FINRA Requests Comment on a Proposal to Publish OTC Equity Volume Executed Outside Alternative Trading Systems

* The comment period has been extended to February 20, 2015.

Equity Trading Initiatives: OTC Equity Trading Volume

Executive Summary

FINRA requests comment on a proposal to expand FINRA's alternative trading system (ATS) transparency initiative to publish the remaining equity volume executed over-the-counter (OTC), including non-ATS electronic trading systems and internalized trades. FINRA believes that the public will be able to better understand a firm's trading of equities off exchanges by reviewing the firm's new OTC equity trading volume information together with its existing ATS volume reports.

The proposed rule text is set forth in Attachment A.

Questions concerning this Notice should be directed to:

Action Requested

FINRA encourages all interested parties to comment on the proposal. Comments must be received by Friday, January 9, 2015.

Comments must be submitted through one of the following methods:

To help FINRA process comments more efficiently, persons should use only one method to comment on the proposal.

Important Notes: The only comments that FINRA will consider are those submitted pursuant to the methods described above. All comments received in response to this Notice will be made available to the public on the FINRA website. Generally, FINRA will post comments as they are received.¹

Before becoming effective, the proposed rule change must be filed with the Securities and Exchange Commission (SEC) pursuant to Section 19(b) of the SEA.²

Background & Discussion

The proposal set forth in this Notice is one of seven FINRA initiatives relating to equity market structure and automated trading activities including high frequency trading (HFT).³ These initiatives are designed to increase the scope of trading information FINRA receives, provide more transparency into trading activities to market participants and investors and require firms engaged in electronic trading and their employees to be trained, educated and accountable for their role in equity trading.

Under FINRA rules, each ATS is required to report its weekly volume, by security, to FINRA, and as of February 2, 2015, each ATS 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 website.⁴ Pursuant to the proposal, FINRA is considering expanding this transparency initiative by publishing the remaining equity trading volume executed OTC by each firm on a security-by-security basis. The proposal would provide additional transparency into a significant portion of the OTC market⁵ by enabling market participants and investors to get a better understanding of each firm's OTC trading.

FINRA would derive a firm's non-ATS volume information directly from OTC trades reported to FINRA's equity trade reporting facilities (i.e., the Alternative Display Facility, a Trade Reporting Facility or the OTC Reporting Facility). As such, firms would not have any new or additional reporting requirements as a result of the proposal. A firm's non-ATS volume would be based on trades reported for dissemination purposes—or "tape reports"—on which the firm is identified as the member firm with the trade reporting obligation—or "Executing Party."⁶ A firm's published trading volume information would not include trades for which the firm is the reported contra party,⁷ nor would it include trades that are reported for regulatory or clearing purposes only—or "non-tape reports." Volume information for each equity security would be published on the FINRA website on a twoweek or four-week delayed basis in accordance with the time frames specified for ATS volume publication.⁸

As noted above, FINRA would publish non-ATS trading 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 firms that use more than one MPID for their non-ATS trading,⁹ FINRA would 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.¹⁰

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, FINRA would combine volume from all firms that do not meet a specified minimum threshold and publish such de minimis volume information for those firms 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 notes that all of the OTC volume would be published, but for firms that meet the de minimis threshold, their volume would not be attributed by name.

FINRA is proposing to establish a threshold of fewer than on average 200 non-ATS transactions per day executed by the firm in the 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).¹¹ FINRA reviewed volume statistics for firms across all securities for a one-week period (June 23–29, 2014). This review indicates 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 60 firms—which account for over 98 percent of all trading volume—would have volume attributed by name.

Thus, under the proposal, if a firm averages below 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 below 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. For example, if, during the reporting period, Firm 1 averages 10,000 trades per day across all securities, but averages only 50 trades per day in ABCD security, Firm 1's volume in ABCD security would be aggregated with other firms' volume in ABCD for that period.

FINRA seeks comment on the appropriate de minimis threshold, and to help inform comments, presents volume statistics at alternative thresholds for the one-week period cited above:

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. However, FINRA believes that publishing non-ATS trading volume information at more granular levels may increase the potential impact on firms and may raise concerns about potential information leakage, such as the possibility that a firm's trading activity or strategy could be discerned from the data. Further 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 of the same concerns about information leakage. Thus, FINRA currently is not proposing to publish the non-ATS volume data at more granular levels than by firm and security. FINRA believes that this approach, coupled with the delayed publication of data, should address any concerns a firm may have regarding potential information leakage.

Economic Impacts

Anticipated Benefits

As discussed above, the proposal would expand the benefits of FINRA's ATS transparency program by providing additional transparency on the remaining equity volume executed OTC. The increased transparency would enable market participants and investors to better understand a firm's trading of equities off exchanges, thereby enhancing their understanding of executing firms' trading volume and market shares in the equity market.

Anticipated Costs

The proposal would not impose any additional reporting requirements on firms, and as a result, would have minimal impact on firms from a systems development perspective. FINRA, however, will incur costs for standardizing and compiling the data, development, testing, quality control, business support, and storage and maintenance of the data. While FINRA currently publishes ATS volume data on its website, the proposal would impose additional costs for Web page development and software changes to present the information as proposed, e.g., for purposes of the de minimis threshold and aggregation of volume executed by a single market participant's multiple MPIDs.

For fee purposes, this data may be combined with the ATS data that is currently available and for which subscribers are charged under Rule 4553.

Request for Comment

FINRA seeks comments on the proposal outlined above. In addition to general comments, FINRA specifically requests comment on the following questions:

FINRA requests that commenters provide empirical data or other factual support for their comments wherever possible.

¹ FINRA will not edit personal identifying information, such as names or email addresses, from submissions. Persons should submit only information that they wish to make publicly available. See NTM 03-73 (November 2003) (NASD Announces Online Availability of Comments) for more information.

²See Section 19 of the Securities Exchange Act of 1934 (SEA) and rules thereunder. After a proposed rule change is filed with the SEC, the proposed rule change generally is published for public comment in the Federal Register. Certain limited types of proposed rule changes, however, take effect upon filing with the SEC. See SEA Section 19(b)(3) and SEA Rule 19b-4.

³See FINRA September 19, 2014, News Release "FINRA Board Approves Series of Equity Trading and Fixed Income Rulemaking Items".

⁴ ATS volume information regarding fixed income securities currently is not being disseminated.

⁵ For example, for the period from May 12 through June 23, 2014, approximately 57 percent of the share volume of OTC trades in NMS stocks was executed outside an ATS.

FINRA notes that its purview extends only to OTC data, and as such, this proposal does not apply to publication of data relating to trades executed on an exchange.

⁶ Under FINRA rules, in a trade between a member and non-member or customer, the member has the obligation to report the trade, and in a trade between two members, the "Executing Party," defined as the member that receives an order for handling or execution or is presented an order against its quote, does not subsequently re-route the order, and executes the transaction, has the obligation to report the trade. See Rules 6282, 6380A, 6380B and 6622.

⁷ FINRA is proposing to include only volume from the executing party perspective because otherwise, published OTC volume would be inflated (i.e., publishing volume from both the executing party and contra party perspectives would double count the executed volume).

⁸ Under Rule 4552, ATS volume information is 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.

⁹ For example, a firm may use separate MPIDs for its proprietary and agency desks.

¹⁰ FINRA reiterates that a firm's ATS volume will continue to be published separately under the unique MPID(s) for each ATS operated by the firm.

¹¹ Specifically, the SEC exempted any market center that reported fewer than 200 transactions per trading day on average over the preceding six month period in securities that are covered by the rule. See letter from Annette L. Nazareth, Director, Division, to Richard Romano, Chair, and Carl P. Sherr, Vice-Chair, NASD Small Firms Advisory Board, dated June 22, 2001.

Attachment A

Below is the text of the proposed rule change. Proposed new language is underlined; proposed deletions are in brackets.

6000. QUOTATION AND TRANSACTION REPORTING FACILITIES

6100. QUOTING AND TRADING IN NMS STOCKS

6110. Trading Otherwise than on an Exchange

"Trading Information" for purposes of this Rule shall not include any transactions executed within an alternative trading system, which information is published under Rule 4552.

6600. OTC REPORTING FACILITY

6610. General

"Trading Information" for purposes of this Rule shall not include any transactions executed within an alternative trading system, which information is published under Rule 4552.