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

I. Introduction

On September 30, 2013, the Financial Industry Regulatory Authority, Inc. (“FINRA”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) and Rule 19b-4 thereunder, a proposed rule change to require each alternative trading system (“ATS”) to report transaction volume information to FINRA and to obtain and use a unique market participant identifier (“MPID”) when reporting trade information to FINRA. The proposed rule change was published for comment in the Federal Register on October 22, 2013. The Commission received ten comments on the proposal.

On December 4, 2013, FINRA granted the Commission an extension of time to act on the proposal until January 20, 2014. On January 15, 2014, FINRA filed Amendment No. 1 with the Commission to respond to the comment letters and to propose additional clarifying guidance, including the addition of supplementary material to one of the proposed rules. The Commission is publishing this notice and order to solicit comments on Amendment No. 1 and to approve the proposed rule change, as modified by Amendment No. 1, on an accelerated basis.

II. Description of the Proposal

Overview

FINRA filed the proposed rule change to impose certain reporting requirements on trading venues that have filed a Form ATS with the Commission. The purpose of the proposal is to make information about ATS trading volume publicly available and thus more transparent. The proposal is also meant to enhance FINRA's ability to monitor ATSs to determine whether they are complying with the requirements of Regulation ATS.

Specifically, FINRA states that the proposal would allow it to better determine whether an ATS is subject to the provisions of Regulation ATS that are triggered by exceeding certain volume thresholds. For instance, Regulation ATS requires an ATS to provide to a national securities exchange or association for display the prices and sizes of orders at the ATS's highest buy price and lowest sell price for any NMS stock, displayed to more than one person in the ATS, with respect to which the ATS has had an average daily trading volume of 5% or more of the aggregate average daily share volume for such NMS stock during at least four of the preceding six calendar months. Regulation ATS also requires any such ATS to provide broker-dealers with fair access to the ATS's services to effect a transaction in any such NMS stock.

To achieve these objectives, the proposal would impose two new requirements on ATSs. First, ATSs would be required to report aggregate weekly trade volume information to FINRA, some of which data FINRA would then make publicly available. Second, the proposal would require each ATS to obtain and use a unique MPID in its regulatory reporting to FINRA.

Self-Reporting Requirement

Proposed Rule 4552 would require each FINRA member that operates an ATS that has filed a Form ATS with the Commission to report to FINRA its aggregate weekly volume information and number of trades, by security, in securities subject to FINRA trade reporting requirements. The self-reporting requirement would thus apply to any NMS stock, any OTC Equity Security, or any debt security subject to FINRA's Trade Reporting and Compliance Engine (“TRACE”) rules (“TRACE-Eligible Securities”). The proposed rule change would require this information to be reported to FINRA on a security-by-security basis within seven business days after the end of each calendar week. An ATS that did not execute any trades in a given week would need to submit a report that affirmatively indicated the ATS did not transact any volume that week.

The proposed rule change contains guidance on how ATSs should calculate their volumes to ensure consistency and to avoid potential over-counting of volume. Proposed Rule 4552 provides that, “[w]hen calculating and reporting the volume of securities traded and the number of trades, an alternative trading system shall include only those trades executed within the alternative trading system. If two orders are crossed by the alternative trading system, the volume shall include only the number of shares or par value of bonds crossed as a single trade (e.g., crossing a buy order of 1,000 shares with a sell order of 1,000 shares would be calculated as a single trade of 1,000 shares of volume).” Thus, for example, an ATS would be required to report only trades executed within the ATS (not individual orders routed out of the ATS that might be executed at another venue), and only the volume of each executed trade once (not double-counting for the buy and sell side of the trade).

In addition, FINRA would make some of this reported ATS trade data available to the public. Specifically, FINRA would publish on its Web site the trading information (volume and number of trades) reported for each equity security, with appropriate disclosures that the information is based on ATS-submitted reports and not on reports produced or validated by FINRA. FINRA would do so on a delayed basis: aggregate information concerning trades in NMS stocks in Tier 1 of the NMS Plan to Address Extraordinary Market Volatility would be published on a two-week delayed basis, and aggregate information on all other NMS stocks and all OTC Equity Securities subject to FINRA trade reporting requirements on a four-week delayed basis.

While the reporting obligations in the proposal would apply to transactions in both equity securities (NMS stocks and OTC Equity Securities) and debt securities (TRACE-Eligible Securities), FINRA would not initially publish the data that it receives concerning transaction volume in TRACE-Eligible Securities. FINRA stated that it would not intend to begin publishing self-reported data for TRACE-Eligible Securities “until it has had the opportunity to evaluate the data received from such ATSs and the differences between the existing trade reporting regimes applicable to equity and debt securities.”

MPID Requirement

The proposed rule change also would require a member operating an ATS to obtain for each such ATS a single, unique MPID that is designated for exclusive use for reporting the ATS's transactions. Members that operate multiple ATSs or engage in other lines of business requiring the use of MPIDs would therefore be required to obtain and use multiple MPIDs. A firm would not be permitted to use multiple MPIDs for a single ATS, and if a firm operates multiple ATSs, each ATS would be required to have its own MPID.

The proposal would prohibit a member from using a separate MPID assigned to an ATS to report any transaction that is not executed within the ATS and require members to have policies and procedures in place to ensure that trades reported with a separate MPID obtained under the rules are restricted to trades executed within the ATS. FINRA noted that this feature of the proposal would be consistent with obligations that already exist for ATSs, which are required by Regulation ATS “to have in place safeguards and procedures to . . . separate alternative trading system functions from other broker-dealer functions, including proprietary and customer trading.”

FINRA currently has three rules that permit the use of multiple MPIDs on FINRA facilities: Rule 6160 (Multiple MPIDs for Trade Reporting Facility Participants), Rule 6170 (Primary and Additional MPIDs for Alternative Display Facility Participants), and Rule 6480 (Multiple MPIDs for Quoting and Trading in OTC Equity Securities). All three rules are permissive, and none of the rules currently requires the use of multiple MPIDs. These three rules would be revised to include language that affirmatively requires any participant of any of these facilities that operates an ATS to obtain a unique MPID for each ATS. In cases where a facility participant wished to use multiple MPIDs, or was required to do so under the proposal, each rule would require the facility participant to submit a written request to FINRA. The three rules, which currently operate on a pilot basis, would also be made permanent.

FINRA noted that member firms currently are required to notify FINRA before changing the usage of the MPID in any way (for example, repurposing an MPID from reflecting ATS activity to other trading activity at the firm). After an ATS is provided its MPID, any reporting by the ATS (either reporting trades to a FINRA TRF, the ADF, the ORF, TRACE, or reporting orders to the Order Audit Trail System (“OATS”)) would need to include the MPID assigned to the particular ATS, and the member would need to use the particular MPID to report all transactions executed within the ATS to the appropriate reporting facility.

FINRA noted further that it would leave in place a voluntary program it adopted in 2010 that allows allow members operating an ATS dark pool to have their daily aggregate trading data published by the TRFs. FINRA believes that the program, which is set forth in Supplementary Material .02 to Rule 6160(c), would largely be eclipsed by the proposal, as all ATSs would now be subject to mandatory reporting requirements. The voluntary program differs slightly from the mandatory requirements of the proposal, however, because it provides for the publication of aggregate daily—rather than weekly—trading volume information. FINRA noted in its proposal that no member has participated in the voluntary program yet.

Implementation Schedule

FINRA stated that it would announce the implementation date of the proposed rule change in a Regulatory Notice to be published no later than 30 days following Commission approval. The implementation date for the self-reporting requirement would be no later than 90 days following publication of the Regulatory Notice. The implementation date for the MPID requirement would be no later than 270 days following publication of the Regulatory Notice.

The Commission points out that, in the Notice of Original Proposal, FINRA stated that it would announce the “effective date” of the proposed rule change by Regulatory Notice within 30 days of Commission approval. In Amendment No. 1, FINRA revised this language to clarify its intent to specify that it will announce the “implementation date,” rather than the “effective date,” of the proposed rule change. FINRA clarified further that the proposed rule change will become effective when it is approved by the Commission. Thus, rules that permit FINRA members to use multiple MPIDs would immediately convert from operating on a pilot to a permanent basis.

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

As noted above, the Commission received ten comment letters concerning the proposal. Eight of the ten commenters expressed general support for the purpose of the proposal—namely, to increase transparency of ATS trade data. For instance, one commenter stated that it “encourage[d] efforts to standardize ATS transparency across the industry and feel[s] that FINRA is well-positioned to do so.” Another commenter expressed its belief “that quantitative, publicly available information regarding ATS trading can provide market participants, regulators and policymakers a greater understanding of the role ATSs play in the equity marketplace, as well as provide a factual foundation for key discussions and decisions concerning equity market structure issues.”

Several of these commenters, in fact, expressed support for an even broader proposal that would apply to all trading venues, rather than only to ATSs. One such commenter argued that “the proposal should be expanded to include trade information for other off-exchange executions and this information should be made public in the same manner as proposed for ATS trade information.” According to another commenter, “including the entire universe of non-exchange trading is important because while ATSs make up approximately 14% of volume, other dark trading venues account for over 22% of volume and receive a significant portion of the retail order flow in the market.” A different commenter, while supporting a broader effort that would include off-exchange venues not limited to ATSs, stated that such an effort should be coupled with an increase in the transparency of information concerning executions that occur on exchanges against non-displayed trading interest.

In response to these comments concerning the scope of the proposal, FINRA noted that it considered various alternatives and concluded that ATS trade information was an appropriate first step toward increased transparency in the off-exchange, OTC market. FINRA stated further that it would consider additional steps, including those suggested by the commenters, in the future.

Some commenters voiced concern with certain elements of the proposal or sought further guidance on how the new requirements would be applied. Of these commenters, a majority argued that the self-reporting requirement should be limited in some fashion because it would soon become unnecessary in light of the proposal's MPID requirement. For example, five commenters asked FINRA to make an affirmative commitment that it will eliminate the reporting requirement once the MPID requirement is fully implemented. Additionally, three commenters suggested that FINRA align the proposal's reporting requirement with Rule 605 of Regulation NMS, meaning that ATSs would report monthly to FINRA rather than weekly. Lastly, four commenters urged FINRA to facilitate compliance with the reporting requirement by establishing a standard, simple format for data transmission.

In its response to these comments, FINRA reiterated that it intends to evaluate the necessity of the self-reporting requirement after the MPID requirement is in place. However, FINRA noted that it would plan to use, for comparison purposes, data reported by ATSs under the self-reporting requirement even when those ATSs have unique MPIDs used exclusively to report trades for the ATS. Moreover, FINRA said that the self-reporting requirement would allow the proposal to more quickly recognize its objective of enhancing ATS transparency. Accordingly, FINRA believes that the self-reporting requirement is a necessary first phase of the proposal. FINRA stated that it would eliminate the self-reporting requirement for ATSs subject to FINRA trade reporting requirements if the MPID requirement is implemented and operating as anticipated.

Aside from the self-reporting requirement, several commenters also expressed concern with FINRA's intent to charge a fee for professionals to access and use the data. These comments ranged from questioning the need for FINRA to charge a fee for data that it would not validate to flatly opposing the imposition of any fee on the data. In response, FINRA noted that it would make available for free on its Web site the most recently reported data, as well as limited historic reports. FINRA also reiterated its plan to charge profession users and data vendors a fee to access professional, downloadable reports; however, FINRA stated it would submit a separate filing to propose the specifics of this data product.

Additionally, one commenter took the position that, if the proposal is approved, FINRA should open up a second formal comment period one year after the rule is implemented to allow for an empirical “retrospective review” of the proposal's costs and benefits. In its response, FINRA disagreed and pointed to the Notice of the Original Proposal, in which FINRA said it “intends periodically to assess the reporting and publication of information to consider whether modifications to the scope of securities covered, the delay between the activity and publication, or the frequency of publication of the information are appropriate.” Moreover, FINRA claimed that it discussed the terms of the proposed rules with a number of ATS operators prior to submitting the proposal, and “continues to believe that the burdens imposed by the Proposal will be minimal for many firms and that the proposed delays in dissemination are sufficient to avoid potentially damaging information leakage of trading information.”

Lastly, one commenter questioned how the proposal would apply to fixed income ATSs in light of the fact that trades from fixed income ATSs may be reported to FINRA by one of the trade counterparties, rather than by the ATS. In response, FINRA pointed out that various of its equity and debt trade reporting rules impose a trade reporting obligation on an ATS, as the “executing party” under FINRA rules, where the transaction is executed by the ATS. FINRA also noted that, under the proposal, it would not publish the trade data reported by fixed income ATSs until it could evaluate the data for consistency.

Furthermore, FINRA submitted Amendment No. 1 to adopt supplementary material to FINRA Rule 4552 to clarify when trades should be considered to have occurred “within an ATS.” Specifically, the proposed supplementary material would provide that a trade should be considered to have occurred within the ATS for purposes of the rule “if the ATS (i) executes the trade; (ii) is considered the `executing party' to the trade under FINRA rules; or (iii) otherwise matches orders constituting the trade in a manner as contemplated by SEC Rule 3b-16 or SEC Regulation ATS.” So, for example, a trade would be considered to have occurred “within an ATS” if the ATS “uses established, non-discretionary methods under which orders interact with each other, and the buyers and sellers entering the orders agree to the terms of the trade.”

The proposed supplementary material would further provide a non-exhaustive list of scenarios to illustrate how the “within an ATS” standard would be applied. The list would include: if the trade was executed as a result of the ATS bringing together the purchaser and seller on or through its systems; if the trade was executed by an ATS's subscribers where the subscribers used the ATS system to negotiate the trade, even if the ATS did not itself execute the trade; if the ATS takes either side of the trade for clearance or settlement or in any other way inserts itself into a trade. The supplementary material would also provide that a trade would not be considered to have occurred “within the ATS” if an ATS were to route an order to another member firm or execution venue for handling or execution where that initial order matches against interest resident at the other venue.

IV. Solicitation of Comments

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

Electronic Comments

• Use the Commission's Internet comment form ( http://www.sec.gov/rules/sro.shtml ); or
• Send an email to rule-comments@sec.gov. Please include File Number SR-FINRA-2013-042 on the subject line.

Paper Comments

• Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR—FINRA-2013-042. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site ( http://www.sec.gov/rules/sro.shtml ). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing will also be available for inspection and copying at the principal office of FINRA. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make publicly available. All submissions should refer to File Number SR-FINRA-2013-042 and should be submitted on or before February 14, 2014.

V. Commission Findings

After carefully considering the proposed rule change, as modified by Amendment No. 1, the comments submitted, and FINRA's response to the comments, the Commission finds that the proposed rule change, as modified by Amendment No. 1, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities association. In particular, the Commission finds that the proposed rule change, as modified by Amendment No. 1, is consistent with Section 15A(b)(6) of the Act, which requires, among other things, that FINRA rules be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest.

The Commission believes that the stated objectives of the proposal—to enhance FINRA's regulatory capabilities with respect to ATSs and to increase public transparency with respect to ATS activity—would further the purposes of the Act. By better enabling FINRA to surveil ATSs for compliance with Regulation ATS, and the display and fair access requirements applicable to ATSs that exceed certain volume thresholds, the proposal is reasonably designed to help prevent fraudulent and manipulative acts and practices and to protect investors and the public interest. By collecting and publishing weekly volume statistics (first, through the self-reporting requirement, and later, potentially, through the MPID requirement), the proposal would increase the amount of information that is publicly available concerning trades that occur in equity ATSs. As many commenters noted, such added transparency would allow regulators and the public to more fully understand the role that equity ATSs play in the marketplace.

The Commission further believes that the proposal is reasonably tailored to achieve these objectives. The self-reporting requirement, which is meant to constitute the first phase of the proposal, will more quickly deliver the benefits of the proposal, and also provide a comparsion for the data that FINRA will receive once the MPID requirement is fully in effect. While the Commission acknowledges that some commenters took issue with the additional costs that could potentially be incurred as a result of the weekly self-reporting requirement, the Commission notes, as FINRA did in its Notice of Original Proposal, that ATSs are already required by Regulation ATS to maintain daily summaries of their trading activities.

In addition, the method of making the ATS trade data publicly available—a two-week delay for Tier 1 NMS stocks and a four-week delay for all other NMS stocks and OTC Equity Securities—appears reasonably designed to balance the desire to inform the public about ATS trading activity with the desire to protect the trading strategies of ATS subscribers. The Commission notes that three commenters supported this element of the proposal, and no commenter objected to the proposed delays for publishing the trade data.

The Commission believes that requiring a member operating an ATS to obtain for each such ATS a single, unique MPID that is designated for exclusive use by the ATS is consistent with the Act. This aspect of the proposal is reasonably designed to create a more reliable and consistent audit trail for ATS activity, from the time an order is received until the time it is executed or cancelled. This is especially important for firms that conduct both ATS and other broker-dealer activities. Currently, if a member uses a single MPID for both its ATS activity and traditional broker-dealer activity, or uses a single MPID to report the activity of two or more ATSs, it could be difficult if not impossible to track the flow of orders through these systems. The Commission agrees with FINRA's assessment that the fact that many firms already use separate MPIDs in the manner now required by this proposed rule change is evidence that the costs of using multiple MPIDs as contemplated by the proposal is not unduly burdensome. Because the proposal requires some firms to obtain and use multiple MPIDs, FINRA has proposed to make permanent certain rules, currently operating on a pilot basis, that allow firms to use multiple MPIDs. The Commission also believes that it is consistent with the Act to make those rules permanent.

Lastly, the Commission believes that the supplementary material included in Amendment No. 1 is consistent with the Act. In response to the initial proposal, one commenter questioned how the proposal would apply to fixed income ATSs, where it is common practice for trades to be given up to the broker-dealer counterparties. FINRA responded by providing new Supplementary Material .01 to proposed Rule 4552 explaining when transactions are attributable to the ATS for purposes of the proposal's volume reporting provisions. In general, the supplementary material would require a transaction to be included in its reporting to FINRA if the ATS executes the trade, is the “executing party” to the trade under FINRA rules, or if the ATS otherwise matches orders constituting the trade in a manner contemplated by Rule 3b-16 under the Exchange Act and Regulation ATS. The Commission believes that it is consistent with the Act for FINRA to attribute volume to an ATS when the transactions underlying that volume would cause the entity itself to meet the criteria of Rule 3b-16.

VI. Accelerated Approval

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

VII. Conclusion

It is therefore ordered pursuant to Section 19(b)(2) of the Act that the proposed rule change (SR-FINRA-2013-042), as modified by Amendment No. 1, be and hereby is approved on an accelerated basis.