Document ID: SEC-2011-1610-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2011-10-20T04:00Z

[Federal Register Volume 76, Number 203 (Thursday, October 20, 2011)]
[Notices]
[Pages 65307-65310]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-27135]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65568; File No. SR-FINRA-2011-058]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Amend 
FINRA Rule 6433 (Minimum Quotation Size Requirements for OTC Equity 
Securities)

October 14, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 6, 2011, the 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

[[Page 65308]]

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 amend FINRA Rule 6433 (Minimum Quotation Size 
Requirements for OTC Equity Securities).
    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 Rule 6433 (Minimum Quotation Size Requirements For OTC Equity 
Securities) (the ``Rule'') requires every member functioning as an OTC 
Market Maker \3\ in an OTC Equity Security \4\ that enters firm 
quotations into any inter-dealer quotation system that permits 
quotation updates on a real-time basis to honor those quotations for 
certain minimum sizes (``minimum quotation sizes''). Under the Rule, 
different minimum quotation sizes apply depending upon the price level 
of the bid or offer and, therefore, a different minimum quotation size 
can apply to each side of the market being quoted by the member in a 
given security.
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    \3\ See FINRA Rule 6420(f).
    \4\ ``OTC Equity Security'' means any equity security that is 
not an ``NMS stock'' as that term is defined in Rule 600(b)(47) of 
SEC Regulation NMS; provided, however, that the term OTC Equity 
Security shall not include any Restricted Equity Security. See FINRA 
Rule 6420(e).
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    FINRA is proposing changes to the minimum quotation sizes to, among 
other things, simplify the tier structure, facilitate the display of 
customer limit orders under new FINRA Rule 6460 (Display of Customer 
Limit Orders) (the ``limit order display rule'') \5\ and expand the 
scope of the rule, as further discussed below.\6\
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    \5\ See Securities Exchange Act Release No. 62359 (June 22, 
2010), 75 FR 37488 (June 29, 2010) (File No. SR-FINRA-2009-054; 
Order Approving NMS-Principled Rules for OTC Equity Securities) 
(``NMS-Principled Rules Approval Order''). FINRA Rule 6460 became 
effective on May 9, 2011.
    \6\ The proposal also would incorporate the requirements of 
FINRA Rule 6434 (Minimum Pricing Increments for OTC Equity 
Securities) which, among other things, prohibits members from 
displaying a bid or offer in an OTC Equity Security in an increment 
smaller than $0.01 if the bid or offer is priced $1.00 or greater 
per share, or in an increment smaller than $0.0001 if the bid or 
offer is priced below $1.00. See FINRA Rule 6460(b)(8).
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    Under the proposed approach, the minimum quotation size required 
for display of a quotation in an OTC Equity Security would fall into 
one of six tiers rather than nine tiers. Specifically, for OTC Equity 
Securities priced between $0.51 and $0.9999/share, the minimum 
quotation size would be 200 shares; between $0.26 and $0.5099/share, 
the minimum quotation size would be 500 shares; between $0.02 and 
$0.2599/share, the minimum quotation size would be 1,000 shares; and 
between $0.0001 and $0.0199/share, the minimum quotation size would be 
10,000 shares.\7\ For quotations in securities priced at least $1.00/
share, the proposed rule generally would parallel the approach taken by 
the exchanges by setting the minimum quotation size at a round lot of 
100 shares,\8\ except that, with respect to OTC Equity Securities 
priced at or above $175.00/share, the minimum quotation size would 
equal the round lot size applicable to those securities, which is one 
(1) share.\9\
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    \7\ Under the proposed revisions, securities priced under $0.02/
share would be subject to a larger minimum quotation size than the 
current Rule. Increasing the minimum for quotations in this lower-
priced tier should result in more substantive dollar-value 
commitments to the market. For securities priced at or above $0.02/
share, the minimum quotation size requirements would be reduced so 
that a greater percentage of customer limit orders priced in this 
range would be eligible for display, while continuing to recognize 
the utility of requiring that displayed quotations represent a 
minimum aggregate dollar value commitment to the market.
    \8\ A round lot of 100 shares applies to most NASDAQ and NYSE 
listed securities.
    \9\ The unit of trade for OTC Equity Securities traded at or 
above $175.00/share is one (1) Share (i.e., transactions in these 
securities for fewer than 100 shares no longer are considered ``odd-
lot transactions'' for dissemination purposes). See Trade Reporting 
Notice, OTC Equity Security Transactions (April 21, 2008).
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    In addition to simplifying the tier structure, FINRA believes that 
the proposed revisions will benefit investors by facilitating display 
of customer limit orders under the limit order display rule, which 
generally requires that OTC Market Makers fully display better-priced 
customer limit orders (or same-priced customer limit orders that are at 
the best bid or offer and that increase the OTC Market Maker's size by 
more than a de minimis amount).\10\ OTC Market Makers are not required 
to display a customer limit order unless doing so would comply with the 
minimum quotation sizes applicable to the display of quotations on an 
inter-dealer quotation system.\11\ Therefore, although a customer limit 
order may otherwise have been required to be displayed under the limit 
order display rule because it improved price or size more than a de 
minimis amount, if the order is less than the minimum quotation size 
set forth in this Rule, the member is not required to display the 
order.
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    \10\ The limit order display rule was adopted as part of a 
broader effort to extend certain protections in place for NMS stocks 
to quoting and trading in OTC Equity Securities. See NMS-Principled 
Rules Approval Order. As stated in the proposal for the limit order 
display rule, FINRA believes that applying the display requirements 
to OTC Equity Securities will improve transparency in the OTC equity 
market and advances the goal of the public availability of quotation 
information, as well as fair competition, market efficiency, best 
execution and disintermediation. See Securities Exchange Act Release 
No. 60515 (August 17, 2009), 74 FR 43207 (August 26, 2009) (Notice 
of Filing File No. SR-FINRA-2009-054).
    \11\ See Regulatory Notice 10-42 (September 2010).
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    FINRA believes that the proposed modifications to the Rule's tiers 
will result in the display of a larger number of customer limit orders 
because more limit orders should meet the revised minimums than those 
currently in place under the Rule. Based upon a review of a sample of 
Order Audit Trail System data submitted over the past year in OTC 
Equity Securities, only approximately 50% of customer limit orders in 
the sample met the current Rule's thresholds and would have been 
eligible to be displayed. For example, the existing tiers apply a 2,500 
share minimum to OTC Equity Securities priced between $0.51 and $1.00/
share, resulting in minimum dollar commitments to the market that range 
from $1,275.00 (for 2,500 shares priced at $0.51/share) to $2,500.00 
(for 2,500 shares priced at $1.00/share). In contrast, the proposed 
minimum quotation size of 200 shares applicable to quotes priced 
between $0.51 and $0.9999/share would have resulted in a significant 
increase in the number of limit orders that would have been eligible to 
be displayed--over 90% of the orders comprising the sample.
    FINRA also is proposing to expand the scope of the Rule to apply to 
all quotations or orders displayed in an inter-dealer quotation system, 
including quotations displayed by alternative

[[Page 65309]]

trading systems (ATSs) or those representing customer trading interest. 
The scope of the current rule is limited to quotations where the member 
``functions as a market maker in OTC Equity Securities.'' Therefore, 
the Rule does not currently apply to quotes by ATSs (because they are 
not market makers) and quotes representing customer trading interest 
(e.g., customer limit orders). However, ATSs have become increasingly 
active in the over-the-counter market and FINRA believes that the 
minimum quotation size requirements should apply uniformly for any 
trading interest displayed on an inter-dealer quotation system by 
members, whether submitted by an OTC Market Maker or an ATS.\12\ In 
addition, FINRA believes that expanding the scope of the Rule to 
include quotations representing customer limit orders will ensure that 
minimum quotation sizes are observed consistently by all members 
displaying quotations on an inter-dealer quotation system.
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    \12\ While ATS quotes and quotes representing customer trading 
interest currently are not captured within the scope of the Rule, as 
a practical matter, members displaying any quotation on an inter-
dealer quotation system often must post a size that is at least 
equal to this Rule's minimums due to the systems requirements of 
inter-dealer quotation systems that program the size field 
consistent with this Rule.
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    Of course, each member would continue to be required to honor its 
quotations to the full quantity displayed in accordance with Rule 5220 
(Offers at Stated Prices), which generally provides that no member 
shall make an offer to buy or sell any security at a stated price 
unless such member is prepared to purchase or sell the security at such 
price and under such conditions as are stated at the time of such offer 
to buy or sell.\13\ Likewise, member obligations pursuant to Rule 5210 
(Publication of Transactions and Quotations) continue to apply. Among 
other things, Rule 5210 generally prohibits members from publishing, 
circulating, or causing to be published or circulated, any quotation 
which purports to quote the bid price or asked price for any security, 
unless such member believes that such quotation represents a bona fide 
bid for, or offer of, such security.\14\
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    \13\ See also Rule 5220.01 (Firmness of Quotations).
    \14\ See also Rule 5210.01 (Manipulative and Deceptive 
Quotations).
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    FINRA will announce the effective date of the proposed rule change 
in a Regulatory Notice. 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,\15\ 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. FINRA also believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(11) of the Act.\16\ 
Section 15A(b)(11) requires that FINRA rules include provisions 
governing the form and content of quotations relating to securities 
sold otherwise than on a national securities exchange which may be 
distributed or published by any member or person associated with a 
member, and the persons to whom such quotations may be supplied.
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    \15\ 15 U.S.C. 78o-3(b)(6).
    \16\ 15 U.S.C. 78o-3(b)(11).
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    FINRA believes that the proposed rule change meets these 
requirements by simplifying the tier structure and facilitating display 
of customer limit orders consistent with Rule 6460, while still 
recognizing the utility of requiring that quotes in lower-priced 
securities represent a minimum dollar-value commitment to the market. 
FINRA believes that the proposed revisions to the minimum quotation 
sizes should benefit investors by increasing the percentage of customer 
limit orders that will be eligible for display under Rule 6460. This 
should improve transparency and enhance execution of customer limit 
orders. Finally, FINRA believes that the applicability of the minimum 
quotation sizes to all members posting quotations in an inter-dealer 
quotation system will promote consistency in the minimum quotation 
sizes displayed on an inter-dealer quotation system.

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.

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:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2011-058 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2011-058. This 
file number should be included on the subject line if e-mail is used.
    To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for Web site 
viewing and printing in the Commission's Public Reference Room 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

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you wish to make available publicly. All submissions should refer to 
File Number SR-FINRA-2011-058, and should be submitted on or before 
November 10, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-27135 Filed 10-19-11; 8:45 am]
BILLING CODE 8011-01-P