[Federal Register Volume 81, Number 39 (Monday, February 29, 2016)]
[Notices]
[Pages 10290-10299]
[FR Doc No: 2016-04320]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77218; File No. SR-FINRA-2015-047]

Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Partial Amendment No. 1 and Order
Granting Accelerated Approval to a Proposed Rule Change To Adopt FINRA
Rule 6191(a) To Implement the Quoting and Trading Requirements of the
Regulation NMS Plan To Implement a Tick Size Pilot Program

February 23, 2016.

I. Introduction

    On November 13, 2015, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposal to adopt FINRA Rule 6191(a) to implement the
quoting and trading requirements of the Plan to Implement Tick Size
Pilot Program (``Plan'') submitted to the Commission pursuant to Rule
608 of Regulation NMS under the Act (``Tick Size Pilot'').\3\ The
proposal was published for comment in the Federal Register on November
25, 2015.\4\ The Commission received three comment letters on the
proposal and a response letter from FINRA.\5\ On February 23, 2016,
FINRA filed Partial Amendment No. 1.\6\ On January 7, 2016, the
Commission designated a longer period for Commission action on the
proposal, until February 23, 2016.\7\ This order approves the proposal,
as modified by Partial Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 74892 (May 6, 2015),
80 FR 27513 (May 13, 2015) (order approving the Tick Size
Pilot)(``Approval Order'').
    \4\ See Securities Exchange Act Release No. 76483 (November 19,
2015). 80 FR 73853.
    \5\ See letters from Mary Lou Von Kaenel, Managing Director,
Financial Information Forum, dated December 16, 2015 (``FIF
Letter''); Theodore R. Lazo, Managing Director and Associate General
Counsel, Securities Industry and Financial Markets Association,
dated December 18, 2015 (``SIFMA Letter''); Brendon J. Weiss, Co-
Head, Government Affairs, Intercontinental Exchange, Inc. and John
K. Kerin, CEO, Chicago Stock Exchange, Inc., dated January 15, 2016
(``NYSE Letter''); and Andrew Madar, Associate General Counsel,
FINRA and Chris Solgan, Assistant General Counsel, BATS, dated
February 23, 2016 (``FINRA Response Letter'').
    \6\ In Partial Amendment No. 1, FINRA proposes to: (1) Add an
exception to permit members to fill a customer order in a Pilot
Security in Test Group Two or Test Group Three at a non-nickel
increment to comply with FINRA Rule 5320 under limited
circumstances; (2) add exceptions to the Trade-at Prohibition for
certain error correction transactions; (3) modify the stopped order
exception to the Trade-at Prohibitions to better align it with the
stopped order exception in Rule 611; and (4) clarify the use of
Trade-at Intermarket Sweep Orders in connection with the Trade-At
Prohibition.
    \7\ See Securities Exchange Act Release No. 76855, 81 FR 1670
(January 13, 2016).
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II. Background

    On August 25, 2014, NYSE Group, Inc., on behalf of BATS Exchange,
Inc., BATS Y-Exchange, Inc., Chicago Stock Exchange, Inc., EDGA
Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory
Authority, Inc., NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, the Nasdaq
Stock Market LLC, New York Stock Exchange LLC (``NYSE''), NYSE MKT LLC,
and NYSE Arca, Inc. (collectively ``Participants'' \8\), filed with the
Commission, pursuant to Section 11A of the Act \9\ and Rule 608 of
Regulation NMS thereunder,\10\ the Plan to Implement the Tick Size
Pilot.\11\ The Participants filed the Plan to comply with an order
issued by the Commission on June 24, 2014.\12\ The Plan was published
for comment in the Federal Register on November 7, 2014,\13\ and
approved by the Commission, as

modified, on May 6, 2015.\14\ On November 6, 2015, the Commission
issued an exemption to the Participants from implementing the Plan
until October 3, 2016.\15\
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    \8\ The Commission notes that on February 5, 2016, National
Stock Exchange, Inc. (``NSX'') filed a Plan amendment with the
Commission to become a Plan Participant pursuant to Section II.C of
the Plan. This amendment is effective upon filing pursuant to Rule
608(b)(3)(iii) of Regulation NMS.
    \9\ 15 U.S.C. 78k-1.
    \10\ 17 CFR 242.608.
    \11\ See letter from Brendon J. Weiss, Vice President,
Intercontinental Exchange, Inc., to Secretary, Commission, dated
August 25, 2014.
    \12\ See Securities Exchange Act Release No. 72460, 79 FR 36840
(June 30, 2014).
    \13\ See Securities Exchange Act Release No. 73511 (November 3,
2014), 79 FR 66423.
    \14\ See Approval Order, supra note 3.
    \15\ See Securities Exchange Act Release No. 76382, 80 FR 70284
(November 13, 2015).
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    The Tick Size Pilot 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 stocks
of certain small-capitalization companies. Each Participant is required
to comply, and to enforce compliance by its members, as applicable,
with the provisions of the Plan.\16\ The Plan requires Participants to
develop quoting and trading requirements for the Tick Size Pilot as
well as collect, publish, and submit to the Commission a variety of
data elements such as market quality statistics and market maker
profitability.\17\ FINRA is proposing to adopt FINRA Rule 6191(a) and
certain Supplementary Material to implement the quoting and trading
requirements of the Tick Size Pilot.\18\
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    \16\ Rule 608(c) of Regulation NMS. 17 CFR 242.608(c). See also
Plan Sections II.B and IV.
    \17\ The data collection requirements for the Plan are specified
in Appendices B and C. See Approval Order, supra note 3. FINRA has
adopted rules to implement the data collection requirements under
the Plan. See FINRA Rule 6191(b). Securities Exchange Act Release
No. 77164 (February 17, 2016), 81 FR 9043, (February 23, 2016).
    \18\ NYSE, on behalf of the Plan Participants, submitted a
letter to the Commission requesting exemption from certain
provisions of the Plan related to the quoting and trading
requirements as they apply to Pilot Securities that have a price
under $1.00. See letter from Elizabeth K. King, General Counsel &
Corporate Secretary, NYSE, to Brent J. Fields, Secretary,
Commission, dated October 14, 2015 (``October Exemption Request'').
In addition, FINRA, on behalf of the Plan Participants, submitted a
letter to the Commission requesting additional exemptions from
certain provisions of the Plan related to the quoting and trading
requirements. See letter from Marcia E. Asquith, Senior Vice
President and Corporate Secretary, FINRA, to Robert W. Errett,
Deputy Secretary, Commission, dated February 23, 2016 (``February
Exemption Request''). The Commission, pursuant to its authority
under Rule 608(e) of Regulation NMS, has granted FINRA a limited
exemption from the requirement to comply with certain provisions of
the Plan as specified in the letters and noted herein. See letter
from David Shillman, Associate Director, Division of Trading and
Markets, Commission to Marcia E. Asquith, Senior Vice President and
Corporate Secretary, FINRA, dated February 23, 2016 (``SEC Exemption
Letter'').
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III. Description of the Proposed Rule Change

A. Policies and Procedures to Comply With the Plan

    Proposed FINRA Rule 6191(a) would establish the rules necessary for
compliance with the applicable quoting and trading requirements
specified in the Plan for FINRA and its members.\19\
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    \19\ FINRA proposed that its Rule 6191 be in effect during a
pilot period to coincide with the Pilot Period of the Plan,
including any extensions. See Proposed FINRA Rule 6191(a)
Supplementary Material .03.
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    Proposed FINRA Rule 6191(a)(1) provides that members shall
establish, maintain, and enforce written policies and procedures that
are reasonably designed to comply with the applicable quoting and
trading requirements of the Plan. Proposed FINRA Rule 6191(a)(2) sets
forth that FINRA systems will not display quotations in violation of
the Plan or its proposed rule.

B. Compliance and Pilot Securities Under $1.00 During the Pilot Period

    Proposed FINRA Rule 6191(a)(3) sets forth the procedures for Pilot
Securities whose price drops below $1.00 during the Pilot Period.\20\
If the price of a Pilot Security drops below $1.00 during regular
trading hours on any trading day, the Pilot Security will continue to
trade according to the quoting and trading requirements of its
originally assigned Test Group within the Plan. If a Pilot Security has
a Closing Price \21\ below $1.00 on any trading day the Pilot Security
would be moved from its respective Test Group into the Control Group,
and would be quoted and traded at any price increment that is currently
permitted for the remainder of the Pilot Period. Proposed FINRA Rule
6191(a)(3) further provides, that notwithstanding anything to the
contrary, all Pilot Securities will continue to be subject to FINRA
Rule 6191(b), which sets forth FINRA's data collection requirements for
Tick Size Pilot.
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    \20\ FINRA has requested an exemption from the Plan related to
this provision. See October Exemption Request, supra note 18.
    \21\ Capitalized terms used in this Order are defined in the
Plan, unless otherwise specified herein. Further, FINRA has proposed
to use the Plan's defined terms in its Rule 6191(a). See Proposed
FINRA Rule 6191(a) Supplementary Material .01.
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C. Quoting and Trading Rules for Test Group One

    Proposed FINRA Rule 6191(a)(4) describes the quoting and trading
requirements for Pilot Securities in Test Group One. Specifically,
FINRA proposes that no member may display, rank, or accept from any
person any displayable or non-displayable bids or offers, orders, or
indications of interest in increments other than $0.05 for Pilot
Securities in Test Group One. Orders priced at either the midpoint of
the national best bid and national best offer (``NBBO'') or best
protected bid and best protected offer (``PBBO'') and orders entered
into a Participant-operated retail liquidity program may be ranked and
accepted in increments of less than $0.05. The provision also sets
forth that Pilot Securities in Test Group One would continue to be able
to trade at any price increment that is currently permitted by
applicable Participant, Commission, and FINRA rules.

D. Quoting and Trading Rules for Test Group Two

    Proposed FINRA Rule 6191(a)(5) describes the quoting and trading
requirements of Pilot Securities in Test Group Two. Specifically, FINRA
proposes that no member may display, rank, or accept from any person
any displayable or non-displayable bids or offers, orders, or
indications of interest in increments other than $0.05 for Pilot
Securities in Test Group Two.\22\ Further, FINRA proposes that absent
any enumerated exceptions, no member organization may execute an order
in any increment other than $0.05 for Pilot Securities in Test Group
Two.\23\
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    \22\ Similar to the exception in Test Group One, orders priced
to trade at the midpoint of the NBBO or PBBO and orders entered into
a Participant-operated retail liquidity price program may be ranked
and accepted in increments of less than $0.05. See Proposed FINRA
Rule 6191(a)(5)(A).
    \23\ Proposed FINRA Rule 6191(a)(5)(B) applies to all trades,
including Brokered Cross Trades. A Brokered Cross Trade is defined
in the Plan as a trade that a broker-dealer that is a member of a
Participant executes directly by matching simultaneous buy and sell
orders for a Pilot Security. See Plan Section I.G.
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    Proposed FINRA Rule 6191(a)(5)(C) provides that Test Group Two
Pilot Securities may trade in increments less than $0.05 in three
circumstances: (1) Trading may occur at the midpoint between the NBBO
or the PBBO: (2) Retail Investor Orders that are provided with price
improvement that is at least $0.005 better than the PBBO; and (3)
Negotiated Trades may trade in increments less than $0.05.
    In Partial Amendment No. 1, FINRA proposes an additional exception
from the requirement that trades in Test Group Two must be in $0.05
increments. Specifically, FINRA proposes to permit members to execute
customer orders to comply with FINRA Rule 5320 following the execution
of a proprietary trade by the member at an increment other than $0.05,
where such proprietary trade was permissible pursuant to an exception
under the Plan.\24\
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    \24\ See Partial Amendment No. 1, supra note 6. FINRA has
requested an exemption from the Plan related to this provision. See
February Exemption Request, supra note 18.

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E. Quoting and Trading Rules for Test Group Three

    Proposed FINRA Rule 6191(a)(6) describes the quoting and trading
requirements of Pilot Securities in Test Group Three. FINRA proposes
for Pilot Securities in Test Group Three that no member may display,
rank, or accept from any person any displayable or non-displayable bids
or offers, orders, or indications of interest in increments other than
$0.05.\25\ Proposed FINRA Rule 6191(a)(6)(B) states that for Test Group
Three Pilot Securities no member would be permitted to execute an
order, including Brokered Cross Trades, in an increment other than
$0.05 unless there was an exception enumerated by the rule. Proposed
FINRA Rule 6191(a)(6)(C) sets forth four exceptions for trading of Test
Group Three Pilot Securities to occur in increments of less than $0.05:
(1) At the midpoint between the NBBO or the PBBO; (2) for Retail
Investor Orders that are provided with price improvement at least
$0.005 better than the PBBO; (3) for Negotiated Trades; and (4) for
executions of a customer order to comply with FINRA Rule 5320 following
the execution of a proprietary trade by the member at an increment
other than $0.05, where such proprietary trade was permissible pursuant
to an exception under the Plan.\26\
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    \25\ Similar to the exceptions for Test Group One and Test Group
Two, orders priced to trade at the midpoint of the NBBO or PBBO and
orders entered in a Participant-operated retail liquidity program
may be ranked and accepted in increments of less than $0.05. See
Proposed FINRA Rule 6191(a)(6)(A).
    \26\ See Partial Amendment No. 1, supra note 6. FINRA has
requested an exemption from the Plan related to this provision. See
February Exemption Request, supra note 18.
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    Proposed FINRA Rule 6191(a)(6)(D)(i) sets forth that, absent an
exception set forth in proposed FINRA Rule 6191(a)(6)(D)(ii), no member
that operates a Trading Center may execute a sell order for a Pilot
Security in Test Group Three at the price of a Protected Bid or execute
a buy order for a Pilot Security in Test Group Three at the price of a
Protected Offer during regular trading hours (i.e., the ``Trade-at
Prohibition''). Under the Trade-at Prohibition, a member that operates
a Trading Center that is displaying a quotation, via either a processor
or an SRO quotation feed, that is at a price equal to the traded-at
Protected Bid or Protected Offer is permitted to execute orders at that
level, but only up to the amount of its displayed size. A member that
operates a Trading Center that was not displaying a quotation at a
price equal to the traded-at Protected Quotation, via either a
processor or an SRO quotation feed, is prohibited from price-matching
protected quotations unless at least one of the exceptions applies.
    Proposed FINRA Rule 6191(a)(6)(D)(ii) sets forth the exceptions to
the Trade-at Prohibition for members that operate Trading Centers as
follows:
    (a) The order is executed within the same independent aggregation
unit \27\ of the member that operates the Trading Center that displayed
the quotation via either a processor or an SRO quotation feed, to the
extent such member uses independent aggregation units, at a price equal
to the traded-at Protected Quotation that was displayed before the
order was received, but only up to the full displayed size of that
independent aggregation unit's previously displayed quote. Further,
proposed FINRA Rule 6191(a)(6)(D)(ii)(a) also specifies that a Trading
Center that is displaying a quotation as agent or riskless principal
may only execute as agent or riskless principal and a Trading Center
displaying a quotation as principal (excluding riskless principal) may
execute as principal, agent or riskless principal;
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    \27\ FINRA proposes that, ``Independent aggregation unit'' has
the same meaning as provided under Rule 200(f) of Regulation SHO.
See 17 CFR 242.200(f).
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    (b) the order that is of Block Size \28\ at the time of origin and
is not an aggregation of non-block orders; broken into orders smaller
than Block Size prior to submitting the order to a Trading Center for
execution; or executed on multiple Trading Centers;
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    \28\ ``Block Size'' is defined in the Plan as an order (1) of at
least 5,000 shares or (2) for a quantity of stock having a market
value of at least $100,000.
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    (c) the order is a Retail Investor Order \29\ that is executed with
at least $0.005 price improvement;
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    \29\ FINRA proposes to clarify the Retail Investor Order
definition for purposes of FINRA's rules to include an order
originating from a natural person, provided that prior to
submission, no change is made to the terms of the order with respect
to price or side of market and the order does not originate from a
trading algorithm or any other computerized methodology. Any member
that operates a Trading Center may execute against a Retail Investor
Order otherwise than on an exchange to satisfy the Retail Investor
Order exceptions to the Tick Size Pilot. Further, any member for
whom FINRA is the Designated Exchange Authority (``DEA'') who
executes Retail Investor Orders must submit a signed attestation
that substantially all orders utilizing the Retail Investor Order
exception meet the qualifications. Finally, a member relying on an
exception to the Trade-at Prohibition for a transaction otherwise
than on an exchange must include all applicable modifiers in trade
reports pursuant to FINRA Rule 6282, 6380A and 6380B. See Proposed
FINRA Rule 6191(a)(7)(A).
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    (d) the order is executed when the Trading Center displaying the
Protected Quotation that was traded-at was experiencing a failure,
material delay, or malfunction of its systems or equipment;
    (e) the order is executed as part of a transaction that was not a
``regular way'' contract;
    (f) the order is executed as part of a single-priced opening,
reopening, or closing transaction by the Trading Center;
    (g) the order is executed when a Protected Bid is priced higher
than a Protected Offer in the Pilot Security;
    (h) the order is identified as a Trade-at Intermarket Sweep Order
(``ISO''); \30\
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    \30\ See Partial Amendment No. 1, supra note 6. In Partial
Amendment No. 1, FINRA proposes to define a Trade-At ISO as a limit
order for a Pilot Security that meets the following requirements: 1.
When routed to a Trading Center, the limit order is identified as a
Trade-at ISO; and 2. simultaneously with the routing of the limit
order identified as a Trade-at ISO, one of more additional limit
orders, as necessary, are routed to execute against the full size of
any protected bid, in the case of a limit order to sell, or the full
displayed size of any protected offer, in the case of a limit order
to buy, for the Pilot Security with a price that is better than or
equal to the limit price of the limit order identified as a Trade-at
ISO. These additional routed orders also must be marked as Trade-at
ISO.
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    (i) the order is executed by a Trading Center that simultaneously
routed Trade-at ISO to execute against the full displayed size of the
Protected Quotation with a price that is better than, or equal to, the
limit price of the limit order identified as a Trade-at ISO;
    (j) the order is executed as part of a Negotiated Trade;
    (k) the order is executed when the Trading Center displaying the
Protected Quotation that was traded at had displayed within one second
prior to execution of the transaction that constituted the Trade-at, a
Best Protected Bid or Best Protected Offer, as applicable, for the
Pilot Security with a price that was inferior to the price of the
Trade-at transaction.;
    (l) the order is executed by a Trading Center, which at the time of
order receipt, had guaranteed an execution at no worse than a specified
price (a ``stopped order'') where: (1) The stopped order was for the
account of a customer; (2) the customer agreed to the specified price
on an order-by-order basis; and (3) the price of the Trade-at
transaction was, for a stopped buy order, equal to or less than the
National Best Bid in the Pilot Security at the time of execution or,
for a stopped sell order, equal to or greater than the National Best
Offer in the Pilot Security at the time of execution, as long as such
order is priced at an acceptable increment; \31\
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    \31\ See Partial Amendment No. 1, supra note 6. FINRA has
requested an exemption from the Plan related to this provision. See
February Exemption Request, supra note 18.

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    (m) the order is for a fractional share order of a Pilot Security,
provided that such fractional share order was not the result of
breaking an order \32\ for one or more whole shares of a Pilot Security
into orders for fractional shares or was not otherwise effected to
evade the requirements of the Tick Size Pilot; and
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    \32\ Additionally, no member shall break an order into smaller
orders or otherwise effect or execute an order to evade the
requirements of the Trade-at Prohibition or any other provisions of
the Plan. See Proposed FINRA Rule 6191(a) Supplementary Material
.02.
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    (n) the order is to correct a bona fide error, which is recorded by
the Trading Center in its error account. FINRA proposes to define a
bond fide error as: 1. The inaccurate conveyance or execution of any
term of an order including, but not limited to, price, number of shares
or other unit of trading; identification of the security;
identification of the account for which securities are purchased or
sold; lost or otherwise misplaced order tickets; short sales that were
instead sold long or vice versa; or the execution of an order on the
wrong side of a market; 2. the unauthorized or unintended purchase,
sale, or allocation of securities, or the failure to follow specific
client instructions; 3. the incorrect entry of data into relevant
systems, including reliance on incorrect cash positions, withdrawals,
or securities positions reflected in an account; or 4. a delay, outage,
or failure of a communication system used to transmit market data
prices or to facilitate the delivery or execution of an order.\33\
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    \33\ See Partial Amendment No. 1, supra note 6. FINRA has
requested an exemption from the Plan related to this provision. See
February Exemption Request, supra note 18.
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IV. Summary of Comments

    As noted above, the Commission received three comment letters
concerning the proposed rule change and a response letter from
FINRA.\34\ All three commenters discussed various aspects of the Trade-
at Prohibition. The commenters noted differences between the Trade-at
Prohibition rules proposed by FINRA and NYSE.\35\ One commenter noted
that the NYSE's proposal would limit a Trading Center from price
matching a Protected Quotation to when the Trading Center is displaying
in a principal capacity, while FINRA's proposal would not restrict
price matching to a Trading Center's principal capacity.\36\
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    \34\ See supra note 5.
    \35\ See Securities Exchange Act Release No. 73229 (October 22,
2015), 80 FR 66065 (October 28, 2015).
    \36\ See SIFMA Letter.
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    Two commenters expressed support for FINRA's Trade-at Prohibition
proposal.\37\ However, one commenter stated FINRA's proposal was
inconsistent with the goals of the Plan because it would incentivize a
migration of trading to dark venues.\38\ This commenter stated FINRA's
proposal would allow an alternative trading system (``ATS'') to execute
matched trades of any of its participants at the Traded-at Protected
Quotation if the ATS is displaying on an agency basis, a quotation of
another participant at the Protected Quotation.\39\ The commenter noted
that all participant orders displayed by an ATS are agency orders of
the ATS and that trades matched by ATS participants without display are
also agency orders of that ATS. Therefore, the commenter believes that
FINRA's proposal would allow trades by ATS participants at the Trade-at
Protected Quotation without that participant displaying a Protected
Quotation. The commenter believes that the proposal allows ATS
participants to ``free-ride'' on the displayed Protected Quotation of
other ATS participants.\40\ The commenter stated that if implemented,
trading would continue in dark pools at a price of displayed liquidity
and that the proposal would result in similar trading behaviors between
Test Group Three and Test Group Two.\41\
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    \37\ See FIF Letter and SIFMA Letter. For example, SIFMA stated
that it believed that the Commission should approve FINRA's
proposal.
    \38\ The commenter also indicated that the proposal did not
follow the procedure outlined by the Plan's Operating Committee. See
NYSE Letter.
    \39\ See NYSE Letter.
    \40\ See NYSE Letter.
    \41\ See NYSE Letter.
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    In its response, FINRA disagreed with NYSE's characterization of
the display exception's operation as set forth in the FINRA proposal,
and confirmed that a broker-dealer would not be permitted to trade
based on interest that it is not responsible for displaying.\42\ FINRA
noted that it would view a broker-dealer that matches orders in the
over-the-counter (``OTC'') market, as principal, agent or riskless
principal, to have ``executed'' such orders as a Trading Center for
purposes of proposed FINRA Rule 6191(a), regardless of whether such
broker-dealer ultimately executes and reports such trade through an OTC
trade reporting facility, an ATS or another Trading Center.
Accordingly, if a broker-dealer has displayed, as principal, a buy
order at the protected bid on an exchange or Electronic Communications
Network (``ECN'') prior to its receipt of a customer sell order, it
could internalize that customer sell order, up to its displayed size,
in reliance on the proposed FINRA Rule 6191(a)(6)(D)(ii)(a) exceptions.
If, however, that broker-dealer has not displayed a principal buy order
at the protected bid, but matches its customer order with an order for
its own account and submits the paired orders to an ECN where another
broker-dealer is displaying a buy order at the protected bid, the
broker-dealer submitting the paired orders could not rely on the
proposed display exceptions. While the ECN, as a Trading Center, could
execute the displayed order as agent with offsetting interest because
it was displaying an agency quotation at the protected bid, the broker-
dealer submitting the paired orders could not, as a Trading Center,
trade with its customer order, because it was not displaying a
principal quotation at the protected bid. Accordingly, such a
transaction could not be effected consistent with the Trade-at
Prohibition under the FINRA proposal.
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    \42\ As noted above, the FINRA Response Letter was also signed
by BATS. The Commission notes that BATS has filed a proposal to
implement the quoting and trading requirements that is similar to
the FINRA proposal. See Securities Exchange Act Release No. 76552
(December 3, 2015), 80 FR 76591 (December 9, 2015).
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    One commenter discussed the proposal by asking specific questions
concerning the operation and interpretation of the Trade-at Prohibition
and within their comment provided explanatory examples.\43\ Further,
this commenter either requested clarifying information or sought an
amendment to the proposal in order to further the Plan's purposes.
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    \43\ See FIF Letter.
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    Specifically, the commenter sought clarification as to whether odd
lot orders were subject to the Trade-at Prohibition. The commenter
indicated they believed odd lots should be allowed to execute at the
price of the Protected Quotation under any circumstance irrespective of
whether a Trading Center had satisfied its Trade-at Prohibition
obligations.\44\ FINRA, in response stated that a Trading Center would
be prevented from executing an odd lot order at the Protected Quotation
unless an exception applied and that the proposal does not include a
separate odd lot exception to the Trade-at Prohibition.\45\
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    \44\ This commenter noted that odd lots are not protected quotes
themselves under Rule 611 of Regulation NMS. See FIF Letter.
    \45\ See FINRA Response Letter.
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    In addition, the commenter stated the proposal's definition of
Block Size order, used for the Block Size exception to the Trade-at
Prohibition, would prevent a Trading Center from

facilitating a block cross trade.\46\ The commenter requested that the
proposal be amended to permit the aggregation of non-block orders as
long as at least one component of the order was of the defined Block
Size.\47\ In response, FINRA stated it does not believe that such an
exception would be consistent with the Plan. FINRA believes that
permitting the aggregation of non-block orders or permitting members to
combine Block Size orders with non-block orders would overly broaden
the Block Size exception and create a means by which members could
undermine the exception.
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    \46\ According to the commenter, a ``block cross trade'' is
block size order that includes smaller orders. The commenter noted
that the three additional qualifications contained within the FINRA
proposal are meant to ensure the purpose of the Trade-at Prohibition
is not undermined. See FIF Letter. See also Proposed FINRA Rule
6191(a)(6)(D)(i)(b).
    \47\ See FIF Letter.
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    The commenter requested that additional exceptions be provided to
the Trade-at Prohibition within the FINRA proposal so that it would
more closely align with the exceptions provided to Rule 611 of
Regulation NMS.\48\ Specifically, the commenter referenced certain
error correction transactions and certain print protection
transactions.\49\ FINRA agreed with the commenter regarding certain
error correction transactions and amended their proposal to incorporate
this additional exception to the Trade-at Prohibition.\50\ FINRA stated
that it did not believe that it would be appropriate to provide an
exception to the Trade-at Prohibition for print protection
transactions.\51\
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    \48\ 17 CFR 242.611.
    \49\ The commenter noted Commission orders related to Rule 611
of Regulation NMS. Order Exempting Certain Error Correction
Transactions from Rule 611 of Regulation NMS under the Securities
Exchange Act of 1934 (http://www.sec.gov/rules/exorders/2007/34-55884.pdf); Order Exempting Certain Print Protection Transactions
from Rule 611 (http://www.sec.gov/rules/exorders/2007/34-55883.pdf).
See FIF Letter.
    \50\ See Partial Amendment No. 1, supra note 6.
    \51\ See Partial Amendment No.1, supra note 6.
---------------------------------------------------------------------------

    The commenter also noted that for stopped orders there was a
distinction between the applicable Rule 611 of Regulation NMS exception
and the Trade-at Prohibition exception included within the Plan. The
commenter provided an example where an order would satisfy Rule 611 of
Regulation NMS but would not satisfy the Plan's Trade-at Prohibition
exception. FINRA responded by stating it would amend the stopped trade
exception to harmonize the stopped order exception.\52\
---------------------------------------------------------------------------

    \52\ See Partial Amendment No.1, supra note 6.
---------------------------------------------------------------------------

    The commenter sought clarification for how undisplayed liquidity is
handled when a Trading Center receives a Trade-at ISO that is larger
than their displayed liquidity (``Oversize ISO''). FINRA responded by
stating that a Trade-at ISO indicates that the sending broker has
executed against all other Protected Quotations at that price,
satisfying the Trade-at requirements. Therefore, the Trading Center
receiving the Trade-at ISO can fill the oversize portion of the order
against its undisplayed liquidity.\53\
---------------------------------------------------------------------------

    \53\ See FINRA Response Letter.
---------------------------------------------------------------------------

    The commenter requested further information and clarification on
the operation of the Trade-At Prohibition in the context of FINRA Rule
5320.\54\ This commenter presented, and FINRA responded to, the
following four scenarios that were unclear to the commenter.
---------------------------------------------------------------------------

    \54\ See FIF Letter.
---------------------------------------------------------------------------

    Scenario 1: The Trading Center receives a customer buy order for
400 shares at $10.10, and facilitates this order by executing against
protected offers at $10.00, $10.05, and $10.10. The Trading Center then
fills the customer buy order on a riskless principal basis at an
average price of $10.05. The commenter inquired whether the Trading
Center would be obligated to send Trade-at ISOs to execute against the
protected offers in allocating the fill to the customer. FINRA
responded by stating the second leg of a riskless principal transaction
that complies with the relevant SRO riskless principal rule would not
constitute a separate transaction for purposes of Rule 611 of
Regulation NMS. Similarly, FINRA believes that the second leg of a
riskless principal transaction would not constitute a separate
transaction for purposes of complying with the Trade-at Prohibition.
Therefore, in filing the customer order in the example, the Trading
Center would not need to send out ISOs to execute against the protected
offers to comply with the Trade-at Prohibition.
    Scenario 2: The Trading Center receives a customer buy order for
200 shares at $9.95 and a customer sell order for 200 shares at $9.95.
The commenter inquired whether the Trading Center would need to route a
Trade-at ISO to execute the customer sell order against the displayed
order on the exchange. FINRA responded by stating that in the example,
the member would be able to comply with both the FINRA Rule 5320
obligations as well as the Trade-at Prohibition by routing a Trade-at
ISO.\55\
---------------------------------------------------------------------------

    \55\ See FINRA Response Letter.
---------------------------------------------------------------------------

    Scenario 3: The Trading Center fills a customer buy order for 200
shares at $9.954 pursuant to the Negotiated Trade exception to the
Trade-at Prohibition, and the Trading Center has a customer sell order
for $9.95. The commenter inquired whether the Trading Center may
execute the customer sell order at $9.954 even though the Plan requires
orders be executed in $0.05 increments. In Partial Amendment No. 1,
FINRA proposes to permit the member to execute the customer order in a
non-nickel increment in certain limited circumstances.
    Scenario 4: A member principally fills a customer buy order for 200
shares at $9.949 pursuant to a Negotiated Trade exception to the Trade-
at Prohibition and owes a fill on a customer order to sell 200 shares
with a limit price of $9.95, pursuant to FINRA Rule 5320. The commenter
inquired whether the member may principally fill the customer order at
$9.95 without sending a Trade-at ISO to another displayed Trading
Center. FINRA states that the member is not displaying at the price of
the Protected Quotation and therefore to comply with the Trade-at
Prohibition it must route a Trade-at ISO to fill the customer sell
order.\56\
---------------------------------------------------------------------------

    \56\ See FINRA Response Letter.
---------------------------------------------------------------------------

    The commenter sought clarification on how an order received with an
impermissible trading increment would be handled.\57\ FINRA responded
that firms are not permitted to change the price or terms of a customer
order without the informed consent of the customer. Accordingly,
whether a member may round the limit price down to the nearest valid
increment will depend on the specific communication between the member
and the customer.
---------------------------------------------------------------------------

    \57\ See FIF Letter. The commenter also requested clarification
on the treatment of a variety of order types, including Good Till
Canceled orders entered in non-nickel increments before the Pilot
Period, indications of interest priced to execute at the mid-point,
and market maker peg orders. FINRA noted that Test Group One permits
indications of interest priced to execute at the mid-point. With
regard to the other orders, FINRA noted that the Participants are
drafting FAQs that will address the commenter's questions.
---------------------------------------------------------------------------

    The commenter sought clarification on whether Market Makers are
obligated to send ISOs in connection with executing against Market
Maker interest.\58\ In the commenter's example, a Market Maker is
displayed on an exchange but may wish to trade without sending an ISO
to its displayed interest. In response, FINRA explained that the Market
Maker in the example was not obligated to send an ISO to trade against
its exchange quote but would be limited to its displayed size.
---------------------------------------------------------------------------

    \58\ See FIF Letter.
---------------------------------------------------------------------------

    The commenter sought clarification on whether a Market Maker could

increase its quote after it had received a long-lived not held
order.\59\ FINRA stated that the Market Maker's quote could increase
while working a not held order as long as the price increase was not
intentional and the Market Maker had policies and procedures to protect
against abuse.\60\
---------------------------------------------------------------------------

    \59\ The commenter noted that the market maker may change their
quote numerous times over the life of a long-lived order, which may
be worked via an agency algorithm, principal/riskless principal
fills, an agency cross or other principal fills. See FIF Letter.
    \60\ See FINRA Response Letter.
---------------------------------------------------------------------------

    Finally, one commenter expressed concern regarding the differences
between the Participants' various proposed quoting and trading rule
filings.\61\ The commenter noted that there are differences among the
Participants' proposed rule changes for certain key defined terms, such
as ``Retail Investor Order'' that should be harmonized across the
Participants' proposed rule filings.\62\ The commenter indicated that
if the differences persisted it would be ``virtually impossible'' for
its members to comply with the Plan.\63\
---------------------------------------------------------------------------

    \61\ See SIFMA Letter.
    \62\ See SIFMA Letter.
    \63\ See SIFMA Letter.
---------------------------------------------------------------------------

V. Discussion and Findings

    After carefully considering the proposed rule change, the comments
submitted, and FINRA's response to the comments, the Commission finds
that the proposal is consistent with the requirements of the Act and
the rules and regulations thereunder applicable to a national
securities association.\64\ Specifically, the Commission finds that the
proposed rule change is consistent with Section 15A(b)(6) of the
Act,\65\ which requires, among other things, that FINRA's rules be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in general, to protect investors and the public
interest, and are not designed to permit unfair discrimination between
customers, issuers, brokers or dealers. In addition, the Commission
finds that the proposed rule change is consistent with Section
15A(b)(9) of the Act,\66\ which requires that FINRA rules not impose
any burden on competition that is not necessary or appropriate.
---------------------------------------------------------------------------

    \64\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
    \65\ 15 U.S.C. 78o-3(b)(6).
    \66\ 15 U.S.C. 78o-3(b)(9).
---------------------------------------------------------------------------

    The Commission stated in the Approval Order that the Tick Size
Pilot should provide a data-driven approach to evaluate whether certain
changes to the market structure for Pilot Securities would be
consistent with the Commission's mission to protect investors, maintain
fair, orderly and efficient markets, and facilitate capital
formation.\67\ As discussed below, the Commission believes that FINRA's
proposal is consistent with the requirements of the Act and would
further the purpose of the Plan to provide meaningful data.
---------------------------------------------------------------------------

    \67\ See Approval Order, supra note 3.
---------------------------------------------------------------------------

    FINRA, as a Participant in the Plan, has an obligation to comply,
and enforce compliance by its members, with the terms of the Plan. 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 participant. Each self-
regulatory organization also shall, absent reasonable justification or
excuse, enforce compliance with any such plan by its members and
persons associated with its members.'' \68\ Proposed FINRA Rule 6191(a)
would impose compliance obligations on its members with the trading and
quoting requirements set forth in Section VI of the Plan. As discussed
below, the Commission also believes the proposal is consistent with the
Act because it is designed to assist FINRA in meeting its regulatory
obligations pursuant to Rule 608 of Regulation NMS and the Plan.
---------------------------------------------------------------------------

    \68\ 17 CFR 242.608(c). See also Section II.B of the Plan which
provides that each Participant will adopt rules requiring compliance
by its members with provisions of the Plan. In addition, Section IV
of the Plan requires all Participants and members of Participants to
establish maintain and enforce written policy and procedures that
are reasonably designed to comply with the applicable quoting and
trading requirements specified in Section VI of the Plan for the
Pilot Securities.
---------------------------------------------------------------------------

A. Policies and Procedures To Comply With the Plan

    Proposed FINRA Rule 6191(a)(1) provides that FINRA members must
establish, maintain, and enforce written policies and procedures that
are reasonably designed to meet the applicable quoting and trading
requirements of the Plan. Proposed FINRA Rule 6191(a)(2) states that
FINRA systems will not display quotations in violation of the Plan and
the rule. As noted above, Sections II.B and IV of the Plan provide that
each Participant must establish, maintain and enforce written policies
and procedures that are reasonably designed to comply with the quoting
and trading requirements of the Plan and adopt rules requiring
compliance by its members with the terms of the Plan. Accordingly,
proposed FINRA Rules 6191(a)(1) and (2) are consistent with the Act as
they implement these Plan provisions.

B. Compliance and Pilot Securities Under $1.00 During the Pilot Period

    Proposed FINRA Rule 6191(a)(3) provides a mechanism to address
instances where the price of a Pilot Security assigned to a Test Group
falls below $1.00. Specifically, if the price of a Pilot Security
assigned to a Test Group falls below $1.00 during a trading day, the
Pilot Security would remain in its assigned Test Group. If, however, a
Pilot Security has a Closing Price below $1.00 during any trading day,
that Pilot Security would be moved out of its respective Test Group and
into the Control Group.\69\ The Commission notes that the selection
criteria for Pilot Securities were developed to minimize the likelihood
of the inclusion of securities that trade with a share price of $1.00
or less. However, the Commission understands that there could be
instances over the course of the Pilot Period where a Pilot Security's
price falls below $1.00. According to the Participants, a $0.05 quoting
and/or trading increment could be harmful to trading for such low
priced Pilot Securities. Accordingly, the Commission believes that this
provision is consistent with the Act because it should help to ensure
that the universe of Pilot Securities remains constant over the Pilot
Period while also addressing trading concerns for Pilot Securities that
experience a fall in price.
---------------------------------------------------------------------------

    \69\ The Commission notes that it has granted FINRA an exemption
from Rule 608(c) related to this provision. See SEC Exemption
Letter, supra note 18.
---------------------------------------------------------------------------

    Proposed FINRA Rule 6191(a) Supplementary material .03 specifies
that the rule's effectiveness shall be contemporaneous with the pilot
period. The Commission believes that this proposed rule is consistent
with the Act because it reinforces and clarifies important dates and
obligations under the Plan.

C. Quoting and Trading Rules for Test Group One and Test Group Two

    Proposed FINRA Rule 6191(a)(4) provides that no member may display,
rank, or accept from any person any displayable or non-displayable bids
or offers, orders, or indications of interest in any Pilot Security in
Test Group One in increments other than $0.05. However, proposed FINRA
Rule

6191(a)(4) also provides that orders priced to execute at the midpoint
of the NBBO or best PBBO and orders entered in a Participant-operated
retail liquidity program may be ranked and accepted in increments of
less than $0.05. Finally, proposed FINRA Rule 6191(a)(4) provides that
Pilot Securities in Test Group One may continue to trade at any price
increment that is currently permitted by applicable Participant, SEC
and FINRA rules. The Commission finds that proposed FINRA Rule
6191(a)(4) is consistent with the Act because it implements provisions
of the Plan.
    Proposed FINRA Rule 6191(a)(5) provides that no member may display,
rank, or accept from any person any displayable or non-displayable bids
or offers, orders, or indications of interest in any Pilot Security in
Test Group Two in increments other than $0.05. However, proposed FINRA
Rule 6191(a)(5) also provides that orders priced to execute at the
midpoint of the NBBO or PBBO and orders entered in a Participant-
operated retail liquidity program may be ranked and accepted in
increments of less than $0.05. Proposed FINRA Rule 6191(a)(5)(B)
further provides that no member may execute an order in a Test Group
Two Pilot Security in an increment other than $0.05, unless an
exception applies. Pilot Securities in Test Group Two may trade in
increments less than $0.05 when trading: (i) At the midpoint between
the NBBO or the PBBO; (ii) Retail Investor Orders\70\ that are provided
price improvement that is at least $0.005 better than the PBBO; (iii)
Negotiated Trades; and (iv) customer orders to comply with FINRA Rule
5320 following the execution of a proprietary trade that is permissible
pursuant to Plan exception.\71\ The Commission finds that proposed
FINRA Rules 6191(a)(5)(C)(i), (ii) and (iii) are consistent with the
Act because they implement provisions of the Plan.
---------------------------------------------------------------------------

    \70\ See Discussion below related to the proposed Rule
6191(a)(7)(A) related to the Retail Investor Order exception for the
trading of Pilot Securities in Test Group Two and Test Group Three.
    \71\ See Partial Amendment No. 1, supra note 6.
---------------------------------------------------------------------------

    In Partial Amendment No. 1, FINRA proposes to add a trading
increment exception in FINRA Rule 6191(a)(5)(C)(iv), which would allow
the execution of a customer order following a proprietary trade by a
FINRA member at an increment less than $0.05 in the same security, on
the same side and at the same price as (or within the prescribed amount
of) a customer order owed a fill pursuant to FINRA Rule 5320, where the
triggering proprietary trade was permissible pursuant to an exception
under the Plan. FINRA believes that this customer order protection
exception should facilitate the ability of its members to continue to
protect customer orders while retaining the flexibility to engage in
proprietary trades that comply with an exception to the Plan. Based on
the foregoing, the Commission finds that proposed FINRA Rule
6191(a)(5)(C)(iv) is consistent with the Act.\72\
---------------------------------------------------------------------------

    \72\ The Commission notes that it has granted FINRA an exemption
from Rule 608(c) related to this provision. See SEC Exemption
Letter, supra note 18.
---------------------------------------------------------------------------

D. Quoting and Trading Rules for Test Group Three

    Proposed FINRA Rule 6191(a)(6)(A) provides that no member may
display, rank, or accept from any person any displayable or non-
displayable bids or offers, orders, or indications of interest in any
Pilot Security in Test Group Three in increments other than $0.05.
Proposed FINRA Rule 6191(a)(6)(A) also provides that for Test Group
Three Pilot Securities orders priced to execute at the midpoint of the
NBBO or PBBO and orders entered in a Participant-operated retail
liquidity program may be ranked and accepted in increments of less than
$0.05. Proposed FINRA Rule 6191(a)(6)(B) specifies that the $0.05
trading increment will apply to all trades, including Brokered Cross
Trades; and that trades for Test Group Three Pilot Securities may not
occur in increments of less than $0.05 unless there is an applicable
exception listed in proposed Rule FINRA Rule 6191(a)(6)(C). Pursuant to
proposed Rule FINRA Rule 6191(a)(6)(C), Test Group Three Pilot
Securities may trade in increments less than $0.05 when trading: (i) At
the midpoint between the NBBO or the PBBO; (ii) Retail Investor Orders
\73\ that are provided price improvement that is at least $0.005 better
than the PBBO and; (iii) Negotiated Trades; and (iv) customer orders to
comply with FINRA Rule 5320 following the execution of a proprietary
trade that is permissible pursuant to Plan exception.\74\
---------------------------------------------------------------------------

    \73\ See Discussion below related to the proposed FINRA Rule
6191(a)(7)(A) related to the Retail Investor Order exception for the
trading of Pilot Securities in Test Group Two and Test Group Three.
    \74\ See Partial Amendment No. 1, supra note 6.
---------------------------------------------------------------------------

    The Commission finds that proposed FINRA Rule 6191(a)(6)(A),
proposed FINRA Rule 6191(a)(6)(B), and proposed FINRA Rules
6191(a)(6)(C)(i), (ii) and (iii) are consistent with the Act because
they implement provisions of the Plan. In addition, as discussed
above,\75\ the Commission finds that proposed FINRA Rule
6191(a)(6)(C)(iv) is consistent with the Act.
---------------------------------------------------------------------------

    \75\ See Section V.C above related to the discussion of proposed
FINRA Rule 6191(a)(5)(C)(iv). The Commission notes that it has
granted FINRA an exemption from Rule 608(c) related to this
provision. See SEC Exemption Letter, supra note 18.
---------------------------------------------------------------------------

1. Quoting and Trading Rules for Test Group Three: Trade-at Prohibition
    Proposed FINRA Rule 6191(a)(6)(D) describes the Trade-at
Prohibition and the exceptions applicable thereto.\76\ Specifically,
proposed FINRA Rule 6191(a)(6)(D)(i) sets forth that absent any of the
exceptions listed in subparagraph (D)(ii), no member that operates a
Trading Center may execute a sell order for a Pilot Security in Test
Group Three at the price of a Protected Bid or execute a buy order for
a Pilot Security in Test Group Three at the price of a Protected Offer
during regular trading hours (i.e., the Trade-at Prohibition). Proposed
FINRA Rule 6191(a)(6)(D)(i) also states that under the Trade-at
Prohibition, a member that operates a Trading Center that is displaying
a quotation, via either a processor or an SRO quotation feed, that is
at a price equal to the traded-at Protected Bid or Protected Offer is
permitted to execute orders at that level, but only up to the amount of
its displayed size. Finally, proposed FINRA Rule 6191(a)(6)(D)(i)
states that a member that operates a Trading Center that was not
displaying a quotation at a price equal to the traded-at Protected
Quotation, via either a processor or an SRO quotation feed, is
prohibited from price-matching protected quotations unless an exception
applies.
---------------------------------------------------------------------------

    \76\ The Commission notes that one commenter submitted extensive
interpretative questions on the implementation and operation to the
Trade-at Prohibition. See FIF Letter. As noted above, FINRA provided
detailed responses to the interpretative questions. See FINRA
Response Letter. The Commission understands that the Participants
are developing interpretative guidance on the quoting and trading
rules under the Plan and expects that Participants will continue to
work with market participants on the implementation of the quoting
and trading rules of the Tick Size Pilot.
---------------------------------------------------------------------------

    Proposed FINRA Rule 6191(a)(6)(D)(ii) lists the exceptions to the
Trade-at Prohibition.\77\ The proposed exceptions set forth in FINRA
Rules 6191(a)(6)(D)(ii)(c) through (g), (j), (k), and (m) mirror the
exceptions set forth in the Plan.\78\ The Commission

finds these exceptions to be consistent with the Act because they
implement Plan provisions.
---------------------------------------------------------------------------

    \77\ One commenter requested that odd lot orders be exempt from
the Trade-at Prohibition. See FIF Letter. The Commission notes that
the Approval Order addressed odd lot orders under the Trade-at
Prohibition. See Approval Order, supra note 3.
    \78\ See Section VI.D(3) through (7), (10), (11) and (13) of the
Plan.
---------------------------------------------------------------------------

    In proposed FINRA Rule 6191(a)(6)(D)(ii)(a), FINRA proposes to
implement the display exception to the Trade-at Prohibition. As
proposed, FINRA has added several details about its operation and
implementation. For example, FINRA proposes that a Trading Center that
uses independent aggregation units execute orders within the same
independent aggregation unit that displayed the quotation. In addition,
FINRA proposes to specify that Trading Centers that display a quotation
as agent or riskless principal may only execute as agent or riskless
principal. If the Trading Center is displaying a quotation as principal
(excluding riskless principal), the Trading Center may execute as
principal, agent or riskless principal.
    As noted above, one commenter suggested that FINRA's proposal would
create an incentive for trading in Test Group Three to migrate to dark
venues.\79\ According to the commenter, FINRA's proposal would permit a
non-displayed Trading Center to submit matched trades to an ATS that
was displaying on an agency basis the quotation of another ATS
subscriber.\80\ FINRA responded that it did not believe this scenario
could occur under its proposal, and confirmed that the broker-dealer
submitting the matched trade could not, as a Trading Center trade with
its customer order because it was not displaying a principal quotation.
The Commission finds that FINRA's proposed Rule 6191(a)(6)(D)(ii)(a) to
be consistent with the Act. The Commission believes that FINRA's
proposed rule clarifies the operation of the display exception in a
manner consistent with the goals of the Plan. First, a Trading Center
would only be able to execute an order in the same capacity in which it
has displayed a quotation. Accordingly, a Trading Center could not rely
on an agency quotation to execute on a principal basis. Further, a
Trading Center that uses independent aggregation units would be
restricted in its ability to rely on quotations displayed by other
independent aggregation units. As noted above, a Trading Center that
utilizes independent aggregation units may only execute an order in the
independent aggregation unit that displayed the quotation. The
Commission believes that these additional rules implement the display
exception to the Trade-at Prohibition in a manner that should incent
the display of liquidity.\81\
---------------------------------------------------------------------------

    \79\ See NYSE Letter.
    \80\ Id.
    \81\ See Approval Order, supra note 3. In the Approval Order,
the Commission stated that the Trade-at Prohibition should test
whether market participants are incentivized to display more
liquidity in a wider tick environment.
---------------------------------------------------------------------------

    Proposed FINRA Rule 6191(a)(6)(D)(ii)(b) sets forth the exception
to the Trade-at Prohibition for orders of Block Size. FINRA proposes
additional provisions with respect to Block Size orders including that
orders at the time of origin may not be: (1) An aggregation of non-
block orders; (2) broken into orders smaller than Block Size prior to
submitting the order to a Trading Center for execution; or (3) executed
on multiple Trading Centers.
    As noted above, one commenter suggested that these additional
provisions would limit firms' ability to facilitate block cross
trades.\82\ FINRA responded that the additional criteria would clarify
this Trade-at Prohibition exception. Further, FINRA noted that
permitting the aggregation of non-block orders or permitting members to
combine a block order with non-block orders would overly expand the
scope of the exception.
---------------------------------------------------------------------------

    \82\ See FIF Letter.
---------------------------------------------------------------------------

    The Commission believes that the additional criteria for the Block
Size exception are consistent with the Act. In the Approval Order, the
Commission modified the Block Size definition for the purposes of the
Plan to more closely reflect the trading characteristics of potential
Pilot Securities.\83\ The Commission believes proposed FINRA Rule
6191(a)(6)(D)(ii)(b) appropriately limits the scope and applicability
of the Block Size exception, and should help to exclude trades and
order handling scenarios that were not contemplated or intended to be
considered for an exception for the Trade-at Prohibition.
---------------------------------------------------------------------------

    \83\ See Approval Order, supra note 3.
---------------------------------------------------------------------------

    Proposed FINRA Rule 6191(a)(6)(D)(ii)(h) sets forth the exception
to the Trade-at Prohibition for orders identified as Trade-at ISO. In
Partial Amendment No. 1, FINRA proposes to clarify the definition of a
Trade-at ISO for purposes of the exception. Specifically, FINRA
proposes to define Trade-At ISO as a limit order for a Pilot Security
that meets the following requirements: (1) When routed to a Trading
Center, the limit order is identified as a Trade-at ISO; and (2)
simultaneously with the routing of the limit order identified as a
Trade-at ISO, one of more additional limit orders, as necessary, are
routed to execute against the full size of any protected bid, in the
case of a limit order to sell, or the full displayed size of any
protected offer, in the case of a limit order to buy, for the Pilot
Security with a price that is better than or equal to the limit price
of the limit order identified as a Trade-at ISO. These additional
routed orders also must be marked as Trade-at ISO.\84\
---------------------------------------------------------------------------

    \84\ See Proposed FINRA Rule 6191(a)(7)(B)(i).
---------------------------------------------------------------------------

    According to FINRA, the use of the term ISO as set forth in the
Plan could be unclear in Test Group Three.\85\ As noted in FINRA's
Partial Amendment No. 1, an ISO may mean that the sender of the ISO has
swept better-priced protected quotations, so that the recipient of that
ISO may trade through the price of the protected quotation (in
compliance with Rule 611 of Regulation NMS \86\), or it could mean that
the sender of the ISO has swept protected quotations at the same price
at which it wishes to execute (in addition to any better-priced
quotations), so that the recipient of that ISO may trade at the price
of the protected quotation (as an exception to the Trade-at
Prohibition). Accordingly, since the meaning of an ISO may differ under
Rule 611 of Regulation NMS and the Trade-at Prohibition under the Plan,
FINRA proposes Rule 6191(a)(6)(D)(ii)(h) to reflect that the order is a
Trade-at ISO so that a receiving Trading Center in a Test Group Three
Pilot Security would know, upon receipt of that Trade-at ISO, that the
Trading Center that sent the Trade-at ISO had already executed against
the full size of displayed quotations at that price (e.g., the
recipient of that Trade-at ISO could permissibly trade at the price of
the protected quotation). In addition, FINRA proposes to make a
corresponding change to FINRA Rule 6191(a)(6)(D)(ii)(i).
---------------------------------------------------------------------------

    \85\ Section VI.D(8) of the Plan provides an exception to the
Trade-at Prohibition for ISOs. In addition, Section I(MM) defined a
Trade-at ISO as a limit order for a Pilot Security that meets the
following requirements: (1) When routed to a Trading Center, the
limit order is identified as an ISO; and (2) simultaneously with the
routing of the limit order identified as an ISO, one or more
additional limit orders, as necessary, are routed to execute against
the full displayed size of any protected bid, in the case of a limit
order to sell, or the full displayed size of any protected offer, in
the case of a limit order to buy, for the Pilot Security with a
price that is equal to the limit price of the limit order identified
as an ISO. These additional routed orders also must be market as
ISO.
    \86\ 17 CFR 242.611.
---------------------------------------------------------------------------

    The Commission believes that proposed FINRA Rule
6191(a)(6)(D)(ii)(h) and FINRA Rule 6191(a)(6)(D)(ii)(i) are consistent
with the Act because they clarify the use and operation of ISOs under
the Plan. The definition in the Plan provided that an ISO received
under the Plan would indicate to the recipient that orders to

execute against the full displayed size at a price equal to the ISO's
limit price had been routed. However, the Commission understands that
the use of the term ISO in connection with the exception to the Trade-
at Prohibition could cause confusion. Therefore, the Commission
believes that FINRA's proposal should clarify the use of ISOs under the
Plan and facilitate their implementation.
    Proposed FINRA Rule 6191(a)(6)(D)(ii)(l) sets forth an exception to
the Trade-at Prohibition for stopped orders. A stopped order is defined
as an order executed by a Trading Center which, at the time of order
receipt, the Trading Center had guaranteed an execution at no worse
than a specified price where: (1) The stopped order was for the account
of a customer; (2) the customer agreed to the specified price on an
order-by-order basis; and (3) the price of the Trade-at transaction
was, for a stopped buy order, equal to or less than the National Best
Bid in the Pilot Security at the time of execution or, for a stopped
sell order, equal to or greater than the National Best Offer in the
Pilot Security at the time of execution, as long as such order is
priced at an acceptable increment.
    As noted above, one commenter raised questions about how the
stopped order exception would operate as an exception to the Trade-at
Prohibition.\87\ In Partial Amendment No. 1, FINRA amended the rule
text of proposed FINRA Rule 6191(a)(6)(D)(ii)(l) to clarify its
operation under the Trade-at Prohibition. The Commission finds that
proposed FINRA Rule 6191(a)(6)(D)(ii)(l), as modified by Partial
Amendment No. 1, is consistent with the Act because it implements the
Plan provision is a manner that clarifies its operation for these order
types.\88\
---------------------------------------------------------------------------

    \87\ See FIF Letter.
    \88\ The Commission notes that it has granted FINRA an exemption
from Rule 608(c) related to this provision. See SEC Exemption
Letter, supra note 18.
---------------------------------------------------------------------------

    In Partial Amendment No. 1, FINRA proposes an additional exception
to the Trade-at Prohibition.\89\ Specifically, proposed FINRA Rule
6191(a)(6)(D)(ii)(n) sets forth an exception to the Trade-at
Prohibition for ``bona fide errors.'' \90\ Proposed FINRA Rule
6191(a)(6)(D)(ii)(n) provides an exception to the Trade-at Prohibition
where the order is to correct a bona fide error, which is recorded by
the Trading Center in its error account. The proposed definition for a
``bona fide error'' is: (i) The inaccurate conveyance or execution of
any term of an order including, but not limited to, price, number of
shares or other unit of trading; identification of the security;
identification of the account for which securities are purchased or
sold; lost or otherwise misplaced order tickets; short sales that were
instead sold long or vice versa; or the execution of an order on the
wrong side of a market; (ii) the unauthorized or unintended purchase,
sale, or allocation of securities, or the failure to follow specific
client instructions; (iii) the incorrect entry of data into relevant
systems, including reliance on incorrect cash positions, withdrawals,
or securities positions reflected in an account; or (iv) a delay,
outage, or failure of a communication system used to transmit market
data prices or to facilitate the delivery or execution of an order.\91\
In order to utilize this exception to the Trade-at Prohibition, the
following conditions must be met: (1) The bona fide error must be
evidenced by objective facts and circumstances, the Trading Center must
maintain documentation of such facts and circumstances, and the Trading
Center must record the transaction in its error account; (2) the
Trading Center must establish, maintain, and enforce written policies
and procedures that are reasonably designed to address the occurrence
of errors and, in the event of an error, the use and terms of a
transaction to correct the error in compliance with this exception; and
(3) the Trading Center must regularly surveil to ascertain the
effectiveness of its policies and procedures to address errors and
transactions to correct errors and takes prompt action to remedy
deficiencies in such policies and procedures.\92\
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    \89\ This additional exception was requested by a commenter. See
FIF Letter.
    \90\ The Commission notes that one commenter suggested that
there should be a print protection exception to the Trade-at
Prohibition that corresponds to the print protection exemption that
is applicable to Rule 611 of Regulation NMS. See FIF Letter. The
Commission does not agree that a print protection exception would be
consistent with the Trade-At Prohibition in the Plan. First, the
print protection exemption applicable to Rule 611 is inconsistent
with the Trade-at Prohibition because the Rule 611 print protection
exemption explicitly contemplates protection for both displayed and
reserve (undisplayed) size of orders. In this regard, the Commission
believes that such an exception for the Trade-at Prohibition often
will be unnecessary because a print protection exception for the
Trade-at Prohibition would need to be premised upon a displayed
customer order, which already is excepted from the Trade-at
Prohibition if it satisfies the requirements of proposed FINRA Rule
6191(a)(6)(D)(i) and the Plan. Moreover, providing a print
protection exemption from the Trade-At Prohibition would create the
potential for trading scenarios that would result in better-priced,
displayed orders being bypassed for the execution of inferior, same-
priced orders. The Commission believes such a result is inconsistent
with the Plan in general, and the Trade-at Prohibition in
particular. Finally, the Commission notes that FINRA represents that
the print protection exemption applicable to Rule 611 of Regulation
NMS is rarely used by its members.
    \91\ Absent a bona fide error as defined above, the proposed
exception would not apply to a broker dealer's mere failure to
execute a not-held order in accordance with a customer's
expectations.
    \92\ See Partial Amendment No. 1, supra note 6. See also
Securities Exchange Act Release No. 55884 (June 8, 2007), 72 FR
32926 (June 14, 2007).
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    The Commission finds that the exception to the Trade-at Prohibition
for the correction of bona fide errors is consistent with the Act.\93\
The Commission believes that this exception should promote efficiency
and the best execution of investor orders. As noted in the Commission's
order exempting such orders from Rule 611 of Regulation NMS, the
exemption will allow Trading Centers to execute error correction
transactions at the appropriate prices to correct bona fide errors
without having to qualify for one of the exceptions to the Trade-at
Prohibition.\94\
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    \93\ The Commission notes that the conditions for a bona fide
error exception for the Trade-at Prohibition would be consistent
with the corresponding bona fide error exemption for Rule 611 would
apply only to the error correction transaction itself and would not,
for example, apply to any subsequent trades effected by a Trading
Center to eliminate a proprietary position connected with the error
correction transaction or a broker dealer's mere failure to execute
a not-held order in accordance with a customer's expectations. See
also Securities Exchange Act Release No. 55884 (June 8, 2007), 72 FR
32926 (June 14, 2007).
    \94\ The Commission notes that it has granted FINRA an exemption
from Rule 608(c) related to this provision. See SEC Exemption
Letter, supra note 18.
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    Proposed FINRA Rule 6191(a)(7)(A) addresses the execution of Retail
Investor Orders other than on a national securities exchange.\95\ FINRA
proposes that any member that operates a Trading Center may execute
against an order received directly from a natural person that did not
originate from a trading algorithm or any other computerized
methodology. This proposed provision generally tracks the Plan's
definition of ``Retail Investor Order'' while allowing a member to
execute against orders received directly from retail customers. FINRA
contends that in the absence of this proposal, many orders that are
currently sent to Trading Centers that otherwise satisfy the Retail
Investor Order definition would not be eligible for the exceptions of
the Plan in the OTC market solely due to the capacity (or lack thereof)
of that order.
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    \95\ Proposed Rule 6191(a)(7)(A)(iii) provides that any member
for which FINRA is the DEA that operates a Trading Center and
executes Retail Investor Orders must submit a signed attestation to
FINRA that substantially all orders to be executed as Retail
Investor Orders will qualify as such under this Rule. The Plan
provides that the Trading Center executing a Retail Investor Order
must sign an attestation that substantially all orders to be
executed as Retail Investor Orders will qualify as such under the
Plan.

---------------------------------------------------------------------------

    The Plan defines a Retail Investor Order as an agency or riskless
principal order. Therefore, according to FINRA orders received directly
from a customer, without an accompanying capacity, and executed by the
receiving Trading Center would not currently fall within the scope of
the Plan's definition of ``Retail Investor Order'' and the
corresponding exceptions from the $0.05 trading increment in Test
Groups Two and Three.
    The Commission believes that proposed FINRA Rule 6191(a)(7)(A) is
consistent with the Act as it implements provisions of the Plan. The
provisions related to Retail Investor Orders permit such orders to
receive price improvement. In the Approval Order, the Commission noted
that allowing Retail Investor Orders to receive price improvement could
minimize some of the concerns related to costs for retail investors.
FINRA's proposal to accommodate price improvement for Retail Investor
Orders executed in the OTC market is consistent with the intent and
goals of the Plan for such orders.
    The Commission finds that the FINRA proposal to implement the Tick
Size Pilot quoting and trading requirements, including the
Supplementary Material, are consistent with the Act. The proposal
clarifies and implements the quoting and trading requirements set forth
in the Plan.

VI. Solicitation of Comments of Partial Amendment No. 1

    Interested persons are invited to submit written data, views, and
arguments concerning Partial Amendment No. 1, including whether the
proposed rule change, as modified by Partial Amendment No. 1, is
consistent with the Act. Comments may be submitted by any of the
following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number SR-FINRA-2015-047 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2015-047. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-FINRA-2015-047 and should be
submitted on or before March 21, 2016.

VII. Accelerated Approval of Proposed Rule Change, as Modified by
Partial Amendment No. 1

    The Commission finds good cause, pursuant to Section 19(b)(2) of
the Act, to approve the proposed rule change, as modified by Partial
Amendment No. 1, prior to the 30th day after the date of publication of
Partial Amendment No. 1 in the Federal Register. Partial Amendment No.
1 amends four of the requirements set forth in this proposed rule
change. First, FINRA proposes to add an exception to permit members to
fill a customer order in a Pilot Security in Test Group Two or Three at
a non-nickel increment to comply with FINRA Rule 5320 (Prohibition
Against Trading Ahead of Customer Orders) under limited circumstances.
Second, FINRA is amending the proposal to adopt an exception to the
Trade-at Prohibition for certain error correction transactions. Third,
FINRA is proposing to modify the stopped order exception to the Trade-
at Prohibition to clarify its operation under the Plan. Finally, FINRA
is proposing to clarify the use of ISOs in connection with the Trade-at
Prohibition.
    FINRA believes that the change to allow members to fill a customer
order at a non-nickel increment to comply with Rule 5320 under limited
circumstances best facilitates the ability of members to continue to
protect customer orders while retaining the flexibility to engage in
proprietary trades that comply with an exception to the Plan. FINRA
believes adding an exception to the Trade-at Prohibition for error
correction transactions is appropriate as this exception is equally
applicable to the Trade-at Prohibition as to Rule 611 of Regulation
NMS, and that adopting this exception appropriately aligns the
requirements of the Trade-at Prohibition with Rule 611 of Regulation
NMS. Similarly, FINRA believes that amending the stopped order
exception will result in more consistent treatment under Regulation NMS
and the Plan, which should ease compliance burdens for members.
Finally, FINRA believes that amending the reference to ISOs in
connection with the Trade-at Prohibition is consistent with the Act
because it will better align that reference to the definition of
``Trade-At Intermarket Sweep Order'' as set forth in the Plan.
    Based on the foregoing, the Commission believes that the changes
to: (1) Add an exception to FINRA Rule 6191(a)(5)(C)(iv) and
6191(a)(6)(C)(iv) to permit members to fill a customer order in a Pilot
Security at a non-nickel increment to comply with FINRA Rule 5320 under
limited circumstances, (2) create an exception to the Trade-at
Prohibition for certain error correction transactions, (3) modify the
stopped order exception to the Trade-at Prohibition, and (4) to clarify
the use of ISOs in connection with the Trade-at Prohibition are all
consistent with the Act. Accordingly, the Commission finds good cause
for approving the proposed rule change, as modified by Partial
Amendment No. 1, on an accelerated basis, pursuant to Section 19(b)(2)
of the Act.

VIII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\96\ that the proposed rule change, as modified by Partial Amendment
No. 1 (SR-FINRA-2015-047) be, and it hereby is, approved on an
accelerated basis.
---------------------------------------------------------------------------

    \96\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\97\
---------------------------------------------------------------------------

    \97\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-04320 Filed 2-26-16; 8:45 am]
 BILLING CODE 8011-01-P


[Federal Register: June 25, 2008 (Volume 73, Number 123)]
[Rules and Regulations]
[Page 35975-35976]
[DOCID:fr25jn08-30]

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DEPARTMENT OF TRANSPORTATION

Federal Motor Carrier Safety Administration

49 CFR Parts 385 and 395

[Docket No. FMCSA-2004-19608]
RIN 2126-AB14

Hours of Service of Drivers; Availability of Supplemental
Documents

AGENCY: Federal Motor Carrier Safety Administration (FMCSA), DOT.

ACTION: Notice of availability of supplemental documents.

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SUMMARY: This notice advises the public that FMCSA is placing in the
public docket four additional documents concerning hours of service
(HOS) for commercial motor vehicle (CMV) drivers. FMCSA published an
interim final rule (IFR) on this issue on December 17, 2007. The Agency
now dockets the supplemental documents.

ADDRESSES: You may submit comments, identified by docket number FMCSA-
2004-19608, by one of the following methods: Internet, facsimile,
regular mail, or hand delivery. Please do not submit the same comments
by more than one method. FMCSA encourages use of the Federal
eRulemaking portal. It provides the most efficient and timely method of
receiving and processing your comments.
     Federal eRulemaking Portal: Go to http://
www.regulations.gov. Follow the online instructions for submitting
comments.
     Fax: 1-202-493-2251.
     Mail: Docket Management Facility; U.S. Department of
Transportation; 1200 New Jersey Avenue, SE., Washington, DC 20590-0001.
     Hand Delivery: Ground floor, Room W12-140, 1200 New Jersey
Avenue, SE., Washington, DC, between 9 a.m. and 5 p.m., e.t., Monday
through Friday, except Federal holidays.
    Instructions: All submissions must include the Agency name and
docket number (FMCSA-2004-19608) or Regulatory Identification Number
(RIN 2126-AB14) for this action. Note that all comments received will
be posted without change to http://www.regulations.gov, including any
personal information provided. Refer to the Privacy Act heading at
http://www.regulations.gov for further information.
    Privacy Act: Anyone is able to search the electronic form of all
comments received into any of our dockets by the name of the individual
submitting the

comment (or signing the comment, if submitted on behalf of an
association, business, labor union, etc.). You may review the
Department of Transportation's complete Privacy Act Statement in the
Federal Register published on April 11, 2000 (65 FR 19476) or you may
visit http://DocketsInfo.dot.gov.
    Submitting Comments:
     You can find electronic submission and retrieval help and
guidelines under the ``help'' section of the Web site.
     For notification that FMCSA received your comments, please
include a self-addressed, stamped envelope or postcard, or print the
acknowledgement page that appears after submitting comments on line.
     All comments received will be available for examination in
the docket at the above address or on the Web site.
     Comments received will be considered to the extent
practicable.
    FMCSA will continue to put relevant information in the docket as it
becomes available and interested persons should continue to examine the
docket for new material.

FOR FURTHER INFORMATION CONTACT: Mr. Thomas Yager, Chief, FMCSA Driver
and Carrier Operations. Telephone<PHONE_NUMBER> or E-mail
<EMAIL_ADDRESS>Office hours are from 7:45 a.m. to 4:15 p.m., e.t.,
Monday through Friday, except Federal holidays.

SUPPLEMENTARY INFORMATION: On August, 25, 2005, FMCSA published a final
HOS rule (``2005 rule'') (70 FR 49978). On July 24, 2007, the DC
Circuit Court vacated the 11-hour driving time and 34-hour restart
provisions of the 2005 rule (Owner-Operator Independent Drivers
Association, Inc. v. Federal Motor Carrier Safety Administration, 494
F.3d 188 (DC Cir. 2007)). In response to the DC Circuit Court decision,
FMCSA published an interim final rule (IFR) on December 17, 2007 (72 FR
71247) that reinstated the two provisions vacated by the Court and
sought further comments on those provisions.
    For a full background on this rulemaking, please see the preamble
to the December 2007 HOS IFR. The docket for this rulemaking (FMCSA-
2004-19608) contains all of the background information for this
rulemaking, including comments.
    This notice advises of the availability of four additional
documents. FMCSA remains committed to issuing a final rule in 2008 and
any comments on the four documents should be submitted as soon as
possible.
    FMCSA is placing the following four documents in the docket:
     ``Integrated Report: Peer Review of R. J. Hanowski et al.,
``Analysis of Risk as a Function of Driving Hours: Assessment of
Driving Hours 1 through 11.'''' The separate reviews were conducted by
D.A. Perrin (January 23, 2008), G. Belenky and L.J. Wu (February 6,
2008), and S.R. Hursh and J. Fanzone (February 7, 2008). This peer
review was conducted at the request of FMCSA.
     ``Review of Hours of Service Regulatory Impact Analysis
(RIA) Report,'' conducted by Linda Ng Boyle, Ron Knipling, and Greg
Belenky, and dated December 27, 2007. This peer review was conducted at
the request of FMCSA.
     ``Hours of Service Regulatory Impact Analysis: Peer Review
Results and FMCSA Responses,'' dated May 2008. This document was
prepared in response to the requested peer review of the RIA that
accompanied the 2007 HOS IFR.
     ``Analysis of Fatigue-Related Large Truck Crashes, the
Assignment of Critical Reason, and Other Variables Using the Large
Truck Crash Causation Study.'' This analysis, dated May 30, 2008, was
prepared by FMCSA.

    Issued on: June 20, 2008.
John H. Hill,
Administrator.
 [FR Doc. E8-14491 Filed 6-24-08; 8:45 am]

BILLING CODE 4910-EX-P