Document ID: SEC-2014-0134-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2014-01-24T05:00Z

[Federal Register Volume 79, Number 16 (Friday, January 24, 2014)]
[Notices]
[Pages 4213-4218]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-01395]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71341; File No. SR-FINRA-2013-042]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc; Notice of Filing of Amendment No. 1 and Order Granting 
Accelerated Approval of a Proposed Rule Change, as Modified by 
Amendment No. 1, To Require Alternative Trading Systems To Report 
Volume Information to FINRA and Use Unique Market Participant 
Identifiers

January 17, 2014.

I. Introduction

    On September 30, 2013, the 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 require each alternative trading system 
(``ATS'') to report transaction volume information to FINRA and to 
obtain and use a unique market participant identifier (``MPID'') when 
reporting trade information to FINRA. The proposed rule change was 
published for comment in the Federal Register on October 22, 2013.\3\ 
The Commission received ten comments on the proposal.\4\
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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. 70676 (October 11, 
2013), 78 FR 62862 (October 22, 2013) (``Notice of Original 
Proposal'').
    \4\ See Letters to the Commission from William White, Head of 
Electronic Trading, Barclays Capital Inc., dated November 12, 2013 
(``Barclays Letter''); Scott C. Goebel, Senior Vice President & 
Deputy General Counsel, Fidelity Investments, dated November 12, 
2013 (``Fidelity Letter''); Manisha Kimmel, Executive Director, 
Financial Information Forum, dated November 12, 2013 (``FIF 
Letter''); Donald Bollerman, Head of Market Operations, IEX 
Services, LLC, dated November 11, 2013 (``IEX Letter''); Ari 
Burstein, Senior Counsel, Investment Company Institute, dated 
November 12, 2013 (``ICI Letter''); Elizabeth K. King, Global Head 
of Regulatory Affairs, KCG Holdings, Inc., dated November 12, 2013 
(``KCG Letter''); Howard Meyerson, General Counsel, Liquidnet, dated 
November 12, 2013 (``Liquidnet Letter''); Janet McGinness, EVP & 
Corporate Secretary, NYSE Euronext, dated November 15, 2013 (``NYSE 
Letter''); Theodore R. Lazo, Managing Director & Associate General 
Counsel, Securities Industry and Financial Markets Association, 
dated November 11, 2013 (``SIFMA Letter''); and James Toes, 
President & CEO, Securities Traders Association, dated November 12, 
2013 (``STA Letter'').
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    On December 4, 2013, FINRA granted the Commission an extension of 
time to act on the proposal until January 20, 2014. On January 15, 
2014, FINRA filed Amendment No. 1 with the Commission to respond to the 
comment letters and to propose additional clarifying guidance, 
including the addition of supplementary material to one of the proposed 
rules.\5\ The Commission is publishing this notice and order to solicit 
comments on Amendment No. 1 and to approve the proposed rule change, as 
modified by Amendment No. 1, on an accelerated basis.
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    \5\ See Letter to the Commission from Brant K. Brown, Associate 
General Counsel, FINRA, dated January 15, 2014 (``FINRA Response 
Letter''). The FINRA Response Letter was submitted into the public 
comment file for SR-FINRA-2013-042.
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II. Description of the Proposal

Overview

    FINRA filed the proposed rule change to impose certain reporting 
requirements on trading venues that have filed a Form ATS with the 
Commission.\6\ The purpose of the proposal is to make information about 
ATS trading volume publicly available and thus more transparent. The 
proposal is also meant to enhance FINRA's ability to monitor ATSs to 
determine whether they are complying with the requirements of 
Regulation ATS.
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    \6\ Under Regulation ATS, an alternative trading system is 
defined as ``any organization, association, person, group of 
persons, or system: (1) That constitutes, maintains, or provides a 
market place or facilities for bringing together purchasers and 
sellers of securities or for otherwise performing with respect to 
securities the functions commonly performed by a stock exchange 
within the meaning of [Exchange Act Rule 3b-16]; and (2) That does 
not: (i) Set rules governing the conduct of subscribers other than 
the conduct of such subscribers' trading on such organization, 
association, person, group of persons, or system; or (ii) Discipline 
subscribers other than by exclusion from trading.'' 17 CFR 
242.300(a). FINRA stated in its Notice of Original Proposal that the 
proposed rule change would apply to any alternative trading system, 
as that term is defined in Regulation ATS, that has filed a Form ATS 
with the Commission.
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    Specifically, FINRA states that the proposal would allow it to 
better determine whether an ATS is subject to the provisions of 
Regulation ATS that are triggered by exceeding certain volume 
thresholds. For instance, Regulation ATS requires an ATS to provide to 
a national securities exchange or association for display the prices 
and sizes of orders at the ATS's highest buy price and lowest sell 
price for any NMS stock, displayed to more than one person in the ATS, 
with respect to which the ATS has had an average daily trading volume 
of 5% or more of the aggregate average daily share volume for such NMS 
stock during at least four of the preceding six calendar months.\7\ 
Regulation ATS also requires any such ATS to provide broker-dealers 
with fair access to the

[[Page 4214]]

ATS's services to effect a transaction in any such NMS stock.\8\
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    \7\ See 17 CFR 242.301(b)(3).
    \8\ See 17 CFR 242.301(b)(5). The fair access requirement also 
applies to other types of securities, including certain unlisted 
equity securities, municipal securities, and corporate debt 
securities. See id. Certain ATSs are excluded from the fair access 
requirement. See 17 CFR 242.301(b)(5)(iii).
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    To achieve these objectives, the proposal would impose two new 
requirements on ATSs. First, ATSs would be required to report aggregate 
weekly trade volume information to FINRA, some of which data FINRA 
would then make publicly available. Second, the proposal would require 
each ATS to obtain and use a unique MPID in its regulatory reporting to 
FINRA.

Self-Reporting Requirement

    Proposed Rule 4552 would require each FINRA member that operates an 
ATS that has filed a Form ATS with the Commission to report to FINRA 
its aggregate weekly volume information \9\ and number of trades, by 
security, in securities subject to FINRA trade reporting requirements. 
The self-reporting requirement would thus apply to any NMS stock,\10\ 
any OTC Equity Security,\11\ or any debt security subject to FINRA's 
Trade Reporting and Compliance Engine (``TRACE'') rules (``TRACE-
Eligible Securities'').\12\ The proposed rule change would require this 
information to be reported to FINRA on a security-by-security basis 
within seven business days after the end of each calendar week. An ATS 
that did not execute any trades in a given week would need to submit a 
report that affirmatively indicated the ATS did not transact any volume 
that week.
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    \9\ Volume information for NMS stocks and OTC Equity Securities 
means the aggregate number of shares traded in each security for the 
week. Volume information for TRACE-Eligible Securities means the 
aggregate par value of trades in each security for the week. See 
proposed Rule 4552(d)(5).
    \10\ See FINRA Rule 6110.
    \11\ See FINRA Rule 6410.
    \12\ See FINRA Rules 6710 and 6730(a).
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    The proposed rule change contains guidance on how ATSs should 
calculate their volumes to ensure consistency and to avoid potential 
over-counting of volume. Proposed Rule 4552 provides that, ``[w]hen 
calculating and reporting the volume of securities traded and the 
number of trades, an alternative trading system shall include only 
those trades executed within the alternative trading system. If two 
orders are crossed by the alternative trading system, the volume shall 
include only the number of shares or par value of bonds crossed as a 
single trade (e.g., crossing a buy order of 1,000 shares with a sell 
order of 1,000 shares would be calculated as a single trade of 1,000 
shares of volume).'' Thus, for example, an ATS would be required to 
report only trades executed within the ATS \13\ (not individual orders 
routed out of the ATS that might be executed at another venue), and 
only the volume of each executed trade once (not double-counting for 
the buy and sell side of the trade).
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    \13\ In response to comments, FINRA submitted Amendment No. 1 to 
propose additional guidance, in the form of Supplementary Material 
.01 to the rule, on what it means for a trade to be executed 
``within the ATS.'' See infra Section III.
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    In addition, FINRA would make some of this reported ATS trade data 
available to the public. Specifically, FINRA would publish on its Web 
site the trading information (volume and number of trades) reported for 
each equity security, with appropriate disclosures that the information 
is based on ATS-submitted reports and not on reports produced or 
validated by FINRA. FINRA would do so on a delayed basis: aggregate 
information concerning trades in NMS stocks in Tier 1 of the NMS Plan 
to Address Extraordinary Market Volatility \14\ would be published on a 
two-week delayed basis, and aggregate information on all other NMS 
stocks and all OTC Equity Securities subject to FINRA trade reporting 
requirements on a four-week delayed basis.\15\
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    \14\ Tier 1 includes those NMS stocks in the S&P 500 Index or 
the Russell 1000 Index and certain ETPs. See NMS Plan to Address 
Extraordinary Market Volatility.
    \15\ The delay would be from the week in which the trades 
occurred, rather than the week the trades were reported to FINRA. 
See Notice of Original Proposal, 78 FR at 62864 n.17.
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    While the reporting obligations in the proposal would apply to 
transactions in both equity securities (NMS stocks and OTC Equity 
Securities) and debt securities (TRACE-Eligible Securities), FINRA 
would not initially publish the data that it receives concerning 
transaction volume in TRACE-Eligible Securities. FINRA stated that it 
would not intend to begin publishing self-reported data for TRACE-
Eligible Securities ``until it has had the opportunity to evaluate the 
data received from such ATSs and the differences between the existing 
trade reporting regimes applicable to equity and debt securities.'' 
\16\
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    \16\ Notice of Original Proposal, 78 FR at 62864.
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MPID Requirement

    The proposed rule change also would require a member operating an 
ATS to obtain for each such ATS a single, unique MPID that is 
designated for exclusive use for reporting the ATS's transactions. 
Members that operate multiple ATSs or engage in other lines of business 
requiring the use of MPIDs would therefore be required to obtain and 
use multiple MPIDs. A firm would not be permitted to use multiple MPIDs 
for a single ATS, and if a firm operates multiple ATSs, each ATS would 
be required to have its own MPID.
    The proposal would prohibit a member from using a separate MPID 
assigned to an ATS to report any transaction that is not executed 
within the ATS and require members to have policies and procedures in 
place to ensure that trades reported with a separate MPID obtained 
under the rules are restricted to trades executed within the ATS. FINRA 
noted that this feature of the proposal would be consistent with 
obligations that already exist for ATSs, which are required by 
Regulation ATS ``to have in place safeguards and procedures to . . . 
separate alternative trading system functions from other broker-dealer 
functions, including proprietary and customer trading.'' \17\
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    \17\ Securities Exchange Act Release No. 40760 (December 8, 
1998), 63 FR 70844, 70879 (December 22, 1998).
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    FINRA currently has three rules that permit the use of multiple 
MPIDs on FINRA facilities: Rule 6160 (Multiple MPIDs for Trade 
Reporting Facility Participants), Rule 6170 (Primary and Additional 
MPIDs for Alternative Display Facility Participants), and Rule 6480 
(Multiple MPIDs for Quoting and Trading in OTC Equity Securities). All 
three rules are permissive, and none of the rules currently requires 
the use of multiple MPIDs. These three rules would be revised to 
include language that affirmatively requires any participant of any of 
these facilities that operates an ATS to obtain a unique MPID for each 
ATS.\18\ In cases where a facility participant wished to use multiple 
MPIDs, or was required to do so under the proposal, each rule would 
require the facility participant to submit a written request to FINRA. 
The three rules, which currently operate on a pilot basis, would also 
be made permanent.
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    \18\ FINRA also proposed to amend Rule 6720, which governs 
reporting to TRACE, to include similar language.
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    FINRA noted that member firms currently are required to notify 
FINRA before changing the usage of the MPID in any way (for example, 
repurposing an MPID from reflecting ATS activity to other trading 
activity at the firm). After an ATS is provided its MPID, any reporting 
by the ATS (either reporting trades to a FINRA TRF, the ADF, the ORF, 
TRACE, or reporting orders to the Order Audit Trail System (``OATS'')) 
would need to include the MPID assigned to the particular ATS, and the 
member would need to use the

[[Page 4215]]

particular MPID to report all transactions executed within the ATS to 
the appropriate reporting facility.\19\
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    \19\ OATS Reporting Members currently are required to include 
MPIDs on OATS reports. See, e.g., FINRA Rule 7440(b)(3), (c)(1)(B), 
(c)(2)(A)(ii), and (c)(2)(A)(iii). The proposed rule change would 
not amend the OATS rules; however, current OATS guidance issued by 
FINRA provides that ``[a]n order that is transferred between two 
valid MPIDs within the same firm is also considered routed.'' See 
OATS Reporting Technical Specifications, at 4-3 (ed. December 11, 
2012). Consequently, FINRA noted, after the proposed rule change is 
implemented, an order routed to an ATS would require the submission 
of a Route Report, which must reflect the unique MPID of the ATS to 
which the order was routed. See FINRA Rule 7440(c).
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    FINRA noted further that it would leave in place a voluntary 
program it adopted in 2010 that allows allow members operating an ATS 
dark pool to have their daily aggregate trading data published by the 
TRFs.\20\ FINRA believes that the program, which is set forth in 
Supplementary Material .02 to Rule 6160(c), would largely be eclipsed 
by the proposal, as all ATSs would now be subject to mandatory 
reporting requirements. The voluntary program differs slightly from the 
mandatory requirements of the proposal, however, because it provides 
for the publication of aggregate daily--rather than weekly--trading 
volume information. FINRA noted in its proposal that no member has 
participated in the voluntary program yet.
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    \20\ See Securities Exchange Act Release No. 61658 (March 5, 
2010), 75 FR 11972 (March 12, 2010).
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Implementation Schedule

    FINRA stated that it would announce the implementation date of the 
proposed rule change in a Regulatory Notice to be published no later 
than 30 days following Commission approval. The implementation date for 
the self-reporting requirement would be no later than 90 days following 
publication of the Regulatory Notice. The implementation date for the 
MPID requirement would be no later than 270 days following publication 
of the Regulatory Notice.
    The Commission points out that, in the Notice of Original Proposal, 
FINRA stated that it would announce the ``effective date'' of the 
proposed rule change by Regulatory Notice within 30 days of Commission 
approval. In Amendment No. 1, FINRA revised this language to clarify 
its intent to specify that it will announce the ``implementation 
date,'' rather than the ``effective date,'' of the proposed rule 
change. FINRA clarified further that the proposed rule change will 
become effective when it is approved by the Commission. Thus, rules 
that permit FINRA members to use multiple MPIDs would immediately 
convert from operating on a pilot to a permanent basis.

III. Summary of Comments, FINRA's Response, and Proposed Additional 
Supplementary Material in Amendment No. 1

    As noted above, the Commission received ten comment letters 
concerning the proposal.\21\ Eight of the ten commenters expressed 
general support for the purpose of the proposal--namely, to increase 
transparency of ATS trade data.\22\ For instance, one commenter stated 
that it ``encourage[d] efforts to standardize ATS transparency across 
the industry and feel[s] that FINRA is well-positioned to do so.'' \23\ 
Another commenter expressed its belief ``that quantitative, publicly 
available information regarding ATS trading can provide market 
participants, regulators and policymakers a greater understanding of 
the role ATSs play in the equity marketplace, as well as provide a 
factual foundation for key discussions and decisions concerning equity 
market structure issues.'' \24\
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    \21\ See supra note 4.
    \22\ See Barclays, Fidelity, IEX, ICI, KCG, NYSE, SIFMA, and STA 
Letters.
    \23\ Barclays Letter at 1.
    \24\ Fidelity Letter at 1-2.
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    Several of these commenters, in fact, expressed support for an even 
broader proposal that would apply to all trading venues, rather than 
only to ATSs.\25\ One such commenter argued that ``the proposal should 
be expanded to include trade information for other off-exchange 
executions and this information should be made public in the same 
manner as proposed for ATS trade information.'' \26\ According to 
another commenter, ``including the entire universe of non-exchange 
trading is important because while ATSs make up approximately 14% of 
volume, other dark trading venues account for over 22% of volume and 
receive a significant portion of the retail order flow in the market.'' 
\27\ A different commenter, while supporting a broader effort that 
would include off-exchange venues not limited to ATSs, stated that such 
an effort should be coupled with an increase in the transparency of 
information concerning executions that occur on exchanges against non-
displayed trading interest.\28\
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    \25\ See Fidelity, ICI, KCG, and NYSE Letters.
    \26\ Fidelity Letter at 2.
    \27\ NYSE Letter at 1.
    \28\ See KCG Letter at 5.
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    In response to these comments concerning the scope of the proposal, 
FINRA noted that it considered various alternatives and concluded that 
ATS trade information was an appropriate first step toward increased 
transparency in the off-exchange, OTC market. FINRA stated further that 
it would consider additional steps, including those suggested by the 
commenters, in the future.\29\
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    \29\ See FINRA Response Letter at 5. FINRA noted however, that 
any commenter's discussion of enhancing the transparency of on-
exchange, non-displayed interest was beyond FINRA's regulatory 
jurisdiction.
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    Some commenters voiced concern with certain elements of the 
proposal or sought further guidance on how the new requirements would 
be applied. Of these commenters, a majority argued that the self-
reporting requirement should be limited in some fashion because it 
would soon become unnecessary in light of the proposal's MPID 
requirement.\30\ For example, five commenters asked FINRA to make an 
affirmative commitment that it will eliminate the reporting requirement 
once the MPID requirement is fully implemented.\31\ Additionally, three 
commenters suggested that FINRA align the proposal's reporting 
requirement with Rule 605 of Regulation NMS, meaning that ATSs would 
report monthly to FINRA rather than weekly.\32\ Lastly, four commenters 
urged FINRA to facilitate compliance with the reporting requirement by 
establishing a standard, simple format for data transmission.\33\
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    \30\ See Barclays, Fidelity, FIF, KCG, SIFMA, and STA Letters. 
No commenter appeared to take issue with the MPID requirement, and 
four commenters expressly supported it. See Barclays, Fidelity, IEX, 
and KCG Letters.
    \31\ See Fidelity, FIF, KCG, SIFMA, and STA Letters.
    \32\ See IEX, SIFMA, and STA Letters.
    \33\ See FIF, Fidelity, IEX, and SIFMA Letters. The FIF Letter 
additionally requested guidance on several other specific, technical 
aspects concerning the proposal's implementation. FINRA noted in 
response that, if the proposal were approved, it would issue 
guidance that addressed technical details like and including those 
raised by FIF.
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    In its response to these comments, FINRA reiterated that it intends 
to evaluate the necessity of the self-reporting requirement after the 
MPID requirement is in place. However, FINRA noted that it would plan 
to use, for comparison purposes, data reported by ATSs under the self-
reporting requirement even when those ATSs have unique MPIDs used 
exclusively to report trades for the ATS. Moreover, FINRA said that the 
self-reporting requirement would allow the proposal to more quickly 
recognize its objective of enhancing ATS transparency. Accordingly, 
FINRA believes that the self-reporting requirement is a necessary first 
phase of the proposal. FINRA stated that it would eliminate the self-
reporting requirement for ATSs subject to FINRA trade reporting 
requirements

[[Page 4216]]

if the MPID requirement is implemented and operating as 
anticipated.\34\
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    \34\ See FINRA Response at 6-7. FINRA noted that, under FINRA 
rules, an ATS may be granted an exemption from its trade reporting 
requirements. FINRA said that, in such a case, it would likely need 
to continue requiring the ATS to self-report, even after the MPID 
requirement were implemented, because the exempt ATS would not be 
using the MPID to report its volume (due to its trade reporting 
exemption). See id. at 7 n.13.
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    Aside from the self-reporting requirement, several commenters also 
expressed concern with FINRA's intent to charge a fee for professionals 
to access and use the data.\35\ These comments ranged from questioning 
the need for FINRA to charge a fee for data that it would not validate 
to flatly opposing the imposition of any fee on the data. In response, 
FINRA noted that it would make available for free on its Web site the 
most recently reported data, as well as limited historic reports. FINRA 
also reiterated its plan to charge profession users and data vendors a 
fee to access professional, downloadable reports; however, FINRA stated 
it would submit a separate filing to propose the specifics of this data 
product.\36\
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    \35\ See Barclays, Fidelity, FIF, IEX, ICI, Liquidnet, and STA 
Letters.
    \36\ See FINRA Response Letter at 8.
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    Additionally, one commenter took the position that, if the proposal 
is approved, FINRA should open up a second formal comment period one 
year after the rule is implemented to allow for an empirical 
``retrospective review'' of the proposal's costs and benefits.\37\ In 
its response, FINRA disagreed and pointed to the Notice of the Original 
Proposal, in which FINRA said it ``intends periodically to assess the 
reporting and publication of information to consider whether 
modifications to the scope of securities covered, the delay between the 
activity and publication, or the frequency of publication of the 
information are appropriate.'' \38\ Moreover, FINRA claimed that it 
discussed the terms of the proposed rules with a number of ATS 
operators prior to submitting the proposal, and ``continues to believe 
that the burdens imposed by the Proposal will be minimal for many firms 
and that the proposed delays in dissemination are sufficient to avoid 
potentially damaging information leakage of trading information.'' \39\
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    \37\ See STA Letter at 2-3.
    \38\ FINRA Response Letter at 8. The Commission notes that this 
quoted language in FINRA's response appears in the Notice of 
Original Proposal, 78 FR at 62864.
    \39\ FINRA Response Letter at 8-9.
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    Lastly, one commenter questioned how the proposal would apply to 
fixed income ATSs in light of the fact that trades from fixed income 
ATSs may be reported to FINRA by one of the trade counterparties, 
rather than by the ATS.\40\ In response, FINRA pointed out that various 
of its equity and debt trade reporting rules impose a trade reporting 
obligation on an ATS, as the ``executing party'' under FINRA rules, 
where the transaction is executed by the ATS. FINRA also noted that, 
under the proposal, it would not publish the trade data reported by 
fixed income ATSs until it could evaluate the data for consistency.
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    \40\ See KCG Letter at 4.
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    Furthermore, FINRA submitted Amendment No. 1 to adopt supplementary 
material to FINRA Rule 4552 to clarify when trades should be considered 
to have occurred ``within an ATS.'' Specifically, the proposed 
supplementary material would provide that a trade should be considered 
to have occurred within the ATS for purposes of the rule ``if the ATS 
(i) executes the trade; (ii) is considered the `executing party' to the 
trade under FINRA rules; or (iii) otherwise matches orders constituting 
the trade in a manner as contemplated by SEC Rule 3b-16 or SEC 
Regulation ATS.'' \41\ So, for example, a trade would be considered to 
have occurred ``within an ATS'' if the ATS ``uses established, non-
discretionary methods under which orders interact with each other, and 
the buyers and sellers entering the orders agree to the terms of the 
trade.'' \42\
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    \41\ FINRA Response Letter at 10 (internal citations omitted).
    \42\ Id.
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    The proposed supplementary material would further provide a non-
exhaustive list of scenarios to illustrate how the ``within an ATS'' 
standard would be applied. The list would include: if the trade was 
executed as a result of the ATS bringing together the purchaser and 
seller on or through its systems; if the trade was executed by an ATS's 
subscribers where the subscribers used the ATS system to negotiate the 
trade, even if the ATS did not itself execute the trade; if the ATS 
takes either side of the trade for clearance or settlement or in any 
other way inserts itself into a trade. The supplementary material would 
also provide that a trade would not be considered to have occurred 
``within the ATS'' if an ATS were to route an order to another member 
firm or execution venue for handling or execution where that initial 
order matches against interest resident at the other venue.\43\
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    \43\ The supplementary material would additionally state that 
trades would still be considered to have occurred ``within an ATS'' 
for purposes of reporting volume under the proposal even if the ATS 
has been granted an exemption from its trade reporting obligations 
under FINRA Rules 6183, 6625, or 6731.
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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-2013-042 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-2013-042. 
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 the filing will also 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 publicly 
available. All submissions should refer to File Number SR-FINRA-2013-
042 and should be submitted on or before February 14, 2014.

V. Commission Findings

    After carefully considering the proposed rule change, as modified 
by

[[Page 4217]]

Amendment No. 1, the comments submitted, and FINRA's response to the 
comments, the Commission finds that the proposed rule change, as 
modified by Amendment No. 1, is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to a national 
securities association.\44\ In particular, the Commission finds that 
the proposed rule change, as modified by Amendment No. 1, is consistent 
with Section 15A(b)(6) of the Act,\45\ which requires, among other 
things, that FINRA rules 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.
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    \44\ In approving this proposed rule change, the Commission has 
considered the proposed rule change's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \45\ 15 U.S.C. 78o-3(b)(6).
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    The Commission believes that the stated objectives of the 
proposal--to enhance FINRA's regulatory capabilities with respect to 
ATSs and to increase public transparency with respect to ATS activity--
would further the purposes of the Act. By better enabling FINRA to 
surveil ATSs for compliance with Regulation ATS, and the display and 
fair access requirements applicable to ATSs that exceed certain volume 
thresholds, the proposal is reasonably designed to help prevent 
fraudulent and manipulative acts and practices and to protect investors 
and the public interest. By collecting and publishing weekly volume 
statistics (first, through the self-reporting requirement, and later, 
potentially, through the MPID requirement), the proposal would increase 
the amount of information that is publicly available concerning trades 
that occur in equity ATSs. As many commenters noted, such added 
transparency would allow regulators and the public to more fully 
understand the role that equity ATSs play in the marketplace.
    The Commission further believes that the proposal is reasonably 
tailored to achieve these objectives. The self-reporting requirement, 
which is meant to constitute the first phase of the proposal, will more 
quickly deliver the benefits of the proposal, and also provide a 
comparsion for the data that FINRA will receive once the MPID 
requirement is fully in effect. While the Commission acknowledges that 
some commenters took issue with the additional costs that could 
potentially be incurred as a result of the weekly self-reporting 
requirement, the Commission notes, as FINRA did in its Notice of 
Original Proposal, that ATSs are already required by Regulation ATS to 
maintain daily summaries of their trading activities.\46\
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    \46\ See 17 CFR 242.301(b)(8); 17 CFR 242.302.
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    In addition, the method of making the ATS trade data publicly 
available--a two-week delay for Tier 1 NMS stocks and a four-week delay 
for all other NMS stocks and OTC Equity Securities--appears reasonably 
designed to balance the desire to inform the public about ATS trading 
activity with the desire to protect the trading strategies of ATS 
subscribers. The Commission notes that three commenters supported this 
element of the proposal,\47\ and no commenter objected to the proposed 
delays for publishing the trade data.\48\
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    \47\ See Fidelity Letter at 3, ICI Letter at 2, and KCG Letter 
at 3.
    \48\ The Commission notes that one commenter that advocated 
monthly, rather than weekly, reporting also recommended a two-week 
publishing delay from the end of each month when the information is 
reported. See STA Letter at 5.
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    The Commission believes that requiring a member operating an ATS to 
obtain for each such ATS a single, unique MPID that is designated for 
exclusive use by the ATS is consistent with the Act. This aspect of the 
proposal is reasonably designed to create a more reliable and 
consistent audit trail for ATS activity, from the time an order is 
received until the time it is executed or cancelled. This is especially 
important for firms that conduct both ATS and other broker-dealer 
activities. Currently, if a member uses a single MPID for both its ATS 
activity and traditional broker-dealer activity, or uses a single MPID 
to report the activity of two or more ATSs, it could be difficult if 
not impossible to track the flow of orders through these systems. The 
Commission agrees with FINRA's assessment that the fact that many firms 
already use separate MPIDs in the manner now required by this proposed 
rule change is evidence that the costs of using multiple MPIDs as 
contemplated by the proposal is not unduly burdensome. Because the 
proposal requires some firms to obtain and use multiple MPIDs, FINRA 
has proposed to make permanent certain rules, currently operating on a 
pilot basis, that allow firms to use multiple MPIDs. The Commission 
also believes that it is consistent with the Act to make those rules 
permanent.
    Lastly, the Commission believes that the supplementary material 
included in Amendment No. 1 is consistent with the Act. In response to 
the initial proposal, one commenter questioned how the proposal would 
apply to fixed income ATSs, where it is common practice for trades to 
be given up to the broker-dealer counterparties.\49\ FINRA responded by 
providing new Supplementary Material .01 to proposed Rule 4552 
explaining when transactions are attributable to the ATS for purposes 
of the proposal's volume reporting provisions. In general, the 
supplementary material would require a transaction to be included in 
its reporting to FINRA if the ATS executes the trade, is the 
``executing party'' to the trade under FINRA rules,\50\ or if the ATS 
otherwise matches orders constituting the trade in a manner 
contemplated by Rule 3b-16 under the Exchange Act \51\ and Regulation 
ATS. The Commission believes that it is consistent with the Act for 
FINRA to attribute volume to an ATS when the transactions underlying 
that volume would cause the entity itself to meet the criteria of Rule 
3b-16.\52\
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    \49\ See KCG Letter at 4.
    \50\ See FINRA Rules 6282, 6830A, 6930B, and 6622. See also 
FINRA Response Letter at 9-10 (discussing when an ATS is considered 
an ``executing party'' to a trade under these rules).
    \51\ 17 CFR 240.3b-16.
    \52\ Meeting the criteria of Rule 3b-16 would in turn would 
cause the entity to have to register with the Commission as a 
national securities exchange or seek an alternative to exchange 
registration, such as registering as a broker-dealer and complying 
with Regulation ATS.
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VI. Accelerated Approval

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\53\ for approving the proposed rule change, as modified by 
Amendment No. 1 thereto, prior to the 30th day after publication of 
Amendment No. 1 in the Federal Register. The new supplementary material 
proposed in Amendment No. 1 responds to a specific issue raised in one 
comment letter received by the Commission in response to the Notice of 
Original Proposal and clarifies when trading volume is attributed to an 
ATS for purposes of this proposal's volume reporting requirements. 
Amendment No. 1 also proposed a revision to the language describing the 
timeframe for FINRA's implementation of the proposal; this revision is 
technical in nature and better clarifies FINRA's original intent. The 
Commission notes that, beyond two other minor technical revisions that 
simply update statutory references,\54\ the rest of the proposed rule 
change is not being amended and was subject to a full notice-and-
comment period. These revisions add clarity to the

[[Page 4218]]

proposal and do not raise any novel regulatory concerns. Accordingly, 
the Commission finds that good cause exists to approve the proposal, as 
modified by Amendment No. 1, on an accelerated basis.
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    \53\ 15 U.S.C. 78s(b)(2).
    \54\ Specifically, Amendment No. 1 would: (1) amend FINRA Rules 
4552, 6160, 6170, 6480, and 6720 to replace ``SEA Rule 300'' with 
``Rule 300 of SEC Regulation ATS''; and (2) amend proposed Rule 4552 
to replace ``SEA Rule 600(b)(47)'' with ``Rule 600(b)(47) of SEC 
Regulation NMS.
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VII. Conclusion

    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\55\ that the proposed rule change (SR-FINRA-2013-042), as modified by 
Amendment No. 1, be and hereby is approved on an accelerated basis.
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    \55\ 15 U.S.C. 78s(b)(2).
    \56\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\56\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-01395 Filed 1-23-14; 8:45 am]
BILLING CODE 8011-01-P