June 13, 2007
On July 9, 2007, the Regulation NMS Pilot Stock Phase is scheduled to begin. In this regard, as described in NASD Notice to Member (NTM) 07-23, NASD has adopted new transaction reporting modifiers that member firms are required to use when reporting to NASD facilities (each of NASD's Trade Reporting Facilities (TRFs) and the Alternative Display Facility (ADF)), whether a transaction qualifies for an exception or an exemption to SEC Rule 611.
NASD is publishing this Member Alert to provide further clarification on the appropriate "execution time" to be reported to NASD under certain circumstances when executing a block transaction using the Intermarket Sweep Order (ISO) exception (outbound), pursuant to SEC Rule 611(b)(6). Specifically, to comply with the ISO exception simultaneously with execution of the block transaction, the firm is required to route an ISO to execute against the full displayed size of any protected quotation with a price superior to the block transaction price (see question and answer 13 in NTM 07-23). In those circumstances where the firm's customer is silent or affirmatively chooses to receive the benefit of any better prices obtained by the execution of such routed ISOs, any fills received from the execution of the routed ISOs must be reflected in the size of the block transaction that is reported to NASD with the ISO exception.
SEC staff has stated its view that, if the routed ISOs are marked as immediate-or-cancel, the firm could await responses to the ISOs for a reasonable time (e.g., five seconds or less) prior to reporting the block transaction. Under these circumstances, SEC staff would consider the firm to have met the "simultaneous routing" requirement of SEC Rule 611(b)(6).1 Based on conversations with SEC staff, because the execution time for a transaction is the time that all material terms are known, the execution time to be reported for the block transaction in this scenario is the time that the firm has determined all the material terms of the block transaction, including, but not limited to, the final number of shares executed after reflecting any fills of routed ISOs. It should be noted that, under such circumstances, the execution time on the trade report will be different than the time the broker-dealer uses to determine whether ISOs were properly routed to execute against any better-priced protected quotations. In surveiling for compliance with SEC Rule 611(b)(6) in this context, firms should compare routed ISOs with the protected quotations that were displayed at the time of routing.
NASD understands that some firms have programmed their systems to use the time that ISOs are sent to trading centers with protected quotations that are priced superior to the block transaction price as the execution time rather than the time all material terms were known, including the number of shares executed. To address concerns raised by firms that have programmed their systems in this manner, NASD has determined, in consultation with SEC staff, that on a temporary basis until October 31, 2007, member firms will be permitted to submit the time of execution on trade reports as either: (1) the time all material terms are known; or (2) the time that ISOs are sent to trading centers with protected quotations that are priced superior to the block transaction price.2
NASD, however, expects that all firms will make the necessary programming changes in order to report the execution time in conformity with the guidance provided in this Member Alert by no later than October 31, 2007.
1 See Questions 3.03 and 3.14, Division of Market Regulation: Responses to Frequently Asked Questions concerning SEC Rule 611 and Rule 610 of Regulation NMS (June 8, 2007 update).
2 NASD understands that some firms, particularly those that use outside vendors for certain functions, may be using different execution times depending on the specific firm system. Accordingly, firms also are permitted to use different execution times within the firm until October 31, 2007.