of securities that will Pilot Securities. FINRA is 
therefore proposing Supplementary Material .12 to define ``Pre-Pilot 
Data Collection Securities'' as the securities designated by the 
Participants for purposes of the data collection requirements described 
in Items I, II and IV of Appendix B and Item I of Appendix C to the 
Plan for the period beginning six months prior to the Pilot Period and 
ending on the trading day immediately preceding the Pilot Period. The 
Participants shall compile the list of Pre-Pilot Data Collection 
Securities by selecting all NMS stocks with a market capitalization of 
$5 billion or less, a Consolidated Average Daily Volume (CADV) of 2 
million shares or less and a closing price of $1 per share or more. The 
market capitalization and the closing price thresholds shall be applied 
to the last day of the Pre-Pilot measurement period, and the CADV 
threshold shall be applied to the duration of the Pre-Pilot measurement 
period. The Pre-Pilot measurement period shall be the three calendar 
months ending on the day when the Pre-Pilot Data Collection Securities 
are selected. The Pre-Pilot Data Collection Securities shall be 
selected thirty days prior to the commencement of the six-month Pre-
Pilot Period. On the trading day that is the first trading day of the 
Pilot Period through six months after the end of the Pilot Period, the 
data collection requirements will become applicable to the Pilot 
Securities only. A Pilot Security will only be eligible to be included 
in a Test Group if it was a Pre-Pilot Security.
    Finally, FINRA is proposing Supplementary Material .13, which 
states that the Rule shall be in effect during a pilot period to 
coincide with the pilot period for the Plan (including any extensions 
to the pilot period for the Plan).
    If the Commission approves the proposed rule change, the proposed 
rule change will be effective upon Commission approval. The 
implementation date will be April 4, 2016.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\33\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest, and Section 15A(b)(9) of the Act,\34\ which requires 
that FINRA rules not impose any burden on competition that is not 
necessary or appropriate.
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    \33\ 15 U.S.C. 78o-3(b)(6).
    \34\ 15 U.S.C. 78o-3(b)(9).
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    FINRA believes that this proposal is consistent with the Act 
because it implements and clarifies the provisions of the Plan, and is 
designed to assist FINRA in meeting its regulatory obligations pursuant 
to the Plan. In approving the Plan, the SEC noted that the Pilot was an 
appropriate, data-driven test that was designed to evaluate the impact 
of a wider tick size on trading, liquidity, and the market quality of 
securities of smaller capitalization companies, and was therefore in 
furtherance of the purposes of the Act. FINRA believes that this 
proposal is in furtherance of the objectives of the Plan, as identified 
by the SEC, and is therefore consistent with the Act because the 
proposal implements and clarifies the requirements of the Plan and 
applies specific obligations to members in furtherance of compliance 
with the Plan.

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

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. FINRA notes that the proposed 
rule change implements the provisions of the Plan, and is designed to 
assist FINRA in meeting its regulatory obligations pursuant to the 
Plan. FINRA notes that the data collection requirements for members 
that operate Trading Centers will apply equally to all such members, as 
will the data collection requirements for Market Makers.
    FINRA estimates that there are approximately 250 members that 
operate Trading Centers, and for which FINRA is the DEA, that would be 
required to submit data pursuant to Appendix B.I and B.II. While the 
Plan imposes comprehensive data collection requirements on members that 
operate Trading Centers, FINRA notes that some of the data requirements 
are modeled upon Rule 605 data, and that it is leveraging existing OATS 
data and systems to assist firms in complying with their Appendix B.I 
and B.II reporting obligations. FINRA also estimates that there are 
approximately 100 members that qualify as Market Makers for which FINRA 
is the DEA. While the Plan imposes new reporting obligations on Market 
Makers, FINRA notes that some of the requested Market Maker 
profitability data may already be captured by members for internal 
purposes.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

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

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

IV. Solicitation of Comments

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

[[Page 73865]]

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2015-048 on the subject line.

Paper Comments

     Send paper comments in triplicate to Robert W. Errett, 
Deputy Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2015-048. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (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 such filing also will be available for 
inspection and copying at the principal office of FINRA. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FINRA-2015-048 and should be 
submitted on or before December 16, 2015.
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    \35\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
Brent J. Fields,
Secretary.
[FR Doc. 2015-29931 Filed 11-24-15; 8:45 am]
BILLING CODE 8011-01-P