Interpretive Letter to Claudia Crowley, NYSE Regulation, Inc.
May 21, 2010
Ms. Claudia Crowley
NYSE Regulation, Inc.
20 Broad Street, 24th Floor
New York, NY 10005
Facsimile: (212) 656-2223
Re: OATS Recording and Reporting Obligations for NYSE Amex Floor Brokers
Dear Ms. Crowley:
This is in response to the letter from NYSE Regulation dated March 15, 2010, as supplemented by discussions with FINRA staff, in which NYSE Regulation requests interpretive guidance regarding the recording and reporting obligations under the FINRA Rule 7400 Series (the “OATS Rules”). Specifically, you ask whether orders involving Nasdaq-listed securities (“Nasdaq Securities”) received by certain NYSE Amex floor brokers from NYSE Amex members through the Exchange’s systems would be subject to the Order Audit Trail System (“OATS”) recording and reporting requirements under the OATS Rules. As discussed below, FINRA staff believes that such orders would not be subject to the OATS Rules.
Based upon your letter, as supplemented by conversations with FINRA staff, we understand the facts to be as follows.
NYSE Amex LLC (“NYSE Amex” or the “Exchange”) is proposing to trade Nasdaq Securities pursuant to a grant of unlisted trading privileges in accordance with the Joint UTP Plan. The Exchange anticipates adopting appropriate rules, subject to SEC approval, governing trading in Nasdaq Securities on the Exchange.
Almost every order received by a NYSE Amex floor broker from a NYSE Amex member is received through the Exchange’s systems.1 Specifically, orders that are electronically routed to the Exchange by NYSE Amex member firms or their sponsored participants (including third-party service bureaus) enter Exchange systems through the Common Customer Gateway, where they are automatically captured in the broker systems that feed the Exchange’s audit trail, and are processed in accordance with the customer’s instructions, including routing the order to the appropriate floor broker. Consequently, when a floor broker receives an order, that order has already been routed to the Exchange for execution. After receiving the order, the floor broker manages the order through the Exchange’s Broker Booth Support System™ (“BBSS”), which is part of a suite of broker systems that are maintained and managed by the Exchange as Exchange facilities. Through BBSS, a floor broker can send the order directly to the point of sale (by sending the order through the Exchange’s Super Display Book™ system) or route it to an eBroker™ handheld trading device to be represented in the trading crowd (either orally or via an e-Quote).
Regardless of the method chosen, when a floor broker receives an order from a NYSE Amex member through the Exchange’s systems, the floor broker’s handling of that order is subject to applicable Exchange rules and oversight.
You have asked whether orders involving Nasdaq Securities received by certain NYSE Amex floor brokers2 from NYSE Amex members through the Exchange’s systems would be subject to the recording and reporting requirements under the OATS Rules.
The OATS Rules generally require FINRA member firms to record and report certain order information for orders in Nasdaq Securities and over-the-counter equity securities. For the purposes of the OATS Rules, Rule 7410 defines an “order” as “any oral, written, or electronic instruction to effect a transaction in an equity security listed on the Nasdaq Stock Market . . . that is received by a member from another person for handling or execution . . . or that is originated by a member . . . other than in the ordinary course of a member’s market making activities.” Among other things, FINRA Rule 7440 requires members to record information concerning order receipt, order transmittal (including transmission of an order to another department within the firm, another FINRA member, an Electronic Communications Network, and a non-FINRA member), and order execution, and FINRA Rule 7450 sets forth the reporting requirements for this information.
As you note in your letter, a NYSE Amex floor broker’s handling of an order received from a NYSE Amex member through the Exchange’s systems is governed by applicable NYSE Amex rules, including Rule 123 (“Record of Orders”) and Rule 132B (“Order Tracking Requirements”), which together require floor brokers to maintain and preserve data elements regarding the order that are substantially similar to the data elements required in the OATS Rules. Unlike the OATS Rules, which require same-day reporting to FINRA of OATS information, NYSE Amex Rule 132C requires NYSE Amex member organizations, including floor brokers, to transmit those records to the Exchange upon request. You note further that this information is also available to FINRA upon request.
You also note in your letter that, under FINRA Rule 7440(c)(6), the transmission of an order by a FINRA member to a national securities exchange ends that member’s OATS recording and reporting obligations. Once the order reaches the Exchange, the handling of that order by Exchange members, including NYSE Amex floor brokers, is within the regulatory ambit of the Exchange and subject to applicable Exchange rules.
As noted above, an order is subject to the OATS Rules only if it is received “from another person for handling or execution.”3 In the circumstances described above, FINRA staff believes that the NYSE Amex floor broker is effectively receiving the instructions from the Exchange and through the Exchange’s systems in order to fulfill an Exchange function. At all times, the floor broker’s activities are subject to all applicable Exchange rules (including the recordkeeping rules) and are within the scope of the Exchange’s regulatory oversight. FINRA staff does not believe that orders in Nasdaq Securities received by NYSE Amex floor brokers from other NYSE Amex members through the Exchange’s systems are “orders” for purposes of the OATS Rules that must be reported to OATS when the floor broker does not have the ability to route the order outside of the Exchange.4 FINRA staff also believes that this position is consistent with FINRA Rule 7440(c)(6), which recognizes the point at which OATS obligations typically cease with respect to orders routed to an exchange.
We trust that this letter is responsive to your request. Please note that the opinions expressed herein are staff opinions only and have not been reviewed or endorsed by the FINRA Board of Governors. This letter responds only to the issues you have raised based on the facts as you have described them and the current OATS Rules, and does not address any other rule or interpretation of FINRA, or all the possible regulatory and legal issues involved. In addition, you should be aware that any changes in the facts as you have described them or any amendments to the OATS Rules will require further consideration and may cause us to reach a different conclusion.
Brant K. Brown
Associate General Counsel
1 Your request is limited to orders that are received by NYSE Amex floor brokers through Exchange systems. Consequently, the interpretive guidance provided in this letter is limited to such orders and does not apply to orders that are received by means other than an Exchange system (e.g., orders received over the telephone).
2 Your request does not apply to any firm approved by NYSE Regulation to route orders away from the Exchange pursuant to NYSE Rule 70.40. Your request acknowledges that orders in Nasdaq Securities handled by such firms would be subject to the OATS Rules because those firms retain the ability to route orders away from the Exchange.
3 In addition, proprietary orders originated other than in the ordinary course of a member’s market making activity are reportable.
4 We emphasize that the interpretive guidance provided in this letter is applicable to the OATS Rules only and does not affect the application of any other FINRA rules concerning “orders” or the application of any of the federal securities laws or SEC Rules (e.g., applicable recordkeeping or order handling rules).