On June 2, 2014, and pursuant to FINRA Rule 4552, the Financial Industry Regulatory Authority Inc. (“FINRA”) began publishing trading data attributable to alternative trading systems (“ATSs”),1 inclusive of trading data from “dark pools.”2 According to FINRA, “ATSs account for a significant percentage of total [over the counter (“OTC”)] trading in exchange-listed equities in the United States.”3 By making dark pool trading activity available to the public, FINRA aims to increase market transparency, improve investor confidence, and allow non-professional and professional traders, academics and regulators to review and study the data.4 ATSs should note, however, that FINRA Rule 4552 differs from the original rule proposal in two significant ways, as discussed below.
FINRA Rule 4552
ATSs that have filed a Form ATS with the Commission are required to report weekly volume information and the number of trades regarding securities transactions within the ATS for NMS stocks and OTC equity securities to FINRA.5 Such reporting is required within seven business days after the end of each calendar week and is published on FINRA’s website.6
Amendments to FINRA’s Initial Proposals
FINRA Rule 4552, as originally adopted, applied to transactions in equity securities subject to FINRA trade reporting requirements (i.e., NMS stocks and OTC stocks) as well as to transactions in debt securities reportable to the Trade Reporting and Compliance Engine (“TRACE”). As amended, FINRA Rule 4552 now only requires an ATS to report transactions in equity securities subject to FINRA trade reporting requirements.7 FINRA noted, however, that it “intends to continue to work with ATSs that trade TRACE-Eligible Securities to confirm they are accurately and completely reporting transaction information to TRACE, and [that it] expects to request periodically that some ATSs provide the staff with their weekly volume for TRACE-Eligible Securities.”8
Furthermore, the SEC initially approved a rule change that would have amended FINRA Rules 6160, 6170, 6480 and 6720 to require each ATS to acquire and use a single, unique Market Participant Identifier (“MPID”) for transaction reporting to FINRA.9 As amended, FINRA Rules 6160, 6170, 6480 and 6720 permit ATSs that trade both TRACE-eligible securities and equity securities to use two MPIDs.10 ATSs that elect to use two MPIDs, however, must use one MPID exclusively for reporting transactions in TRACE-eligible securities and the other MPID for reporting transactions in equity securities.11 The implementation date for the changes to Rules 6160, 6170, 6480 and 6720 will be November 14, 2014.12
As FINRA obtains trading data from the dark pools, FINRA will make the data available on its website on a delayed basis. For NMS stocks in Tier 1 of the NMS Plan to Address Extraordinary Volatility (the “Plan”) (e.g., those NMS stocks in the S&P 500 Index, the Russell 1000 Index, and certain exchange-traded products, as specified in the Plan), FINRA will initially publish the reported information on a two-week delayed basis.13 For all other NMS stocks and OTC Equity Securities subject to FINRA’s trade reporting requirements, FINRA will publish the reported information on a four-week delayed basis.14
ATSs that are subject to Rule 4552 should update their policies and procedures accordingly and also ensure that their TRACE reporting is accurate and complete.
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1 Regulation ATS defines an ATS as:
[A]ny organization, association, person, group of persons, or system: (1) That constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange within the meaning of [Exchange Act Rule 3b-16]; and (2) That does not: (i) Set rules governing the conduct of subscribers other than the conduct of such subscribers’ trading on such organization, association, person, group of persons, or system; or (ii) Discipline subscribers other than by exclusion from trading.
17 C.F.R. §242.300(a).
2 See FINRA Makes Dark Pool Data Available Free to the Investing Public (June 2, 2014), available at http://www.finra.org/Newsroom/NewsReleases/2014/P519139 (explaining that trading in dark pools “[o]ccurs away from traditional stock exchanges.”)
5 FINRA Regulatory Notice 14-07 (Feb. 2014) at 2, available at http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p446087.pdf (“Notice 14-07”).
7 Securities Exchange Act Release No. 71911 (Apr. 9, 2014), 79 F.R. 21316, 21318 (Apr. 15, 2014) (DR-FINRA-2014-017).
12 Id. The rule amendments to Rule 4552 were implemented on May 12, 2014.
13 Notice 14-07 at 3.
This article was originally published by Bingham McCutchen LLP.