Financial Industry Regulatory Authority

Financial Industry Regulatory Authority

Marcia E. Asquith

Executive Vice President,

Board and External Relations

March 2, 2017

Robert W. Errett

Deputy Secretary

U.S. Securities and Exchange Commission

100 F Street, N .E.

Washington, D.C. 20549-1090

Re:

Exemptive Application Pursuant to Rule 608 of Regulation NMS ­

NMS Plan to Implement a Tick Size Pilot Program

Dear Mr. Errett:

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

of 1934 ("Exchange Act"), Financial Industry Regulatory Authority, Inc. ("FINRA"),

on behalf of itself and Chicago Stock Exchange, Inc. ("CHX"), 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"), 1 as discussed below.2

In consultation with Commission staff, FINRA and CHX intend to submit

proposed rule changes to modify the website data publication provisions for Appendix

B data to provide for the aggregation of over-the-counter ("OTC") activity for firms

for which FINRA or CHX is the designated examining authority ("DEA"). In

addition, FINRA intends to file a proposed rule change to implement an anonymous,

grouped masking methodology for Appendix B.I., B.11. and B.IV. data related to OTC

activity, including OTC Trading Centers for which CHX is the DEA. 3 To the extent

that the provisions contained in the FINRA and CHX filings alter the data

requirements in the Plan, as approved by the Commission, FINRA and CHX

respectfully request that the Commission grant an exemption from those provisions of

the Plan.

See Securities Exchange Act Release No. 74892 (May 6, 2015), 80 FR 27513

(May 13, 2015) ("Approval Order").

2

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

meanings ascribed to them in the Plan.

3

See File No. SR-FINRA-2017-006.

Investor protection. Market integrity.

1735 K Street, NW

t 202 728 8000

Washington, DC

www.finra.org

20006-1506

Robert W. Errett

March 2, 2017

Page 2of5

Background

On August 25, 2014, the Participants filed the Plan4 with Commission,

pursuant to Section 1 lA of the Act5 and Rule 608 of Regulation NMS thereunder. 6

The Participants filed the Plan to comply with an order issued by the Commission on

June 24, 2014. 7 The Plan was published for comment in the Federal Register on

November 7, 2014, and approved by the Commission, as modified, on May 6, 2015. 8

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

no later than May 6, 2016. 9 On November 6, 2015, the SEC provided an exemption to

the Participants from implementing the Pilot until October 3, 2016. 10 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.

Among-other things, the Plan provides for the collection of specified data, the

transmission of data to the SEC, and the publication of data on Participant websites. 11

In particular, with respect to Appendix B data, on a monthly basis, the Participants and

the DEA for each member of a Participant operating a Trading Center will make the

required data publicly available on their websites for free and will report such data to

the SEC on a disaggregated basis by Trading Center. 12

Rule 608 and the Proposed Exemption

Rule 608(c) of Regulation NMS provides that "[e]ach 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-regulatory organization also shall,

4

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

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

s

15 u.s.c. 78k-l.

6

17 CFR 242.608.

7

See Securities Exchange Act Release No 72460 (June 24, 2014), 79 FR 36840

(June 30, 2014).

8

See Approval Order.

9

Id.

10

See Securities Exchange Act Release No. 76382 (November 6, 2015), 80 FR

70284(November13, 2015).

11

See Section VII of the Plan.

12

See Section VII(A) of the Plan.

Robert W. Errett

March 2, 2017

Page 3 of5

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

members and persons associated with its members." 13 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 int~rest, the protection of investors, the maintenance of fair and orderly

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

national market system." 14 FINRA and CHX are seeking exemptive relief from the

specific Plan provisions set forth below, as applicable.

Website Data Publication Reguirements

Section VII(A) of the Plan (Collectio:1,1 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): 15

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;

Daily number of registered Market Makers; and

Daily Market Maker participation statistics.

Section VII(A) of the Plan further provides, among other things, that on a monthly

basis, each Participant and the DEA for each member of a Participant operating a

Trading Center will, as applicable, make specified data publicly available on its

website for free. In addition, the Plan provides that the Appendix B data made

publicly available will not identify the Trading Center that generated the data.16 The

Participants intended to publish data relating to OTC activity on a disaggregated basis

by Trading Center. 17

FINRA and CHX are requesting an exemption to permit the publication of data

relating to OTC activity pursuant to Appendix B.I (Market Quality Statistics), B.11

13

17 CFR 242.608(c).

14

17 CFR 242.608(e).

15

See Section VIl(A) of the Plan.

16

See Section VII(A) of the Plan.

17

See Securities Exchange Act Release No. 73511 (November 3, 2014), 79 FR

66423 (November 7, 2014) (Notice of Filing of Proposed National Market

System Plan to Implement a Tick Size Pilot Program on a One-Year Pilot

Basis, File No. 4-657).

Robert W. Errett

March 2, 2017

Page4 of5

(Market and Marketable Limit Order Data) and B.IV (Daily Market Maker

Participation Statistics) on an aggregated basis using an anonymous, grouped masking

methodology. If granted, the requested relief should help to mitigate comments or

concerns regarding the confidentiality of the website data with regard to OTC trading

activity required to be published pursuant to the Plan, which originally was proposed

to be published on a Trading Center-by-Trading Center basis using a consistent

masked identifier for the duration of the data publication period. 18 FINRA and CHX

believe that an anonymous, grouped masking methodology for the purposes of

publishing the required data related to OTC activity will support the Plan's

requirement that the data to be made publicly available will not identify the Trading

Center that generated the data. In furtherance of this objective, the details of the

methodology used to formulate the anonymous groupings will not be disclosed. 19

CHX is requesting an exemption from the requirement that CHX, as the DEA

for CHX members operating a Trading Center, make the required Appendix B data

publicly available on its website with respect to OTC activity.20 Because CHX is the

DEA for a relatively small number of OTC Trading Centers, publishing the CHX

activity, whether on an aggregated or a disaggregated basis, raises concerns that the

identities of these Trading Centers could be determined. Thus, if the requested

exemption is granted, FINRA would publish the required Appendix BJ., BJI. and

B.IV. data for OTC activity with respect to Trading Centers for which FINRA or CHX

is the DEA. As such, FINRA would incorporate the firms for which CHX is the DEA

into the FINRA groupings and publish OTC-wide statistics for Appendix BJ, B.11 and

B.IV data on the FINRA website.

FINRA and CHX are requesting the above exemption from Section VIl(A) of

the Plan to implement an aggregated, anonymous, grouped data masking methodology

for Appendix BJ., BJI. and B.IV. data related to OTC activity to respond to and

mitigate confidentiality concerns raised by industry participants. 21 This requested

exemption would support the Plan's objective that the data to be made publicly

available will not identify the Trading Center that generated the data.

18

See Letters from William Hebert, Managing Director, Financial Information

Forum, to Robert W. Errett, Deputy Secretary, Commission, dated December

21, 2016; and Adam C. Cooper, Senior Managing Director and Chief Legal

Officer, Citadel Securities, to Brent J. Fields, Secretary, Commission, dated

December 21, 2016 (together, "Comment Letters").

19

A general description of the proposed aggregation method is provided in File

No. SR-FINRA-2017-006.

20

See Section VIl(A) of the Plan.

21

See Comment Letters.

Robert W. Errett

March 2, 2017

Page 5of5

*****

For the reasons set forth above, FINRA and CHX respectfully request that,

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

the Plan as set forth above. FINRA and CHX 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 of impediments to, and perfection ofthe

mechanisms of, a national market system.

Thank you in advance for your consideration of this request.

~~~

Executive Vice President,

Board and External Relations