Document ID: SEC-2016-0351-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2016-02-29T05:00Z

[Federal Register Volume 81, Number 39 (Monday, February 29, 2016)]
[Notices]
[Pages 10290-10299]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-04320]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77218; File No. SR-FINRA-2015-047]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Partial Amendment No. 1 and Order 
Granting Accelerated Approval to a Proposed Rule Change To Adopt FINRA 
Rule 6191(a) To Implement the Quoting and Trading Requirements of the 
Regulation NMS Plan To Implement a Tick Size Pilot Program

February 23, 2016.

I. Introduction

    On November 13, 2015, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposal to adopt FINRA Rule 6191(a) to implement the 
quoting and trading requirements of the Plan to Implement Tick Size 
Pilot Program (``Plan'') submitted to the Commission pursuant to Rule 
608 of Regulation NMS under the Act (``Tick Size Pilot'').\3\ The 
proposal was published for comment in the Federal Register on November 
25, 2015.\4\ The Commission received three comment letters on the 
proposal and a response letter from FINRA.\5\ On February 23, 2016, 
FINRA filed Partial Amendment No. 1.\6\ On January 7, 2016, the 
Commission designated a longer period for Commission action on the 
proposal, until February 23, 2016.\7\ This order approves the proposal, 
as modified by Partial Amendment No. 1.
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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) (order approving the Tick Size 
Pilot)(``Approval Order'').
    \4\ See Securities Exchange Act Release No. 76483 (November 19, 
2015). 80 FR 73853.
    \5\ See letters from Mary Lou Von Kaenel, Managing Director, 
Financial Information Forum, dated December 16, 2015 (``FIF 
Letter''); Theodore R. Lazo, Managing Director and Associate General 
Counsel, Securities Industry and Financial Markets Association, 
dated December 18, 2015 (``SIFMA Letter''); Brendon J. Weiss, Co-
Head, Government Affairs, Intercontinental Exchange, Inc. and John 
K. Kerin, CEO, Chicago Stock Exchange, Inc., dated January 15, 2016 
(``NYSE Letter''); and Andrew Madar, Associate General Counsel, 
FINRA and Chris Solgan, Assistant General Counsel, BATS, dated 
February 23, 2016 (``FINRA Response Letter'').
    \6\ In Partial Amendment No. 1, FINRA proposes to: (1) Add an 
exception to permit members to fill a customer order in a Pilot 
Security in Test Group Two or Test Group Three at a non-nickel 
increment to comply with FINRA Rule 5320 under limited 
circumstances; (2) add exceptions to the Trade-at Prohibition for 
certain error correction transactions; (3) modify the stopped order 
exception to the Trade-at Prohibitions to better align it with the 
stopped order exception in Rule 611; and (4) clarify the use of 
Trade-at Intermarket Sweep Orders in connection with the Trade-At 
Prohibition.
    \7\ See Securities Exchange Act Release No. 76855, 81 FR 1670 
(January 13, 2016).
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II. Background

    On August 25, 2014, NYSE Group, Inc., on behalf of BATS Exchange, 
Inc., BATS Y-Exchange, Inc., Chicago Stock Exchange, Inc., EDGA 
Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory 
Authority, Inc., NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, the Nasdaq 
Stock Market LLC, New York Stock Exchange LLC (``NYSE''), NYSE MKT LLC, 
and NYSE Arca, Inc. (collectively ``Participants'' \8\), filed with the 
Commission, pursuant to Section 11A of the Act \9\ and Rule 608 of 
Regulation NMS thereunder,\10\ the Plan to Implement the Tick Size 
Pilot.\11\ The Participants filed the Plan to comply with an order 
issued by the Commission on June 24, 2014.\12\ The Plan was published 
for comment in the Federal Register on November 7, 2014,\13\ and 
approved by the Commission, as

[[Page 10291]]

modified, on May 6, 2015.\14\ On November 6, 2015, the Commission 
issued an exemption to the Participants from implementing the Plan 
until October 3, 2016.\15\
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    \8\ The Commission notes that on February 5, 2016, National 
Stock Exchange, Inc. (``NSX'') filed a Plan amendment with the 
Commission to become a Plan Participant pursuant to Section II.C of 
the Plan. This amendment is effective upon filing pursuant to Rule 
608(b)(3)(iii) of Regulation NMS.
    \9\ 15 U.S.C. 78k-1.
    \10\ 17 CFR 242.608.
    \11\ See letter from Brendon J. Weiss, Vice President, 
Intercontinental Exchange, Inc., to Secretary, Commission, dated 
August 25, 2014.
    \12\ See Securities Exchange Act Release No. 72460, 79 FR 36840 
(June 30, 2014).
    \13\ See Securities Exchange Act Release No. 73511 (November 3, 
2014), 79 FR 66423.
    \14\ See Approval Order, supra note 3.
    \15\ See Securities Exchange Act Release No. 76382, 80 FR 70284 
(November 13, 2015).
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    The Tick Size Pilot is designed to allow the Commission, market 
participants, and the public to study and assess the impact of 
increment conventions on the liquidity and trading of the common stocks 
of certain small-capitalization companies. Each Participant is required 
to comply, and to enforce compliance by its members, as applicable, 
with the provisions of the Plan.\16\ The Plan requires Participants to 
develop quoting and trading requirements for the Tick Size Pilot as 
well as collect, publish, and submit to the Commission a variety of 
data elements such as market quality statistics and market maker 
profitability.\17\ FINRA is proposing to adopt FINRA Rule 6191(a) and 
certain Supplementary Material to implement the quoting and trading 
requirements of the Tick Size Pilot.\18\
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    \16\ Rule 608(c) of Regulation NMS. 17 CFR 242.608(c). See also 
Plan Sections II.B and IV.
    \17\ The data collection requirements for the Plan are specified 
in Appendices B and C. See Approval Order, supra note 3. FINRA has 
adopted rules to implement the data collection requirements under 
the Plan. See FINRA Rule 6191(b). Securities Exchange Act Release 
No. 77164 (February 17, 2016), 81 FR 9043, (February 23, 2016).
    \18\ NYSE, on behalf of the Plan Participants, submitted a 
letter to the Commission requesting exemption from certain 
provisions of the Plan related to the quoting and trading 
requirements as they apply to Pilot Securities that have a price 
under $1.00. See letter from Elizabeth K. King, General Counsel & 
Corporate Secretary, NYSE, to Brent J. Fields, Secretary, 
Commission, dated October 14, 2015 (``October Exemption Request''). 
In addition, FINRA, on behalf of the Plan Participants, submitted a 
letter to the Commission requesting additional exemptions from 
certain provisions of the Plan related to the quoting and trading 
requirements. See letter from Marcia E. Asquith, Senior Vice 
President and Corporate Secretary, FINRA, to Robert W. Errett, 
Deputy Secretary, Commission, dated February 23, 2016 (``February 
Exemption Request''). The Commission, pursuant to its authority 
under Rule 608(e) of Regulation NMS, has granted FINRA 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, Senior Vice President and 
Corporate Secretary, FINRA, dated February 23, 2016 (``SEC Exemption 
Letter'').
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III. Description of the Proposed Rule Change

A. Policies and Procedures to Comply With the Plan

    Proposed FINRA Rule 6191(a) would establish the rules necessary for 
compliance with the applicable quoting and trading requirements 
specified in the Plan for FINRA and its members.\19\
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    \19\ FINRA proposed that its Rule 6191 be in effect during a 
pilot period to coincide with the Pilot Period of the Plan, 
including any extensions. See Proposed FINRA Rule 6191(a) 
Supplementary Material .03.
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    Proposed FINRA Rule 6191(a)(1) provides that members shall 
establish, maintain, and enforce written policies and procedures that 
are reasonably designed to comply with the applicable quoting and 
trading requirements of the Plan. Proposed FINRA Rule 6191(a)(2) sets 
forth that FINRA systems will not display quotations in violation of 
the Plan or its proposed rule.

B. Compliance and Pilot Securities Under $1.00 During the Pilot Period

    Proposed FINRA Rule 6191(a)(3) sets forth the procedures for Pilot 
Securities whose price drops below $1.00 during the Pilot Period.\20\ 
If the price of a Pilot Security drops below $1.00 during regular 
trading hours on any trading day, the Pilot Security will continue to 
trade according to the quoting and trading requirements of its 
originally assigned Test Group within the Plan. If a Pilot Security has 
a Closing Price \21\ below $1.00 on any trading day the Pilot Security 
would be moved from its respective Test Group into the Control Group, 
and would be quoted and traded at any price increment that is currently 
permitted for the remainder of the Pilot Period. Proposed FINRA Rule 
6191(a)(3) further provides, that notwithstanding anything to the 
contrary, all Pilot Securities will continue to be subject to FINRA 
Rule 6191(b), which sets forth FINRA's data collection requirements for 
Tick Size Pilot.
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    \20\ FINRA has requested an exemption from the Plan related to 
this provision. See October Exemption Request, supra note 18.
    \21\ Capitalized terms used in this Order are defined in the 
Plan, unless otherwise specified herein. Further, FINRA has proposed 
to use the Plan's defined terms in its Rule 6191(a). See Proposed 
FINRA Rule 6191(a) Supplementary Material .01.
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C. Quoting and Trading Rules for Test Group One

    Proposed FINRA Rule 6191(a)(4) describes the quoting and trading 
requirements for Pilot Securities in Test Group One. Specifically, 
FINRA proposes that no member may display, rank, or accept from any 
person any displayable or non-displayable bids or offers, orders, or 
indications of interest in increments other than $0.05 for Pilot 
Securities in Test Group One. Orders priced at either the midpoint of 
the national best bid and national best offer (``NBBO'') or best 
protected bid and best protected offer (``PBBO'') and orders entered 
into a Participant-operated retail liquidity program may be ranked and 
accepted in increments of less than $0.05. The provision also sets 
forth that Pilot Securities in Test Group One would continue to be able 
to trade at any price increment that is currently permitted by 
applicable Participant, Commission, and FINRA rules.

D. Quoting and Trading Rules for Test Group Two

    Proposed FINRA Rule 6191(a)(5) describes the quoting and trading 
requirements of Pilot Securities in Test Group Two. Specifically, FINRA 
proposes that no member may display, rank, or accept from any person 
any displayable or non-displayable bids or offers, orders, or 
indications of interest in increments other than $0.05 for Pilot 
Securities in Test Group Two.\22\ Further, FINRA proposes that absent 
any enumerated exceptions, no member organization may execute an order 
in any increment other than $0.05 for Pilot Securities in Test Group 
Two.\23\
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    \22\ Similar to the exception in Test Group One, orders priced 
to trade at the midpoint of the NBBO or PBBO and orders entered into 
a Participant-operated retail liquidity price program may be ranked 
and accepted in increments of less than $0.05. See Proposed FINRA 
Rule 6191(a)(5)(A).
    \23\ Proposed FINRA Rule 6191(a)(5)(B) applies to all trades, 
including Brokered Cross Trades. A Brokered Cross Trade is defined 
in the Plan as a trade that a broker-dealer that is a member of a 
Participant executes directly by matching simultaneous buy and sell 
orders for a Pilot Security. See Plan Section I.G.
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    Proposed FINRA Rule 6191(a)(5)(C) provides that Test Group Two 
Pilot Securities may trade in increments less than $0.05 in three 
circumstances: (1) Trading may occur at the midpoint between the NBBO 
or the PBBO: (2) Retail Investor Orders that are provided with price 
improvement that is at least $0.005 better than the PBBO; and (3) 
Negotiated Trades may trade in increments less than $0.05.
    In Partial Amendment No. 1, FINRA proposes an additional exception 
from the requirement that trades in Test Group Two must be in $0.05 
increments. Specifically, FINRA proposes to permit members to execute 
customer orders to comply with FINRA Rule 5320 following the execution 
of a proprietary trade by the member at an increment other than $0.05, 
where such proprietary trade was permissible pursuant to an exception 
under the Plan.\24\
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    \24\ See Partial Amendment No. 1, supra note 6. FINRA has 
requested an exemption from the Plan related to this provision. See 
February Exemption Request, supra note 18.

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[[Page 10292]]

E. Quoting and Trading Rules for Test Group Three

    Proposed FINRA Rule 6191(a)(6) describes the quoting and trading 
requirements of Pilot Securities in Test Group Three. FINRA proposes 
for Pilot Securities in Test Group Three that no member may display, 
rank, or accept from any person any displayable or non-displayable bids 
or offers, orders, or indications of interest in increments other than 
$0.05.\25\ Proposed FINRA Rule 6191(a)(6)(B) states that for Test Group 
Three Pilot Securities no member would be permitted to execute an 
order, including Brokered Cross Trades, in an increment other than 
$0.05 unless there was an exception enumerated by the rule. Proposed 
FINRA Rule 6191(a)(6)(C) sets forth four exceptions for trading of Test 
Group Three Pilot Securities to occur in increments of less than $0.05: 
(1) At the midpoint between the NBBO or the PBBO; (2) for Retail 
Investor Orders that are provided with price improvement at least 
$0.005 better than the PBBO; (3) for Negotiated Trades; and (4) for 
executions of a customer order to comply with FINRA Rule 5320 following 
the execution of a proprietary trade by the member at an increment 
other than $0.05, where such proprietary trade was permissible pursuant 
to an exception under the Plan.\26\
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    \25\ Similar to the exceptions for Test Group One and Test Group 
Two, orders priced to trade at the midpoint of the NBBO or PBBO and 
orders entered in a Participant-operated retail liquidity program 
may be ranked and accepted in increments of less than $0.05. See 
Proposed FINRA Rule 6191(a)(6)(A).
    \26\ See Partial Amendment No. 1, supra note 6. FINRA has 
requested an exemption from the Plan related to this provision. See 
February Exemption Request, supra note 18.
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    Proposed FINRA Rule 6191(a)(6)(D)(i) sets forth that, absent an 
exception set forth in proposed FINRA Rule 6191(a)(6)(D)(ii), no member 
that operates a Trading Center may execute a sell order for a Pilot 
Security in Test Group Three at the price of a Protected Bid or execute 
a buy order for a Pilot Security in Test Group Three at the price of a 
Protected Offer during regular trading hours (i.e., the ``Trade-at 
Prohibition''). Under the Trade-at Prohibition, a member that operates 
a Trading Center that is displaying a quotation, via either a processor 
or an SRO quotation feed, that is at a price equal to the traded-at 
Protected Bid or Protected Offer is permitted to execute orders at that 
level, but only up to the amount of its displayed size. A member that 
operates a Trading Center that was not displaying a quotation at a 
price equal to the traded-at Protected Quotation, via either a 
processor or an SRO quotation feed, is prohibited from price-matching 
protected quotations unless at least one of the exceptions applies.
    Proposed FINRA Rule 6191(a)(6)(D)(ii) sets forth the exceptions to 
the Trade-at Prohibition for members that operate Trading Centers as 
follows:
    (a) The order is executed within the same independent aggregation 
unit \27\ of the member that operates the Trading Center that displayed 
the quotation via either a processor or an SRO quotation feed, to the 
extent such member uses independent aggregation units, at a price equal 
to the traded-at Protected Quotation that was displayed before the 
order was received, but only up to the full displayed size of that 
independent aggregation unit's previously displayed quote. Further, 
proposed FINRA Rule 6191(a)(6)(D)(ii)(a) also specifies that a Trading 
Center that is displaying a quotation as agent or riskless principal 
may only execute as agent or riskless principal and a Trading Center 
displaying a quotation as principal (excluding riskless principal) may 
execute as principal, agent or riskless principal;
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    \27\ FINRA proposes that, ``Independent aggregation unit'' has 
the same meaning as provided under Rule 200(f) of Regulation SHO. 
See 17 CFR 242.200(f).
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    (b) the order that is of Block Size \28\ at the time of origin and 
is not an aggregation of non-block orders; broken into orders smaller 
than Block Size prior to submitting the order to a Trading Center for 
execution; or executed on multiple Trading Centers;
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    \28\ ``Block Size'' is defined in the Plan as an order (1) of at 
least 5,000 shares or (2) for a quantity of stock having a market 
value of at least $100,000.
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    (c) the order is a Retail Investor Order \29\ that is executed with 
at least $0.005 price improvement;
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    \29\ FINRA proposes to clarify the Retail Investor Order 
definition for purposes of FINRA's rules to include an order 
originating from a natural person, provided that prior to 
submission, no change is made to the terms of the order with respect 
to price or side of market and the order does not originate from a 
trading algorithm or any other computerized methodology. Any member 
that operates a Trading Center may execute against a Retail Investor 
Order otherwise than on an exchange to satisfy the Retail Investor 
Order exceptions to the Tick Size Pilot. Further, any member for 
whom FINRA is the Designated Exchange Authority (``DEA'') who 
executes Retail Investor Orders must submit a signed attestation 
that substantially all orders utilizing the Retail Investor Order 
exception meet the qualifications. Finally, a member relying on an 
exception to the Trade-at Prohibition for a transaction otherwise 
than on an exchange must include all applicable modifiers in trade 
reports pursuant to FINRA Rule 6282, 6380A and 6380B. See Proposed 
FINRA Rule 6191(a)(7)(A).
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    (d) the order is executed when the Trading Center displaying the 
Protected Quotation that was traded-at was experiencing a failure, 
material delay, or malfunction of its systems or equipment;
    (e) the order is executed as part of a transaction that was not a 
``regular way'' contract;
    (f) the order is executed as part of a single-priced opening, 
reopening, or closing transaction by the Trading Center;
    (g) the order is executed when a Protected Bid is priced higher 
than a Protected Offer in the Pilot Security;
    (h) the order is identified as a Trade-at Intermarket Sweep Order 
(``ISO''); \30\
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    \30\ See Partial Amendment No. 1, supra note 6. In Partial 
Amendment No. 1, FINRA proposes to define a Trade-At ISO as a limit 
order for a Pilot Security that meets the following requirements: 1. 
When routed to a Trading Center, the limit order is identified as a 
Trade-at ISO; and 2. simultaneously with the routing of the limit 
order identified as a Trade-at ISO, one of more additional limit 
orders, as necessary, are routed to execute against the full size of 
any protected bid, in the case of a limit order to sell, or the full 
displayed size of any protected offer, in the case of a limit order 
to buy, for the Pilot Security with a price that is better than or 
equal to the limit price of the limit order identified as a Trade-at 
ISO. These additional routed orders also must be marked as Trade-at 
ISO.
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    (i) the order is executed by a Trading Center that simultaneously 
routed Trade-at ISO to execute against the full displayed size of the 
Protected Quotation with a price that is better than, or equal to, the 
limit price of the limit order identified as a Trade-at ISO;
    (j) the order is executed as part of a Negotiated Trade;
    (k) the order is executed when the Trading Center displaying the 
Protected Quotation that was traded at had displayed within one second 
prior to execution of the transaction that constituted the Trade-at, a 
Best Protected Bid or Best Protected Offer, as applicable, for the 
Pilot Security with a price that was inferior to the price of the 
Trade-at transaction.;
    (l) the order is executed by a Trading Center, which at the time of 
order receipt, had guaranteed an execution at no worse than a specified 
price (a ``stopped order'') where: (1) The stopped order was for the 
account of a customer; (2) the customer agreed to the specified price 
on an order-by-order basis; and (3) the price of the Trade-at 
transaction was, for a stopped buy order, equal to or less than the 
National Best Bid in the Pilot Security at the time of execution or, 
for a stopped sell order, equal to or greater than the National Best 
Offer in the Pilot Security at the time of execution, as long as such 
order is priced at an acceptable increment; \31\
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    \31\ See Partial Amendment No. 1, supra note 6. FINRA has 
requested an exemption from the Plan related to this provision. See 
February Exemption Request, supra note 18.

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[[Page 10293]]

    (m) the order is for a fractional share order of a Pilot Security, 
provided that such fractional share order was not the result of 
breaking an order \32\ for one or more whole shares of a Pilot Security 
into orders for fractional shares or was not otherwise effected to 
evade the requirements of the Tick Size Pilot; and
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    \32\ Additionally, no member shall break an order into smaller 
orders or otherwise effect or execute an order to evade the 
requirements of the Trade-at Prohibition or any other provisions of 
the Plan. See Proposed FINRA Rule 6191(a) Supplementary Material 
.02.
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    (n) the order is to correct a bona fide error, which is recorded by 
the Trading Center in its error account. FINRA proposes to define a 
bond fide error as: 1. The inaccurate conveyance or execution of any 
term of an order including, but not limited to, price, number of shares 
or other unit of trading; identification of the security; 
identification of the account for which securities are purchased or 
sold; lost or otherwise misplaced order tickets; short sales that were 
instead sold long or vice versa; or the execution of an order on the 
wrong side of a market; 2. the unauthorized or unintended purchase, 
sale, or allocation of securities, or the failure to follow specific 
client instructions; 3. the incorrect entry of data into relevant 
systems, including reliance on incorrect cash positions, withdrawals, 
or securities positions reflected in an account; or 4. a delay, outage, 
or failure of a communication system used to transmit market data 
prices or to facilitate the delivery or execution of an order.\33\
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    \33\ See Partial Amendment No. 1, supra note 6. FINRA has 
requested an exemption from the Plan related to this provision. See 
February Exemption Request, supra note 18.
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IV. Summary of Comments

    As noted above, the Commission received three comment letters 
concerning the proposed rule change and a response letter from 
FINRA.\34\ All three commenters discussed various aspects of the Trade-
at Prohibition. The commenters noted differences between the Trade-at 
Prohibition rules proposed by FINRA and NYSE.\35\ One commenter noted 
that the NYSE's proposal would limit a Trading Center from price 
matching a Protected Quotation to when the Trading Center is displaying 
in a principal capacity, while FINRA's proposal would not restrict 
price matching to a Trading Center's principal capacity.\36\
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    \34\ See supra note 5.
    \35\ See Securities Exchange Act Release No. 73229 (October 22, 
2015), 80 FR 66065 (October 28, 2015).
    \36\ See SIFMA Letter.
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    Two commenters expressed support for FINRA's Trade-at Prohibition 
proposal.\37\ However, one commenter stated FINRA's proposal was 
inconsistent with the goals of the Plan because it would incentivize a 
migration of trading to dark venues.\38\ This commenter stated FINRA's 
proposal would allow an alternative trading system (``ATS'') to execute 
matched trades of any of its participants at the Traded-at Protected 
Quotation if the ATS is displaying on an agency basis, a quotation of 
another participant at the Protected Quotation.\39\ The commenter noted 
that all participant orders displayed by an ATS are agency orders of 
the ATS and that trades matched by ATS participants without display are 
also agency orders of that ATS. Therefore, the commenter believes that 
FINRA's proposal would allow trades by ATS participants at the Trade-at 
Protected Quotation without that participant displaying a Protected 
Quotation. The commenter believes that the proposal allows ATS 
participants to ``free-ride'' on the displayed Protected Quotation of 
other ATS participants.\40\ The commenter stated that if implemented, 
trading would continue in dark pools at a price of displayed liquidity 
and that the proposal would result in similar trading behaviors between 
Test Group Three and Test Group Two.\41\
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    \37\ See FIF Letter and SIFMA Letter. For example, SIFMA stated 
that it believed that the Commission should approve FINRA's 
proposal.
    \38\ The commenter also indicated that the proposal did not 
follow the procedure outlined by the Plan's Operating Committee. See 
NYSE Letter.
    \39\ See NYSE Letter.
    \40\ See NYSE Letter.
    \41\ See NYSE Letter.
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    In its response, FINRA disagreed with NYSE's characterization of 
the display exception's operation as set forth in the FINRA proposal, 
and confirmed that a broker-dealer would not be permitted to trade 
based on interest that it is not responsible for displaying.\42\ FINRA 
noted that it would view a broker-dealer that matches orders in the 
over-the-counter (``OTC'') market, as principal, agent or riskless 
principal, to have ``executed'' such orders as a Trading Center for 
purposes of proposed FINRA Rule 6191(a), regardless of whether such 
broker-dealer ultimately executes and reports such trade through an OTC 
trade reporting facility, an ATS or another Trading Center. 
Accordingly, if a broker-dealer has displayed, as principal, a buy 
order at the protected bid on an exchange or Electronic Communications 
Network (``ECN'') prior to its receipt of a customer sell order, it 
could internalize that customer sell order, up to its displayed size, 
in reliance on the proposed FINRA Rule 6191(a)(6)(D)(ii)(a) exceptions. 
If, however, that broker-dealer has not displayed a principal buy order 
at the protected bid, but matches its customer order with an order for 
its own account and submits the paired orders to an ECN where another 
broker-dealer is displaying a buy order at the protected bid, the 
broker-dealer submitting the paired orders could not rely on the 
proposed display exceptions. While the ECN, as a Trading Center, could 
execute the displayed order as agent with offsetting interest because 
it was displaying an agency quotation at the protected bid, the broker-
dealer submitting the paired orders could not, as a Trading Center, 
trade with its customer order, because it was not displaying a 
principal quotation at the protected bid. Accordingly, such a 
transaction could not be effected consistent with the Trade-at 
Prohibition under the FINRA proposal.
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    \42\ As noted above, the FINRA Response Letter was also signed 
by BATS. The Commission notes that BATS has filed a proposal to 
implement the quoting and trading requirements that is similar to 
the FINRA proposal. See Securities Exchange Act Release No. 76552 
(December 3, 2015), 80 FR 76591 (December 9, 2015).
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    One commenter discussed the proposal by asking specific questions 
concerning the operation and interpretation of the Trade-at Prohibition 
and within their comment provided explanatory examples.\43\ Further, 
this commenter either requested clarifying information or sought an 
amendment to the proposal in order to further the Plan's purposes.
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    \43\ See FIF Letter.
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    Specifically, the commenter sought clarification as to whether odd 
lot orders were subject to the Trade-at Prohibition. The commenter 
indicated they believed odd lots should be allowed to execute at the 
price of the Protected Quotation under any circumstance irrespective of 
whether a Trading Center had satisfied its Trade-at Prohibition 
obligations.\44\ FINRA, in response stated that a Trading Center would 
be prevented from executing an odd lot order at the Protected Quotation 
unless an exception applied and that the proposal does not include a 
separate odd lot exception to the Trade-at Prohibition.\45\
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    \44\ This commenter noted that odd lots are not protected quotes 
themselves under Rule 611 of Regulation NMS. See FIF Letter.
    \45\ See FINRA Response Letter.
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    In addition, the commenter stated the proposal's definition of 
Block Size order, used for the Block Size exception to the Trade-at 
Prohibition, would prevent a Trading Center from

[[Page 10294]]

facilitating a block cross trade.\46\ The commenter requested that the 
proposal be amended to permit the aggregation of non-block orders as 
long as at least one component of the order was of the defined Block 
Size.\47\ In response, FINRA stated it does not believe that such an 
exception would be consistent with the Plan. FINRA believes that 
permitting the aggregation of non-block orders or permitting members to 
combine Block Size orders with non-block orders would overly broaden 
the Block Size exception and create a means by which members could 
undermine the exception.
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    \46\ According to the commenter, a ``block cross trade'' is 
block size order that includes smaller orders. The commenter noted 
that the three additional qualifications contained within the FINRA 
proposal are meant to ensure the purpose of the Trade-at Prohibition 
is not undermined. See FIF Letter. See also Proposed FINRA Rule 
6191(a)(6)(D)(i)(b).
    \47\ See FIF Letter.
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    The commenter requested that additional exceptions be provided to 
the Trade-at Prohibition within the FINRA proposal so that it would 
more closely align with the exceptions provided to Rule 611 of 
Regulation NMS.\48\ Specifically, the commenter referenced certain 
error correction transactions and certain print protection 
transactions.\49\ FINRA agreed with the commenter regarding certain 
error correction transactions and amended their proposal to incorporate 
this additional exception to the Trade-at Prohibition.\50\ FINRA stated 
that it did not believe that it would be appropriate to provide an 
exception to the Trade-at Prohibition for print protection 
transactions.\51\
---------------------------------------------------------------------------

    \48\ 17 CFR 242.611.
    \49\ The commenter noted Commission orders related to Rule 611 
of Regulation NMS. Order Exempting Certain Error Correction 
Transactions from Rule 611 of Regulation NMS under the Securities 
Exchange Act of 1934 (http://www.sec.gov/rules/exorders/2007/34-55884.pdf); Order Exempting Certain Print Protection Transactions 
from Rule 611 (http://www.sec.gov/rules/exorders/2007/34-55883.pdf). 
See FIF Letter.
    \50\ See Partial Amendment No. 1, supra note 6.
    \51\ See Partial Amendment No.1, supra note 6.
---------------------------------------------------------------------------

    The commenter also noted that for stopped orders there was a 
distinction between the applicable Rule 611 of Regulation NMS exception 
and the Trade-at Prohibition exception included within the Plan. The 
commenter provided an example where an order would satisfy Rule 611 of 
Regulation NMS but would not satisfy the Plan's Trade-at Prohibition 
exception. FINRA responded by stating it would amend the stopped trade 
exception to harmonize the stopped order exception.\52\
---------------------------------------------------------------------------

    \52\ See Partial Amendment No.1, supra note 6.
---------------------------------------------------------------------------

    The commenter sought clarification for how undisplayed liquidity is 
handled when a Trading Center receives a Trade-at ISO that is larger 
than their displayed liquidity (``Oversize ISO''). FINRA responded by 
stating that a Trade-at ISO indicates that the sending broker has 
executed against all other Protected Quotations at that price, 
satisfying the Trade-at requirements. Therefore, the Trading Center 
receiving the Trade-at ISO can fill the oversize portion of the order 
against its undisplayed liquidity.\53\
---------------------------------------------------------------------------

    \53\ See FINRA Response Letter.
---------------------------------------------------------------------------

    The commenter requested further information and clarification on 
the operation of the Trade-At Prohibition in the context of FINRA Rule 
5320.\54\ This commenter presented, and FINRA responded to, the 
following four scenarios that were unclear to the commenter.
---------------------------------------------------------------------------

    \54\ See FIF Letter.
---------------------------------------------------------------------------

    Scenario 1: The Trading Center receives a customer buy order for 
400 shares at $10.10, and facilitates this order by executing against 
protected offers at $10.00, $10.05, and $10.10. The Trading Center then 
fills the customer buy order on a riskless principal basis at an 
average price of $10.05. The commenter inquired whether the Trading 
Center would be obligated to send Trade-at ISOs to execute against the 
protected offers in allocating the fill to the customer. FINRA 
responded by stating the second leg of a riskless principal transaction 
that complies with the relevant SRO riskless principal rule would not 
constitute a separate transaction for purposes of Rule 611 of 
Regulation NMS. Similarly, FINRA believes that the second leg of a 
riskless principal transaction would not constitute a separate 
transaction for purposes of complying with the Trade-at Prohibition. 
Therefore, in filing the customer order in the example, the Trading 
Center would not need to send out ISOs to execute against the protected 
offers to comply with the Trade-at Prohibition.
    Scenario 2: The Trading Center receives a customer buy order for 
200 shares at $9.95 and a customer sell order for 200 shares at $9.95. 
The commenter inquired whether the Trading Center would need to route a 
Trade-at ISO to execute the customer sell order against the displayed 
order on the exchange. FINRA responded by stating that in the example, 
the member would be able to comply with both the FINRA Rule 5320 
obligations as well as the Trade-at Prohibition by routing a Trade-at 
ISO.\55\
---------------------------------------------------------------------------

    \55\ See FINRA Response Letter.
---------------------------------------------------------------------------

    Scenario 3: The Trading Center fills a customer buy order for 200 
shares at $9.954 pursuant to the Negotiated Trade exception to the 
Trade-at Prohibition, and the Trading Center has a customer sell order 
for $9.95. The commenter inquired whether the Trading Center may 
execute the customer sell order at $9.954 even though the Plan requires 
orders be executed in $0.05 increments. In Partial Amendment No. 1, 
FINRA proposes to permit the member to execute the customer order in a 
non-nickel increment in certain limited circumstances.
    Scenario 4: A member principally fills a customer buy order for 200 
shares at $9.949 pursuant to a Negotiated Trade exception to the Trade-
at Prohibition and owes a fill on a customer order to sell 200 shares 
with a limit price of $9.95, pursuant to FINRA Rule 5320. The commenter 
inquired whether the member may principally fill the customer order at 
$9.95 without sending a Trade-at ISO to another displayed Trading 
Center. FINRA states that the member is not displaying at the price of 
the Protected Quotation and therefore to comply with the Trade-at 
Prohibition it must route a Trade-at ISO to fill the customer sell 
order.\56\
---------------------------------------------------------------------------

    \56\ See FINRA Response Letter.
---------------------------------------------------------------------------

    The commenter sought clarification on how an order received with an 
impermissible trading increment would be handled.\57\ FINRA responded 
that firms are not permitted to change the price or terms of a customer 
order without the informed consent of the customer. Accordingly, 
whether a member may round the limit price down to the nearest valid 
increment will depend on the specific communication between the member 
and the customer.
---------------------------------------------------------------------------

    \57\ See FIF Letter. The commenter also requested clarification 
on the treatment of a variety of order types, including Good Till 
Canceled orders entered in non-nickel increments before the Pilot 
Period, indications of interest priced to execute at the mid-point, 
and market maker peg orders. FINRA noted that Test Group One permits 
indications of interest priced to execute at the mid-point. With 
regard to the other orders, FINRA noted that the Participants are 
drafting FAQs that will address the commenter's questions.
---------------------------------------------------------------------------

    The commenter sought clarification on whether Market Makers are 
obligated to send ISOs in connection with executing against Market 
Maker interest.\58\ In the commenter's example, a Market Maker is 
displayed on an exchange but may wish to trade without sending an ISO 
to its displayed interest. In response, FINRA explained that the Market 
Maker in the example was not obligated to send an ISO to trade against 
its exchange quote but would be limited to its displayed size.
---------------------------------------------------------------------------

    \58\ See FIF Letter.
---------------------------------------------------------------------------

    The commenter sought clarification on whether a Market Maker could

[[Page 10295]]

increase its quote after it had received a long-lived not held 
order.\59\ FINRA stated that the Market Maker's quote could increase 
while working a not held order as long as the price increase was not 
intentional and the Market Maker had policies and procedures to protect 
against abuse.\60\
---------------------------------------------------------------------------

    \59\ The commenter noted that the market maker may change their 
quote numerous times over the life of a long-lived order, which may 
be worked via an agency algorithm, principal/riskless principal 
fills, an agency cross or other principal fills. See FIF Letter.
    \60\ See FINRA Response Letter.
---------------------------------------------------------------------------

    Finally, one commenter expressed concern regarding the differences 
between the Participants' various proposed quoting and trading rule 
filings.\61\ The commenter noted that there are differences among the 
Participants' proposed rule changes for certain key defined terms, such 
as ``Retail Investor Order'' that should be harmonized across the 
Participants' proposed rule filings.\62\ The commenter indicated that 
if the differences persisted it would be ``virtually impossible'' for 
its members to comply with the Plan.\63\
---------------------------------------------------------------------------

    \61\ See SIFMA Letter.
    \62\ See SIFMA Letter.
    \63\ See SIFMA Letter.
---------------------------------------------------------------------------

V. Discussion and Findings

    After carefully considering the proposed rule change, the comments 
submitted, and FINRA's response to the comments, the Commission finds 
that the proposal is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities association.\64\ Specifically, the Commission finds that the 
proposed rule change is consistent with Section 15A(b)(6) of the 
Act,\65\ which requires, among other things, that FINRA's rules be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest, and are not designed to permit unfair discrimination between 
customers, issuers, brokers or dealers. In addition, the Commission 
finds that the proposed rule change is consistent with Section 
15A(b)(9) of the Act,\66\ which requires that FINRA rules not impose 
any burden on competition that is not necessary or appropriate.
---------------------------------------------------------------------------

    \64\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \65\ 15 U.S.C. 78o-3(b)(6).
    \66\ 15 U.S.C. 78o-3(b)(9).
---------------------------------------------------------------------------

    The Commission stated in the Approval Order that the Tick Size 
Pilot 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.\67\ 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 meaningful data.
---------------------------------------------------------------------------

    \67\ See Approval Order, supra note 3.
---------------------------------------------------------------------------

    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. Each self-
regulatory organization also shall, absent reasonable justification or 
excuse, enforce compliance with any such plan by its members and 
persons associated with its members.'' \68\ Proposed FINRA Rule 6191(a) 
would impose compliance obligations on its members with the trading and 
quoting requirements set forth in Section VI of the Plan. As discussed 
below, the Commission also believes 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.
---------------------------------------------------------------------------

    \68\ 17 CFR 242.608(c). See also Section II.B of the Plan which 
provides that each Participant will adopt rules requiring compliance 
by its members with provisions of the Plan. In addition, Section IV 
of the Plan requires all Participants and members of Participants to 
establish maintain and enforce written policy and procedures that 
are reasonably designed to comply with the applicable quoting and 
trading requirements specified in Section VI of the Plan for the 
Pilot Securities.
---------------------------------------------------------------------------

A. Policies and Procedures To Comply With the Plan

    Proposed FINRA Rule 6191(a)(1) provides that FINRA members must 
establish, maintain, and enforce written policies and procedures that 
are reasonably designed to meet the applicable quoting and trading 
requirements of the Plan. Proposed FINRA Rule 6191(a)(2) states that 
FINRA systems will not display quotations in violation of the Plan and 
the rule. As noted above, Sections II.B and IV of the Plan provide that 
each Participant must establish, maintain and enforce written policies 
and procedures that are reasonably designed to comply with the quoting 
and trading requirements of the Plan and adopt rules requiring 
compliance by its members with the terms of the Plan. Accordingly, 
proposed FINRA Rules 6191(a)(1) and (2) are consistent with the Act as 
they implement these Plan provisions.

B. Compliance and Pilot Securities Under $1.00 During the Pilot Period

    Proposed FINRA Rule 6191(a)(3) provides a mechanism to address 
instances where the price of a Pilot Security assigned to a Test Group 
falls below $1.00. Specifically, if the price of a Pilot Security 
assigned to a Test Group falls below $1.00 during a trading day, the 
Pilot Security would remain in its assigned Test Group. If, however, a 
Pilot Security has a Closing Price below $1.00 during any trading day, 
that Pilot Security would be moved out of its respective Test Group and 
into the Control Group.\69\ The Commission notes that the selection 
criteria for Pilot Securities were developed to minimize the likelihood 
of the inclusion of securities that trade with a share price of $1.00 
or less. However, the Commission understands that there could be 
instances over the course of the Pilot Period where a Pilot Security's 
price falls below $1.00. According to the Participants, a $0.05 quoting 
and/or trading increment could be harmful to trading for such low 
priced Pilot Securities. Accordingly, the Commission believes that this 
provision is consistent with the Act because it should help to ensure 
that the universe of Pilot Securities remains constant over the Pilot 
Period while also addressing trading concerns for Pilot Securities that 
experience a fall in price.
---------------------------------------------------------------------------

    \69\ The Commission notes that it has granted FINRA an exemption 
from Rule 608(c) related to this provision. See SEC Exemption 
Letter, supra note 18.
---------------------------------------------------------------------------

    Proposed FINRA Rule 6191(a) Supplementary material .03 specifies 
that the rule's effectiveness shall be contemporaneous with the pilot 
period. The Commission believes that this proposed rule is consistent 
with the Act because it reinforces and clarifies important dates and 
obligations under the Plan.

C. Quoting and Trading Rules for Test Group One and Test Group Two

    Proposed FINRA Rule 6191(a)(4) provides that no member may display, 
rank, or accept from any person any displayable or non-displayable bids 
or offers, orders, or indications of interest in any Pilot Security in 
Test Group One in increments other than $0.05. However, proposed FINRA 
Rule

[[Page 10296]]

6191(a)(4) also provides that orders priced to execute at the midpoint 
of the NBBO or best PBBO and orders entered in a Participant-operated 
retail liquidity program may be ranked and accepted in increments of 
less than $0.05. Finally, proposed FINRA Rule 6191(a)(4) provides that 
Pilot Securities in Test Group One may continue to trade at any price 
increment that is currently permitted by applicable Participant, SEC 
and FINRA rules. The Commission finds that proposed FINRA Rule 
6191(a)(4) is consistent with the Act because it implements provisions 
of the Plan.
    Proposed FINRA Rule 6191(a)(5) provides that no member may display, 
rank, or accept from any person any displayable or non-displayable bids 
or offers, orders, or indications of interest in any Pilot Security in 
Test Group Two in increments other than $0.05. However, proposed FINRA 
Rule 6191(a)(5) also provides that orders priced to execute at the 
midpoint of the NBBO or PBBO and orders entered in a Participant-
operated retail liquidity program may be ranked and accepted in 
increments of less than $0.05. Proposed FINRA Rule 6191(a)(5)(B) 
further provides that no member may execute an order in a Test Group 
Two Pilot Security in an increment other than $0.05, unless an 
exception applies. Pilot Securities in Test Group Two may trade in 
increments less than $0.05 when trading: (i) At the midpoint between 
the NBBO or the PBBO; (ii) Retail Investor Orders\70\ that are provided 
price improvement that is at least $0.005 better than the PBBO; (iii) 
Negotiated Trades; and (iv) customer orders to comply with FINRA Rule 
5320 following the execution of a proprietary trade that is permissible 
pursuant to Plan exception.\71\ The Commission finds that proposed 
FINRA Rules 6191(a)(5)(C)(i), (ii) and (iii) are consistent with the 
Act because they implement provisions of the Plan.
---------------------------------------------------------------------------

    \70\ See Discussion below related to the proposed Rule 
6191(a)(7)(A) related to the Retail Investor Order exception for the 
trading of Pilot Securities in Test Group Two and Test Group Three.
    \71\ See Partial Amendment No. 1, supra note 6.
---------------------------------------------------------------------------

    In Partial Amendment No. 1, FINRA proposes to add a trading 
increment exception in FINRA Rule 6191(a)(5)(C)(iv), which would allow 
the execution of a customer order following a proprietary trade by a 
FINRA member at an increment less than $0.05 in the same security, on 
the same side and at the same price as (or within the prescribed amount 
of) a customer order owed a fill pursuant to FINRA Rule 5320, where the 
triggering proprietary trade was permissible pursuant to an exception 
under the Plan. FINRA believes that this customer order protection 
exception should facilitate the ability of its members to continue to 
protect customer orders while retaining the flexibility to engage in 
proprietary trades that comply with an exception to the Plan. Based on 
the foregoing, the Commission finds that proposed FINRA Rule 
6191(a)(5)(C)(iv) is consistent with the Act.\72\
---------------------------------------------------------------------------

    \72\ The Commission notes that it has granted FINRA an exemption 
from Rule 608(c) related to this provision. See SEC Exemption 
Letter, supra note 18.
---------------------------------------------------------------------------

D. Quoting and Trading Rules for Test Group Three

    Proposed FINRA Rule 6191(a)(6)(A) provides that no member may 
display, rank, or accept from any person any displayable or non-
displayable bids or offers, orders, or indications of interest in any 
Pilot Security in Test Group Three in increments other than $0.05. 
Proposed FINRA Rule 6191(a)(6)(A) also provides that for Test Group 
Three Pilot Securities orders priced to execute at the midpoint of the 
NBBO or PBBO and orders entered in a Participant-operated retail 
liquidity program may be ranked and accepted in increments of less than 
$0.05. Proposed FINRA Rule 6191(a)(6)(B) specifies that the $0.05 
trading increment will apply to all trades, including Brokered Cross 
Trades; and that trades for Test Group Three Pilot Securities may not 
occur in increments of less than $0.05 unless there is an applicable 
exception listed in proposed Rule FINRA Rule 6191(a)(6)(C). Pursuant to 
proposed Rule FINRA Rule 6191(a)(6)(C), Test Group Three Pilot 
Securities may trade in increments less than $0.05 when trading: (i) At 
the midpoint between the NBBO or the PBBO; (ii) Retail Investor Orders 
\73\ that are provided price improvement that is at least $0.005 better 
than the PBBO and; (iii) Negotiated Trades; and (iv) customer orders to 
comply with FINRA Rule 5320 following the execution of a proprietary 
trade that is permissible pursuant to Plan exception.\74\
---------------------------------------------------------------------------

    \73\ See Discussion below related to the proposed FINRA Rule 
6191(a)(7)(A) related to the Retail Investor Order exception for the 
trading of Pilot Securities in Test Group Two and Test Group Three.
    \74\ See Partial Amendment No. 1, supra note 6.
---------------------------------------------------------------------------

    The Commission finds that proposed FINRA Rule 6191(a)(6)(A), 
proposed FINRA Rule 6191(a)(6)(B), and proposed FINRA Rules 
6191(a)(6)(C)(i), (ii) and (iii) are consistent with the Act because 
they implement provisions of the Plan. In addition, as discussed 
above,\75\ the Commission finds that proposed FINRA Rule 
6191(a)(6)(C)(iv) is consistent with the Act.
---------------------------------------------------------------------------

    \75\ See Section V.C above related to the discussion of proposed 
FINRA Rule 6191(a)(5)(C)(iv). The Commission notes that it has 
granted FINRA an exemption from Rule 608(c) related to this 
provision. See SEC Exemption Letter, supra note 18.
---------------------------------------------------------------------------

1. Quoting and Trading Rules for Test Group Three: Trade-at Prohibition
    Proposed FINRA Rule 6191(a)(6)(D) describes the Trade-at 
Prohibition and the exceptions applicable thereto.\76\ Specifically, 
proposed FINRA Rule 6191(a)(6)(D)(i) sets forth that absent any of the 
exceptions listed in subparagraph (D)(ii), no member that operates a 
Trading Center may execute a sell order for a Pilot Security in Test 
Group Three at the price of a Protected Bid or execute a buy order for 
a Pilot Security in Test Group Three at the price of a Protected Offer 
during regular trading hours (i.e., the Trade-at Prohibition). Proposed 
FINRA Rule 6191(a)(6)(D)(i) also states that under the Trade-at 
Prohibition, a member that operates a Trading Center that is displaying 
a quotation, via either a processor or an SRO quotation feed, that is 
at a price equal to the traded-at Protected Bid or Protected Offer is 
permitted to execute orders at that level, but only up to the amount of 
its displayed size. Finally, proposed FINRA Rule 6191(a)(6)(D)(i) 
states that a member that operates a Trading Center that was not 
displaying a quotation at a price equal to the traded-at Protected 
Quotation, via either a processor or an SRO quotation feed, is 
prohibited from price-matching protected quotations unless an exception 
applies.
---------------------------------------------------------------------------

    \76\ The Commission notes that one commenter submitted extensive 
interpretative questions on the implementation and operation to the 
Trade-at Prohibition. See FIF Letter. As noted above, FINRA provided 
detailed responses to the interpretative questions. See FINRA 
Response Letter. The Commission understands that the Participants 
are developing interpretative guidance on the quoting and trading 
rules under the Plan and expects that Participants will continue to 
work with market participants on the implementation of the quoting 
and trading rules of the Tick Size Pilot.
---------------------------------------------------------------------------

    Proposed FINRA Rule 6191(a)(6)(D)(ii) lists the exceptions to the 
Trade-at Prohibition.\77\ The proposed exceptions set forth in FINRA 
Rules 6191(a)(6)(D)(ii)(c) through (g), (j), (k), and (m) mirror the 
exceptions set forth in the Plan.\78\ The Commission

[[Page 10297]]

finds these exceptions to be consistent with the Act because they 
implement Plan provisions.
---------------------------------------------------------------------------

    \77\ One commenter requested that odd lot orders be exempt from 
the Trade-at Prohibition. See FIF Letter. The Commission notes that 
the Approval Order addressed odd lot orders under the Trade-at 
Prohibition. See Approval Order, supra note 3.
    \78\ See Section VI.D(3) through (7), (10), (11) and (13) of the 
Plan.
---------------------------------------------------------------------------

    In proposed FINRA Rule 6191(a)(6)(D)(ii)(a), FINRA proposes to 
implement the display exception to the Trade-at Prohibition. As 
proposed, FINRA has added several details about its operation and 
implementation. For example, FINRA proposes that a Trading Center that 
uses independent aggregation units execute orders within the same 
independent aggregation unit that displayed the quotation. In addition, 
FINRA proposes to specify that Trading Centers that display a quotation 
as agent or riskless principal may only execute as agent or riskless 
principal. If the Trading Center is displaying a quotation as principal 
(excluding riskless principal), the Trading Center may execute as 
principal, agent or riskless principal.
    As noted above, one commenter suggested that FINRA's proposal would 
create an incentive for trading in Test Group Three to migrate to dark 
venues.\79\ According to the commenter, FINRA's proposal would permit a 
non-displayed Trading Center to submit matched trades to an ATS that 
was displaying on an agency basis the quotation of another ATS 
subscriber.\80\ FINRA responded that it did not believe this scenario 
could occur under its proposal, and confirmed that the broker-dealer 
submitting the matched trade could not, as a Trading Center trade with 
its customer order because it was not displaying a principal quotation. 
The Commission finds that FINRA's proposed Rule 6191(a)(6)(D)(ii)(a) to 
be consistent with the Act. The Commission believes that FINRA's 
proposed rule clarifies the operation of the display exception in a 
manner consistent with the goals of the Plan. First, a Trading Center 
would only be able to execute an order in the same capacity in which it 
has displayed a quotation. Accordingly, a Trading Center could not rely 
on an agency quotation to execute on a principal basis. Further, a 
Trading Center that uses independent aggregation units would be 
restricted in its ability to rely on quotations displayed by other 
independent aggregation units. As noted above, a Trading Center that 
utilizes independent aggregation units may only execute an order in the 
independent aggregation unit that displayed the quotation. The 
Commission believes that these additional rules implement the display 
exception to the Trade-at Prohibition in a manner that should incent 
the display of liquidity.\81\
---------------------------------------------------------------------------

    \79\ See NYSE Letter.
    \80\ Id.
    \81\ See Approval Order, supra note 3. In the Approval Order, 
the Commission stated that the Trade-at Prohibition should test 
whether market participants are incentivized to display more 
liquidity in a wider tick environment.
---------------------------------------------------------------------------

    Proposed FINRA Rule 6191(a)(6)(D)(ii)(b) sets forth the exception 
to the Trade-at Prohibition for orders of Block Size. FINRA proposes 
additional provisions with respect to Block Size orders including that 
orders at the time of origin may not be: (1) An aggregation of non-
block orders; (2) broken into orders smaller than Block Size prior to 
submitting the order to a Trading Center for execution; or (3) executed 
on multiple Trading Centers.
    As noted above, one commenter suggested that these additional 
provisions would limit firms' ability to facilitate block cross 
trades.\82\ FINRA responded that the additional criteria would clarify 
this Trade-at Prohibition exception. Further, FINRA noted that 
permitting the aggregation of non-block orders or permitting members to 
combine a block order with non-block orders would overly expand the 
scope of the exception.
---------------------------------------------------------------------------

    \82\ See FIF Letter.
---------------------------------------------------------------------------

    The Commission believes that the additional criteria for the Block 
Size exception are consistent with the Act. In the Approval Order, the 
Commission modified the Block Size definition for the purposes of the 
Plan to more closely reflect the trading characteristics of potential 
Pilot Securities.\83\ The Commission believes proposed FINRA Rule 
6191(a)(6)(D)(ii)(b) appropriately limits the scope and applicability 
of the Block Size exception, and should help to exclude trades and 
order handling scenarios that were not contemplated or intended to be 
considered for an exception for the Trade-at Prohibition.
---------------------------------------------------------------------------

    \83\ See Approval Order, supra note 3.
---------------------------------------------------------------------------

    Proposed FINRA Rule 6191(a)(6)(D)(ii)(h) sets forth the exception 
to the Trade-at Prohibition for orders identified as Trade-at ISO. In 
Partial Amendment No. 1, FINRA proposes to clarify the definition of a 
Trade-at ISO for purposes of the exception. Specifically, FINRA 
proposes to define Trade-At ISO as a limit order for a Pilot Security 
that meets the following requirements: (1) When routed to a Trading 
Center, the limit order is identified as a Trade-at ISO; and (2) 
simultaneously with the routing of the limit order identified as a 
Trade-at ISO, one of more additional limit orders, as necessary, are 
routed to execute against the full size of any protected bid, in the 
case of a limit order to sell, or the full displayed size of any 
protected offer, in the case of a limit order to buy, for the Pilot 
Security with a price that is better than or equal to the limit price 
of the limit order identified as a Trade-at ISO. These additional 
routed orders also must be marked as Trade-at ISO.\84\
---------------------------------------------------------------------------

    \84\ See Proposed FINRA Rule 6191(a)(7)(B)(i).
---------------------------------------------------------------------------

    According to FINRA, the use of the term ISO as set forth in the 
Plan could be unclear in Test Group Three.\85\ As noted in FINRA's 
Partial Amendment No. 1, an ISO may mean that the sender of the ISO has 
swept better-priced protected quotations, so that the recipient of that 
ISO may trade through the price of the protected quotation (in 
compliance with Rule 611 of Regulation NMS \86\), or it could mean that 
the sender of the ISO has swept protected quotations at the same price 
at which it wishes to execute (in addition to any better-priced 
quotations), so that the recipient of that ISO may trade at the price 
of the protected quotation (as an exception to the Trade-at 
Prohibition). Accordingly, since the meaning of an ISO may differ under 
Rule 611 of Regulation NMS and the Trade-at Prohibition under the Plan, 
FINRA proposes Rule 6191(a)(6)(D)(ii)(h) to reflect that the order is a 
Trade-at ISO so that a receiving Trading Center in a Test Group Three 
Pilot Security would know, upon receipt of that Trade-at ISO, that the 
Trading Center that sent the Trade-at ISO had already executed against 
the full size of displayed quotations at that price (e.g., the 
recipient of that Trade-at ISO could permissibly trade at the price of 
the protected quotation). In addition, FINRA proposes to make a 
corresponding change to FINRA Rule 6191(a)(6)(D)(ii)(i).
---------------------------------------------------------------------------

    \85\ Section VI.D(8) of the Plan provides an exception to the 
Trade-at Prohibition for ISOs. In addition, Section I(MM) defined a 
Trade-at ISO as a limit order for a Pilot Security that meets the 
following requirements: (1) When routed to a Trading Center, the 
limit order is identified as an ISO; and (2) simultaneously with the 
routing of the limit order identified as an ISO, one or more 
additional limit orders, as necessary, are routed to execute against 
the full displayed size of any protected bid, in the case of a limit 
order to sell, or the full displayed size of any protected offer, in 
the case of a limit order to buy, for the Pilot Security with a 
price that is equal to the limit price of the limit order identified 
as an ISO. These additional routed orders also must be market as 
ISO.
    \86\ 17 CFR 242.611.
---------------------------------------------------------------------------

    The Commission believes that proposed FINRA Rule 
6191(a)(6)(D)(ii)(h) and FINRA Rule 6191(a)(6)(D)(ii)(i) are consistent 
with the Act because they clarify the use and operation of ISOs under 
the Plan. The definition in the Plan provided that an ISO received 
under the Plan would indicate to the recipient that orders to

[[Page 10298]]

execute against the full displayed size at a price equal to the ISO's 
limit price had been routed. However, the Commission understands that 
the use of the term ISO in connection with the exception to the Trade-
at Prohibition could cause confusion. Therefore, the Commission 
believes that FINRA's proposal should clarify the use of ISOs under the 
Plan and facilitate their implementation.
    Proposed FINRA Rule 6191(a)(6)(D)(ii)(l) sets forth an exception to 
the Trade-at Prohibition for stopped orders. A stopped order is defined 
as an order executed by a Trading Center which, at the time of order 
receipt, the Trading Center had guaranteed an execution at no worse 
than a specified price where: (1) The stopped order was for the account 
of a customer; (2) the customer agreed to the specified price on an 
order-by-order basis; and (3) the price of the Trade-at transaction 
was, for a stopped buy order, equal to or less than the National Best 
Bid in the Pilot Security at the time of execution or, for a stopped 
sell order, equal to or greater than the National Best Offer in the 
Pilot Security at the time of execution, as long as such order is 
priced at an acceptable increment.
    As noted above, one commenter raised questions about how the 
stopped order exception would operate as an exception to the Trade-at 
Prohibition.\87\ In Partial Amendment No. 1, FINRA amended the rule 
text of proposed FINRA Rule 6191(a)(6)(D)(ii)(l) to clarify its 
operation under the Trade-at Prohibition. The Commission finds that 
proposed FINRA Rule 6191(a)(6)(D)(ii)(l), as modified by Partial 
Amendment No. 1, is consistent with the Act because it implements the 
Plan provision is a manner that clarifies its operation for these order 
types.\88\
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    \87\ See FIF Letter.
    \88\ The Commission notes that it has granted FINRA an exemption 
from Rule 608(c) related to this provision. See SEC Exemption 
Letter, supra note 18.
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    In Partial Amendment No. 1, FINRA proposes an additional exception 
to the Trade-at Prohibition.\89\ Specifically, proposed FINRA Rule 
6191(a)(6)(D)(ii)(n) sets forth an exception to the Trade-at 
Prohibition for ``bona fide errors.'' \90\ Proposed FINRA Rule 
6191(a)(6)(D)(ii)(n) provides an exception to the Trade-at Prohibition 
where the order is to correct a bona fide error, which is recorded by 
the Trading Center in its error account. The proposed definition for a 
``bona fide error'' is: (i) The inaccurate conveyance or execution of 
any term of an order including, but not limited to, price, number of 
shares or other unit of trading; identification of the security; 
identification of the account for which securities are purchased or 
sold; lost or otherwise misplaced order tickets; short sales that were 
instead sold long or vice versa; or the execution of an order on the 
wrong side of a market; (ii) the unauthorized or unintended purchase, 
sale, or allocation of securities, or the failure to follow specific 
client instructions; (iii) the incorrect entry of data into relevant 
systems, including reliance on incorrect cash positions, withdrawals, 
or securities positions reflected in an account; or (iv) a delay, 
outage, or failure of a communication system used to transmit market 
data prices or to facilitate the delivery or execution of an order.\91\ 
In order to utilize this exception to the Trade-at Prohibition, the 
following conditions must be met: (1) The bona fide error must be 
evidenced by objective facts and circumstances, the Trading Center must 
maintain documentation of such facts and circumstances, and the Trading 
Center must record the transaction in its error account; (2) the 
Trading Center must establish, maintain, and enforce written policies 
and procedures that are reasonably designed to address the occurrence 
of errors and, in the event of an error, the use and terms of a 
transaction to correct the error in compliance with this exception; and 
(3) the Trading Center must regularly surveil to ascertain the 
effectiveness of its policies and procedures to address errors and 
transactions to correct errors and takes prompt action to remedy 
deficiencies in such policies and procedures.\92\
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    \89\ This additional exception was requested by a commenter. See 
FIF Letter.
    \90\ The Commission notes that one commenter suggested that 
there should be a print protection exception to the Trade-at 
Prohibition that corresponds to the print protection exemption that 
is applicable to Rule 611 of Regulation NMS. See FIF Letter. The 
Commission does not agree that a print protection exception would be 
consistent with the Trade-At Prohibition in the Plan. First, the 
print protection exemption applicable to Rule 611 is inconsistent 
with the Trade-at Prohibition because the Rule 611 print protection 
exemption explicitly contemplates protection for both displayed and 
reserve (undisplayed) size of orders. In this regard, the Commission 
believes that such an exception for the Trade-at Prohibition often 
will be unnecessary because a print protection exception for the 
Trade-at Prohibition would need to be premised upon a displayed 
customer order, which already is excepted from the Trade-at 
Prohibition if it satisfies the requirements of proposed FINRA Rule 
6191(a)(6)(D)(i) and the Plan. Moreover, providing a print 
protection exemption from the Trade-At Prohibition would create the 
potential for trading scenarios that would result in better-priced, 
displayed orders being bypassed for the execution of inferior, same-
priced orders. The Commission believes such a result is inconsistent 
with the Plan in general, and the Trade-at Prohibition in 
particular. Finally, the Commission notes that FINRA represents that 
the print protection exemption applicable to Rule 611 of Regulation 
NMS is rarely used by its members.
    \91\ Absent a bona fide error as defined above, the proposed 
exception would not apply to a broker dealer's mere failure to 
execute a not-held order in accordance with a customer's 
expectations.
    \92\ See Partial Amendment No. 1, supra note 6. See also 
Securities Exchange Act Release No. 55884 (June 8, 2007), 72 FR 
32926 (June 14, 2007).
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    The Commission finds that the exception to the Trade-at Prohibition 
for the correction of bona fide errors is consistent with the Act.\93\ 
The Commission believes that this exception should promote efficiency 
and the best execution of investor orders. As noted in the Commission's 
order exempting such orders from Rule 611 of Regulation NMS, the 
exemption will allow Trading Centers to execute error correction 
transactions at the appropriate prices to correct bona fide errors 
without having to qualify for one of the exceptions to the Trade-at 
Prohibition.\94\
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    \93\ The Commission notes that the conditions for a bona fide 
error exception for the Trade-at Prohibition would be consistent 
with the corresponding bona fide error exemption for Rule 611 would 
apply only to the error correction transaction itself and would not, 
for example, apply to any subsequent trades effected by a Trading 
Center to eliminate a proprietary position connected with the error 
correction transaction or a broker dealer's mere failure to execute 
a not-held order in accordance with a customer's expectations. See 
also Securities Exchange Act Release No. 55884 (June 8, 2007), 72 FR 
32926 (June 14, 2007).
    \94\ The Commission notes that it has granted FINRA an exemption 
from Rule 608(c) related to this provision. See SEC Exemption 
Letter, supra note 18.
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    Proposed FINRA Rule 6191(a)(7)(A) addresses the execution of Retail 
Investor Orders other than on a national securities exchange.\95\ FINRA 
proposes that any member that operates a Trading Center may execute 
against an order received directly from a natural person that did not 
originate from a trading algorithm or any other computerized 
methodology. This proposed provision generally tracks the Plan's 
definition of ``Retail Investor Order'' while allowing a member to 
execute against orders received directly from retail customers. FINRA 
contends that in the absence of this proposal, many orders that are 
currently sent to Trading Centers that otherwise satisfy the Retail 
Investor Order definition would not be eligible for the exceptions of 
the Plan in the OTC market solely due to the capacity (or lack thereof) 
of that order.
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    \95\ Proposed Rule 6191(a)(7)(A)(iii) provides that any member 
for which FINRA is the DEA that operates a Trading Center and 
executes Retail Investor Orders must submit a signed attestation to 
FINRA that substantially all orders to be executed as Retail 
Investor Orders will qualify as such under this Rule. The Plan 
provides that the Trading Center executing a Retail Investor Order 
must sign an attestation that substantially all orders to be 
executed as Retail Investor Orders will qualify as such under the 
Plan.

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[[Page 10299]]

    The Plan defines a Retail Investor Order as an agency or riskless 
principal order. Therefore, according to FINRA orders received directly 
from a customer, without an accompanying capacity, and executed by the 
receiving Trading Center would not currently fall within the scope of 
the Plan's definition of ``Retail Investor Order'' and the 
corresponding exceptions from the $0.05 trading increment in Test 
Groups Two and Three.
    The Commission believes that proposed FINRA Rule 6191(a)(7)(A) is 
consistent with the Act as it implements provisions of the Plan. The 
provisions related to Retail Investor Orders permit such orders to 
receive price improvement. In the Approval Order, the Commission noted 
that allowing Retail Investor Orders to receive price improvement could 
minimize some of the concerns related to costs for retail investors. 
FINRA's proposal to accommodate price improvement for Retail Investor 
Orders executed in the OTC market is consistent with the intent and 
goals of the Plan for such orders.
    The Commission finds that the FINRA proposal to implement the Tick 
Size Pilot quoting and trading requirements, including the 
Supplementary Material, are consistent with the Act. The proposal 
clarifies and implements the quoting and trading requirements set forth 
in the Plan.

VI. Solicitation of Comments of Partial Amendment No. 1

    Interested persons are invited to submit written data, views, and 
arguments concerning Partial Amendment No. 1, including whether the 
proposed rule change, as modified by Partial Amendment No. 1, 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-2015-047 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-2015-047. 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 the Exchange. 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-2015-047 and should be 
submitted on or before March 21, 2016.

VII. Accelerated Approval of Proposed Rule Change, as Modified by 
Partial Amendment No. 1

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act, to approve the proposed rule change, as modified by Partial 
Amendment No. 1, prior to the 30th day after the date of publication of 
Partial Amendment No. 1 in the Federal Register. Partial Amendment No. 
1 amends four of the requirements set forth in this proposed rule 
change. First, FINRA proposes to add an exception to permit members to 
fill a customer order in a Pilot Security in Test Group Two or Three at 
a non-nickel increment to comply with FINRA Rule 5320 (Prohibition 
Against Trading Ahead of Customer Orders) under limited circumstances. 
Second, FINRA is amending the proposal to adopt an exception to the 
Trade-at Prohibition for certain error correction transactions. Third, 
FINRA is proposing to modify the stopped order exception to the Trade-
at Prohibition to clarify its operation under the Plan. Finally, FINRA 
is proposing to clarify the use of ISOs in connection with the Trade-at 
Prohibition.
    FINRA believes that the change to allow members to fill a customer 
order at a non-nickel increment to comply with Rule 5320 under limited 
circumstances best facilitates the ability of members to continue to 
protect customer orders while retaining the flexibility to engage in 
proprietary trades that comply with an exception to the Plan. FINRA 
believes adding an exception to the Trade-at Prohibition for error 
correction transactions is appropriate as this exception is equally 
applicable to the Trade-at Prohibition as to Rule 611 of Regulation 
NMS, and that adopting this exception appropriately aligns the 
requirements of the Trade-at Prohibition with Rule 611 of Regulation 
NMS. Similarly, FINRA believes that amending the stopped order 
exception will result in more consistent treatment under Regulation NMS 
and the Plan, which should ease compliance burdens for members. 
Finally, FINRA believes that amending the reference to ISOs in 
connection with the Trade-at Prohibition is consistent with the Act 
because it will better align that reference to the definition of 
``Trade-At Intermarket Sweep Order'' as set forth in the Plan.
    Based on the foregoing, the Commission believes that the changes 
to: (1) Add an exception to FINRA Rule 6191(a)(5)(C)(iv) and 
6191(a)(6)(C)(iv) to permit members to fill a customer order in a Pilot 
Security at a non-nickel increment to comply with FINRA Rule 5320 under 
limited circumstances, (2) create an exception to the Trade-at 
Prohibition for certain error correction transactions, (3) modify the 
stopped order exception to the Trade-at Prohibition, and (4) to clarify 
the use of ISOs in connection with the Trade-at Prohibition are all 
consistent with the Act. Accordingly, the Commission finds good cause 
for approving the proposed rule change, as modified by Partial 
Amendment No. 1, on an accelerated basis, pursuant to Section 19(b)(2) 
of the Act.

VIII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\96\ that the proposed rule change, as modified by Partial Amendment 
No. 1 (SR-FINRA-2015-047) be, and it hereby is, approved on an 
accelerated basis.
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    \96\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\97\
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    \97\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-04320 Filed 2-26-16; 8:45 am]
 BILLING CODE 8011-01-P