July 2, 2015.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) 
and Rule 19b-4 thereunder,
notice is hereby given that on June 23, 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.
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
FINRA is proposing to expand FINRA's alternative trading system (“ATS”) transparency initiative to publish the remaining equity volume executed over-the-counter (“OTC”) by FINRA members, including, among other trading activity, non-ATS electronic trading systems and internalized trades.
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.Start Printed Page 39464
A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
Under FINRA rules, each member that operates an ATS is required to report its weekly volume, by security, to FINRA and also must use a unique market participant identifier (“MPID”) for reporting order and trade information to FINRA. As part of these requirements, FINRA makes the reported volume and trade count information for equity securities publicly available on its Web site.
Pursuant to the proposed rule change, FINRA is proposing to amend Rules 6110 and 6610 to expand this transparency initiative by publishing the remaining OTC equity (or “non-ATS”) volume by member firm and security.
FINRA is proposing to derive a firm's non-ATS volume information directly from OTC trades reported to FINRA's equity trade reporting facilities.
As such, members would not have any new or additional reporting requirements as a result of the proposed rule change. FINRA would base a firm's non-ATS volume on trades reported for dissemination purposes (or “tape reports”) on which the firm is identified as the member with the trade reporting obligation.
A firm's published trading volume information would not include trades for which the firm is the reported contra party,
nor would it include trades that are reported for regulatory or clearing purposes only (or “non-tape reports”).
FINRA is proposing to publish on the FINRA Web site weekly volume information (number of trades and shares) by firm and security, with limited de minimis exceptions noted below, on a two-week or four-week delayed basis in accordance with the time frames specified for ATS volume publication.
Specifically, volume information would be published on a two-week delayed basis for NMS stocks in Tier 1 under the NMS Plan to Address Extraordinary Market Volatility (also referred to as the “Limit Up/Limit Down Plan”) 
and a four-week delayed basis for all other NMS stocks and OTC Equity Securities.
Based on feedback FINRA has received from firms, FINRA is also proposing to publish aggregate volume totals across all NMS stocks and aggregate volume totals across all OTC Equity Securities for each calendar month. FINRA proposes to publish monthly aggregate totals on a one month delayed basis, e.g., totals for the month of April would be published on or around June 1.
FINRA is proposing to publish non-ATS volume information at the firm level and not on an MPID-by-MPID basis. FINRA believes that this is appropriate because outside of the ATS context, not all firms have a separate MPID for each unique trading center at the firm, and as such, publishing volume information at the MPID level may not provide meaningful or consistent information to the marketplace. For members that use more than one MPID for their non-ATS trading,
FINRA proposes to aggregate and publish the non-ATS trading volume for all non-ATS MPIDs belonging to the firm under a single “parent” identifier or firm name.
FINRA notes that a firm's ATS volume will continue to be published separately under the unique MPID(s) for each ATS operated by the firm.
FINRA does not believe that publishing volume information for each firm that executed only a small number of trades or shares in any given period would provide meaningful information to the marketplace. Accordingly, as described in more detail below, FINRA is proposing to combine volume from all members that do not meet a specified minimum threshold and publish such “de minimis” volume information for those members on an aggregated basis. For example, if five firms each execute 10 trades in the reporting period in a security, their 50 trades would be aggregated and published as a single line item; the firms and their volume information would not be identified separately. For a firm with more than one non-ATS MPID, the total volume across all of its non-ATS MPIDs would be combined for purposes of determining whether the de minimis threshold has been met.
FINRA is proposing to establish a de minimis threshold of fewer than on average 200 non-ATS transactions per day executed by the firm across all securities or in a specific security during the one-week reporting period. This proposed threshold is based on the level of trading activity used by the SEC to identify “small market makers” for purposes of exemptive relief from the rule requiring market centers that trade NMS securities to make publicly available electronic reports that include uniform statistical measures of execution quality (SEC Rule 605 of Regulation NMS).
In developing its proposal, FINRA reviewed volume statistics for firms across all securities for a one-week period (June 23-29, 2014). This review indicated that without applying any threshold, approximately 300 individual firms would have volume attributed by name. Looking at market participants with on average 200 or more trades per day across all securities, approximately 62 firms would have volume attributed by Start Printed Page 39465name and would account for 98.99 percent of all trading volume.
Thus, if a firm averages fewer than 200 non-ATS transactions per day across all securities during the reporting period, FINRA would aggregate the firm's volume with that of similarly situated firms. Additionally, because the published volume data would be broken down by security, if a firm averages fewer than 200 non-ATS transactions per day in a given security during the reporting period, FINRA would aggregate the firm's volume in that security with that of similarly situated firms, even if the firm averages more than 200 non-ATS transactions per day across all securities during the reporting period. FINRA notes that all of the OTC volume would be published, but for members that meet the de minimis threshold, their volume would not be attributed by name.
The proposed rule change will provide additional transparency into a significant portion of the OTC market.
Accordingly, FINRA believes that the proposed rule change will enable the public to better understand a firm's equity trading activity off exchanges by reviewing the proposed non-ATS volume together with the current ATS volume reports. In this regard, FINRA notes that during the rulemaking process on the ATS transparency initiative, some commenters recommended broadening the proposal to include trade information for other OTC execution venues.
FINRA considered whether dividing published volume information into more granular categories, such as by trading capacity (i.e., principal versus agency or riskless principal) or by participant type (e.g., market maker), would be feasible or provide additional meaningful or reliable information to market participants. Segregating the data, e.g., by trading desk, would entail potentially significant development work by firms to sufficiently identify the activity for FINRA (e.g., volume attributable to a market making desk) and may not be consistent across firms, while also leading to some concerns about information leakage. Thus, FINRA is not proposing at this time to publish the non-ATS volume data at more granular levels than by firm and security.
In developing its approach, FINRA staff solicited industry input prior to presenting the proposal to FINRA's Board of Governors in September 2014. In addition to discussing the proposal with a number of FINRA's industry advisory committees, FINRA staff also informally consulted a number of firms, including large and mid-size firms with a variety of business models, as well as two buy-side firms. The committees and all but one of the consulted firms were generally supportive of the proposal. Some of the consulted firms noted that the published volume information would provide market participants with a better sense of flow in a given market segment and would most likely be used for purposes of market share or other longer-term quantitative market analysis. However, because publication of the data necessarily would be delayed, the consulted firms believe that it would likely not be a valuable tool for such purposes as analyzing execution quality or making day-to-day order routing and trading decisions.
Several of the consulted firms and committee members expressed some concern about the potential for information leakage. The consulted firms agreed on the importance of delaying publication of non-ATS volume information, noting that the closer to real-time the information is published, the greater the risks that would result from disclosing a market participant's trading activity. One of the consulted firms was concerned about publication of non-ATS volume information at the market participant and security level, even on a delayed basis, asserting that other market participants would be able to download data associated with the firm's trading activity, re-engineer it to discern patterns of historical trading and identify similar patterns in future trading that could be used to their advantage (and to the firm's disadvantage). Even the firms that were generally supportive of the proposal to publish non-ATS volume information indicated that they would have concerns if the information were published at a more granular level.
FINRA believes it has taken appropriate steps to address firms' concerns by delaying publication and limiting the granularity of the published information to firm and security. The proposed rule change is similar to the approach currently taken with respect to ATS volume information, and firms have not come to FINRA with any complaints regarding information leakage since FINRA began publishing ATS volume information. However, following implementation of the proposed rule change, FINRA will consider whether modifications are appropriate, e.g., to the scope of published information or the delay between trading activity and publication, based on feedback it may receive from interested parties, including firms and users of the data.
One of the consulted firms also indicated that FINRA should not charge for the data, noting that the potential value is diminished if it is another cost center for the industry. FINRA notes that it has determined not to charge a fee for the data that would be published pursuant to the proposed rule change and will make non-ATS OTC volume information available to the public for free in a downloadable format.
In addition to the oral feedback discussed above, FINRA solicited written comments on the proposal in Regulatory Notice 14-48 (November 2014), which are summarized below.
FINRA proposes that the effective date of the proposed rule change will be no later than 180 days after Commission approval. Thus, FINRA anticipates that it will begin publication of data in accordance with the proposed rule change in the fourth quarter of 2015 or first quarter of 2016 and will announce the specific date in a Regulatory Notice.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act,
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. FINRA believes that the proposed rule change will provide additional transparency into a significant portion of the OTC market and that the increased transparency will enable market participants and investors to better understand a firm's trading Start Printed Page 39466volume and market share in the equity market.
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 has undertaken an economic impact assessment, as set forth below, to analyze the regulatory need for the proposed rule change, its potential economic impacts, including anticipated costs and benefits, and the alternatives FINRA considered in assessing how to best meet its regulatory objectives.
FINRA's current rules require each member that operates an ATS to report its weekly trade volume information to FINRA. As part of these requirements, FINRA makes the information for equity securities available to the public, thereby providing market participants and investors useful information about trading activity in the ATS segment of the OTC equity market. The proposed rule change will expand this transparency initiative by publishing the remaining OTC equity volume reported to FINRA. The increased transparency will enable the market to better understand a firm's trading volume, its market share in the equity market and the amount of OTC trading in each equity security.
The proposed rule change would expand the benefits of FINRA's ATS transparency initiative by providing additional transparency to the remaining equity volume executed in the non-ATS segment of the OTC equity market. The trading activity in this non-ATS segment represents a significant portion of the overall equity trading in the OTC market.
The increased transparency would enable market participants and investors to better understand the overall equity trading in the OTC market as well as the amount of OTC trading in individual equity securities. Furthermore, the expansion of transparency would help the marketplace better understand a firm's overall OTC trading of equities, thereby enhancing their understanding of executing firms' trading volume and market shares in the equity market.
The proposed rule change would not impose any additional reporting requirements on firms since FINRA will directly derive the non-ATS volume data from OTC trades reported to FINRA's equity trade reporting facilities. As a result, the proposed rule would have minimal impact on firms from a systems development and reporting perspective.
Other Economic Impacts
In developing this proposal, FINRA considered whether a firm's trading strategy could be discerned from the published data. FINRA believes that the proposed rule change mitigates such information leakage concerns by delaying the publication of trading volumes and by limiting the granularity of the published information. The proposed rule change is a well-calibrated effort to reduce information leakage concerns and to provide market participants access to meaningful information on non-ATS trading activity. FINRA believes that the proposed rule change will not impose differential risks of information leakage on firms. Moreover, by expanding transparency to all OTC equity trading by FINRA members, the proposed rule change would bridge gaps in information published across ATS versus non-ATS segments of the OTC equity market, thereby reducing any competitive distortions that may be associated with such information gaps.
In considering how to best meet its regulatory objectives, FINRA considered several alternatives to particular features of this proposed rule change. For example, FINRA considered whether publishing volume information at a more granular level (e.g. by trading capacity or by participant type) would provide additional useful information to market participants, and the costs associated with such an alternative. FINRA believes that segregating the data, e.g., by trading desk, would entail significant development work by firms, without commensurate benefit to market participants. In addition, as discussed in more detail above, several commenters raised concerns about information leakage with publishing more granular data. Accordingly, FINRA has determined not to publish data at a more granular level than by firm and security.
FINRA also considered publishing non-ATS volume information at the MPID level, as opposed to the firm level. FINRA believes that publishing information at the firm level is more appropriate because not all firms have a separate MPID for each unique trading center at the firm. Accordingly, publishing volume information at the firm level would likely provide more consistent information to the marketplace.
In developing this proposal, FINRA also considered alternative approaches related to publishing volume information for firms with minimal non-ATS trading activity. As discussed in more detail above, FINRA does not believe that publishing volume information separately for each firm with minimal trading would provide meaningful information to the marketplace. Accordingly, FINRA is proposing to combine volume from all members with trading activity below a de minimis threshold of on average 200 transactions per day. FINRA considered several alternative de minimis thresholds and solicited comment on these alternatives in Regulatory Notice 14-48. FINRA believes that the proposed de minimis threshold is reasonable as it would account for the vast majority 
of the total non-ATS trading volume and is also consistent with the level of trading activity used by the SEC to identify “small market makers” for SEC Rule 605 of Regulation NMS.
C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others
The proposed rule change was published for comment in Regulatory Notice 14-48 (November 2014). Three comments were received in response to the Regulatory Notice.
A copy of the Regulatory Notice is attached as Exhibit 2a.
Copies of the comment letters Start Printed Page 39467received in response to the Regulatory Notice are attached as Exhibit 2c. The comments are summarized below.
All three commenters generally supported the proposal. One commenter specifically noted that the data can be used by market participants, regulators and academics to better understand and track trends in OTC trading generally, and can also help investors better evaluate the routing and execution practices of individual firms.
This commenter agreed with the proposal to publish non-ATS volume information at the firm (rather than MPID) level, while another commenter disagreed with this aspect of the proposal, stating that the trade publication should identify the matching engine with a unique identifier.
FINRA agrees that publication at the MPID level makes sense in the context of ATS executions; however, as noted above, outside of the ATS context, not all firms have a separate MPID for each unique trading center at the firm, and as such, publishing volume information at the MPID level may not provide meaningful or consistent information to the marketplace.
One commenter agreed with the proposal to aggregate volume information for firms with a de minimis amount of OTC volume, noting that it is a reasonable way to assure that the published information will be meaningful and free of the “noise” that could otherwise arise from a broader publication measure.
On the other hand, another commenter disagreed with the proposal to aggregate data for firms with a de minimis amount of trading, noting that they believe in simple rules with no exceptions.
However, this commenter did not discuss the potential value of publishing unaggregated volume information for firms with only a small number of trades. As discussed above, FINRA does not believe that publishing volume information below the proposed de minimis threshold would provide meaningful information to the marketplace.
One commenter suggested using an alternate notional volume measure as part of the de minimis threshold so that firms doing relatively few trades but in large notional volume are included.
FINRA believes that the potential costs and additional resources, including technology infrastructure, that would be required to implement a second de minimis threshold measure would outweigh any potential benefit. In addition, FINRA is concerned that utilizing two different threshold measures may be confusing to consumers of the data, and believes that a single threshold measure, based on number of trades, would be the simplest and easiest to understand. However, as noted above, following implementation of the proposed rule change, FINRA will consider whether modifications are appropriate, including whether changes to the de minimis threshold would be appropriate, based on feedback it may receive from interested parties.
Another commenter expressed concern that the proposed two-week publication timeframe for Tier 1 NMS stocks may result in unintended information leakage, and in particular disclosure of large institutional trades, which could enable reverse engineering of those trades if published within two weeks of execution.
To address the information leakage concerns, this commenter recommended aggregation on a monthly, not weekly basis, and publishing on a four-week delayed basis. Another commenter stated that a delay of one month is sufficient to enable broker-dealers to manage their risk, but also recommended that FINRA consider the shortest publication time that provides enough time to manage the risk of a position, which could differ by security class (e.g., two weeks for liquid equities and six months for illiquid bonds).
This commenter further noted that it supports the publication of complete and fully granular data, without specifying the level of granularity or how to mitigate the attendant risk of information leakage.
As discussed above, FINRA considered the potential for information leakage in developing its proposal and believes that it has taken adequate steps to mitigate that potential by, among other things, proposing to publish non-ATS volume information on the same delayed basis that is used for ATS volume data, as well as at the firm, rather than MPID, level and not further segregating volume information by trading capacity or trading desk.
One commenter opposes FINRA charging for non-ATS volume information.
As noted above, FINRA has determined not to charge for the non-ATS volume information that would be published pursuant to the proposed rule change.
Finally, several comments submitted on Regulatory Notice 14-48 are not germane to the proposal. One commenter urged FINRA to eliminate the current requirement for ATSs to report volume information to FINRA.
FINRA notes that elimination of the ATS volume reporting requirement will be addressed in a separate proposed rule change by FINRA. Another commenter proposed an alternative to the consolidated audit trail,
which is not germane to the proposed rule change and does not warrant a specific response.
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:
- 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-2015-020. 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 Start Printed Page 39468post 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 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-2015-020 and should be submitted on or before July 30, 2015.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Robert W. Errett,
[FR Doc. 2015-16729 Filed 7-8-15; 8:45 am]
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