[1] Create your Watchlist to save your favorite quotes on Nasdaq.com. Why or why not? Cookies collect information about your preferences and your devices and are used to make the site work as you expect it to, to understand how you interact with the site, and to show advertisements that are targeted to your interests. Response: Yes. These limited customer-specific disclosures are required for held orders as well as not held orders for which a more detailed customer-specific report is not required under new Rule 606(b)(3). FINRA believes these same goals would be furthered by applying certain aspects of Rule 606, as amended, to orders in OTC Equity Securities.9In particular, FINRA believes that public disclosure of order routing practices and arrangements, including payment for order flow, would enhance competition and benefit customers who participate in the markets for OTC Equity Securities. Commission Interpretation Regarding Automated Quotations Under Regulation NMS A Rule by the Securities and Exchange Commission on 06/23/2016 Document Details Printed version: PDF Publication Date: 06/23/2016 Agency: Securities and Exchange Commission Dates: Effective June 23, 2016. Reg NMS II. FINRA believes that, at present, customers receive limited information on how members route their orders in OTC Equity Securities, any payments that members receive from execution venues related to the routing of these orders and the relative order execution quality by member or execution venue. Are broker-dealers typically compensated for all orders routed to venues for execution in the OTC market or only for orders that are actually executed at the venue? Regulation National Market System (NMS) is a set of rules passed in 2005 by the Securities and Exchange Commission (SEC) that sought to refine how all listed U.S. stocks are traded. The information in these reports would permit customers to evaluate broker-dealer routing decisions more effectively and be better informed in making choices among broker-dealers. 12 Rule 606(a) requires reports for NMS securities to be made available using the most recent versions of the XML schema and the associated PDF renderer as published by the SEC on its website. Comments must be submitted through one of the following methods: To help FINRA process and review comments more efficiently, persons should use only one method to comment on the proposal. NMS Plans: Any two SROs may propose changes to NMS via an NMS plan. See id. SIP Registration: Including applications for changes to rules of the SIP must be submitted on Form SIP.. Given the current structure of the OTC market, FINRA does not believe breaking out disclosures by these order types would provide useful information for OTC Equity Securities at this time. Trade dissemination: All trades must be reported. However, routing solely to maximize rebates or minimize transaction fees may result in lower execution quality than alternative routing strategies. Why or why not? If so, which market participants, and why? Consequently, the largest average number of symbols routed per firm was for ADRs and foreign ordinaries, but the average number of orders per symbol per firm was largest for domestic OTC Equity Securities. The Best Execution section of the 2022 Report on FINRAs Risk Monitoring and Examination Activities (the Report) informs member firms compliance programs by providing annual insights from FINRAs ongoing regulatory operations, including (1) relevant regulatory obligations and related considerations, (2) exam findings and effective practices, and (3) additional resources. In general, comments will be posted as they are received.1, Before becoming effective, the proposed rule change must be filed with the SEC pursuant to Section 19(b) of the Securities Exchange Act of 1934 (SEA or Exchange Act).2. FINRA requests that commenters provide empirical data or other factual support for their comments wherever possible. These numbers represent the potential upper bound on the maximum possible number of firms by security category that could be required to provide the proposed disclosure reports, as some firms may not handle customer orders (based on fourth quarter of 2020 data). Thus, the size of a customer limit order is considered de minimis for purposes of Rule 6460 if . Theoretical models of the conflict between investors and their broker-dealers, who have an incentive to route orders based on the take fees paid or rebates charged by exchanges, find that the conflict of interest reduces investor utility.26 Using Rule 606 data, one study examined broker-dealer routing of non-marketable limit orders in NMS stocks to exchanges offering the largest rebate. Brokerage commissions, if charged, may depend on the amount of payment for order flow received and net make-take fees paid by the broker-dealer. Comments must be received by December 6, 2021. Consistent with the definition of directed order under Regulation NMS, a directed order would mean a customer order that the customer specifically instructed the member to route to a particular venue for execution. 23 Boehmer, Ekkehart, Robert Jennings, and Li Wei, 2006, Public Disclosure and Private Decisions: Equity Market Execution Quality and Order Routing, The Review of Financial Studies, 20: 315358. 27 Battalio, Robert, Shawn Corwin, and Robert Jennings, 2016, Can Brokers Have It All? Exchanges report directly to SIPs. Should this proposal be adopted, customers may more easily consider indirect and less observable costs, such as transaction fees paid less rebates or payment for order flow. How this affects you. SUPPLEMENTARY INFORMATION: I. Please be specific. Specifically, for each of the three categories of OTC Equity Securities noted above, the new quarterly reports would require the following disclosures: FINRA preliminarily believes that these targeted public disclosures, tailored to the unique characteristics of OTC Equity Securities, would represent an important first step toward increasing transparency around order routing practices in the OTC market. Please explain. A proposed sample of the reports format is provided in Attachment A. FINRA is proposing that the new quarterly reports for OTC Equity Securities be separated into sections for: (i) domestic OTC Equity Securities; (ii)American Depository Receipts (ADRs) and foreign ordinaries that are OTC Equity Securities; and (iii)Canadian-listed securities trading in the United States as OTC Equity Securities.13FINRA understands that in many instances broker-dealers currently segment securities into these categories for purposes of their internal assessments of routing and execution quality and other operational processes. After a proposed rule change is filed with the SEC, the proposed rule change generally is published for public comment in the Federal Register. Should GDRs be covered by the proposed routing disclosure reports? Why or why not? Once the system to create the proposed reports is built, there would be fixed costs for maintaining the system and on-going compliance costs, and variable costs for creating and posting the publicly available quarterly reports. With respect to the content of the quarterly public reports within each of the three security-type sections noted above, FINRA is proposing disclosures similar to those required under Rule 606(a) for NMS stocks, but simplified to provide more targeted information relevant to the market for OTC Equity Securities. Do commenters agree that reports should be published on a quarterly basis, broken out by calendar month? This reflects the generally lower prices for domestic OTC equites and Canadian-listed securities that trade OTC in the U.S. than for ADRs and foreign ordinary shares. at 58372 (the Commissions main concern with held NMS stock orders is the impact of intensified competition for customer order flowparticularly retail investor order flowthat has arisen concomitant with the rise in the number of trading centers and the introduction of new fee models for execution services. The rule applies to all Reg NMS securities, except those for which the price of the quotation was less than $1.00. Sub-penny trading is a practice where brokers and dealers trade in increments of less than a penny through wholesalers, dark pools, and lit exchanges. If yes, which market participants would find the disclosures useful? 9 FINRA notes that the SECs Equity Market Structure Advisory Committee (EMSAC) recommended enhancing the current order routing disclosures required under Rule 606 with information about OTC Equity Securities. Regulation NMSRegulation of the National Market System Source: 70 FR 37620, June 29, 2005, unless otherwise noted. The SEC did not specifically define held or not held orders in amended Rule 606, but stated that typically a not held order provides the broker-dealer with price and time discretion in handling the order, whereas a broker-dealer must attempt to execute a held order immediately. The proposed fees would apply uniformly to all market participants regardless of the number of connections they choose to purchase. Why or why not? OTC Equity Security routing data is currently not required to be publicly available and no studies have been conducted on the quality of order handling services provided by broker-dealers for such securities. Finally, if broker-dealers stop or limit routing orders to venues paying rebates or making payments for order flow, given the existence of the proposed reports, then these venues may reduce or eliminate these financial incentives as their volume declines. Trade Reporting Facilities (TRFs) and the Alternative Display Facility (ADF) are not considered trading centers or SRO trading facilities under SEC Regulation NMS and its Order Protection Rule. The reports would be required to be posted on a website that is free and readily accessible to the public for three years, and would be required to be made available in a standardized format to be determined by FINRA.12These proposed format and timing requirements are in line with the reports required for NMS securities under Rule 606(a). Computers are also more deterministic and predictable in their intentions than most human traders. Reg NMS also mandated market-wide cross-connectivity, allowing for a competitive and distributed market. Some proposed rule changes take effect immediately upon filing with the SEC. 28 Di Maggio, Marco, Jerry Liu, Savina Rizova, and Ryan Wiley, 2020, Exchange Fees and Overall Trading Costs, Working Paper. In addition, the SEC approved amendments to NASD Rules that align them with Regulation NMS requirements, facilitate oversight, and enhance transparency. Under the proposal, member firms would be required to disclose the identity of the ten venues to which the largest number of total non-directed orders were routed for execution, as well as any venue to which five percent or more of non-directed orders were routed for execution. Copy and paste multiple symbols separated by spaces. Automation also hastened the development of statistical arbitrage and quant strategies, which in turn led to more liquidity. prevent trade-throughs of protected quotations, unless an exception or exemption applies. Under the Regulation NMS Plan to Address Extraordinary Market Volatility, transactions that (1) do not update the last sale price (except if solely because the transaction was reported late) and (2) are excepted or exempt from the SEC's trade-through rule (Reg NMS Rule 611) can be executed outside the price bands. 16 20 A firm is defined as having Central Registration Depository number. See SEA Section 19(b)(3) and SEA Rule 19b-4. Why or why not? FINRA, however, reserves the right to redact, remove or decline to post comments that are inappropriate for publication, such as vulgar, abusive or potentially fraudulent comment letters. at 58377-78; see also EMSAC Recommendation at 2 (recommending that the SEC could consider centralizing [Rule 605 and 606] report creation in an unbiased and trusted source such as FINRA). Rule 603 of Regulation NMS (Vendor Display Rule) generally requires broker-dealers to provide a consolidated display of market data for NMS stocks for which they provide quotation information to customers. Table 1: Summary of what Reg NMS rules cover. 1 Warren Buffett Stock Down 86% You'll Regret Not Buying on the Dip, Two Bullish Announcements Create a Stir in Lucid Group Stock. Do the proposed categories appropriately capture all relevant types of OTC Equity Securities for purposes of the proposed routing disclosure reports? The purpose of these disclosures is to assist investors in better understanding how broker-dealers route their orders and the impact of this routing on order execution quality. The SEC is proposing to amend Regulation NMS to (1) amend the tick sizes under Rule 612 to establish a variable minimum pricing increment model that would apply to both the quoting and the trading of NMS stocks; (2) reduce the access fee caps under Rule 610 of Regulation NMS in conjunction with the reduction of the minimum pricing increments . 18 Similar to Rule 606(a), the types of arrangements referenced above are not an exhaustive list of terms of payment for order flow arrangements or profit-sharing relationships that may influence a broker-dealers order routing decision that would be required to be disclosed. If so, should disclosures be broken out into the same order types as Rule 606(a) or would a different categorization be more appropriate for OTC Equity Securities? They are not a rule, regulation, or statement of the Commission. In addition to general comments, FINRA specifically requests comments on the following questions: 1 Parties should submit in their comments only personally identifiable information, such as phone numbers and addresses, that they wish to make available publicly. NMS security designation and definitions. If not, do commenters believe breaking out disclosures further by order type would provide beneficial information? Further updates to Regulation NMS have been recommended by its critics. As a result, the Exchange believes that the proposed changes further the Commission's goal in adopting Regulation NMS of fostering competition among orders, which promotes "more efficient . Therefore, for example, Canadian securities that are listed in Canada and trade OTC in the U.S. market would fall into category (iii) (Canadian-listed securities trading in the United States as OTC Equity Securities), while Canadian securities that trade only OTC in the United States would fall into category (i) (domestic OTC Equity Securities). As discussed above, increased transparency into order routing practices in the market for NMS stocks may lead broker-dealers to change how they route held orders in ways that reflect positively on their routing decisions, but that may be suboptimal for customers on execution quality dimensions that are less easily observable. Beginning in 2010, FINRA incorporated the principles of several rules from Regulation NMS into the regulatory framework for OTC Equity Securities.3Specifically, FINRA adopted NMS-Principled Rules that govern four areas of quotation practices for OTC Equity Securities: minimum pricing increments, locking and crossing quotations, access fees and limit order display.4The purpose of the NMS-Principled Rules was to enhance market quality and to better protect investors in unlisted stocks. If commissions paid by investors are conditioned on the fees paid and rebates received by broker-dealers, then investors may be indifferent to which type of exchange broker-dealers route orders. Dissemination of transaction reports and last sale data with respect to transactions in NMS stocks. In 2018, the SEC amended Rule 606 of Regulation NMS to enhance the content of, and modify the scope of, the public standardized reports that a broker-dealer must publish concerning the broker-dealers handling of customers held orders. In addition, as Rules 605 and 606 went into effect at approximately the same time, these studies are unable to distinguish between the separate effects of order execution quality disclosure under Rule 605 and that of order routing disclosure under Rule 606 on the routing of orders in NMS stocks. The Best Execution, Outside Business Activities and Private Securities Transactions, Private Placements, and Reg BI and Form CRS sections of the 2023 Report on FINRAs Examination and Risk Monitoring Program (the Report) informs member firms compliance programs by providing annual insights from FINRAs ongoing regulatory operations, including (1) regulatory obligations and related considerations, (2) findings and effective practices, and (3) additional resources. Do commenters agree with this requirement? 242.600 NMS security designation and definitions. Data costs: SROs may impost reasonable, uniform charges for trade dissemination. FINRA also reserves the right to redact or edit personally identifiable information from comment submissions. The SEC recently proposed conditional exemptive relief that would allow the distribution of quotes and data in an expert market for securities that would otherwise trade in the grey markets. What costs would be associated with the proposed disclosure reports? Access fees: Limited to 30mils (silent on rebates). There are, however, studies that examine the benefits of transparency around the implementation of Rules 60521and 606 of Regulation NMS with respect to member routing and venue execution quality for NMS stocks. Similarly, if a broker-dealer receives variable payments or discounts based on order types and the amount of orders sent to a venue, or if the level of execution quality is negotiated for an increase or decrease in payment for order flow, such arrangements would be required to be disclosed. On April 6, 2005, the Commission adopted Regulation NMS, a series of initiatives designed to modernize and strengthen the national market system for equity securities. Some have gone as far as suggesting the policies be replaced entirely in favor of new rules more in line with previous trading practices. Make-take fees may lead to such agency conflicts and rebate volume pricing tiers may worsen such conflicts further24,25. The Reg NMS Trade Through Report Card is a monthly statistical report detailing the transactions in NMS Securities that appear to have been reported by your firm to a Trade Reporting Facility ("TRF") or to FINRA's Alternative Display Facility at a price that traded through at least one protected best bid or offer at the respective time of execut. In particular, broker-dealers may pay costs to: identify which orders are non-directed and submitted on a held basis; differentiate between domestic OTC Equity Securities, ADRs and foreign ordinaries that are OTC Equity Securities, and Canadian-listed securities that trade in the U.S. as OTC Equity Securities; and determine the net aggregate amount of any payment for order flow received and net rebates received in total and per order. 13 For purposes of these categories of OTC Equity Securities, securities would be delineated based on the market where such securities trade, rather than on the location of the issuer. Furthermore, the average number of quotes per symbol and per firm, 37,831, was the largest for Canadian-listed securities that trade OTC in the U.S., as compared to 1,203 for domestic and 25,105 for ADRs and foreign ordinaries. These symbols will be available throughout the site during your session. If not, how should the reports be broken out? After implementation of Rule 605, effective and quoted spreads for NYSE-, AMEX-, and NASDAQ-listed stocks declined significantly.22In addition, the implementation of Rules 605 and 606 resulted in broker-dealers increasingly routing orders in NMS stocks to venues that offered better execution quality on the dimensions of effective spreads and fill rates, which suggests these reports contain information that appears useful in routing decisions.23, Studies analyzing the market for NMS stocks indicate that broker-dealers may route orders to maximize order flow payments by sending market orders to venues making such payments and sending limit orders to venues paying large liquidity rebates. If you believe grey market securities should be treated differently and not subject to the proposed disclosures, what basis do you believe exists to exclude them? Routing: This currently applies to small orders only (under $200,000) and requires disclosure of Top 10 routing destinations by brokers, financial incentives with destinations including PFOF and profit sharing. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses.