Document ID: SEC-2015-1982-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2015-11-25T05:00Z

[Federal Register Volume 80, Number 227 (Wednesday, November 25, 2015)]
[Notices]
[Pages 73853-73858]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-29930]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76483; File No. SR-FINRA-2015-047]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of 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

November 19, 2015.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on November 13, 2015, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to adopt FINRA Rule 6191 to implement the 
quoting and trading requirements of the Regulation NMS Plan to 
Implement a Tick Size Pilot Program (``Plan'').
    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal office of FINRA and at 
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    On August 25, 2014, NYSE Group, Inc., on behalf of Financial 
Industry Regulatory Authority, Inc. (``FINRA''), BATS Exchange, Inc., 
BATS Y-Exchange, Inc., Chicago Stock Exchange, Inc., EDGA Exchange, 
Inc., EDGX Exchange, 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''), 
filed with the Commission, pursuant to Section 11A of the Act \3\ and 
Rule 608 of Regulation NMS thereunder, the Plan to implement a tick 
size pilot program (``Pilot'').\4\ The Participants filed the Plan to 
comply with an order issued by the Commission on June 24, 2014.\5\ The 
Plan \6\ was published for comment in the Federal Register on November 
7, 2014, and approved by the Commission, as modified, on May 6, 
2015.\7\
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    \3\ 15 U.S.C. 78k-1.
    \4\ See Letter from Brendon J. Weiss, Vice President, 
Intercontinental Exchange, Inc., to Secretary, Commission, dated 
August 25, 2014.
    \5\ See Securities Exchange Act Release No. 72460 (June 24, 
2014), 79 FR 36840 (June 30, 2014).
    \6\ Unless otherwise specified, capitalized terms used in this 
rule filing are defined as set forth in the Plan. FINRA also 
proposes supplementary material as part of this proposed rule change 
to, among other things, provide that the terms used in proposed Rule 
6191 shall have the same meaning as provided in the Plan, unless 
otherwise specified.
    \7\ See Securities Exchange Act Release No. 74892 (May 6, 2015), 
80 FR 27514 (May 13, 2015) (``Approval Order'').
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    The Plan 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 small-
capitalization companies. Each Participant is required to comply with, 
and to enforce compliance by its members, as applicable, with the 
provisions of the Plan. As is described more fully below, the proposed 
rules would require members to comply with the applicable quoting and 
trading increments for Pilot Securities.\8\
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    \8\ Proposed Rule 6191 shall be in effect during a pilot period 
to coincide with the pilot period for the Plan (including any 
extensions to the pilot period for the Plan).
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    The Pilot Securities will include stocks of companies with $3 
billion or less in market capitalization, an average daily trading 
volume of one million shares or less, and a volume weighted average 
price of at least $2.00 for every trading day. The Pilot will consist 
of a Control Group of approximately 1400 Pilot Securities and three 
test groups with 400 Pilot Securities in each selected by a stratified 
sampling.\9\ During the pilot, Pilot securities in the Control Group 
will be quoted and traded at the currently permissible increments. 
Pilot Securities in the first test group (``Test Group One'') will be 
quoted in $0.05 minimum increments but will continue to trade at any 
price increment that is currently permitted.\10\ Pilot Securities in 
the second test group (``Test Group Two'') will be quoted in $0.05 
minimum increments and will trade at $0.05 minimum increments subject 
to a midpoint exception, a retail investor order exception, and a 
negotiated trade exception.\11\ Pilot Securities in the third test 
group (``Test Group Three'') will be subject to the same restrictions 
as Test Group Two and also will be subject to the ``Trade-at'' 
requirement to prevent price matching by a market participant that is 
not displaying at the price of a Trading

[[Page 73854]]

Center's \12\ ``Best Protected Bid'' or ``Best Protected Offer,'' 
unless an enumerated exception applies.\13\ In addition to the 
exceptions provided under Test Group Two, an exception for Block Size 
orders and exceptions that mirror those under Rule 611 of Regulation 
NMS \14\ apply to the Trade-at requirement.
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    \9\ See Section V of the Plan for identification of Pilot 
Securities, including criteria for selection and grouping.
    \10\ See Section VI(B) of the Plan.
    \11\ See Section VI(C) of the Plan.
    \12\ The Plan incorporates the definition of ``Trading Center'' 
from Rule 600(b)(78) of Regulation NMS. Regulation NMS defines a 
Trading Center as ``a national securities exchange or national 
securities association that operates an SRO trading facility, an 
alternative trading system, an exchange market maker, an OTC market 
maker, or any other broker or dealer that executes orders internally 
by trading as principal or crossing orders as agent.''
    \13\ See Section VI(D) of the Plan.
    \14\ 17 CFR 242.611.
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Compliance With the Quoting and Trading Increments of the Plan
    The Plan requires FINRA to establish, maintain, and enforce written 
policies and procedures that are reasonably designed to comply with 
applicable quoting and trading requirements specified in the Plan.\15\ 
Accordingly, FINRA is proposing new Rule 6191 (Compliance with 
Regulation NMS Plan to Implement a Tick Size Pilot Program) to require 
members to comply with the Plan.
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    \15\ FINRA is also required by the Plan to develop appropriate 
policies and procedures that provide for data collection and 
reporting to the Commission of data described in Appendixes B and C 
of the Plan. FINRA is separately proposing rules that would require 
compliance by FINRA members with the data collection and submission 
provisions of the Plan described in Section VII of the Plan, and has 
reserved Paragraph (b) for such rules.
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    Proposed Rule 6191(a) (Compliance with Quoting and Trading 
Restrictions) (the ``Rule'') sets forth the requirements for FINRA and 
FINRA members in meeting their quoting and trading obligations, as 
applicable, under the Plan. Rule 6191(a)(1) will require members to 
establish, maintain and enforce written policies and procedures that 
are reasonably designed to comply with the applicable quoting and 
trading requirements of the Plan. Rule 6191(a)(2) provides that FINRA 
systems will not display quotations in violation of the Plan and this 
Rule.
    Proposed Rule 6191(a)(3) clarifies the treatment of Pilot 
Securities that drop below $1.00 during the Pilot Period. In 
particular, Rule 6191(a)(3) provides that, if the price of a Pilot 
Security drops below $1.00 during regular trading hours on any trading 
day, such Pilot Security will continue to be a Pilot Security subject 
to the Plan. However, if the Closing Price of a Pilot Security on any 
given trading day is below $1.00, such Pilot Security will be moved out 
of its Pilot Test Group into the Control Group, and may then be quoted 
and traded at any price increment that is currently permitted for the 
remainder of the Pilot Period. Rule 6191(a)(3) also provides that, 
notwithstanding anything contained within these rules to the contrary, 
Pilot Securities (whether in the Control Group or any Pilot Test Group) 
will continue to be subject to the data collection requirements of the 
Plan at all times during the Pilot Period and for the six-month period 
following the end of the Pilot Period.
    In approving the Plan, the Commission noted that the Participants 
had proposed additional selection criteria to minimize the likelihood 
that securities that trade with a share price of $1.00 or less would be 
included in the Pilot, and stated that, once established, the universe 
of Pilot Securities should stay as consistent as possible so that the 
analysis and data can be accurate throughout the Pilot Period.\16\ 
FINRA notes that a Pilot Security that drops below $1.00 during regular 
trading hours will remain in its applicable Test Group; a Pilot 
Security will only be moved to the Control Group if its Closing Price 
on any given trading day is below $1.00. FINRA believes that this 
provision is appropriate because it will help ensure that Pilot 
Securities in Test Groups One, Two and Three continue to reflect the 
Pilot's selection criteria, helping ensure that they yield useful data. 
FINRA also believes that this provision is appropriate because it 
responds to comments that the Plan address the treatment of securities 
that trade below $1.00 during the Pilot Period.\17\
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    \16\ See Approval Order, supra note 7, 80 FR at 27535.
    \17\ See Approval Order, supra note 7, 80 FR at 27535. FINRA 
notes that this proposed change is also the subject of an 
application for exemptive relief from the Plan, filed pursuant to 
Rule 608(e) of Regulation NMS by NYSE on behalf of all the 
Participants. See Letter from Elizabeth K. King, NYSE, to Brent J. 
Fields, Secretary, Commission, dated October 14, 2015.
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    Proposed Rule 6191(a)(4) sets forth the applicable limitations for 
securities in Test Group One. Consistent with the language of the Plan, 
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, orders priced to execute 
at the midpoint of the national best bid and national best offer 
(``NBBO'') or best protected bid and best protected offer (``PBBO'') 
\18\ and orders entered in a Participant-operated retail liquidity 
program may be ranked and accepted in increments of less than $0.05. 
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.
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    \18\ Regulation NMS defines a protected bid or protected offer 
as a quotation in an NMS stock that (1) is displayed by an automated 
trading center; (2) is disseminated pursuant to an effective 
national market system plan; and (3) is an automated quotation that 
is the best bid or best offer of a national securities exchange, the 
best bid or best offer of The Nasdaq Stock Market, Inc., or the best 
bid or best offer of a national securities association other than 
the best bid or best offer of The Nasdaq Stock Market, Inc. See 17 
CFR 242.600(57). In the Approval Order, the Commission noted that 
the protected quotation standard encompasses the aggregate of the 
most aggressively priced displayed liquidity on all Trading Centers, 
whereas the NBBO standard is limited to the single best order in the 
market. See Approval Order, supra note 7, 80 FR at 27539.
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    Proposed Rule 6191(a)(5) sets forth the applicable quoting and 
trading requirements for securities in Test Group Two. This provision 
states 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, 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 Rule 6191(a)(5) also sets forth the applicable trading 
restrictions for Test Group Two securities. Absent any of the 
exceptions listed in the Rule, no member may execute orders in any 
Pilot Security in Test Group Two in price increments other than $0.05. 
The $0.05 trading increment will apply to all trades, including 
Brokered Cross Trades.\19\
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    \19\ A brokered cross trade is 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 Section 
I(G) of the Plan.
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    Consistent with the language of the Plan, the proposed Rule 
provides that Pilot Securities in Test Group Two may trade in 
increments of less than $0.05 under the following circumstances: (1) 
Trading may occur at the midpoint between the NBBO or the PBBO; (2) 
Retail Investor Orders may be provided with price improvement that is 
at least $0.005 better than the PBBO; and (3) Negotiated Trades may 
trade in increments of less than $0.05.
    Proposed Rule 6191(a)(6) sets forth the applicable quoting and 
trading restrictions for Pilot Securities in Test Group Three. The 
proposed Rule provides that no member may display, rank, or accept from 
any person any displayable or non-displayable bids or

[[Page 73855]]

offers, orders, or indications of interest in any Pilot Security in 
Test Group Three in increments other than $0.05. However, 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. The rule also states that, 
absent any of the applicable exceptions, no member that operates a 
Trading Center may execute orders in any Pilot Security in Test Group 
Three in price increments other than $0.05. The $0.05 trading increment 
will apply to all trades, including Brokered Cross Trades.
    Proposed Rule 6191(a)(6)(C) sets forth the exceptions pursuant to 
which Pilot Securities in Test Group Three may trade in increments of 
less than $0.05. First, trading may occur at the midpoint between the 
NBBO or PBBO. Second, Retail Investor Orders may be provided with price 
improvement that is at least $0.005 better than the PBBO. Third, 
Negotiated Trades may trade in increments of less than $0.05.
    Proposed Rule 6191(a)(6)(D) sets forth the ``Trade-at 
Prohibition,'' which is the prohibition against executions by a member 
that operates a Trading Center of a sell order for a Pilot Security in 
Test Group Three at the price of a Protected Bid or the execution of a 
buy order for a Pilot Security in Test Group Three at the price of a 
Protected Offer during regular trading hours, absent any of the 
exceptions set forth in Rule 6191(a)(6)(D). Consistent with the Plan, 
the proposed Rule reiterates that a member that operates a Trading 
Center that is displaying a quotation, via either a processor or an SRO 
quotation feed, that is at the price of a 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 that is the same price as a 
Protected Quotation, via either a processor or an SRO quotation feed, 
is prohibited from price-matching protected quotations unless an 
exception applies.
    Consistent with the Plan, proposed Rule 6191(a)(6)(D) also sets 
forth the exceptions to the Trade-at prohibition, pursuant to which a 
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. The first exception to the Trade-at 
Prohibition is the ``display exception,'' which allows a trade to occur 
at the price of the Protected Quotation, up to the Trading Center's 
full displayed size, if the order ``is executed by a trading center 
that is displaying a quotation.'' \20\
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    \20\ See Section VI(D)(1) of the Plan.
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    In Rule 6191(a)(6)(D), FINRA proposes that a member that utilizes 
the independent aggregation unit concept may satisfy the display 
exception only if the same independent aggregation unit that displays 
interest via either a processor or an SRO Quotation Feed also executes 
an order in reliance upon this exception. The rule provides that 
``independent aggregation unit'' has the same meaning as provided under 
Rule 200(f) of SEC Regulation SHO.\21\ This provision also recognizes 
that not all members may utilize the independent aggregation unit 
concept as part of their regulatory structure, and still permits such 
members to utilize the display exception if all the other requirements 
of that exception are met.
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    \21\ 17 CFR 242.200. Treatment as an independent aggregation 
unit is available if traders in an aggregation unit pursue only the 
particular trading objective(s) or strategy(ies) of that aggregation 
unit and do not coordinate that strategy with any other aggregation 
unit. Therefore, one independent aggregation unit within a Trading 
Center cannot execute trades pursuant to the display exception in 
reliance on quotations displayed by a different independent 
aggregation unit. As an example, an agency desk of a Trading Center 
cannot rely on the quotation of a proprietary desk in a separate 
independent aggregation unit at that same Trading Center.
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    As initially proposed by the Participants, the Plan contained an 
additional condition to the display exception, which would have 
required that, where the quotation is displayed through a national 
securities exchange, the execution at the size of the order must occur 
against the displayed size on that national securities exchange; and 
where the quotation is displayed through the Alternative Display 
Facility or another facility approved by the Commission that does not 
provide execution functionality, the execution at the size of the order 
must occur against the displayed size in accordance with the rules of 
the Alternative Display Facility of such approved facility (``venue 
limitation'').\22\ Some commenters stated that this provision was anti-
competitive, as it would have forced off-exchange Trading Centers to 
route orders to the venue on which the order was displayed.\23\
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    \22\ See Securities Exchange Act Release No. 73511 (November 3, 
2014), 79 FR 66423, 66437 (November 7, 2014).
    \23\ See Approval Order, supra note 7, 80 FR at 27540.
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    In approving the Plan, the Commission modified the Trade-At 
Prohibition to remove the venue limitation.\24\ The Commission noted 
that the venue limitation was not prescribed in its Order mandating the 
filing of the Plan.\25\ The Commission also noted that the venue 
limitation would have unnecessarily restricted the ability of off-
exchange market participants to execute orders in Test Group Three 
Securities, and that removing the venue limitation should mitigate 
concerns about the cost and complexity of the Pilot by reducing the 
need for off-exchange Trading Centers to route to the exchange.\26\ The 
Commission also stated that the venue limitation did not create any 
additional incentives to display liquidity in furtherance of the 
purposes of the Trade-At Prohibition, because the requirement that a 
Trading Center could only trade at a protected quotation up to its 
displayed size should be sufficient to incentivize displayed 
liquidity.\27\
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    \24\ See Approval Order, supra note 7, 80 FR at 27540.
    \25\ See Approval Order, supra note 7, 80 FR at 27540.
    \26\ See Approval Order, supra note 7, 80 FR at 27540.
    \27\ See Approval Order, supra note 7, 80 FR at 27540.
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    Consistent with Plan and the SEC's determination to remove the 
venue limitation, FINRA is making clear that the display exception 
applies to trades executed by a Trading Center otherwise than on an 
exchange where the Trading Center has previously displayed a quotation 
in either an agency, riskless principal or principal capacity. As part 
of the display exception, FINRA also proposes that a Trading Center 
that is displaying a quotation as agent or riskless principal may only 
execute as agent or riskless principal, while a Trading Center 
displaying a quotation as principal (excluding riskless principal) may 
execute either as principal or agent or riskless principal. FINRA 
believes this is consistent with the Plan and the objective of the 
Trade-at Prohibition, which is to promote the display of liquidity and 
generally to prevent any Trading Center that is not quoting from price-
matching Protected Quotations. Providing that a Trading Center may not 
execute on a proprietary basis in reliance on a quotation representing 
customer interest (whether agency or riskless principal) ensures that 
the Trading Center cannot avoid compliance with the Trade-at 
Prohibition by trading on a proprietary basis in reliance on a 
quotation that does not represent such Trading Center's own interest. 
Where a Trading Center is displaying a quotation at the same price as a 
Protected Quotation in a proprietary capacity, transactions in any 
capacity at the price and up to the size of such Trading Center's 
displayed quotation would be permissible.

[[Page 73856]]

Transactions executed pursuant to the display exception may occur on 
the venue on which such quotation is displayed or over the counter.
    The proposal also excepts Block Size orders \28\ and permits 
Trading Centers to trade at the price of a Protected Quotation, 
provided that the order is of Block Size 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.\29\ The Plan only 
provides that Block Size orders shall be exempted from the Trade-At 
Prohibition. In requiring that the order be of Block Size at the time 
of origin and not an aggregation of non-block orders, or broken into 
orders smaller than Block Size prior to submitting the order to a 
Trading Center for execution; or executed on multiple Trading Centers, 
FINRA believes that it is providing clarity as to the circumstances 
under which a Block Size order will be excepted from the Trade-At 
Prohibition.
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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.
    \29\ Once a Block Size order or portion of such Block Size order 
is routed from one Trading Center to another Trading Center in 
compliance with Rule 611 of Regulation NMS, the Block Size order 
would lose the proposed Trade-at exemption, unless the Block Size 
remaining after the first route and execution meets the Block Size 
definition under the Plan.
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    Consistent with the Plan, the proposal also excepts an order that 
is a Retail Investor Order that is executed with at least $0.005 price 
improvement.
    The exceptions set forth in proposed Rule 6191(a)(6)(D)(iii) d. 
through l. are based on the exceptions found in Rule 611 of Regulation 
NMS.\30\ The subparagraph d. exception applies when 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. The subparagraph e. exception 
applies to an order that is executed as part of a transaction that was 
not a ``regular way'' contract. The subparagraph f. exception applies 
to an order that is executed as part of a single-priced opening, 
reopening, or closing transaction by the Trading Center. The 
subparagraph g. exception applies to an order that is executed when a 
Protected Bid was priced higher than a Protected Offer in a Pilot 
Security. The subparagraph h. exception applies when the order is 
identified as a Trade-at Intermarket Sweep Order. The subparagraph i. 
exception applies when the order is executed by a Trading Center that 
simultaneously routed Trade-at Intermarket Sweep Orders to execute 
against the full displayed size of the Protected Quotation that was 
traded at. The subparagraph j. exception applies when the order is 
executed as part of a Negotiated Trade. The subparagraph k. exception 
applies when 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.
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    \30\ See 17 CFR 242.611.
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    The exception proposed in subparagraph l. applies to a ``stopped 
order.'' Both the Plan and Rule 6191(a)(6) define a ``stopped order'' 
as an order that is 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 the National Best 
Bid in the Pilot Security at the time of execution or, for a stopped 
sell order, equal to the National Best Offer in the Pilot Security at 
the time of execution.
    Consistent with the Plan, the final exception to the Trade-At 
Prohibition and its accompanying supplementary material applies to an 
order that is for a fractional share of a Pilot Security. The 
supplementary material provides that such fractional share orders may 
not be the result of breaking an order for one or more whole shares of 
a Pilot Security into orders for fractional shares or that otherwise 
were effected to evade the requirements of the Trade-at Prohibition or 
any other provisions of the Plan. In approving the Plan, the Commission 
noted that this exception was appropriate, as there could be potential 
difficulty in the routing and executing of fractional shares.\31\
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    \31\ See Approval Order, supra note 7, 80 FR at 27541.
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    Rule 6191(a)(7) addresses the operation of certain exceptions to 
the Pilot. Rule 6191(a)(7)(A) relates to the Retail Investor Order 
exception. Consistent with the Plan, the proposed Rule defines a 
``Retail Investor Order'' as an order that originates 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.\32\ A Retail Investor Order may be an odd 
lot, round lot, or partial round lot.
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    \32\ See Section I(DD) of the Plan.
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    Proposed Rule 6191(a)(7)(A) addresses the execution of Retail 
Investor Orders other than on a national securities exchange. Given 
that the definition of a ``Retail Investor Order'' in the Plan includes 
that the order is an agency or riskless principal order, 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 Test Groups Two and Three. FINRA 
is therefore proposing 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.
    The Plan also 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. Rule 6191(a)(7)(A) provides that any member for which FINRA is 
the Designated Examining Authority (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.
    Finally, FINRA is proposing 6191(a)(7)(B) to clarify how members 
should report trades when utilizing one of the enumerated exceptions to 
the Trade-at requirement. Rule 6191(a)(7)(B) provides that a member 
that is relying on an exception to the Trade-at prohibition for a 
transaction otherwise than on a national securities exchange must 
include all applicable modifiers in trade reports pursuant to Rules 
6282, 6380A and 6380B. This provision will facilitate the accurate and 
complete reporting of transactions in Pilot Securities by member.
    If the Commission approves the proposed rule change, the proposed 
rule change will become operative on October 3, 2016.

[[Page 73857]]

2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\33\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest, and Section 15A(b)(9) of the Act,\34\ which requires 
that FINRA rules not impose any burden on competition that is not 
necessary or appropriate.
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    \33\ 15 U.S.C. 78o-3(b)(6).
    \34\ 15 U.S.C. 78o-3(b)(9).
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    FINRA believes that this proposal is consistent with the Act 
because it implements and clarifies the provisions of the Plan, and is 
designed to assist FINRA and members in meeting regulatory obligations 
pursuant to the Plan. In approving the Plan, the SEC noted that the 
Pilot was an appropriate, data-driven test that was designed to 
evaluate the impact of a wider tick size on trading, liquidity, and the 
market quality of securities of smaller capitalization companies, and 
was therefore in furtherance of the purposes of the Act. To the extent 
that this proposal implements and clarifies the Plan and applies 
specific requirements to members, FINRA believes that this proposal is 
in furtherance of the objectives of the Plan, as identified by the SEC, 
and is therefore consistent with the Act.

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. FINRA notes that the proposed 
rule change implements the provisions of the Plan, and is designed to 
assist FINRA in meeting its regulatory obligations pursuant to the 
Plan. FINRA also notes that the quoting and trading requirements of the 
Plan will apply equally to all firms that trade Pilot Securities.
Economic Impact Assessment
Need for the Rule
    As noted above, the Plan directs FINRA to establish rules and 
procedures for itself and member firms necessary in meeting their 
obligations under the Plan. The rules and procedures proposed here 
should be reasonably 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 small-capitalization companies.
    The rule, as proposed here, essentially codifies the Plan as 
approved by the Commission. FINRA is proposing rules relating to the 
operation of the Plan, including provisions intended to modify the 
obligations and prohibitions of the Plan market participants in a 
manner that is consistent with the stated objectives of the Plan.
    First, as discussed above, in Rule 6191(a)(6)(D), FINRA proposes to 
permit that a member that operates a Trading Center and chooses to use 
aggregation units may rely upon the display exception only with respect 
to a transaction executed at the price of a Protected Quotation if the 
order is executed within the same independent aggregation unit that 
displayed a quotation that is equal in price to the Protected 
Quotation.
    Second, as part of the display exception, FINRA also proposes to 
provide that a Trading Center that is displaying a quotation as agent 
or riskless principal may only execute as agent or riskless principal, 
while a Trading Center displaying a quotation as principal (excluding 
riskless principal) may execute either as principal or agent or 
riskless principal.
    Third, under proposed Rule 6191(a)(7)(A), FINRA is proposing 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 and continue to 
qualify for the Retail Investor Order exception.
Economic Baseline
    The baseline used by FINRA to evaluate the impact of the proposed 
rule change is the regulatory framework under the Plan, specifically 
the Control Group consisting of securities that will be quoted and 
traded at the currently permissible increments. An additional baseline 
considered corresponds to the current regulatory framework, prior to 
the implementation of the Plan. These two baselines serve as the 
primary points of comparison for assessing economic impacts, including 
the incremental benefits and costs of the proposed rule.
    Trading Centers currently can quote in the common stock of small 
and middle-capitalization companies at the minimum increment 
permissible by the SEC of $0.01. In the Approval Order, the SEC 
identified concerns with decimalization, particularly with respect to 
the market quality for securities of small and middle-sized 
capitalization companies, such as the potential for reduced incentives 
to underwriters, limited sell-side research on these companies, and 
less market-making in these securities.
    Under the Plan, all market participants who are active in Pilot 
Securities will quote and trade securities in the Pilot Test Groups in 
the manner prescribed by the Plan. The conditions for each Test Group 
are discussed above. All market participants that will participate in 
the Pilot by virtue of their activity in Pilot Securities will have 
established the functionality within their systems to trade and quote 
at the permissible increments, as well as update the set of securities 
in each Test Group on a daily basis.
Economic Impacts
    The analysis of economic impacts focuses on the instances where the 
proposed rule modifies requirements to the Plan as adopted.
Anticipated Benefits
The Display Exception
    As noted above, proposed Rule 6191(a)(6)(D) would limit the ability 
of a Trading Center operated by a member that chooses to use 
independent aggregation units to avail itself of the display exception 
only with respect to a transaction executed at the price of a Protected 
Quotation if the order is executed within the same independent 
aggregation unit that displayed the Protected Quotation. This 
clarification would enhance the incentives of any independent 
aggregation unit to provide liquidity under the Plan.
    In its absence, all independent aggregation units of the same 
trading center could conceivably take advantage of the display 
exception when any one unit were to post a quotation that meets the 
exception, in essence creating an opportunity for related aggregation 
units to ``free ride'' on the eligible quotation. Thus, the proposal 
may promote displayed liquidity by aggregation units that are active in 
Pilot Securities in Test Group 3, which would be consistent with the 
objectives of the Pilot.
Capacity of the Orders Displayed
    The second proposal requires that the Trading Center in taking 
advantage of a trade exception provided by the Plan, must act as agent 
or riskless principal if the quotation that provides the exception is 
an agency or riskless principal quotation. In its absence, a trading 
center could conceivably execute proprietary trades on its own behalf 
even when it is not providing the additional liquidity through a 
quotation

[[Page 73858]]

representing its own interest, in essence possibly allowing a Trading 
Center to avoid displaying proprietary interest while still availing 
itself of the exception. By facilitating the display of liquidity 
representing the Trading Center's capital commitment, the proposal may 
facilitate the goals of the Pilot.
Definition of Retail Investor Order
    The third proposal extends the definition of Retail Investor Order 
to include any order received directly from a natural person that did 
not originate from a trading algorithm or any other computerized 
methodology, without requiring that such order be an agency or riskless 
principal order.
    In the absence of this change, many orders that are currently sent 
to Trading Centers that otherwise satisfy the Retail 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. Retail 
customers could avail themselves of the exemption by placing additional 
conditions on the order, but this might preclude some Trading Centers 
from being able to interact with these orders. Therefore, this may 
provide greater liquidity to Test Group Two and Three Pilot Securities.
Anticipated Costs
The Display Exception
    Under the clarification proposed, independent aggregation units not 
displaying quotations are not covered by the exception. Members that 
operate Trading Centers that utilize multiple independent aggregation 
units may be disadvantaged compared to members that operate Trading 
Centers with a single independent aggregation unit, or members that do 
not utilize aggregation units. But this impact may be small, as there 
is no prohibition from multiple independent aggregation units providing 
quotations covered by the exceptions. Thus all are eligible to take 
advantage of the exceptions provide under the Plan.
Capacity of the Order Displayed
    Trading Centers would be limited in their capacity to transact 
under FINRA's proposed exception to this rule. Some orders that would 
be able to trade under the exception as set forth in the Plan would no 
longer be eligible. These orders may thus have a lower probability of 
execution and potentially worse execution quality, if executed. It is 
difficult to assess the extent to which this might occur prior to the 
Pilot, but the data collected by the Plan will permit an analysis of 
this potential impact.
Definition of Retail Investor Order
    To the extent that this clarification creates added competition by 
Trading Centers to provide executions under the exceptions of the Plan, 
some Trading Centers may lose order flow to trading centers that would 
not have been permitted to execute these trades but for the 
clarification. FINRA notes that others may gain from this increase in 
competition, so that the overall effect could be beneficial.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

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

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

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an 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 Robert W. Errett, 
Deputy 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 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of FINRA. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FINRA-2015-047 and should be 
submitted on or before December 16, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
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    \35\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-29930 Filed 11-24-15; 8:45 am]
BILLING CODE 8011-01-P