Document ID: SEC-2016-1649-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2016-09-15T04:00Z

[Federal Register Volume 81, Number 179 (Thursday, September 15, 2016)]
[Notices]
[Pages 63565-63568]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-22149]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78800; File No. SR-FINRA-2016-035]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Amend FINRA Rule 6191 Relating to the Data 
Collection Requirements of the Regulation NMS Plan To Implement A Tick 
Size Pilot Program

September 9, 2016.
    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 August 26, 2016, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
and II below, which Items have been prepared by FINRA. FINRA has 
designated the proposed rule change as constituting a ``non-
controversial'' rule change under paragraph (f)(6) of Rule 19b-4 under 
the Act,\3\ which renders the proposal effective upon receipt of this 
filing by the Commission. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend FINRA Rule 6191 to modify certain data 
collection requirements of 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, FINRA, and several other self-regulatory 
organizations (the ``Participants'') filed with the Commission, 
pursuant to Section 11A of the Act \4\ and Rule 608 of Regulation NMS 
thereunder,\5\ the Plan to Implement a Tick Size Pilot Program (the 
``Plan'').\6\ The Participants filed the Plan to comply with an order 
issued by the Commission on June 24, 2014.\7\ The Plan 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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    \4\ 15 U.S.C. 78k-1.
    \5\ 17 CFR 242.608.
    \6\ See Letter from Brendon J. Weiss, Vice President, 
Intercontinental Exchange, Inc., to Secretary, Commission, dated 
August 25, 2014.
    \7\ See Securities Exchange Act Release No 72460 (June 24, 
2014), 79 FR 36840 (June 30, 2014).
    \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 stock 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.
    The Plan provides for the creation of a group of Pilot Securities, 
which shall be placed in a control group and three separate test 
groups, with each subject to varying quoting and trading increments. 
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 will be 
quoted in $0.05 minimum increments but will continue to trade at any 
price increment that is currently permitted.\9\ 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.\10\ 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 the price of a Trading Center's ``Best Protected 
Bid'' or ``Best Protected Offer,'' unless an enumerated exception 
applies.\11\ 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 \12\ will apply to the Trade-at 
requirement.
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    \9\ See Section VI(B) of the Plan.
    \10\ See Section VI(C) of the Plan.
    \11\ See Section VI(D) of the Plan.
    \12\ 17 CFR 242.611.
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    The Plan also requires a Trading Center \13\ or a Market Maker \14\ 
to collect and transmit certain data to its designated examining 
authority (``DEA''), and requires DEAs to transmit this data to the 
Commission. Participants that operate a Trading Center also are 
required under the Plan to collect certain data, which is then 
transmitted directly to the Commission. With respect to Trading 
Centers, Appendix B.I to the Plan (Market Quality Statistics) requires 
a Trading

[[Page 63566]]

Center to submit to the Participant that is its DEA a variety of market 
quality statistics. Appendix B.II to the Plan (Market and Marketable 
Limit Order Data) requires a Trading Center to submit information to 
its DEA relating to market orders and marketable limit orders, 
including the time of order receipt, order type, the order size, and 
the National Best Bid or National Best Offer (``NBBO'') quoted price.
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    \13\ 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).
    \14\ 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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    With respect to Market Makers, Appendix B.III requires a 
Participant that is a national securities exchange to collect daily 
Market Maker Registration statistics. Appendix B.IV requires a 
Participant to collect data related to Market Maker participation with 
respect to each Market Maker engaging in trading activity on a Trading 
Center operated by the Participant. Appendix C.I requires a Participant 
to collect data related to Market Maker profitability from each Market 
Maker for which it is the DEA. Appendix C.II requires the Participant, 
as DEA, to aggregate the Appendix C.I data, and to transmit this data 
to the Commission.
    The Commission approved the Pilot on a two-year basis, with 
implementation to begin no later than May 6, 2016.\15\ On November 6, 
2015, the SEC exempted the Participants from implementing the pilot 
until October 3, 2016.\16\ As set forth in Appendices B and C to the 
Plan, data that is reported pursuant to the appendices shall be 
provided for dates starting six months prior to the Pilot Period 
through six months after the end of the Pilot Period. Under the revised 
Pilot implementation date, the Pre-Pilot data collection period 
commenced on April 4, 2016.
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    \15\ See Approval Order at 27533 and 27545.
    \16\ See Securities Exchange Act Release No. 76382 (November 6, 
2015), 80 FR 70284 (November 13, 2015) (File No. 4-657).
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    On November 13, 2015, FINRA filed with the Commission a proposed 
rule change to adopt FINRA Rule 6191(b) and amend FINRA Rule 7440 to 
implement the data collection requirements of the Plan.\17\ On December 
9, 2015, FINRA submitted an exemptive request to the Commission, 
seeking an exemption from certain data collection and reporting 
requirements set forth in the Plan.\18\ On February 17, 2016, the 
Commission approved FINRA's rule change, as amended, to implement the 
data collection requirements of the Plan, and also granted exemptive 
relief from complying with certain data collection and reporting 
requirements in the Plan.\19\
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    \17\ See Securities Exchange Act Release No. 76484 (November 19, 
2015), 80 FR 73858 (November 25, 2015) (Notice of Filing of File No. 
SR-FINRA-2015-048).
     FINRA also submitted a proposed rule change to implement the 
quoting and trading requirements of the Plan. See Securities 
Exchange Act Release No. 76483 (November 19, 2015), 80 FR 73853 
(November 25, 2015) (Notice of Filing of File No. SR-FINRA-2015-
047). The Commission approved that proposal on February 23, 2016. 
See Securities Exchange Act Release No. 77218 (February 23, 2016), 
81 FR 10290 (February 29, 2016) (Order Approving File No. SR-FINRA-
2015-047).
    \18\ See Letter from Marcia E. Asquith, Senior Vice President 
and Corporate Secretary, FINRA, to Robert W. Errett, Deputy 
Secretary, Commission, dated December 9, 2015 (``Exemptive 
Request'').
    \19\ See Securities Exchange Act No. 77164 (February 17, 2016), 
81 FR 9043 (February 23, 2016) (Order Approving File No. SR-FINRA-
2015-048); see letter from David S. Shillman, Associate Director, 
Division of Trading and Markets, Commission, to Marcia E. Asquith, 
Senior Vice President and Corporate Secretary, FINRA, dated February 
17, 2016.
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    FINRA now proposes to further amend Rule 6191 to modify additional 
data collection and reporting requirements.\20\ First, Appendix 
B.I.a(21) through B.I.a(27) currently requires that Trading Centers 
report the cumulative number of shares of cancelled orders during a 
specified duration of time after receipt of the order that was 
cancelled. FINRA and the other Participants believe that, for purposes 
of reporting cancelled orders, it is appropriate to categorize 
unexecuted Immediate or Cancel orders separately as one bucket 
irrespective of the duration of time after order receipt, i.e., without 
a time increment, to better differentiate orders cancelled subsequent 
to entry from those where the customer's intent prior to order entry 
was to cancel the order if no execution could be immediately obtained. 
FINRA, therefore, proposes to modify Supplementary Material .05 to 
provide that unexecuted Immediate or Cancel orders shall be categorized 
separately for purposes of Appendix B.I.a(21) through B.I.a(27).
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    \20\ FINRA notes that, in connection with this proposed rule 
change, FINRA intends to file an exemptive request seeking relief 
from certain of the Plan's data collection requirements.
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    The second change relates to the reporting of daily market quality 
statistics pursuant to Appendix B.I. Currently, Appendix B.I sets forth 
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. FINRA and the other Participants 
have determined that it is appropriate to include an order type for 
limit orders priced more than $0.10 away from the NBBO for purposes of 
Appendix B reporting. FINRA therefore proposes to amend Supplementary 
Material .09 to provide that limit orders priced more than $0.10 away 
from the NBBO shall be included as an order type for purposes of 
Appendix B reporting, and shall be assigned the number (22). These 
orders are not currently required to be reported pursuant to Appendix 
B, and FINRA and the other Participants believe that requiring the 
reporting of such orders will produce a more comprehensive data set.
    The third change relates to the reporting of market quality 
statistics pursuant to Appendix B.I for a variety of order types, 
including inside-the-quote resting limit orders (12), at-the-quote 
resting limit orders (13), and near-the-quote resting limit orders 
(within $0.10 of the NBBO) (14). FINRA and the other Participants 
believe that it is appropriate to require Trading Centers to report all 
orders that fall within these categories, and not just those orders 
that are ``resting.'' FINRA, therefore, proposes to amend Supplementary 
Material .09 to make this change.
    In the fourth change, FINRA proposes to add new Supplementary 
Material .11 to modify the manner in which market maker participation 
statistics are calculated. Currently, Appendix B.IV provides that 
market maker participation statistics shall be calculated based on 
share participation, trade participation, cross-quote share (trade) 
participation, inside-the-quote share (trade) participation, at-the-
quote share (trade) participation, and outside-the-quote share (trade) 
participation. FINRA and the other Participants have determined that it 
is appropriate to add the count of the number of Market Makers used in 
the calculation of share (trade) participation to each category. FINRA 
is therefore proposing this change as part of Supplementary Material 
.11. In addition, Appendix B.IV(b) and (c) currently require that, when 
aggregating across Market Makers, share participation and trade 
participation shall be calculated using the share-weighted average and 
trade-weighted average, respectively. FINRA and the other Participants 
believe that it is more appropriate to calculate share and trade 
participation by providing the total count of shares or trades, as 
applicable, rather than weighted averages, and FINRA is therefore 
proposing this change as part of Supplementary Material .11.
    The fifth change relates to the NBBO that a Trading Center is 
required to use when performing certain quote-related calculations. 
When calculating cross-quote share (trade) participation pursuant to 
Appendix B.IV(d) and inside-the-quote share (trade) participation 
pursuant to Appendix B.IV(e), the Plan requires the Trading Center to 
utilize the NBBO at the time

[[Page 63567]]

of the trade for both share and trade participation calculations. When 
calculating at-the-quote share (trade) participation and outside-the-
quote share (trade) participation pursuant to Appendix B.IV(f) and (g), 
the Plan allows the Trading Center to utilize the NBBO at the time of 
or immediately before the trade for both share and trade participation 
calculations. FINRA and the other Participants believe that it is 
appropriate to calculate all quote participation (cross-quote share 
(trade) participation, inside-the-quote share (trade) participation, 
at-the-quote share (trade) participation and outside-the-quote share 
(trade) participation) solely by reference to the NBBO in effect 
immediately prior to the trade. FINRA therefore proposes to make this 
change as part of Supplementary Material .11.
    Finally, FINRA proposes to change the end date until which the Pre-
Pilot Data Collection Securities shall be used to fulfill the Plan's 
data collection requirements. Currently, Supplementary Material .13 
provides that Pre-Pilot Data Collection Securities are 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. FINRA and the other Participants believe that it is 
appropriate to use the Pilot Securities to satisfy the Plan's data 
collection requirements prior to the commencement of the Pilot. 
According, FINRA is revising Supplementary Material .13 (which will be 
re-numbered as Supplementary Material .14) to provide that the Pre-
Pilot Data Collection Securities shall be used to satisfy the Plan's 
data collection requirements through thirty-one days prior to the Pilot 
Period, after which time the Pilot Securities shall be used for 
purposes of the data collection requirements.\21\
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    \21\ After regular trading hours on September 2, 2016, the 
national securities exchanges will establish which securities will 
be included as Pilot Securities for purposes of the Plan. FINRA and 
the other Participants have determined that members should use the 
Pilot Securities list for data collection purposes once it becomes 
available. Thus, the proposed rule change requires that, beginning 
thirty days prior to the first day of the Pilot Period--i.e., 
September 3, 2016--FINRA and FINRA members will comply with the data 
collection obligations of the Plan by collecting data on the Pilot 
Securities. As a result, beginning on September 3, 2016, members 
must migrate from using FINRA's published Pre-Pilot Data Collection 
Security list and begin using the Pilot Securities list. September 
2, 2016 will be the last day that members use the Pre-Pilot Data 
Collection Security list.
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    FINRA has filed the proposed rule change for immediate 
effectiveness. FINRA has requested that the SEC waive the 30-day 
operative period so that the proposed rule change can become operative 
on August 30, 2016.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\22\ 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,\23\ which requires 
that FINRA rules not impose any burden on competition that is not 
necessary or appropriate.
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    \22\ 15 U.S.C. 78o-3(b)(6).
    \23\ 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.

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

    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 also notes that, other than the 
change to require use of the Pilot Securities beginning thirty days 
prior to the beginning of the Pilot Period, the proposed changes will 
not affect the data collection and reporting requirements for members 
that operate Trading Centers; the proposed changes will only affect how 
FINRA and Participants that operate Trading Centers collect and report 
data. FINRA notes that, with respect to the change to require the use 
of the Pilot Securities beginning thirty days prior to the start of the 
Pilot Period, the proposed change reduces the number of securities on 
which affected members otherwise would have been required to collect 
data pursuant to the Plan and FINRA Rule 6191. In addition, the 
proposed rule change applies equally to all similarly situated members. 
Therefore, 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.

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

    Written comments were neither solicited nor received.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \24\ and Rule 19b-4(f)(6) \25\ thereunder 
because the proposal does not: (i) Significantly affect the protection 
of investors or the public interest; (ii) impose any significant burden 
on competition; and (iii) by its terms, become operative for 30 days 
from the date on which it was filed, or such shorter time as the 
Commission may designate if consistent with the protection of investors 
and the public interest.
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    \24\ 15 U.S.C. 78s(b)(3)(A).
    \25\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) \26\ normally 
does not become operative prior to 30 days after the date of the 
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\27\ the Commission 
may designate a shorter time if such action is consistent with the 
protection of investors and the public interest. FINRA has asked the 
Commission to waive the 30-day operative delay so that so that the 
proposed rule change can become operative on August 30, 2016.
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    \26\ 17 CFR 240.19b-4(f)(6).
    \27\ 17 CFR 240.19b-4(f)(6)(iii).
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    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest 
because it will allow FINRA to implement the proposed rules immediately 
thereby preventing delays in the implementation of the Plan. The 
Commission notes that the Plan is scheduled to start on October 3, 
2016. Therefore, the Commission hereby waives the 30-day operative 
delay and designates the proposed rule change to

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be operative upon filing with the Commission.\28\
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    \28\ For purposes only of waiving the operative delay for this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    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.\29\
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    \29\ 15 U.S.C. 78s(b)(3)(C).
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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 email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2016-035 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2016-035. 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-2016-035 and should be 
submitted on or before October 6, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-22149 Filed 9-14-16; 8:45 am]
 BILLING CODE 8011-01-P