When routing orders to other trading centers to comply with the ISO exception, does Rule 611 permit the routing trading center to bypass a trading center with respect to which the routing trading center is currently exercising the self-help exception? Note, however, that display of the same quotation directly in the ECNs proprietary data stream (i.e., not in the Network quotation stream) and indirectly in the Network data stream through an SRO trading facility on an order-delivery basis would not raise similar concerns because the quotation would appear in the Network data stream as only a single protected quotation. Note, however, that the fee limitations of Rule 610(c) apply (either directly or through the definition of protected quotation in Rule 600(b)(57)) only to quotations that are the BBOs of a national securities exchange or a national securities association. Firm Settles FINRA Charges For Failing To Detect Potential - Mondaq Immediately upon invoking the exception, the electing entity must notify the bypassed automated trading center. As discussed in FAQ 3.03 above, a broker-dealer that intends to use the ISO exception to execute a block order for a customer may, if the customer gives its informed consent, retain the benefit of any fills of the ISOs at better prices than the block trade price. Price-To-Comply Orders comply with the Reg NMS Order Protection Rule and Locked and Crossed market rule by re-pricing to the NBBO. 57621 (April 4, 2008). In other circumstances, a commitment to execute a customer order seeking an intra-day VWAP that was submitted well in advance of the VWAP period could qualify for the benchmark exception, even if the VWAP period is shorter than one-half of the trading day. For example, if an ECN is displaying a quotation that equals the NBBO, a market participant executing a best-price routing strategy can route an ISO with a limit price at the NBBO directly to the ECN under Rule 600(b)(30)(i). If so, is any broker-dealer responsible for routing ISOs also entitled to bypass a trading center experiencing systems problems that would justify use of the self-help exception? A trading centers policies and procedures to prevent trade-throughs under Rule 611(a) are not required to prevent transactions that are executed in compliance with these exceptions or with an exemption from Rule 611. A trading center that elects to use the self-help exception must notify the trading center whose quotations are bypassed. Question 3.13: Exemption for Certain Sub-Penny Trade-Throughs. To date, the Commission has not approved an SRO rule modifying the definition of regular trading hours for purposes of Rule 600(b)(64).46 Given the importance to the securities industry of any change to the definition of regular trading hours that would affect compliance with Regulation NMS, an SRO proposed rule change to modify the definition should explicitly state that the hours specified in Rule 600(b)(64) are to be changed and identify the NMS stocks that would be affected. Of course, all other terms of the exception must be met, including the requirement that the order be executed at a price that renders it underwater from the perspective of the broker-dealer that is giving the guarantee (i.e., the broker-dealer sells to the customer at a price below the national best bid, or buys from the customer at a price above the national best offer). Using an ISO in this context will assure that the ECN can execute the ISO without regard to protected quotations at any automated trading center, even if such quotations change while the ISO is in transit (see FAQ 4.04 above). Answer: Yes, the residual principal trade of 20,000 shares would qualify for the benchmark exception because the execution of the order was not based, directly or indirectly, on the quoted price of the NMS stock at the time of execution and the commitment to fill the residual amount of the order at a volume-weighted average price was made at a time when the material terms of the residual trade were not reasonably determinable. Will the SROs adopt a consistent approach in developing their rules? The following questions and answers have been compiled by the Staff to assist in the application of Rule 611 and Rule 610. Rule 611(c) of Regulation NMS requires firms to take reasonable steps to establish that intermarket sweep orders ("ISOs") meet the requirements of SEC Rule 600(b)(30), which defines an ISO as a limit order for an NMS stock that meets two requirements: (i) it is identified as an ISO; and (ii) the firm routes additional limit orders, as . By giving its informed consent, the customer would, in effect, recognize that the block price was determined, at least in part, by a judgment of the extent to which the broker-dealer would receive fills of the ISOs at better prices. For ordinary traders, Rule 611 is intended to force exchanges to allow a trade to be executed at the NBBO (National Best Bid-Offer) price, on whichever exchange it can be found. The revised compliance dates provide additional time for automated trading centers to finalize development of their Regulation NMS-compliant trading systems. Question 4.04: Routing Single ISO to Best Displayed Price. 36 Rule 600(b)(16) defines customer as any person that is not a broker or dealer. If a broker-dealer is a party to the transaction (party BD), the arranging broker-dealer may not act in concert with the party BD to facilitate trades between the party BD and its customers. Objective Parameters. When the trade is reported to the relevant SRO, however, the price is inferior to a protected quotation. The Networks will identify such ADF participants in the Network quotation streams that are disseminated to the public.14, Question 2.08: Treatment of ISOs by Automated Trading Centers. . PDF Frequently Asked Questions - NASDAQtrader.com Rule 611(d) provides that the Commission may grant exemptions from the Rule that are necessary or appropriate in the public interest and consistent with the protection of investors. Answer: Yes, the definition of automated quotation in Rule 600(b)(3)(ii) requires that a trading center immediately and automatically execute an IOC order against an automated quotation up to its full size. 46 Amex has adopted a rule providing for the trading of certain of its listed securities until 4:15 (see Commentary .03 to Amex Rule 1), but the rule does not specify that it changes the definition of regular trading hours under Rule 600(b)(64) (or its predecessor section, Rule 11Ac1-5(a)(19), which was redesignated as Rule 600(b)(64) in the NMS Release). In addition, the questions and answers reflect current technological and other industry conditions and may require modification in the future if such conditions change materially. An order router is not entitled to bypass protected quotations pursuant to the self-help exception if it has reason to believe that an order-response problem is not attributable to a problem with systems for which the destination trading center is responsible. Intermarket sweep order - Wikipedia In structuring their ISO routing arrangements, trading centers and broker-dealers should reasonably address the potential for systems problems. To meet this objective, the notice should, at a minimum, provide a mechanism for communication with someone at the electing trading center who will be able to respond to inquiries concerning the notice. 22 See NMS Release, 70 FR at 37536-37537 (benchmark exception encompasses execution of an order that is benchmarked to a markets single-priced opening). Trading Centers. Securities industry participants need certainty concerning the protected quotations for which they will be required to afford trade-through protection during the Pilot Stocks Phase and All Stocks Phase. The Firm will want to be in a position to demonstrate that its policies and procedures are reasonable. Yes. Rather, an order can be evaluated separately under each exception. Question 7.05: Rule 611 and Rule 10a-1 Broker-Dealer Routing of ISOs to Facilitate Customer Long Sales. As part of its policies and procedures under Rule 600(b)(4)(i), an automated trading center should, at a minimum, provide a mechanism for receiving self-help notifications, as well as assign personnel to monitor the receipt of such notifications on a real-time basis, so that potential systems problems can be promptly evaluated and appropriately addressed. PDF Trade Reporting Modifier Chart - FINRA.org At the time the broker-dealer commits to execute the order, it is not reasonably determinable whether the execution price will be the volume-weighted average price or the guaranteed price. Other types of trading centers, such as over-the-counter (OTC) market makers, which typically provide quotations to SRO trading facilities that are executed through such facilities, are not subject to the requirements for automated trading centers (assuming they do not choose to become ADF participants). Networks. A broker-dealer intends to utilize the ISO exception to execute a block trade for a customer at a price inferior to one or more protected quotations. Moreover, the trading center cannot simply decline to provide any execution of an ISO merely because of the order routers unwillingness to accept a high-fee execution. Would the transaction qualify for the stopped order exception of Rule 611(b)(9)? Do these alternative policies and procedures for handling agency block transactions with individually negotiated prices comply with Rule 611(a)? If the price of the protected quotation at Trading Center A does not change, is it permissible for such order router to continue to route ISOs to other trading centers for one full second, without routing a new ISO to execute against the same-priced protected quotation at Trading Center A? Answer: Yes, the net price reported to the SRO (and thereafter disseminated in the Network data stream) is the price of the block trade for all purposes under Rule 611, such as determining whether a trade-through occurred and routing the necessary orders to execute against protected quotations to comply with the ISO exception. 11 See NMS Release, 70 FR at 37519. 15 The ISO designation allows the trading center to execute the order immediately, regardless of any better-priced protected quotations displayed by other trading centers. Facts and circumstances of particular transactions may differ, and the Staff notes that even slight variations may require different responses. An ISO therefore triggers both the firm quote requirements of Rule 602(b) and the limitation on fees of Rule 610(c). Answer: Yes, the sale of the ADRs to the broker-dealers customer would qualify for the benchmark exception in Rule 611(b)(7). May the broker-dealer execute the principal trade at $50 per share using the benchmark exception under Rule 611(b)(7)? To what extent do Rule 610 and Rule 611 apply outside of regular trading hours? Is it permissible for a broker-dealer to use the services of another broker-dealer or trading center solely as a conduit for routing ISOs to one or more of such automated trading centers? 43 See, e.g., Securities Exchange Act Release No. The self-help notice is intended to give the bypassed trading center an opportunity to assess whether its systems are in fact malfunctioning. 32 Absent a bona fide error as defined above, the exemption does not apply to a broker-dealers mere failure to execute a not-held order in accordance with a customers expectations. The order router must assess whether the cause of a problem lies with its own systems or connections and, if so, take immediate steps to resolve the problem appropriately.40. The broker-dealer intends to accumulate the 100,000 shares in the market as principal for the purpose of filling the customers order. Question 3.22: Benchmark Exception/Average Price Order with Guaranteed Price (NEW). In this structure, the originating broker-dealer (i.e., a broker-dealer that intends to take advantage of the ISO exception either for itself or on behalf of a customer) would perform the essential ISO routing functions, such as taking a snapshot of protected quotations and transmitting the necessary ISOs to execute against protected quotations. The exception will expire after the ISO exhausts the liquidity that is immediately available at the trading center. Is there an exemption from Rule 611 for certain transactions that enable a trading center to offer print protection to its customers? Answer: The Commission has extended the original compliance dates for Rules 610 and 611 to a series of five dates for different functional stages of compliance.47 The extended compliance dates are as follows: (1) October 16, 2006 (Specifications Date) final date for publication on Internet web site of applicable SROs of final technical specifications for interaction with Regulation NMS-compliant trading systems of all automated trading centers (both SRO trading facilities and ADF participants) that intend to qualify their quotations for trade-through protection under Rule 611 during the Pilot Stocks Phase and All Stocks Phase (as defined below); (2) March 5, 2007 (Trading Phase Date) final date for full operation of Regulation NMS-compliant trading systems of all automated trading centers that intend to qualify their quotations for trade-though protection during the Pilot Stocks Phase and All Stocks Phase; (3) July 9, 2007 (Pilot Stocks Phase Date) start of full industry compliance with Rules 610 and 611 for 250 NMS stocks; (4) August 20, 2007 (All Stocks Phase Date) start of full industry compliance with Rules 610 and 611 for all remaining NMS stocks; and (5) October 8, 2007 (Completion Date) completion of phased-in compliance with Rules 610 and 611. In addition, the customer receiving the favorable price in agency cross transaction (i.e., buying below the price of a protected bid or selling above the price of a protected offer) potentially could decline to participate in the transaction if the size of the agency cross transaction were reduced by any ISO fills. Buy orders will be Question 3.14: ISO Exception/Agency Cross Transactions. A broker-dealer that designates an order as an intermarket sweep order has the responsibility of complying with Rules 610 and 611 of Regulation NMS. Given the desire of some customers to seek capital commitments from broker-dealers at manually negotiated prices, the broker-dealers practice of having its traders immediately input the transaction information into an automated system is one reasonable way to comply with Rule 611. As a result, a broker-dealer could face practical issues in implementing the block trade for its customer, including (1) transferring to the customer the benefit of any better prices obtained through executed ISOs, (2) handling the residual size of ISOs that did not receive a fill, and (3) reporting the block trade to the relevant SRO.19 The Staff believes that there are several ways for a broker-dealer reasonably to address these practical issues, depending on the preferences of its customers. The Staff does not believe that it would be possible for manual routing of ISOs to comply with the requirement in Rule 611(b)(6). Under Rule 611(a)(1), a trading center is required to establish, maintain, and enforce written policies and procedures that are reasonably designed to assure compliance with the terms of the exceptions in Rule 611(b). 1. Answer: The broker-dealer should implement procedures that reliably document the time of execution of the trade.18 Time of execution for purposes of Rule 611 would be when final agreement is reached on the stock, price, and size of the trade. Other facts and circumstances, however, could lead to a different result. The Networks disseminate real-time quotations in NMS stocks pursuant to the joint-SRO market data plans (which are effective national market system plans). PDF The New York Stock Exchange Llc Letter of Acceptance, Waiver and - Nyse FAQs 3.01 to 3.24 below primarily address compliance by trading centers with Rules 610 and 611. This definition is embedded in the definition of quotation in Rule 600(b)(62), as well as the definition of protected bid or protected offer in Rule 600(b)(57). When an order is designated as an ISO, the broker-dealer routing the order must assume the responsibility for transmitting additional orders, as necessary, to execute against any better-priced protected quotations (see FAQs 4.02 to 4.06 below). Similarly, Rule 611(c) requires trading centers and broker-dealers to take reasonable steps to establish that ISOs meet the requirements of Rule 600(b)(30). The data that bears on Rule 611 compliance can be divided into three categories: (1) the order and trade data of each trading center or broker-dealer (Firm), with internal time stamps reflecting when it was processed by each Firm (Firm-Specific Order and Trade Data); (2) the protected quotation data received by each Firm, with internal time stamps reflecting when it was received by the Firm (Firm-Specific Quotation Data); and (3) the protected quotation and trade data of the Network processors, with time stamps assigned by such processors (Network Data). For example, such rules would need to comply with the relevant SRO rule on the display of locking or crossing quotations (see FAQ 5.01 below). The NMS Release notes that one of the policy objectives of this definition is to treat exchange markets comparably with the ADF. 30 Securities Exchange Act Release No. Answer: The definition of an automated trading center in Rule 600(b)(4) requires, among other things, that a trading center (1) implement such systems, procedures, and rules as are necessary to render it capable of meeting the requirements for automated quotations, as defined in Rule 600(b)(3); and (2) immediately identify its quotations as manual whenever it has reason to believe it is not capable of displaying automated quotations. Are the procedures for executing and reporting block transactions discussed in FAQ 3.03 above also available for an agency cross transaction? If the customer receiving a price inferior to a protected quotation (i.e., buying at a price above a protected offer or selling at a price below a protected bid) consents to not receiving any better prices obtained through fills of ISOs, the broker-dealer could report the agency cross transaction immediately on the routing of the ISOs because the size of the agency cross transaction would not be reduced by any fills of the ISOs. The ISO exception to the SRO lock/cross rules, in contrast, requires that ISOs be routed to execute against all protected quotations with a price that is equal to the display price (i.e., those protected quotations that would be locked by the displayed quotation), as well as all protected quotations with prices that are better than the display price (i.e., those protected quotations that would be crossed by the displayed quotation). Question 3.15: Benchmark Exception/Conversion of Foreign Ordinary Shares to ADRs (MODIFIED). An intermarket sweep order (ISO) is a digital circumvention of Rule 611 of Regulation NMS. What elements must be included in a trading centers policies and procedures to implement the self-help exception? Find out how. Answer: The three Networks, which disseminate consolidated quotation data for NMS stocks to the public, have agreed to adopt uniform identifiers for manual and automated quotations. When the limit price of an ISO is equal to or better than the NBBO at time of order receipt, there can be no better-priced quotations elsewhere, and the router is simply seeking an order execution at the best displayed price or better. In the scenario set forth in the above question, the customer would have agreed to a specific amount, separate from the average price benchmark, that was designed to provide reasonably determinable compensation to the broker-dealer, and this reasonably determinable amount would have been included in the trade price that was reported to the SRO and thereafter disseminated in the Network trade stream. This conduit would not be a responsible broker-dealer or trading center under Rule 611(c) and would not be required to perform any other ISO functions (e.g., take an additional snapshot of protected quotations or affirm that the originating broker-dealer has transmitted other ISOs appropriately). Nevertheless, market participants that want to control the handling of their own orders (see FAQ 4.01 above) may want to be prepared to comply with the ISO-routing requirements of Rule 600(b)(30) on the Trading Phase Date. PDF NYSE ARCA, INC. - The New York Stock Exchange See Division of Trading and Markets, Responses to Frequently Asked Questions Concerning Rule 612 (Minimum Pricing Increment) of Regulation NMS (available on the Commissions Internet Web site at http://www.sec.gov).
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