Financial Industry Regulatory Authority

inra r

Financial Industry Regulatory Authority

Marcia E. Asquith

Senior Vice President and

Corporate Secretary

Direct:

Fax:

(202) 728-8831

(202) 728-8300

November 14. 20 I 6

Robert W. I rrett

I)eputy Secretary

l.).S. Securities and Exchange Commission

100 F Street, N.E.

Washington, I).C. 20549-1090

Re:

Exemptive Application Pursuant to Rule 6t)8 of Regulation NMS

NMS Plan to Implement a Tick Size Pilot Program

—

I)ear Mr. Errett:

Pursuant to Rule 608(e) of Regulation NMS under the Securities Exchange Act

of 1 934 (“Exchange Act”). Financial Industry Regulatory Authority. Inc. (“FINRA”),

on behalf of itself and BATS BZX Exchange. Inc., BATS BYX Exchange. Inc., I3ATS

EDGA Exchange, Inc., BATS EDOX Exchange, Inc., Chicago Stock Exchange, Inc.,

tnvestors Exchange LLC, NASDAQ BX, Inc., NASDAQ PiiI.X LLC, the Nasdaq

Stock Market EEC, National Stock Exchange, Inc., New York Stock Exchange EEC

(“NYSE”), NYSE MKT LLC, and NYSE Area, Inc. (collectively, “Participants”),

requests that the Securities and Exchange Commission (“Commission” or “SEC”)

grant an exemption from the website data publication requirements of the National

Market System Plan to Implement a Tick Size Pilot Program (“Plan” or “Pilot”),’ as

disctissed below.2

In consultation with the Commission, the Participants intend to scibmit

proposed rule changes to modify certain aspects of the website data publication

provisions (“Website Data Publication Rule Filings”). Specifically, the Participants

intend to file proposed rule changes. as necessary, to: (1) make the required Appendix

B and Appendix C data publicly available on a 90-calendar day delayed basis; and (2)

See Securities Exchange Act Release No. 74892 (May 6, 2015), 80 lR 275 13

(May 13, 2015) (“Approval Order”).

2

Capitalized terms cised herein, but not otherwise defined, shall have the

meanings ascribed to them in the Plan.

Investor protection. Market integrity.

1735 K Street, NW

t 202 728 8000

Washington, DC

www.finra.org

200064506

Iobert I rrett

November 1 4, 2() 1 6

Page 2 o17

provide that I’IN Ri\ viIl aggregate and pub! ish all of’ the aggregated Market Maker

pt’ofitaIi lity data on the FIN RA website. rather than each Participant that is the

desirnated examining authority (“1)1 BA”) of’ a Market Maker separately publishing

such data on its respective websitc. lo the extent that the provisions contained in the

Website l)ata Publication Rule Filings alter the data t’equirements in the Plan, as

approved by the Commission, the Participants respectt’ully request that the

Commission grant an exemption Irom those provisions ot’ the Plan.

TI’C)dit1dl

On August 25, 2014. the Participants filed the Plan” with Commission,

pursuant to Section 11 A of the Act’ and Rule 608 of Regulation NMS thereunder.6

The Participants filed the Plan to comply with an ot’der isscied by the Commission on

.June 24, 201 4•7 The Plan was published fbi’ comment in the Federal Register on

Novembet’ 7, 2014, and appt’oved by the Commission, as modifIed, on May 6, 201

The Commission approved the Pilot on a two—year basis, with implementation to begin

no later than May 6, 201 6. On November 6, 2015, the SEC provided an exemption to

‘°

the Participants tl’om implementing the Pilot until Octobet’ 3, 2016. The Plan is

designed to allow the Commission, market participants. and the public to study and

assess the impact of’ increment conventions on the liquidity and trading of’ the common

stock of small—capitalization companies. Each Participant is required to comply. and

to enforce compliance by its member organizations, as applicable, with the provisions

of the Plan.

The Plan provides for the creation of a group of Pilot Securities, placed in a

control group and three separate test groups, with each subject to varying quoting and

The Plan defines a Market Maker as “a dealer registered with any selfregulatory organization, in accordance with the rules thereofi as (i) a market

maker or (ii) a liquidity provider with an obligation to maintain continuous.

two-sided trading interest.”

See Letter from Brendon J. Weiss, Vice President, Intercontinental Exchange.

Inc., to Secretary, Commission, dated August 25, 2014.

15 U.S.C. 78k-i.

6

17CFR242.608.

See Securities Exchange Act Release No 72460 (June 24, 2014). 79 FR 3684t)

(June 30, 2014).

See Approval Order.

Id.

See Securities Exchange Act Release No. 76382 (November 6.2015). 801k

70284 (November 13, 2015).

Robert I rrett

November 14, 2() I 6

Page 3 ot’7

ttading increments. Pilot Securities in the control group may quote and trade at a tick

size increment currently permitted today. Pilot Securities in the first lest group are

quoted in $0.0 mitlimum increments hut may continue to trade at currently permitted

increments. ‘ Pilot Securities in the second test group (“Test Group Two”) are qtioted

in $t).05 minimum increments and trade at $0.05 minimum increments subject to a

midpoint exception, a retail investor order exception, and a negotiated trade

exception.’ Pilot Securities in the third test group (“l’est Group l’hree”) are subject to

the same quoting and trading increments as Test Group ‘fwo, and also are subject to

the i’rade—at” requirement to prevent price matching by a market participant that is

not displaying at the price of a Trading Center’s’3 “l3cst Protected Bid” or ‘Best

Protected Of’lr,” unless an enumerated exception applies.’4 In addition to the

exceptions provided under Test Group Two, an exception for Block Size orders and

I)

exceptions that mirror those under Rule 611 ot Regulation NMS, apply to the Trade—

at requirement.

The Plan also provides for the collection of’ specified data, the transmission of

data to the SEC. and the publication of data on Participant websites. The Plan

generally requires a Trading Center or a Market Maker to collect and transmit certain

data to its Dt-A. and requires DEAs to transmit this data to the Commission.

Participants that operate a Trading Center also are required under the Plan to collect

certain data, which is then transmitted directly to the Commission.

Item I (Market Quality Statistics) and Item II (Market and Marketable Limit

Order Data) of’Appendix B require a Trading Center that is not operated by a

Participant to submit the data set forth in those items to its DEA on a monthly basis.

and the DEA to transmit the data on a disaggregated basis within 30 calendar days

following month end to the SEC. Item Ill of Appendix B (Daily Market Maker

Registration Statistics) requires a Participant that is a national securities exchange to

collect daily Market Maker registration statistics, and transmit this data to the

See Section VI(B) of the Plan.

2

See Section V1(C) of the Plan.

The Plan incorporates the definition of a “Trading Center” from Rule

600(b)(78) of Regulation NMS. Regulation NMS defmes a “Trading Center”

as “a national securities exchange or national securities association that

operates an SRO trading facility, an alternative trading system, an exchange

market maker, an OTC market maker, or any other broker or dealer that

executes orders internally by trading as principal or crossing orders as agent.”

S.cc 17 CFR 242.600(b).

See Section VI(D) of the Plan.

‘

17CFR242.6H.

16

See Section VII of the Plan. See also Appendices 13 and C to the Plan.

Robert Irrett

November 14. 201 6

Page 4 of 7

Commission. Item IV of’ Appendix B ( l)aily Market Maker Participation Statistics)

requires a Participant that operates a Trading Center to collect daily Market Maker

participation statistics relating to Market Makers engaging in trading activity on that

Trading Center, and transmit this data to the Commission. Appendix C (Data

Collected by Market Makers) requires a Market Maker to transmit Appendix C.l data

Market Maker Profitability) to its l)EA on a monthly basis, with the I)EA providing

augregated Market Maker profitability to the SEC within 3t) calendar day’s flullow’in

month end. Section VII of the Plan (Collection of Pilot I)ata) requires that specilied

information collected pursuant to Appendices 13 and C to the Plan be made publicly

available by each Participant on its respective website for free, and provides that the

data made ptiblicly available will not identify’ the Trading Center that generated the

data, in the case of Appendix B data, or the Market Maker or individual securities, in

the case of Appendix C data.

Rule 608 and the Proposed Exemption

Rule 608(c) of Regulation NMS provides that “[ejach self-regulatory

organization shall comply with the terms of any effective national market system plan

of which it is a sponsor or a participant. Each self—regtdatory’ organization also shalt,

absent reasonable justification or excuse. enforce compliance with any such plan by its

members and persons associated with its members.”7 Rule 608(e) allows the

Commission to “exempt from the provisions of this section, either unconditionally’ or

on specified terms and conditions, any self-regulatory organization, member thereof

or specified security, if the Commission determines that such exemption is consistent

with the public interest, the protection of investors, the maintenance of fair and orderly

markets and the removal of impediments to, and perfection of the mechanisms oL a

national market system.”8 The Participants are seeking exemptive relief from the

specific Plan provisions set forth below.

Website Data Publication Requirements

Section VII(A) of the Plan (Collection of Trading Center Pilot Data) provides

that the Participants must collect the following data with respect to Pilot Securities (as

set forth in Appendix B):’9

-

-

Daily market quality statistics of orders by security, order type. original

order size (as observed by the Trading Center). hidden status (as

applicable), and coverage under Rule 605 of Regulation NMS:

Specified data regarding market orders and marketable limit orders;

17 CFR 242.608(e).

8

17 CFR 242.608(e).

See Section VII(A) of the Plan.

Robert I rrett

November 14, 201 6

Page 5 o17

—

—

I)aily ntiinher ol’ registered Market Makers: and

1)aily Market Maker participation statistics.

Section VI 1(A) of the Plan turther provides, among other things, that on a

monthly basis, each Participant and the [)EA for each member of a Participant

operating a Trading Center will, as applicable, make specified data pciblicly available

on its respective website for free. The data made publicly available will not identiI

the ‘l’rading Center that generated the data.

In addition. Section Vt 1(B) of the Plan (Collection of Market Maker

Protitability Data) provides that each Participant that is the DEA of a Market Maker

will require such Market Maker to provide to the DEA the data specified in Item I of’

Appendix C to the Plan regarding daily Market Maker trading profits.20 Section

VI 1(13) of’ the Plan further provides, among other things, that on a monthly basis, the

DEA will aggregate such data related to Market Makers categorized by the Control

Group and each Test Group and make the aggregated data publicly available on its

website for free and will report such data to the SEC, provided, however, the data

reported to the SEC shall include the profitability statistics categorized by security.

The data made publicly available will not identify’ the Market Makers that generated

the data or the individual securities:

The Participants adopted utile amendments to implement the data collection

requirements of the Plan, including provisions relating to the website data publication

requirements.22 Pursuant to the Plan and Participant rules, website publication is

currently required to begin on November 30, 2016.23 The Participants are requesting

an exemption from Section VII of the Plan and Appendices B and C to the Plan to

permit the Participants to adopt rule amendments, as necessary, to: (1) make the

required Appendix B and Appendix C data publicly available on a 90-calendar day

delayed basis; and (2) provide that FINRA will aggregate and publish all of the

2()

See Section VII(B) of the Plan.

21

See Section VII(B) of the Plan.

22

cg, Securities Exchange Act Release No. 76484 (November 19, 2015).

$0 FR 73858 (November25. 2015) (Notice of Filing of File No. XR-J’INRA

2015-048): see also Securities Exchange Act Release No. 77164 (February 17,

2016), 81 FR 9043 (February 23, 2016) (Notice of Filing of Partial

Amendment No. I and Order Granting Accelerated Approval of l”ile No. SR

FINRA-2015-04$) (‘Accelerated Approval Order”); see also Letter fr

David S. Shillman, Associate I)irector, Division of Trading and Markets,

Commission, to Marcia F. Asquith. Senior Vice President and Corporate

Secretary, F1NRA, dated February 17. 2016.

.

23

g. F1NRA Rule 6191.12.

Robert I rrett

November 1 4, 201 6

Page 6 of?

aggregated Market Maker protitability data on the I’INRA website, rather than each

Participant that is the 1)1 A of a Market Maker separately ptiblishing such data on its

respective website:

The Participants intend to file proposed rule changes to provide for delayed

publication of the website data, such that data thr the Pre-Pilot Period,2 currently

required to be published on November 30, 2016, would be delayed by 90 days until

February 28. 2017. Website data for the Pilot Period (and post—Pilot Period) would be

delayed by ninety days such that it wotild be published within 120 calendar days

tollowing the end of the month.2 Thus, for example, data for the month of October

2() 1 6 wocilcl be made available on Participant websites by February 28, 2t) 1 7, data for

the month of November 2016 would be made available on Participant websites by

March 3 1, 2017. data for the month of December 2016 would be made available on

Participant websites by April 30, 2017. and data for the month of January 2017 would

be made available on Participant websites by May 30, 2017. The Participants also

intend to amend their rules, as necessary, to provide that the aggregated Market Maker

profitability data required to be made publicly available by each Participant that is a

DEA on such Participant’s website shall. instead, be aggregated together and

published by FINRA on the FINRA website, including Market Makers for which

FINRA is not the DEA.27

Extending the period by which Participants must make publicly available the

required data on Participant websites is intended to address confidentiality concerns by

providing for the passage of additional time between the market information reflected

in the data and the public availability of such information.25 Likewise, the publication

21

FINRA will aggregate and publish, by Control Grocip and each Test Group: (I)

Market Maker profitability statistics for Market Makers for which FINRA is

the DEA, (2) Market Maker profitability statistics collected from other

Participants that are DEAs, and (3) Market Maker profitability statistics for

Market Makers whose DEA is not a Participant.

25

The Pre-Pilot period began six months before the start of the Pilot (j1c., began

on April 4, 2016).

26

Currently, Pilot Period data is required to be published on Participant websites

within 30 calendar days following month end. Under the exemption, that

period would be extended by an additional 90 calendar days to 120 calendar

days.

Each Participant will publish the required Appendix B data on their respective

websites. The Participants do not seek to modify the requirements regarding

the submission of Appendix B or Appendix C data to the SEC.

27

25

Accelerated Approval Order at 9049. See also Letter from Mary Lou

Von Kaenel, Managing J)irector, Financial Information Forum, to I)avid S.

Robert I rrett

November 14, 2016

Page 7 Dl 7

by [iN RA of aggregated Market Maker profitability data on the [‘IN RA website.

including Market Makers tor which [iNRA is not the 1)kA. is intended to address

confidentiality concerns with respect to the Appendix C data required to be made

publicly available.

*****

For the reasons set forth above, the Participants respectfully request that.

pursuant to Rule 608(e). the Commission grant exemptive relief to the provisions in

the Plan as set forth above. The Participants therefore believe that this exemption is

consistent with the public interest, the protection of investors, the maintenance of fair

and orderly markets and the removal ol impediments to, and peilection of the

mechanisms ot a national market system.

Thank you in advance for your consideration of this request.

MarciaE

Senior Vice President and

Corporate Secretary

Shiliman. Associate Director, I)ivision of ‘Irading and Markets, Commission.

dated August 16, 2016. available at https://www.lif.corn/comment-letters.