Document ID: SEC-2017-0719-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2017-05-04T04:00Z

[Federal Register Volume 82, Number 85 (Thursday, May 4, 2017)]
[Notices]
[Pages 20948-20951]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-08978]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80551; File No. SR-FINRA-2017-006]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Granting Approval of a Proposed Rule Change To 
Amend Rule 6191 To Implement an Anonymous, Grouped Masking Methodology 
for Over-the-Counter Activity in Connection With Web Site Data 
Publication of Appendix B Data Pursuant to the Regulation NMS Plan To 
Implement a Tick Size Pilot Program

April 28, 2017.

I. Introduction

    On March 3, 2017, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend FINRA Rule 6191 to implement an 
anonymous, grouped masking methodology for over-the-counter (``OTC'') 
activity in connection with Web site publication of Appendix B data 
pursuant to the Regulation NMS

[[Page 20949]]

Plan to Implement a Tick Size Pilot Program (``Plan'' or ``Pilot'').\3\ 
The proposed rule change was published for comment in the Federal 
Register on March 15, 2017.\4\ The Commission received three comment 
letters on the proposed rule change.\5\ This order approves the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 74892 (May 6, 2015), 
80 FR 27513 (May 13, 2015) (``Approval Order''). Unless otherwise 
specified, capitalized terms used in this order are defined as set 
forth in the Plan.
    \4\ See Securities Exchange Act Release No. 80193 (Mar. 9, 
2017), 82 FR 13901 (``Notice'').
    \5\ See Letters to Brent J. Fields, Secretary, Commission from 
Alisa McCoy, dated March 13, 2017 (``McCoy Letter''); Christopher W. 
Bok, Financial Information Forum, dated April 5, 2017 (``FIF 
Letter''); and Stephen John Berger, Managing Director, Government & 
Regulatory Policy, Citadel, dated April 7, 2017 (``Citadel 
Letter'').
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II. Description of the Proposal

    FINRA Rule 6191(b) (Compliance with Data Collection Requirements) 
implements the data collection and Web site publication requirements of 
the Plan. FINRA Rule 6191(b)(2)(A) describes the data collection and 
submission requirements for data that is required under Appendix B.I. 
and B.II. of the Plan. FINRA Rule 6191(b)(2)(B) provides, among other 
things, that FINRA will publish data collected pursuant to FINRA Rule 
6191(b)(2)(A) on its Web site within 120 calendar days following month 
end at no charge,\6\ and that such publication will not identify the 
Trading Center that generated the data.
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    \6\ FINRA Rule 6191.12 provides that the Web site publication of 
Appendix B data shall commence on April 28, 2017.
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    FINRA Rule 6191(b)(3)(A) describes the data collection and 
submission requirements for data specified under Appendix B.IV. of the 
Plan. FINRA Rule 6191(b)(3)(C) provides, among other things, that FINRA 
will publish data collected pursuant to FINRA Rule 6191(b)(3)(A) on its 
Web site within 120 calendar days following month end at no charge,\7\ 
and that such publication will not identify the Trading Center that 
generated the data.
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    \7\ Id.
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    FINRA proposes new Supplementary Material .15 to FINRA Rule 6191 to 
implement an anonymous, grouped masking methodology for Appendix B.I., 
B.II. and B.IV. data (``Appendix B data''). FINRA also proposes to 
incorporate the OTC Trading Centers for which Chicago Stock Exchange, 
Inc. (``CHX'') is the designated examining authority (``DEA'') into the 
anonymous, grouped masking methodology and publish OTC-wide statistics 
for Appendix B data on the FINRA Web site.\8\
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    \8\ In connection with the instant filing, FINRA and CHX 
requested exemptive relief from the Plan to permit the publication 
on the FINRA Web site of data relating to OTC activity pursuant to 
Appendix B.I., B.II. and B.IV. using an anonymous, grouped masking 
methodology. See Letter from Marcia E. Asquith, Executive Vice 
President, Board and External Relations, FINRA, to Robert W. Errett, 
Deputy Secretary, Commission, dated March 2, 2017. The Commission, 
pursuant to its authority under Rule 608(e) of Regulation NMS, has 
granted FINRA and CHX a limited exemption from the requirement to 
comply with certain provisions of the Plan as specified in the 
letters and noted herein. See letter from David Shillman, Associate 
Director, Division of Trading and Markets, Commission to Marcia E. 
Asquith, Executive Vice President, Board and External Relations, 
FINRA, dated April 28, 2017 (``SEC Exemption Letter'').
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A. Grouping Methodology

    FINRA proposes to establish ATS and non-ATS categories. Thereafter, 
FINRA would assign OTC Trading Centers into groups of five to twenty-
five, using an undisclosed methodology to assign each Trading Center to 
a group.
    The Trading Center group assignments will not be published and 
generally will remain unchanged for the duration of the data 
publication period, with the exception of the entrance of a new Trading 
Center (i.e., new FINRA member). FINRA will assign an anonymized 
identifier for each group that will remain unchanged for the duration 
of the data publication period. The anonymized identifier will be used 
for all Appendix B data sets. The number of Trading Centers assigned to 
each group will not specifically be disclosed; however, as noted above, 
each group will contain between five and twenty-five market participant 
identifiers (``MPIDs''). In addition, for each day's statistics, the 
number of MPIDs in each group with activity in any Pilot Security for 
that day will be published.

B. Appendix B.I. Data Aggregation Methodology

    FINRA proposes to aggregate the Appendix B.I. data by aggregating 
statistics within each group by Pilot Security for each trading day. 
The methodology used for computing the statistics at the group level 
will be the same methodology used to compute these statistics at the 
Trading Center level in the non-public version of the data (and in the 
public version of the exchange data).\9\ Specifically, FINRA would 
calculate group-level sums for statistics that are quantity counts \10\ 
and use all underlying data within a group to calculate statistics 
requiring averages or weighted averages.\11\ Data will be aggregated 
separately for each order type and subcategory, and will not be 
aggregated across order types or subcategories.
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    \9\ See Tick Size Appendix B and C Statistics FAQs (available at 
http://www.finra.org/sites/default/files/Tick-Size-Pilot-Appendix-B-and-C-FAQ.pdf).
    \10\ See e.g., Appendix B.I.a(7) (cumulative number of orders).
    \11\ See e.g., Appendix B.I.a(28) (the share weighted average 
realized spread for executions of orders); and Appendix B.I.a(29) 
(the received share-weighted average percentage for shares not 
displayable as of order receipt). FINRA will calculate averages for 
all price variables and percentages.
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C. Appendix B.II. Data Aggregation Methodology

    Appendix B.II. data includes order-level statistics; thus, FINRA 
proposes that all individual orders be displayed for all Trading 
Centers within a group, with each order attributed to the group rather 
than the underlying Trading Center. In addition, Appendix B.II. order 
information would be displayed in chronological order based on time of 
order receipt.

D. Appendix B.IV. Data Aggregation Methodology

    FINRA proposes to aggregate Appendix B.IV. data by aggregating 
statistics within each group by trading day by summing the statistics 
of all Market Maker activity represented within the group. The number 
of Market Makers would be displayed as the unique number of Market 
Makers \12\ across all Trading Centers within the group.
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    \12\ As provided in FINRA Rule 6191.11, FINRA will provide a 
count of the number of Market Makers used in the participation 
calculations. Thus, if a single unique Market Maker traded on 
multiple Trading Centers within the same masking group, for the 
Appendix B.IV. count of unique Market Makers on a given trading day, 
FINRA will count this activity as attributed to one unique Market 
Maker.
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III. Summary of Comment Letters

    The Commission received three comment letters expressing general 
support for the proposed rule change.\13\ One commenter praised ``the 
significant steps taken to improve the masking methodology'' for the 
Pilot data.\14\ Another commenter commended FINRA for ``taking into 
account the feedback received from market participants and working to 
devise an approach that seeks to address identified confidentiality 
concerns while still maintaining the usefulness of the publicly 
available data.'' \15\
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    \13\ One letter reads in its entirety ``That is great idea since 
all of the compromise.'' See McCoy Letter.
    \14\ See FIF Letter.
    \15\ See Citadel Letter.
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    One commenter, however, expressed a continued concern related to 
FINRA's

[[Page 20950]]

proposed grouping methodology.\16\ Specifically, this commenter 
believed that the proposal to break ATS and non-ATS OTC Trading Centers 
into groupings of five to twenty-five MPIDs may allow interested 
parties the opportunity to discern the identity of the Trading Center, 
perhaps by comparing the published data to Rule 605 reports of OTC 
volume data published by FINRA. This commenter also expressed concern 
that the disclosure of the number of active MPIDs in each group could 
potentially lead to the identification of broker-dealer Trading 
Centers. As an alternative, the commenter suggested that all OTC 
Trading Centers be aggregated into either a single ATS or non-ATS 
category.
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    \16\ See FIF Letter.
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    Another commenter recommended eliminating the proposed daily 
publication of the number of MPIDs with activity in each group of 
Trading Centers.\17\ This commenter suggested that FINRA reconsider 
whether this additional information is necessary to provide a useful 
data set to the public because, ``in practice, FINRA will thus be 
disclosing information regarding the number of trading centers assigned 
to each group.'' In this commenter's view, FINRA must ensure that the 
additional data cannot be used to ``undermine the confidentiality of 
FINRA's methodology for assigning trading centers to particular groups 
or the actual group assignments.''
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    \17\ See Citadel Letter.
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IV. Discussion and Commission's Findings

    After careful review of the proposed rule change and the comment 
letters, the Commission finds that the proposal is consistent with the 
requirements of the Act and the rules and regulations thereunder that 
are applicable to a national securities association.\18\ Specifically, 
the Commission finds that the proposed rule change is consistent with 
Section 15A(b)(6) of the Act,\19\ 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,\20\ which requires 
that FINRA rules not impose any burden on competition that is not 
necessary or appropriate.
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    \18\ In approving this rule change, the Commission has 
considered the rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \19\ 15 U.S.C. 78o-3(b)(6).
    \20\ 15 U.S.C. 78o-3(b)(9).
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    In the Approval Order, the Commission noted that the Pilot is, by 
design, an objective, data-driven test that should ``provide measurable 
data that should facilitate the ability of the Commission, the public 
and market participants to review and analyze the effect of tick size 
on the trading, liquidity and market quality of securities of smaller 
capitalization companies.'' \21\ The Commission further stated that the 
Plan should provide ``a data-driven approach to evaluate whether 
certain changes to the market structure for Pilot Securities would be 
consistent with the Commission's mission to protect investors, maintain 
fair, orderly and efficient markets and facilitate capital formation.'' 
\22\ To that end, the Plan provides for the collection, submission and 
publication of data specified in Appendix B of the Plan. The Plan 
further provides that the data to be made publicly available not 
identify the Trading Center that generated the data. As discussed 
below, the Commission believes that FINRA's proposal is consistent with 
the requirements of the Act and would further the purpose of the Plan 
to provide measurable data.
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    \21\ See Approval Order, supra note 3.
    \22\ Id.
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    FINRA, as a Participant in the Plan, has an obligation to comply, 
and enforce compliance by its members, with the terms of the Plan. Rule 
608(c) of Regulation NMS provides that ``[e]ach self-regulatory 
organization shall comply with the terms of any effective national 
market system plan of which it is a sponsor or participant.'' \23\ 
Proposed FINRA Rule 6191, Supplementary Material .15 would establish a 
means to anonymize the identities of OTC Trading Centers when 
publishing the data set forth in Appendix B to the Plan. The Commission 
also believes that the proposal is consistent with the Act because it 
is designed to assist FINRA in meeting its regulatory obligations 
pursuant to Rule 608 of Regulation NMS and the Plan.
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    \23\ 17 CFR 242.608(c).
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    FINRA's proposal seeks to address the provision in the Plan that 
individual OTC Trading Centers not be identified in the published data. 
FINRA proposes to create ATS and non-ATS categories and then assign OTC 
Trading Centers into groups of five to twenty-five. In addition, FINRA 
proposes to aggregate and publish data from those OTC Trading Centers 
for which CHX is DEA. Thereafter, FINRA would publish Appendix B data 
for OTC Trading Centers by group on its Web site using an anonymized 
identifier.
    The Commission notes that commenters had previously raised concerns 
about the publication of OTC Trading Centers' Appendix B data on a 
disaggregated basis.\24\ FINRA noted that it filed the proposed rule 
change to mitigate the confidentiality concerns of the commenters.
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    \24\ See Letters from William Hebert, Managing Director, 
Financial Information Forum, to Robert W. Errett, Deputy Secretary, 
Commission, dated December 21, 2016; and Adam C. Cooper, Senior 
Managing Director and Chief Legal Officer, Citadel Securities, to 
Brent J. Fields, Secretary, Commission, dated December 21, 2016. See 
also Securities Exchange Act Release No. 79424 (November 29, 2016), 
81 FR 87603 (December 5, 2016) (Notice of Filing and Immediate 
Effectiveness of File No. SR-FINRA-2016-042).
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    As noted above, while commenters were generally supportive of 
FINRA's proposal, some believe FINRA should do more to mitigate 
confidentiality concerns related to OTC Trading Centers' Appendix B 
data. These commenters suggested that FINRA eliminate the sub-groupings 
of ATS and non-ATS OTC Trading Centers, or the daily identification of 
the number of active MPIDs in each group. While these commenters 
broadly suggested this information might be used to identify the group 
to which a particular OTC Trading Center was assigned, they did not 
articulate why the identification of that group, if possible, could 
reveal proprietary information or otherwise harm the interests of the 
OTC Trading Center. In this regard, the Commission notes that the 
activity of each OTC Trading Center would be combined with that of at 
least four other OTC Trading Centers, and would be at least four months 
old.
    The Commission believes that FINRA's proposal to develop an 
anonymous, grouped masking methodology is reasonably designed to 
address concerns that the activity of individual Trading Centers might 
be identified. The Commission notes that the identities of individual 
Trading Centers within each group would not be disclosed and the 
activity of each Trading Center would be aggregated with the activity 
of four to twenty-four other Trading Centers. At the same time, the 
Commission believes that the maintenance of these groups, and the daily 
identification of the number of active MPIDs in each group, should 
substantially enhance the usefulness of the Pilot data for academics 
and others seeking to analyze it. For example, establishing smaller 
groups of OTC Trading Centers should increase the ability of 
researchers to control for group fixed effects, and thereby help

[[Page 20951]]

isolate the impact of the Pilot so that more precise and robust 
analysis can be performed. Similarly, identifying daily the number of 
active MPIDs should increase the ability of researchers to assess the 
impact of the Pilot by allowing them to control for changes in the 
number of OTC Trading Centers in each group that are active in Pilot 
Securities.\25\
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    \25\ The Commission also notes that FINRA will publish Appendix 
B data from OTC Trading Centers 120 days after the month end. This 
delay in publication should help support FINRA's efforts to mitigate 
confidentiality concerns.
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    The Commission also believes that FINRA's proposal to aggregate and 
publish data from those OTC Trading Centers for which CHX is the DEA 
should help to mitigate confidentiality concerns. The Commission notes 
that CHX is DEA to a small number of OTC Trading Centers. Therefore, 
including these OTC Trading Centers in the broader anonymous data set 
should mitigate concerns about the disclosure of their identities.
    For the reasons noted above, the Commission finds that the proposal 
is consistent with the requirements of the Act. The proposal clarifies 
and implements certain data collection requirements set forth in the 
Plan.

V. Conclusion

    It is therefore ordered that, pursuant to Section 19(b)(2) of the 
Act,\26\ that the proposed rule change (SR-FINRA-2017-006), be and 
hereby is, approved.
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    \26\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-08978 Filed 5-3-17; 8:45 am]
BILLING CODE 8011-01-P