Document ID: SEC-2016-0398-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2016-03-07T05:00Z

[Federal Register Volume 81, Number 44 (Monday, March 7, 2016)]
[Notices]
[Pages 11851-11856]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-04912]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77269; File No. SR-FINRA-2016-010]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Adopt 
FINRA Rule 4554 (Alternative Trading Systems--Recording and Reporting 
Requirements of Order and Execution Information for NMS Stocks)

March 1, 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 February 29, 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, 
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 the 
Substance of the Proposed Rule Change

    FINRA is proposing to adopt FINRA Rule 4554 to require alternative 
trading systems (``ATSs'') to submit additional order information to 
FINRA.
    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
    FINRA is proposing to adopt FINRA Rule 4554 to require ATSs to 
report additional order information to FINRA. While ATSs already submit 
order information to FINRA that is required by the Order Audit Trail 
System (``OATS'') rules, there is additional order information not 
currently required to be reported to OATS, such as order re-pricing 
events (e.g., changes to an order that is pegged to the National Best 
Bid or Offer (``NBBO'')) and order display and reserve size 
information, that, if available to FINRA, would greatly enhance FINRA's 
ability to perform certain order-based surveillance, including 
layering, quote spoofing and mid-point pricing manipulation 
surveillance, by enabling FINRA to more fully reconstruct an ATS's 
order book. FINRA therefore is proposing to require ATSs to report 
additional ATS-specific data elements in existing OATS reports for 
orders in NMS stocks. ATSs would be required to report this information 
to FINRA consistent with current OATS reporting requirements (no later 
than 8:00 a.m. Eastern Time on the calendar day following receipt of 
the order in an electronic form as prescribed by FINRA).
    As described in more detail in Item C, FINRA initially solicited 
comment on this proposal in Regulatory Notice 14-51.\3\ Based on 
concerns raised by commenters about potential burdens associated with 
the original proposal, FINRA has revised the original proposal to 
narrow some aspects of the order information required to be reported 
while still enhancing FINRA's ability to reconstruct an ATS's order 
book for surveillance purposes. The proposal sets forth four categories 
of reporting requirements: (1) Data to be reported by all ATSs at the 
time of order receipt; (2) data to be reported by all ATSs at the time 
of order execution; (3) data to be reported by ATSs that display 
subscriber orders; and (4) data specific to ATSs that are registered as 
ADF Trading Centers. The proposed requirements would apply to order and 
execution information for NMS stocks.\4\
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    \3\ See Regulatory Notice 14-51 (November 2014).
    \4\ See 17 CFR 242.600(b)(47).
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Proposed Order Receipt Reporting Requirements Applicable to All ATSs 
That Trade NMS Stocks
    The first category of proposed changes applies to all ATSs when 
reporting the receipt of an order to OATS. Specifically, the proposed 
rule would require each ATS to indicate on all orders received whether 
it displays subscriber orders outside of the ATS (other than to 
alternative trading system employees).\5\ This requirement will enable 
FINRA to distinguish between ATSs that display orders outside the ATS, 
either to subscribers or through consolidated quote data (``display 
ATS'') and ATSs that do not display orders outside the ATS (``non-
display ATS'').\6\ A display ATS would also indicate whether the order 
book is displayed to subscribers only, or distributed for publication 
in the consolidated quotation data. Each ATS would also be required to 
identify whether it is an ADF Trading Center as defined in FINRA Rule 
6220. An ATS would make these determinations on a general basis, but 
would provide this information through flags submitted on every order 
event. Each ATS also would be required to identify whether a specific 
order can be routed away from the ATS for execution, and whether there 
are any counter-party restrictions on the order. ATSs would also be 
required to provide FINRA with a unique identifier representing the 
specific order type other than market and limit orders that have no 
other special handling instructions. In order for FINRA to map the 
identifier to a specific order type, an ATS will also be required to 
provide FINRA with a list of all of its order types twenty days before 
such order types become effective, and if the ATS makes any subsequent 
changes to its order types, twenty days before such changes become 
effective.\7\
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    \5\ The proposed requirements apply to any alternative trading 
system, as defined in Rule 300(a)(1) of SEC Regulation ATS, that has 
filed a Form ATS with the SEC and is subject to FINRA's OATS and 
equity trade reporting rules. See 17 CFR 242.300(a)(1).
     For purposes of this rule, the term ``order'' includes a 
broker-dealer's proprietary quotes that are transmitted to an ATS.
    \6\ If an ATS meets the applicable volume thresholds, it is 
required to make its best bid and best offer available for 
publication in the consolidated quotation data. See 17 CFR 
242.301(b)(3).
    \7\ In a Regulatory Notice announcing the implementation of this 
proposal, FINRA will provide a deadline prior to the implementation 
date by which current ATSs must initially submit lists of their 
existing order types to FINRA.
     FINRA notes that, under current Rule 301(b)(2)(ii) of 
Regulation ATS, ATSs are required to file an amendment on Form ATS 
at least 20 calendar days prior to implementing a material change to 
the operation of the ATS. See 17 CFR 242.301(b)(2)(ii). In the 
adopting release for Regulation NMS, the Commission noted that a 
material change to the operation of the ATS would include any change 
to: the operating platform of the ATSs, the types of securities 
traded, or the types of subscribers. The Commission also noted that 
ATSs implicitly make materiality decisions in determining when to 
notify their subscribers of changes. See Securities Exchange Act 
Release No. 40760 (December 8, 1998) 63 FR 70844, 70864 (December 
22, 1998). Under a proposed rule that would alter the reporting 
requirements for ATSs that trade NMS stocks, an ATS would be 
required to amend its effective form at least 30 calendar days prior 
to the date of implementation of a material change to the operations 
of the ATS or to the activities of the broker-dealer operator or its 
affiliates that are subject to disclosure on the form. The 
Commission stated that a scenario that is likely to implicate a 
material change to the operations of an ATS would likely include the 
introduction or removal of a new order type on the ATS. See 
Regulation of NMS Stock Alternative Trading Systems, Securities 
Exchange Act Release No. 76474 (November 18, 2015), 80 FR 80998, 
81027-28 (December 28, 2015).

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[[Page 11852]]

    An ATS also would be required to report, for all orders, the NBBO 
(or relevant reference price) in effect at the time of order receipt 
and the timestamp of when the ATS captured the effective NBBO (or 
relevant reference price); as part of this report, the ATS must 
identify the market data feed it used to obtain the NBBO (or relevant 
reference price).\8\ FINRA believes that there may be some time 
difference, however small, between the time that an ATS receives an 
order and places it on the order book, and the time that the ATS 
records the NBBO. Reporting both fields will enable FINRA to ascertain 
if the NBBO changed between the time of order receipt and the time the 
ATS captured the effective NBBO.
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    \8\ An ATS may use a relevant reference price other than the 
NBBO if, for example, it pegs to the primary market for a security 
or pegs to the Protected Best Bid or Offer.
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    If, for any reason, the ATS uses an alternative feed to the one 
that was reported on its ATS data submission, the ATS must notify FINRA 
via email of the fact that an alternative source was used, identify the 
alternative source, and specify the date(s), time(s) and securities for 
which the alternative source was used. Finally, each ATS would be 
required to provide the sequence number assigned to the order event by 
the ATS's matching engine.
Proposed Order Execution Reporting Requirements Applicable to All ATSs 
That Trade NMS Stocks
    The second category of proposed changes applies to all ATSs when 
reporting the execution of an order to OATS. Specifically, each ATS 
must record and report the NBBO (or relevant reference price) in effect 
at the time of order execution, and the timestamp of when the ATS 
captured the effective NBBO (or relevant reference price). An ATS must 
identify the market data feed used by the ATS to obtain the NBBO (or 
other reference price). If for any reason, the ATS uses an alternative 
feed than the one that was reported on its ATS data submission, the ATS 
must notify FINRA via email of the fact that an alternative source was 
used, identify the alternative source, and specify the date(s), time(s) 
and securities for which the alternative source was used.
Proposed Reporting Requirements Applicable to Display ATSs That Trade 
NMS Stocks
    The third category of changes applies only to display ATSs and 
requires that those ATSs report the following additional order receipt 
information: (1) Whether the order is hidden or displayable; (2) 
display quantity; (3) reserve quantity, if applicable; (4) displayed 
price; and (5) the price entered. If the matching engine re-prices a 
displayed order or changes the display quantity of a displayed order, 
the ATS must report the time of such modification and the applicable 
new display price or size.
    The initial proposal applied these requirements to both display and 
non-display ATSs and would have required reporting of all changes to 
the price and size of orders, whether or not displayed. Commenters 
raised concerns with these proposed requirements, especially those 
related to non-displayed orders, because they would have required ATSs 
to record and report information that they indicated that they do not 
currently capture.\9\ While FINRA understands the additional burdens 
associated with reporting this information, FINRA believes it is 
important that FINRA receive this information for display ATSs because 
the pricing and size changes are being displayed to others and FINRA 
needs to have an accurate, time sequenced audit trail to reconstruct 
the displayed market. Therefore, rather than requiring that all ATSs 
report changes to the price and size of orders as set forth in the 
initial proposal, FINRA is proposing that only those ATSs that display 
subscriber orders report changes to the price or size of a displayed 
order. FINRA believes that this information is particularly relevant to 
display ATSs, and that this requirement will enhance FINRA's 
surveillance of displayed ATSs while not imposing undue reporting 
burdens on non-display ATSs.
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    \9\ FINRA notes that ATSs are currently required to capture and 
maintain several categories of order-specific information for both 
displayed and non-displayed orders. For example, ATSs are required 
to capture the time an order was received, the number of shares to 
which the order applies, any limit or stop price prescribed by the 
order, any instructions to modify or cancel the order, the time the 
order was executed, the price at which the order was executed, and 
the size at which the order was executed. See 17 CFR 242.302(c).
     Similarly, ATSs are currently required to report a variety of 
order-specific information to FINRA via OATS. For example, upon 
receipt of an order, a member must report the number of shares to 
which the order applies, any limit or stop price prescribed in the 
order, special handling requests, and the time at which the order is 
received. See Rule 7440(b). Upon the modification or execution of an 
order, the member must report the time of modification or execution, 
whether the order was fully or partially executed, the number of 
unexecuted shares remaining if the order was only partially 
executed, and the execution price. See Rule 7440(d).
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Proposed Reporting Requirements Applicable to ATSs that are ADF Trading 
Centers That Trade NMS Stocks
    Finally, FINRA is proposing to require that ATSs that are ADF 
Trading Centers report information in addition to the requirements for 
all ATSs and display ATSs described above. Specifically, under the 
proposed rule, if a change to the displayed size or price of an order 
resulted in a new quote being transmitted to the ADF, the ADF Trading 
Center would be required to report the quote identifier provided to the 
ADF. In addition, an ADF Trading Center would be required to provide a 
new quote identifier if an order held by the ADF Trading Center becomes 
associated with a quote identifier based on an action by the matching 
engine related to different order(s), (e.g., another order is cancelled 
making the order being held the best priced order in the matching 
engine). The following example illustrates the operation of this last 
provision:

    10:00:01 a.m.: ATS receives order #7896 to buy 500 shares of XYZ 
at $10.
    10:00:02 a.m.: ATS receives order #8521 to buy 500 shares of XYZ 
at $10.
    10:00:03 a.m.: ATS submits a quote to the ADF to buy 1,000 
shares of XYZ at $10, and assigns the quote ID of #1234.
    The ATS would be required to report the quote ID of #1234 with 
orders #7896 and #8521 so that FINRA would be able to identify the 
specific orders that were represented in quote ID #1234.
    10:00:20 a.m.: Order #7896 to buy 500 shares at $10 is 
cancelled.
    10:00:21 a.m.: The ATS must update its bid to reflect the 
cancellation of order #7896. Since quote ID #1234 reflected the now-
cancelled order, the ATS must assign a new quote identifier when it 
updates its bid to reflect the cancellation of order #7896.
    10:00:22 a.m.: The ATS updates its quote on the ADF to buy 500 
shares of XYZ at $10, and assigns the quote ID of #5678.
    The ATS will be required to submit a report to OATS for order 
#8521 to reflect the new quote ID of #5678 now associated with the 
order. This report is necessary so that

[[Page 11853]]

FINRA is able to identify the specific order that is represented in 
quote ID #5678.

    The proposed requirements for ADF Trading Centers largely replicate 
the requirements applicable to ADF Trading Centers that were proposed 
in Regulatory Notice 14-51. In response to comments, however, FINRA 
modified the types of identifiers that ADF Trading Centers are required 
to report to FINRA. As proposed in Regulatory Notice 14-51 proposal, 
ADF Trading Centers were required to report, for each order that is 
part of the displayed bid or offer, the unique identifier that the ADF 
Trading Center assigned to the order. ADF Trading Centers were also 
required to report the quote identifier that it provided to the ADF. In 
this proposal, FINRA is requiring that an ADF Trading Center report the 
quote identifier that it provided to the ADF if a new order is 
transmitted to the ADF, or a new quote identifier even when there is no 
change in the order itself (e.g., another order is cancelled making the 
order being held the best-priced order in the matching engine). These 
requirements will enable FINRA to identify all orders that make up a 
specific quote displayed on the ADF, thereby enhancing surveillance of 
the ADF, while not unduly burdening ATSs that are ADF Trading Centers 
by requiring them to submit their own internal identifiers.
    If the Commission approves the proposed rule change, FINRA will 
announce the effective date of the proposed rule change no later than 
90 days following Commission approval. The effective date will be no 
later than 180 days following Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\10\ 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,\11\ which requires 
that FINRA rules not impose any burden on competition that is not 
necessary or appropriate.
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    \10\ 15 U.S.C. 78o-3(b)(6).
    \11\ 15 U.S.C. 78o-3(b)(9).
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    FINRA believes that this proposed rule change is consistent with 
the Act because it will greatly enhance FINRA's ability to surveil 
activity occurring within an ATS, and by extension FINRA's ability to 
surveil for potentially abusive algorithmic trading activity more 
generally across markets. For example, to effectively conduct 
quotation-based surveillance such as layering and quote spoofing, FINRA 
needs access to comprehensive order information and to the identity of 
firms that are generating ATS quotations. The proposed rule change 
would address such information gaps and would provide FINRA with 
additional information that can be integrated into FINRA's surveillance 
patterns to support alert generation and analysis. In addition, the 
proposed rule change would also increase FINRA's ability to detect the 
use of a display or non-display ATS by a market participant to further 
a wide range of other potential market-specific and cross-market 
manipulative activities that market participants may engage in by 
placing orders or executing trades on the ATS itself or across multiple 
ATSs or exchanges.
    FINRA believes that applying this proposal to NMS stocks is 
consistent with the Act because the potentially abusive trading 
activity that the proposal is designed to detect, including, but not 
limited to, layering, quote spoofing, and mid-point pricing 
manipulation within ATSs and across markets is of particular concern 
with respect to NMS stocks.\12\ While some of the data required to be 
reported under the proposed rule change may be captured as part of the 
Consolidated Audit Trail (``CAT''), FINRA strongly believes that gaps 
in ATS order book data must be addressed in the near-term, weighing the 
burdens to firms and the necessity of the change, to ensure effective 
surveillance of ATSs and by extension abusive algorithmic trading 
activity more generally across markets. FINRA therefore believes that 
this ATS reporting requirement should not be delayed due to the future 
implementation of CAT.\13\ To the extent this proposed rule change 
requires the reporting of information that will also be captured by the 
CAT, FINRA would sunset the rule upon the implementation of the CAT 
requirement.
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    \12\ FINRA notes that OATS reporting requirements apply to OTC 
equity securities, as defined in Rule 6420, in addition to NMS 
stocks.
    \13\ By its terms, Rule 613 of SEC Regulation NMS, which sets 
forth the requirements for the CAT, will not require all broker-
dealers to report to CAT until three years after the CAT plan is 
approved. See 17 CFR 242.613 (a)(3)(vi).
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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. The proposed changes will apply 
equally to all similarly situated ATSs. FINRA also notes that the 
proposed rule change is designed to assist FINRA in meeting its 
regulatory obligations by enhancing its ability to efficiently surveil 
activity occurring within ATSs and across markets.
Economic Impact Assessment
    The purpose of the proposed rule change is to enhance FINRA's 
surveillance of potential abusive trading activity, including, but not 
limited to, layering, quote spoofing, and mid-point pricing 
manipulation within ATSs and across markets. Specifically, the proposal 
requires ATSs to report additional order information to FINRA, such as 
specific order types, and whether an order can be routed away from the 
ATS for execution, so that FINRA has the relevant information to 
reconstruct an ATS's order book for surveillance purposes.
    For purposes of this rule proposal, FINRA defines the economic 
baseline as the current regulatory reporting requirements of an ATS to 
FINRA. Currently, each ATS has the same reporting requirements to FINRA 
related to OATS that apply to all FINRA members.\14\ For instance, 
these obligations accrue when an ATS acts as a party to a securities 
transaction, such as matching buy and sell orders from its subscribers. 
Currently, ATSs do not have to notify FINRA of any amendments or 
additions to existing order types. FINRA requires each member, 
including an ATS, to associate its order types with one of the existing 
special handling codes defined in the OATS technical documentation. 
This association is not perfect, as the conditions on a specific order 
type offered by a firm or ATS may differ from the approximately 70 
special handing codes identified in OATS.\15\
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    \14\ In addition to the OATS reporting requirements, ATSs were 
required to calculate their volume information pursuant to Rule 4552 
through January 31, 2016, and were required to report this data to 
FINRA by February 9, 2016. FINRA began calculating ATS volume data 
based on trade reports on February 1, 2016.
    \15\ See ``OATS Reporting Technical Specifications'' at http://www.finra.org/sites/default/files/OATSTechSpec_01112016.pdf for a 
full list of special handling codes.
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    FINRA does not believe that this proposed rule change will impose a 
significant burden on its member firms that are ATSs. Given the level 
of order activity generated on ATSs, ATSs currently report a 
significant amount of order information to OATS. The proposed rule 
change would require an

[[Page 11854]]

ATS to supplement its current submissions with the additional 
information described herein using the existing OATS gateway. In so 
doing, the proposal minimizes duplication with OATS reporting and the 
potential impact on ATSs, while providing FINRA with the necessary 
order information to perform more comprehensive order-based 
surveillance of ATSs and the market as a whole. FINRA does not believe 
that this proposed rule change would require ATSs to generate 
significant new information relating to orders; rather it would require 
ATSs to report information already compiled as part of operating their 
order books, and for which the ATSs are already obligated to capture 
under Regulation ATS.\16\ In addition, as described above, FINRA has 
revised the proposal as published in Regulatory Notice 14-51 so that 
FINRA will obtain order information that will enhance its surveillance 
of ATS activity, while not imposing undue reporting requirements on 
ATSs.
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    \16\ See 17 CFR 242.302.
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    FINRA expects that there will be approximately 42 ATSs that will be 
impacted by the rule change, where they will be required to report 
additional information at the time of the order receipt and order 
execution. Of those, five are identified as display ATSs, and therefore 
will be subject to additional reporting requirements at the time of the 
order receipt such as whether the order is hidden or displayable, 
display quantity, reserve quantity, displayed price and price 
entered.\17\ However, based on a series of communications with a sample 
of ATSs, FINRA understands that ATSs already collect and store such 
information, including the NBBO at the time of the order receipt and 
execution.
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    \17\ Of the five ATSs that are display ATSs, one ATS is an ECN 
that displays quotes on an exchange.
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    FINRA also acknowledges that ATSs may incur some costs associated 
with updating their reporting systems to reflect the new requirements 
introduced by this rule proposal. However, some of the reporting 
requirements under this Rule, such as an indicator whether the order 
can be routed away from the ATS and display size, have already been 
implemented due to the National Market System Plan to Implement a Tick 
Size Pilot Program,\18\ and reporting additional data fields are 
expected to create marginal reporting costs for member firms that are 
ATSs. Therefore, the proposed rule change is not expected to create an 
unnecessary burden on member firms that are ATSs.
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    \18\ See Securities Exchange Act Release No. 74892 (May 6, 
2015), 80 FR 27514 (May 13, 2015) (File No. 4-657).
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    As of February 2016, there are no ATSs that are also ADF Trading 
Centers and the requirements on reporting quote identifiers would not 
be applicable to the approximately 42 ATSs that are active at the time 
of the writing of this filing.
    Pursuant to Section 19(b)(1) of the Act \19\ and Rule 19b-4 
thereunder,\20\ exchanges have to file with the SEC when they intend to 
eliminate, amend and add to the existing order types, modifiers and 
related references. The proposed rule change introduces similar pre-use 
reporting requirements for ATSs which currently have no such reporting 
requirements to FINRA, and hence would impose comparable obligations 
between execution venues as it relates to the introduction of new order 
types.\21\
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    \19\ 15 U.S.C. 78s(b)(1).
    \20\ 17 CFR 240.19b-4.
    \21\ FINRA notes that, under current Rule 301(b)(2)(ii) of SEC 
Regulation ATS, ATSs are required to file an amendment on Form ATS 
at least 20 calendar days prior to implementing a material change to 
the operation of the ATS. See 17 CFR 242.301(b)(2)(ii).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    This proposal, in addition to another proposal involving OATS order 
reporting, was published for comment in Regulatory Notice 14-51 
(November 2014).\22\ Five comments were received in response to the 
Regulatory Notice.\23\ A copy of Regulatory Notice 14-51 is attached as 
Exhibit 2a. A list of comment letters received in response to 
Regulatory Notice 14-51 is attached as Exhibit 2b, and copies of the 
five comment letters that addressed the proposed rule change are 
attached as Exhibit 2c.\24\
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    \22\ The OATS non-member reporting proposal also described in 
Regulatory Notice 14-51 is not reflected in the current proposed 
rule change; consequently, comments on that proposal are not 
addressed.
    \23\ See Letter from Manisha Kimmel, Managing Director, 
Financial Information Forum, to Marcia E. Asquith, Secretary, FINRA, 
dated February 20, 2015 (``FIF''); Letter from John A. McCarthy, 
General Counsel, KCG Holdings, Inc., to Marcia E. Asquith, 
Secretary, FINRA, dated February 20, 2015 (``KCG''); Letter from 
Howard Meyerson, General Counsel, Liquidnet Inc., to Marcia E. 
Asquith, Secretary, FINRA, dated February 20, 2015 (``Liquidnet''); 
Letter from Theodore R. Lazo, Managing Director and Associate 
General Counsel, Securities Industry and Financial Markets 
Association, to Marcia E. Asquith, Secretary, FINRA, dated February 
24, 2015 (``SIFMA''); and Letter from Mark Holder, Managing 
Director, UBS Securities LLC, to Marcia E. Asquith, Secretary, 
FINRA, dated February 26, 2015 (``UBS'').
    \24\ The Commission notes that the exhibits referred to in the 
Notice, 2a, 2b, and 2c, are exhibits to the proposed rule change, 
not to this Notice.
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    As proposed in Regulatory Notice 14-51, ATSs would be required to 
report additional order information that is not currently captured in 
OATS, which would enable FINRA to better recreate the full ATS order 
book. This would include all events and order attributes that would 
change the ATS's system quantity (the number of shares of an order, 
whether displayed or undisplayed, that can currently execute within the 
ATS), the displayed quantity, highest (buy orders) or lowest (sell 
orders) price at which the order may be executed, and the displayed 
price for an order. As initially proposed, an ATS also would have been 
required to provide, for every order, the associated OATS identifier, 
which would link information about that order to the related 
information and full lifecycle reported to OATS. That proposal would 
have applied to any ATS that accounted for more than 0.25% of 
consolidated market share in any security over a one-month period. Once 
an ATS had exceeded the threshold for one security, it would have been 
required to report order information for all securities for which the 
ATS receives an order. As proposed, an ATS that triggered the reporting 
requirement would have had to fall under the 0.25% threshold and remain 
there for six months before being relieved of its reporting obligation.
    While some of the commenters supported the overall goal of 
increased surveillance of ATSs and increased transparency of ATS 
operations,\25\ all the commenters opposed some aspect of the proposal, 
with commenters primarily criticizing the proposed requirement that 
ATSs report re-pricing events for pegged orders. Multiple commenters 
argued that this part of the proposal would require ATSs to record and 
generate information that they do not currently capture.\26\ Commenters 
noted that an ATS may not necessarily re-price an order due to a change 
in the NBBO, especially if it does not display or route orders to other 
market centers.\27\ Commenters noted that the proposal, and 
particularly the requirement to report re-pricing events for pegged 
orders, would generate a substantial number of new OATS records, which 
would place an additional burden on ATSs and might

[[Page 11855]]

create latency.\28\ Liquidnet noted that midpoint pegged orders 
constitute all of its order flow, and that reporting re-pricings of 
pegged orders would impose a heavy reporting burden on it.\29\ 
Commenters stated that the new requirements might also necessitate the 
creation of real-time OATS generation, rather than end-of-day 
batching.\30\
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    \25\ See KCG Letter at 4; SIFMA Letter at 2; UBS Letter at 1.
    \26\ See FIF Letter at 2, KCG Letter at 4-5; SIFMA Letter at 3; 
UBS Letter at 2.
    \27\ See FIF Letter at 2; KCG Letter at 4; UBS Letter at 2. One 
commenter suggested that some of the stated goals of the proposal, 
e.g., detection of spoofing and layering, may not be applicable to 
ATSs that do not display or route orders. See FIF Letter at 3.
    \28\ See FIF Letter at 2; KCG Letter at 4; SIFMA Letter at 3-4.
    \29\ See Liquidnet Letter at 2.
    \30\ See FIF Letter at 2; KCG Letter at 5; UBS Letter at 3.
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    Several commenters also stated that the proposal should be modified 
to reflect the differences between exchanges and ATSs. Commenters noted 
that ATSs may use variants of price/time priority, and may also allow 
subscribers to opt out of executing against certain order flow.\31\ As 
a result, it may appear that an ATS is not executing against available 
interest. Commenters also noted that the proposal should be modified to 
reflect the fact that not all ATSs operate similarly, e.g., order 
handling and execution methodologies may differ among ATSs.\32\
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    \31\ See FIF Letter at 3; SIFMA Letter at 3.
    \32\ See supra note 29.
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    FIF recommended that the proposed 0.25% volume threshold should be 
modified so that it is consistent with the current fair access 
threshold of Regulation ATS (ADV of five percent or more of the 
aggregate average daily share volume) or the Regulation SCI ATS 
threshold.\33\ Liquidnet noted that FINRA already has access to NBBO 
data and suggested an alternative whereby the ATS could report, in 
connection with the execution of a midpoint pegged order, the BBO that 
the ATS referenced to derive its execution price.\34\ UBS suggested 
enhancing existing OATS order attributes, rather than the current 
proposal, e.g., the addition of special handling codes.\35\
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    \33\ See FIF Letter at 2. FIF also suggested that any changes to 
order reporting should not be undertaken through OATS but through 
changes to the functionality of CAT. See FIF Letter at 3.
    \34\ See Liquidnet Letter at 2.
    \35\ See UBS Letter at 3.
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    After the close of the comment period, FINRA engaged in discussions 
with representatives of several ATSs to better understand their 
concerns with the proposal and to solicit input on possible 
alternatives to the proposal. In response to commenters and in 
furtherance of those discussions, FINRA has amended the proposal in 
several respects as noted above in Item II.A.1. The most significant 
change is the removal of the requirement for non-displayed ATSs to 
report changes in price or size, including changes to pegged orders 
each time the pegging price changes. Based on the comment letters and 
FINRA's subsequent discussions with several ATSs, such events generally 
would not be created by an ATS matching engine unless a new order on 
the opposite side of the market that is eligible to execute against 
that resting order is received and can match against the resting order. 
Consequently, the initial requirement to report re-pricing events would 
have required ATSs to create such events for the specific purpose of 
reporting to FINRA. FINRA believes that removing the requirement to 
report changes to price or size for non-displayed ATSs responds to 
commenters' concerns that the proposal is complex, will significantly 
impact members' OATS reporting practices, and will require members to 
create information that they do not currently capture. At the same 
time, FINRA believes that the revised proposal still enhances FINRA's 
surveillance capabilities by requiring ATSs that display subscriber 
orders to report this information. FINRA believes that this information 
is particularly relevant to display ATSs, and that FINRA does not 
currently possess this information.
    FINRA has also amended the proposal to remove the volume-based 
threshold that would trigger the reporting requirements. FINRA believes 
that removing the reporting threshold will increase the number of ATSs 
that report the proposed order information, and by extension increase 
FINRA's ability to enhance its surveillance of trading and order 
activity occurring on or through ATSs. At the same time, FINRA notes 
that removing the proposed reporting threshold should not significantly 
impact the reporting status of most ATSs, since the majority of ATSs 
would have satisfied the proposed reporting requirement. To the extent 
that FINRA is distinguishing among ATSs in setting forth reporting 
requirements, FINRA believes that a more useful distinction is between 
non-display and display ATSs, as it is currently proposing.

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

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

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2016-010 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-2016-010. 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 
10:00 a.m. and 3:00 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-2016-010, and should 
be submitted on or before March 28, 2016.

[[Page 11856]]

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\36\
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    \36\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-04912 Filed 3-4-16; 8:45 am]
 BILLING CODE 8011-01-P