Document ID: SEC-2016-1800-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2016-10-07T04:00Z

[Federal Register Volume 81, Number 195 (Friday, October 7, 2016)]
[Notices]
[Pages 69893-69896]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-24280]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79026; File No. SR-FINRA-2016-038]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Amend FINRA Rule 6191 To Modify the Quoting and 
Trading Requirements Relating to the Block Size Exception and the Use 
of Intermarket Sweep Orders and Trade-at Intermarket Sweep Orders

October 3, 2016.
    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 September 30, 2016, 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 and 
II below, which Items have been prepared by FINRA. FINRA has designated 
the proposed rule change as constituting a ``non-controversial'' rule 
change under paragraph (f)(6) of Rule 19b-4 under the Act,\3\ which 
renders the proposal effective upon receipt of this filing by the 
Commission. 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.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend FINRA Rule 6191 (Compliance with 
Regulation NMS Plan to Implement a Tick Size Pilot Program) to modify 
the quoting and trading requirements relating to the block size 
exception and the use of Intermarket Sweep Orders (``ISOs'') and Trade-
at Intermarket Sweep Orders (``TAISOs'').\4\
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    \4\ Unless otherwise specified, capitalized terms used in this 
rule filing are defined as set forth in the Plan.
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    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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    On August 25, 2014, FINRA and several other self-regulatory 
organizations (``Participants'') filed with the Commission, pursuant to 
Section 11A of the Act \5\ and Rule 608 of SEC Regulation NMS \6\ 
thereunder, the Regulation NMS Plan to Implement a Tick Size Pilot 
Program (``Plan'').\7\ The Participants filed the Plan to comply with 
an order issued by the Commission on June 24, 2014.\8\ The Plan was 
published for comment in the Federal Register on November 7, 2014, and 
approved by the Commission, as modified, on May 6, 2015.\9\ The 
Commission approved the Plan on a two-year pilot basis.\10\ On November 
6, 2015, the SEC exempted the Participants from implementing the pilot 
until October 3, 2016.\11\
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    \5\ 15 U.S.C. 78k-1.
    \6\ 17 CFR 242.608.
    \7\ See Letter from Brendon J. Weiss, Vice President, 
Intercontinental Exchange, Inc., to Secretary, Commission, dated 
August 25, 2014.
    \8\ See Securities Exchange Act Release No. 72460 (June 24, 
2014), 79 FR 36840 (June 30, 2014).
    \9\ See Securities Exchange Act Release No. 74892 (May 6, 2015), 
80 FR 27514 (May 13, 2015) (``Approval Order'').
    \10\ See Approval Order.
    \11\ See Securities Exchange Act Release No. 76382 (November 6, 
2015), 80 FR 70284 (November 13, 2015).
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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 stock of small-
capitalization companies. Each Participant is required to comply, and 
to enforce compliance by its member organizations, as applicable, with 
the provisions of the Plan. The Plan provides for the creation of a 
group of Pilot Securities, which shall be placed in a control group and 
three separate test groups, with each subject to varying quoting and 
trading increments. Pilot Securities in the control group will be 
quoted at the current tick size increment of $0.01 per share and will 
trade at the currently permitted increments. Pilot Securities in

[[Page 69894]]

the first test group will be quoted in $0.05 minimum increments but 
will continue to trade at any price increment that is currently 
permitted.\12\
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    \12\ See Section VI(B) of the Plan.
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    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, a negotiated trade exception, and an exception for certain 
executions to comply with FINRA Rule 5320.\13\ Pilot Securities in the 
third test group (``Test Group Three'') will be subject to the same 
quoting and trading increments 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 
Center's ``Best Protected Bid'' or ``Best Protected Offer,'' unless an 
enumerated exception applies.\14\ On November 13, 2015, FINRA filed 
with the Commission a proposed rule change to adopt Rule 6191(a) to 
implement the quoting and trading requirements of the Plan,\15\ which 
was approved, as amended, on February 23, 2016.\16\
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    \13\ See Section VI(C) of the Plan; See also FINRA Rule 
6191(a)(5)(C).
    \14\ See Section VI(D) of the Plan.
    \15\ See Securities Exchange Act Release No. 76483 (November 19, 
2015), 80 FR 73853 (November 25, 2015) (Notice of Filing of File No. 
SR-FINRA-2015-047).
    \16\ See Securities Exchange Act Release No. 77218 (February 23, 
2016), 81 FR 10290 (February 29, 2016) (Order Approving File No. SR-
FINRA-2015-047).
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    FINRA is now proposing to amend Rule 6191(a) to make refinements to 
the operation of the Block Size and TAISO exceptions to the Trade-at 
requirement. With respect to the Block Size exception, FINRA is filing 
the proposed rule change to eliminate the condition that, to be 
eligible for the Block Size exception, the order may not be executed on 
multiple Trading Centers.\17\ FINRA also is amending provisions 
relating to the TAISO exceptions of Rule 6191(a)(6)(D) by amending the 
definition of ``Trade-at Intermarket Sweep Order'' in Rule 
6191(a)(7)(C) to clarify that a Trading Center can simultaneously route 
TAISOs or ISOs to execute against the full ``displayed'' size of the 
Protected Quotation that was traded at and to amend Rule 
6191(a)(6)(D)(i) to provide that additional limit orders routed 
simultaneously with a TAISO can be routed as either TAISOs or ISOs, as 
further discussed below.\18\
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    \17\ The Plan incorporates the definition of a ``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.'' See 17 CFR 242.600(b).
    \18\ FINRA understands that other Participants have filed (or 
intend to file) amendments to their rules regarding the operation of 
the TAISO and Block Size exceptions consistent to the changes being 
proposed by FINRA in the instant filing. See e.g., Securities 
Exchange Act Release No. 78802 (September 9, 2016), 81 FR 63515 
(September 15, 2016) (Notice of Filing of File No. SR-NYSE-2016-62).
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Block Size Exception
    FINRA is proposing to amend Rule 6191(a)(6)(D)(ii)b. to clarify the 
operation of the Block Size exception to the Trade-at requirement. 
Specifically, FINRA is deleting current prong three of the Block Size 
exception, which provides that orders executed on multiple Trading 
Centers do not qualify for the Block Size exception. By deleting this 
requirement, the Block Size exception to the Trade-at requirement would 
apply to an order, irrespective of whether the member routes out a 
portion of the Block Size order to another Trading Center to comply 
with Rule 611.\19\
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    \19\ 17 CFR 242.611.
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    As stated in FAQ # 170 in the Tick Size Pilot Program Trading and 
Quoting FAQs,\20\ an over-the-counter (``OTC'') Trading Center may rely 
on the Block Size exception irrespective of whether it routes an ISO, 
as required by Rule 611, to execute against the full displayed size of 
any Protected Quotation with a price superior to the price at which the 
Block Size order was executed.\21\ The instant amendment to the Block 
Size exception provision of Rule 6191(a) aligns the rule text with the 
guidance provided by FINRA and the other Participants in the Tick Size 
Pilot Program Trading and Quoting FAQs. The proposed amendment is 
designed to accommodate activity resulting from member compliance 
obligations under Rule 611 while remaining consistent with the Plan. 
FINRA notes that the multiple trading center condition to the use of 
the Block Size exception is not required by the Plan; thus, the 
proposed rule change remains consistent with the terms of the Plan.
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    \20\ See Tick Size Pilot Program Trading and Quoting FAQs, 
available at: http://www.finra.org/sites/default/files/TSPP-Trading-and-Quoting-FAQs.pdf.
    \21\ The FAQ also provides, among other things that, in all 
cases, an OTC Trading Center may avail itself of the Block Size 
exception only where it has committed to execute the order in Block 
Size, irrespective of whether or not the outbound ISOs required 
pursuant to Regulation NMS Rule 611 were fully executed. See FAQ 
#170, Tick Size Pilot Program Trading and Quoting FAQs.
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Trade-at Intermarket Sweep Orders
    The Plan defines a ``Trade-At Intermarket Sweep Order'' as a limit 
order for a Pilot Security that, when routed to a Trading Center, is 
identified as an ISO, and simultaneous 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.\22\ The Plan states that 
these additional routed orders also must be marked as ISOs.\23\
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    \22\ See Section I(MM) of the Plan.
    \23\ Id.
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    FINRA clarified the use of ISOs in connection with the Trade-at 
requirement by adopting a definition of ``Trade-at Intermarket Sweep 
Order.'' \24\ FINRA is proposing to further clarify that, when a TAISO 
is routed to a Trading Center, when simultaneously routing additional 
limit orders 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, such additional limit orders can be routed as either TAISOs or 
ISOs. Therefore, FINRA is proposing to distinguish TAISOs from ISOs by 
adding the phrase ``or Intermarket Sweep Orders'' to the end of FINRA 
Rule 6191(a)(7)(C)(ii), so that any such additional routed orders sent 
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 better than or equal to the limit price 
of the limit order identified as a TAISO, may be marked as either 
TAISOs or ISOs.
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    \24\ Rule 6191(a)(7)(C) (``Trade-at Requirement'') provides that 
``Trade-at Intermarket Sweep Order'' means a limit order for a Pilot 
Security that meets the following requirements: (i) When routed to a 
Trading Center, the limit order is identified as a TAISO; and (ii) 
simultaneously with the routing of the limit order identified as a 
TAISO, 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 TAISO. These additional 
routed orders also must be marked as TAISO.
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    Likewise, FINRA is proposing to amend Rule 6191(a)(6)(D)(i) to add 
the

[[Page 69895]]

phrase ``or Intermarket Sweep Orders'' to the TAISO exception to the 
Trade-at requirement, to clarify that a Trading Center can 
simultaneously route TAISOs or ISOs to execute against the full 
displayed size of the Protected Quotation that was traded at. FINRA 
believes that this amendment is consistent with the Plan and preserves 
the intended operation of the exception, while providing members with 
additional flexibility when availing themselves of the TAISO exception 
to the Trade-at requirement.
    FINRA has filed the proposed rule change for immediate 
effectiveness. FINRA has requested that the SEC waive the 30-day 
operative period so that the proposed rule change can become operative 
on October 3, 2016.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\25\ 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,\26\ which requires 
that FINRA rules not impose any burden on competition that is not 
necessary or appropriate.
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    \25\ 15 U.S.C. 78o-3(b)(6).
    \26\ 15 U.S.C. 78o-3(b)(9).
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    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. 
FINRA believes that this proposal is consistent with the Act because it 
is designed to assist FINRA in meeting its regulatory obligations 
pursuant to the Plan and is in furtherance of the objectives of the 
Plan.
    FINRA believes that this proposal will clarify the permissible 
parameters around members' use of the Block Size exception by taking 
into account the possibility that a member may be required to route an 
ISO in compliance with Rule 611. Thus, FINRA believes that the proposed 
rule change better accommodates activity resulting from member 
compliance obligations under Rule 611, while remaining consistent with 
the Plan. FINRA also believes that the proposed changes to the 
operation of the TAISO exception to the Trade-at requirement is 
consistent with the Act in that it provides members with additional 
flexibility in using the TAISO exception while preserving the intended 
operation of the exception, consistent with the Plan.

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 
proposal will apply equally to all members that trade Pilot Securities.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \27\ and Rule 19b-
4(f)(6) thereunder.\28\
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    \27\ 15 U.S.C. 78s(b)(3)(A).
    \28\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.
    FINRA has filed the proposed rule change for immediate 
effectiveness. FINRA has requested that the SEC waive the 30-day 
operative period so that the proposed rule change can become operative 
on October 3, 2016.
    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest 
because it will allow FINRA to implement the proposed rules immediately 
thereby preventing delays in the implementation of the Plan. The 
Commission notes that the Plan is scheduled to start on October 3, 
2016. Therefore, the Commission hereby waives the 30-day operative 
delay and designates the proposed rule change to be operative upon 
filing with the Commission.\29\
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    \29\ For purposes only of waiving the operative delay for this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2016-038 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-2016-038. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing 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

[[Page 69896]]

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-2016-038, and should be submitted 
on or before October 28, 2016.
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    \30\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-24280 Filed 10-6-16; 8:45 am]
 BILLING CODE 8011-01-P