[Federal Register Volume 85, Number 48 (Wednesday, March 11, 2020)]
[Notices]
[Pages 14275-14284]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-04902]
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SECURITIES AND EXCHANGE COMMISSION
Release No. 34-88324; File No. SR-FINRA-2020-006]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing and Immediate Effectiveness of
Proposed Rule Change To Modify the Trade Reporting Fees Applicable to
the FINRA/NYSE Trade Reporting Facility
March 5, 2020.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on February 28, 2020, Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by FINRA. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to amend FINRA Rule 7620B (FINRA/NYSE Trade
Reporting Facility Reporting Fees) to modify the trade reporting fees
applicable to participants that use the FINRA/NYSE Trade Reporting
Facility (``FINRA/NYSE TRF'').
The text of the proposed rule change is available on FINRA's
website at http://www.finra.org, at the principal office of FINRA and
at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The FINRA/NYSE TRF, which is operated by NYSE Market (DE), Inc.
(``NYSE Market (DE)''), is one of four FINRA facilities \3\ that FINRA
members can use to report over-the-counter (``OTC'') trades in NMS
stocks. While members are required to report all OTC trades in NMS
stocks to FINRA, they may choose which FINRA Facility (or
[[Page 14276]]
Facilities) to use to satisfy their trade reporting obligations.\4\
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\3\ The four FINRA facilities are the FINRA/NYSE TRF, two FINRA/
Nasdaq Trade Reporting Facilities (together, the ``FINRA/Nasdaq
TRF''), and the Alternative Display Facility (``ADF'' and together,
the ``FINRA Facilities'').
\4\ Members can use the FINRA/NYSE TRF as a backup system and
reserve bandwidth if there is a failure at another FINRA Facility
that supports the reporting of OTC trades in NMS stocks. As set
forth in Trade Reporting Notice (January 1, 2016) (OTC Equity
Trading and Reporting in the Event of Systems Issues), a firm that
routinely reports its OTC trades in NMS stocks to only one FINRA
Facility must establish and maintain connectivity and report to a
second FINRA Facility, if the firm intends to continue to support
OTC trading as an executing broker while its primary facility is
experiencing a widespread systems issue.
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As discussed below, NYSE Market (DE) proposes to modify the trade
reporting fees applicable to FINRA members that use the FINRA/NYSE TRF
(``FINRA/NYSE TRF Participants'' or ``Participants''). Currently, the
monthly fee for use of the FINRA/NYSE TRF is calculated using a tiered
fee structure based on the reporting member's trading activity reported
to the FINRA/NYSE TRF and, for some tiers, the reporting member's count
of tape reports to the FINRA/NYSE TRF (``Trade Report Count''). NYSE
Market (DE) proposes to (a) change the tier structure, such that all
the tiers take into account the reporting member's Trade Report Count,
while only some of the tiers take into account the reporting member's
trading activity reported to the FINRA/NYSE TRF, and the number of fee
tiers increases from nine to 13; and (b) exclude certain Participants
from the fee.
If there were no change in reporting to the FINRA/NYSE TRF, such
that Participants' reporting volume stayed the same as it was in the
final quarter of 2019, under the proposed fee schedule the total
monthly subscriber fees paid to the FINRA/NYSE TRF would decrease.
FINRA is proposing to amend FINRA Rule 7620B (FINRA/NYSE Trade
Reporting Facility Reporting Fees) accordingly. There is no new product
or service accompanying the proposed fee change.
Background
The FINRA/NYSE TRF
Under the governing limited liability company agreement,\5\ the
FINRA/NYSE TRF has two members: FINRA and NYSE Market (DE). FINRA, the
``SRO Member,'' has sole regulatory responsibility for the FINRA/NYSE
TRF. NYSE Market (DE), the ``Business Member,'' is primarily
responsible for the management of the FINRA/NYSE TRF's business affairs
to the extent those affairs are not inconsistent with the regulatory
and oversight functions of FINRA.
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\5\ See the Second Amended and Restated Limited Liability
Company Agreement of FINRA/NYSE Trade Reporting Facility LLC. The
limited liability company agreement, which was submitted as part of
the rule filing to establish the FINRA/NYSE TRF and was subsequently
amended and restated, can be found in the FINRA Manual.
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The Business Member establishes pricing for use of the FINRA/NYSE
TRF, which pricing is implemented pursuant to FINRA rules that FINRA
must file with the Commission and that must be consistent with the Act.
The relevant FINRA rules are administered by NYSE Market (DE), in its
capacity as the Business Member and operator of the FINRA/NYSE TRF on
behalf of FINRA,\6\ and the Business Member collects all fees on behalf
of the FINRA/NYSE TRF. In addition, the Business Member is obligated to
pay the cost of regulation and is entitled to the profits and losses,
if any, derived from the operation of the FINRA/NYSE TRF.
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\6\ FINRA's oversight of this function performed by the Business
Member is conducted through a recurring assessment and review of the
FINRA/NYSE TRF operations by an outside independent audit firm.
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FINRA/NYSE TRF Participants are charged fees pursuant to Rule 7620B
and may qualify for transaction credits under Rule 7610B (Securities
Transaction Credit). In addition, pursuant to Rule 7630B (Aggregation
of Activity of Affiliated Members), affiliated members can aggregate
their activity for purposes of fees and credits that are dependent upon
the volume of their activity.\7\
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\7\ No change is proposed to be made to Rules 7610B or 7630B,
and so there will be no change to the requirements for, or process
of, securities transaction credits and the aggregation of affiliated
member activity.
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The FINRA/NYSE TRF is smaller than the FINRA/Nasdaq TRF in terms of
reported volume: FINRA members currently use the FINRA/NYSE TRF to
report approximately 20% of shares in NMS stocks traded OTC. For
example, from January through December 2019, the breakout of trade
report activity among the FINRA Facilities was as follows:
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Number of reported
Facility shares Percentage of TRF total
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FINRA/NYSE TRF................................................ 132,423,476,814 20.06
FINRA/NASDAQ TRF.............................................. 527,748,470,214 79.94
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Competitive Environment
According to the Business Member, the FINRA/NYSE TRF operates in a
competitive environment. The FINRA Facilities have different pricing
\8\ and compete for FINRA members' trade report activity. In turn,
FINRA members can choose which FINRA Facility they use to report OTC
trades in NMS stocks. The Commission has repeatedly expressed its
preference for competition over regulatory intervention in determining
prices, products, and services in the securities markets. Specifically,
in Regulation NMS, the Commission highlighted the importance of market
forces in determining prices and SRO revenues and recognized that
current regulation of the market system ``has been remarkably
successful in promoting market competition in its broader forms that
are most important to investors and listed companies.'' \9\
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\8\ Because the FINRA/NYSE TRF and FINRA/Nasdaq TRF are operated
by different business members competing for market share, FINRA does
not take a position on whether the pricing for one TRF is more
favorable or competitive than the pricing for the other TRF.
\9\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496, 37499 (June 29, 2005) (File No. S7-10-04).
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FINRA members currently use the FINRA/NYSE TRF to report
approximately 20% of shares in NMS stocks traded OTC, compared to
approximately 80% for the FINRA/Nasdaq TRF. The Business Member
believes that pricing is the key factor for FINRA members when choosing
which FINRA Facility to use. FINRA members can report their OTC trades
in NMS stocks to a given FINRA Facility's competitors if they deem
pricing levels at the other FINRA Facilities to be more favorable, so
long as they are participants of such other facilities.
By amending the tier structure and expanding the number of tiers,
the Business Member believes that the proposed fee change will more
closely correspond to actual usage. Such a change would make the FINRA/
NYSE TRF more competitive with the FINRA/Nasdaq TRF and give members
more attractive options for trade reporting, potentially encouraging
FINRA
[[Page 14277]]
members to use the FINRA/NYSE TRF to report more than the approximately
20% of their shares in NMS stocks traded OTC that they currently use it
for.
Proposed Amendments to Rule 7620B
Under Rule 7620B, FINRA/NYSE TRF Participants are charged a flat
fee for access to the complete range of functionality offered by the
FINRA/NYSE TRF rather than a separate fee for each activity (e.g., a
per trade or per side fee for reporting a trade, a separate per trade
fee for canceling a trade, etc.) or a separate fee for
connectivity.\10\ Rather than charging the same fee to all FINRA/NYSE
TRF Participants irrespective of trading activity, the fees set forth
in Rule 7620B are tiered.
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\10\ See, e.g., Rules 7510(a) and 7520 (trade reporting fees and
connectivity charges for the ADF) and Rule 7620A (trade reporting
fees for the FINRA/Nasdaq TRF).
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The Current Monthly Fee
Pursuant to a recent change in the fee structure,\11\ the monthly
fee for use of the FINRA/NYSE TRF is calculated based on the
Participant's share of total market volume reported to the FINRA/NYSE
TRF. More specifically, the fees are based on the Participant's
``FINRA/NYSE TRF Market Share'' (``Market Share''), defined as the
percentage calculated by dividing:
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\11\ See Securities Exchange Act Release No. 87205 (October 3,
2019), 84 FR 54219, 54224 (October 9, 2019) (Notice of Filing and
Immediate Effectiveness of File No. SR-FINRA-2019-024). The
operative date was October 1, 2019.
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a. The total number of shares reported to the FINRA/NYSE TRF for
public dissemination (or ``tape'') purposes during a given calendar
month that are attributable to a FINRA/NYSE TRF Participant, by
b. the total number of all shares reported to the Consolidated Tape
Association (``CTA'') or the Nasdaq Securities Information Processor
(``UTP SIP''), as applicable, during that period.
Where the Market Share is below 0.10%, the Participant's Trade
Report Count is a second factor in determining the applicable monthly
fee.
The following chart sets forth the current tiers:
------------------------------------------------------------------------
Count of tape Monthly
FINRA/NYSE TRF market share reports to FINRA/ participant
NYSE TRF fee
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Greater than or equal to 1.25%.... n/a................. $30,000
Greater than or equal to 0.75% but n/a................. 20,000
less than 1.25%.
Greater than or equal to 0.50% but n/a................. 17,500
less than 0.75%.
Greater than or equal to 0.25% but n/a................. 15,000
less than 0.50%.
Greater than or equal to 0.10% but n/a................. 10,000
less than 0.25%.
Less than 0.10%................... 25,000 or more trade 2,000
reports.
Less than 0.10%................... 100 or more trade 750
reports but fewer
than 25,000 trade
reports.
Less than 0.10%................... 1 or more trade 250
reports but fewer
than 100 trade
reports.
Less than 0.10%................... No trade reports.... 2,000
------------------------------------------------------------------------
The Proposed Monthly Fee
Under the proposed fee, each Participant would still be charged a
monthly fee for use of the FINRA/NYSE Trade Reporting Facility, with
the exception that ``Retail Participants'' would not be subject to a
monthly fee.
Retail Participants. A Participant would be a ``Retail
Participant'' if substantially all of its trade reporting activity on
the FINRA/NYSE TRF comprises Retail Orders. In turn, a ``Retail Order''
would mean an order that originates 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.
The proposed amended Rule 7620B would set forth the definitions of
``Retail Participant'' and ``Retail Order,'' together with a
description of the relevant requirements in a new paragraph (a) in Rule
7620B. The new paragraph would state that a Participant that wished to
qualify as a Retail Participant and be exempt from the monthly fee in
accordance with the Rule would be required to complete and submit to
the FINRA/NYSE TRF an application form and a written attestation of its
then-existing qualifications as a Retail Participant and its reasonable
expectation that it will maintain such qualifications for a one-year
period following the date of attestation. In addition, the new text
would state that a Retail Participant:
Would be required to complete and submit a written
attestation to the FINRA/NYSE TRF on an annual basis to retain its
status as such;
would be required to inform the FINRA/NYSE TRF promptly if
at any time it ceases to qualify or it reasonably expects that it will
cease to qualify as a Retail Participant; and
may be audited by the FINRA/NYSE TRF periodically.
The new text would also state that Participants would be required
to contact the FINRA/NYSE TRF for the application and attestation
forms,\12\ and that if the FINRA/NYSE TRF approved a Participant as a
Retail Participant on or prior to the twenty-seventh day of a month,
then the approval would be deemed to be effective as of the first day
of that month, whereas an approval that occurred after the twenty-
seventh day of the month would be deemed effective as of the first day
of the following month. If a Participant notified the FINRA/NYSE TRF
that it ceased to qualify as a Retail Participant during a month, then
such notification would be deemed effective as of the first day of the
following month.
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\12\ The Business Member expects to make the required
application and attestation forms available on the FINRA/NYSE TRF
website.
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The proposed exemption, definitions and requirements would be
consistent with the exemption, definitions and requirements for retail
participants of the FINRA/Nasdaq TRF set forth in FINRA Rule 7620A.\13\
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\13\ See FINRA Rule 7620A, including the commentary thereto, and
Securities Exchange Act Release No. 88135 (February 6, 2020), 85 FR
8079 (February 12, 2020) (Notice of Filing and Immediate
Effectiveness of File No. SR-FINRA-2020-004).
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Retail Participants would continue to receive unlimited use of the
Client Management Tool, as well as full access to the FINRA/NYSE TRF
and supporting functionality, e.g., trade submission, reversal and
cancellation.
Proposed Tiers. The proposed amended Rule 7620B would set forth the
fees for Participants that are not Retail Participants in a new
paragraph (b) and would expand the current tier structure from nine to
13 tiers. Unlike now, the determination of the applicable tier would
take into account the Trade Report Counts in every case. Only when the
Trade Report Count is
[[Page 14278]]
above 25,000 would the Market Share be a factor in determining the
relevant tier. The following chart sets forth the proposed fee tiers
for Participants that are not Retail Participants:
------------------------------------------------------------------------
Count of Tape Monthly
FINRA/NYSE TRF market share Reports to FINRA/ participant
NYSE TRF fee
------------------------------------------------------------------------
Greater than or equal to 1.25%.... More than 25,000 $30,000
trade reports.
Greater than or equal to 1.00% but More than 25,000 25,000
less than 1.25%. trade reports.
Greater than or equal to 0.75% but More than 25,000 20,000
less than 1.00%. trade reports.
Greater than or equal to 0.50% but More than 25,000 15,000
less than 0.75%. trade reports.
Greater than or equal to 0.25% but More than 25,000 10,000
less than 0.50%. trade reports.
Greater than or equal to 0.20% but More than 25,000 7,500
less than 0.25%. trade reports.
Greater than or equal to 0.10% but More than 25,000 5,000
less than 0.20%. trade reports.
Less than 0.10%................... More than 25,000 2,000
trade reports.
n/a............................... Between 15,001 and 2,000
25,000 trade
reports.
n/a............................... Between 5,001 and 1,000
15,000 trade
reports.
n/a............................... Between 101 and 750
5,000 trade reports.
n/a............................... Between 1 and 100 250
trade reports.
n/a............................... No trade reports.... 2,000
------------------------------------------------------------------------
The Market Share would continue to be calculated in aggregate
across all tapes \14\ and be based on the number of shares attributable
to a FINRA/NYSE TRF Participant. A transaction is attributed to a
Participant if the Participant is identified as the executing party in
a tape report submitted to the FINRA/NYSE TRF. Such calculation would
continue to be based on the data available for the prior full calendar
month.\15\
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\14\ There are three tapes: ``Tape A'' includes securities
listed on the New York Stock Exchange, ``Tape B'' includes
securities listed on NYSE American and regional exchanges, and
``Tape C'' includes securities listed on Nasdaq.
\15\ For example, the bill issued in June would be for the month
of May, and would be based on shares reported during May.
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The monthly fee would continue to be charged at the end of the
calendar month and to apply to any Participant that is not a Retail
Participant and has submitted a participant application agreement to
the FINRA/NYSE TRF pursuant to Rule 7220B (Trade Reporting
Participation Requirements). As is true now, if a new FINRA/NYSE TRF
Participant submits the participant application agreement and reports
no shares traded in a given month, the Participant would not be charged
the monthly fee for the first two calendar months in order to provide
time to connect to the FINRA/NYSE TRF.\16\ The monthly fees paid by
FINRA/NYSE TRF Participants will continue to include unlimited use of
the Client Management Tool, as well as full access to the FINRA/NYSE
TRF and supporting functionality, e.g., trade submission, reversal and
cancellation.\17\
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\16\ As is the case today, after the first two calendar months,
the Participant will be charged regardless of connectivity.
\17\ See 84 FR 54219, supra note 13 [sic], at 54221.
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Application of Proposed Fee Schedule
The proposed fee schedule will be applied in the same manner to all
FINRA members that are, or elect to become, FINRA/NYSE TRF
Participants. It will not apply differently to different sizes of
Participants. Different types of Participants will be treated the same
except that, as noted above, Retail Participants will not be charged a
fee. For all other Participants, the determination of the applicable
tier would be based on the Participant's Trade Report Count and, in
some cases, FINRA/NYSE TRF Market Share. By expanding the structure
from nine monthly Participant tiers to 13, the proposed rule change
would create a more nuanced fee structure.
Proposed Exclusion of Retail Participants
The proposed exclusion of Retail Participants from the monthly fee
is intended to improve the competitiveness of the FINRA/NYSE TRF for
Retail Participants in light of recent initiatives by retail brokers to
eliminate fees for executing retail customer transactions and the
recent determination by the FINRA/Nasdaq TRF not to charge its retail
participants any fees for trade reporting.\18\ Recently, some large
retail brokers, such as Charles Schwab Corp., TD Ameritrade Holding
Corp., and E*Trade Financial Corp., have removed commission trading
fees for stock trades, leading to pressure on retail brokers to reduce
operational costs.\19\ The Business Member believes that its proposal
would support these efforts and attract Retail Participants to the
FINRA/NYSE TRF.
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\18\ See note 15 [sic], supra.
\19\ See 85 FR 8079, 8081; see also Lisa Beilfuss and Alexander
Osipovich, ``The Race to Zero Commissions,'' Wall Street Journal,
October 5, 2019, at https://www.wsj.com/articles/the-race-to-zero-commissions-11570267802.
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Proposed Tiers
The current fee structure came into effect in October 2019. Based
largely on its experience with the current fee structure over the last
few months, the Business Member has identified two issues that the
proposed change is meant to address.
First, the current structure works on the general assumption that
as a Participant's Market Share goes up its Trade Report Count will
increase as well. Analyzing the fees paid under the current structure,
the Business Member has found instances where that assumption is wrong:
In such cases, a Participant may have a Market Share that is above
0.10% but may make only a few trade reports to the FINRA/NYSE TRF,
resulting in a more substantial fee per trade than if the Participant
had a lower Market Share. To address the issue, the Business Member
proposes to take the Trade Report Count into account for every tier. At
the same time, it proposes to reduce the current focus on Market Share.
Two examples show the effect of the proposed change:
Assume that, during a given month, a Participant has a
Market Share of 0.15% and makes two trade reports to the FINRA/NYSE
TRF. Under the current structure, it has a monthly fee of $10,000--the
same fee that would apply if it had a Trade Report Count of 30,000.
Under the proposed structure, because the Trade Report Count is taken
into account, the hypothetical Participant would have a monthly fee of
$250 if it made two trade reports and $5,000 if it made 30,000.
[[Page 14279]]
Assume that, during a given month, Participant A has a
Market Share of 0.02% and a Trade Report Count of 500, and Participant
B has a Market Share of 0.12% and a Trade Report Count of 500. Under
the current structure, Participant A has a monthly fee of $750 and
Participant B has a monthly fee of $10,000, even though their Trade
Report Count is the same. Under the proposed structure, both would be
charged a monthly fee of $750.
Currently, a Participant with a Market Share of less than 0.10%
would pay a fee based on its Trade Report Count. Under the proposed
structure, a Participant with a Market Share of less than 0.10% would
pay a fee based on its Trade Report Count only if that count was more
than 25,000. In all cases, if a Participant had a Trade Report Count of
25,000 or less, the fee would depend on the Trade Report Count, and the
Market Share would not be a factor in determining the tier. As a
result, a Participant that has a Market Share above 0.10% but has a low
Trade Report Count would not be subject to the more substantial fee per
trade than it would be under the current structure, addressing the
first issue that the Business Member identified with the current
structure.
Second, under the current structure, in some cases the applicable
monthly fee increases by up to $10,000 when a customer moves from one
tier to the next. As a result, for a Participant on the upper edge of a
tier range, a relatively small increase in Market Share can result in a
substantial fee increase. To address the issue, the proposal would
increase the number of tiers to 13, adding granularity to the structure
and decreasing the impact of changing tiers.
Three scenarios show the effect of the proposed change:
Currently the monthly fee increases fivefold, from $2,000
to $10,000, if a Participant crosses the threshold between two of the
middle tiers.\20\ The proposed creation of two new tiers between them,
with fees of $5,000 and $7,500 per month, would mean that the
Participant would have to move three tiers to increase its fee from
$2,000 to $10,000 per month.
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\20\ From a Market Share of less than 0.10%, to a Market Share
greater than or equal to 0.10% but less than 0.25%.
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Currently the monthly fee increases from $750 to $2,000 if
a Participant crosses the threshold between two of the lower tiers.\21\
The proposal would introduce a tier with a $1,000 monthly fee between
them.
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\21\ From a Market Share of less than 0.10% and Trade Report
Count of 100 or more trade reports but fewer than 25,000 trade
reports, to a Market Share of less than 0.10% and Trade Report Count
of 25,000 or more trade reports.
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Currently the monthly fee increases from $20,000 to
$30,000 if a Participant crosses the threshold between the two highest
tiers.\22\ The proposal would introduce a tier with a $25,000 fee, so
that a Participant would not have its monthly fee increase by $10,000
simply by crossing the threshold between two tiers.
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\22\ From a Market Share greater than or equal to 0.75% but less
than 1.25%, to a Market Share greater than or equal to 1.25%.
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In addition, the proposed fee schedule uses different threshold
percentages for its tiers than the current fee schedule. The Business
Member selected the proposed tiers and fees based on its evaluation of
what thresholds and fees would create a more nuanced structure and
would help address the described issues. In making its evaluation, the
Business Member utilized its activity records and its analysis of the
more detailed information on the FINRA website (the ``OTC Transparency
Data website'').\23\
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\23\ https://otctransparency.finra.org/otctransparency/AtsIssueData. FINRA began reporting information regarding each
firm's aggregate non-ATS OTC volume (number of trades and number of
shares) in December 2019, increasing the information available on
the OTC Transparency Data website. See Securities Exchange Act
Release No. 86706 (August 19, 2019), 84 FR 44341 (August 23, 2019)
(Order Approving File No. SR-FINRA-2019-019).
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To facilitate comparison, the following table shows the proposed
and current tiers and monthly fees.
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Market share & trade report counts: tiers Monthly fee
----------------------------------------------------------------------------------------------------------------
Current Proposed \1\ Current Proposed \1\
----------------------------------------------------------------------------------------------------------------
Greater than or equal to 1.25%................ Greater than or equal to 1.25% $30,000 $30,000
and more than 25,000 trade
reports.
Greater than or equal to 1.00% .............. 25,000
but less than 1.25% and more
than 25,000 trade reports.
Greater than or equal to 0.75% but less than Greater than or equal to 0.75% 20,000 20,000
1.25%. but less than 1.00% and more
than 25,000 trade reports.
Greater than or equal to 0.50% but less than Greater than or equal to 0.50% 17,500 15,000
0.75%. but less than 0.75% and more
than 25,000 trade reports.
Greater than or equal to 0.25% but less than Greater than or equal to 0.25% 15,000 10,000
0.50%. but less than 0.50% and more
than 25,000 trade reports.
Greater than or equal to 0.20% .............. 7,500
but less than 0.25% and more
than 25,000 trade reports.
Greater than or equal to 0.10% but less than Greater than or equal to 0.10% 10,000 5,000
0.25%. but less than 0.20% and more
than 25,000 trade reports.
Less than 0.10% and 25,000 or more trade Less than 0.10% and more than 2,000 2,000
reports. 25,000 trade reports.
Between 15,001 and 25,000 trade .............. 2,000
reports.
Between 5,001 and 15,000 trade .............. 1,000
reports.
Less than 0.10% and 100 or more trade reports Between 101 and 5,000 trade 750 750
but fewer than 25,000 trade reports. reports.
Less than 0.10% and 1 or more trade reports Between 1 and 100 trade reports. 250 250
but fewer than 100 trade reports.
Less than 0.10% and no trade reports.......... No trade reports................ 2,000 2,000
----------------------------------------------------------------------------------------------------------------
\1\ Under the proposed change, Retail Participants would not be subject to monthly fees.
[[Page 14280]]
Anticipated Application of the New Structure
It is not possible to fully predict the number of FINRA members
that are likely to become FINRA/NYSE TRF Participants, how many
Participants would be subject to each of the proposed tiers, or whether
there will be an appreciable increase--or decrease--in reporting to the
FINRA/NYSE TRF.\24\ The Business Member anticipates that the proposed
pricing will incentivize Participants to increase their reporting to
the FINRA/NYSE TRF.
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\24\ The Business Member does not propose to change the revenue
sharing structure. The Business Member notes, however, that the
proposed pricing may increase revenue sharing by encouraging
Participants that have a Trade Report Count of zero to make trade
reports to the FINRA/NYSE TRF in order to reduce their fees from
$2,000 to $250, $750 or $1,000. The Business Member believes that
the increase in reporting would increase such Participants' revenue
share as well as decrease their fee.
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If there were no change in reporting to the FINRA/NYSE TRF, such
that Participants' reporting volume stayed the same as it was in the
final quarter of 2019, under the proposed fee schedule, the total
monthly subscriber fees paid to the FINRA/NYSE TRF would decrease.
Based on those assumptions, 28 Participants would have no change in
their fees and seven Participants would have a decreased or no fee. Of
those seven, one would go from $17,500 to $15,000, one would go from
$10,000 to $7,500, and two would go from $10,000 to $5,000. The three
Retail Participants would go from $2,000 to $0.
The following table suggests how the new tiers would apply if more
FINRA members were Participants. Using FINRA data for activity reported
to the FINRA Facilities in December 2019 from FINRA's OTC Transparency
Data website, the table indicates the number of firms that would be
subject to each tier if all FINRA members were reporting to the FINRA/
NYSE TRF subject to the current or proposed fee. For the proposed fee,
the table shows the number of firms that would be in each tier were
they to report 25%, 50% or 100% of their activity to the FINRA/NYSE
TRF.
----------------------------------------------------------------------------------------------------------------
Market share & trade report counts: tiers Number of Number of firms per tier based on percentage
------------------------------------------------- firms per of reported volume \1\
tier under -----------------------------------------------
Current Proposed current fee 25% 50% 100%
----------------------------------------------------------------------------------------------------------------
Greater than or equal to 1.25% Greater than or 6 2 3 6
equal to 1.25%
and more than
25,000 trade
reports.
Greater than or .............. 0 0 2
equal to 1.00%
but less than
1.25% and more
than 25,000
trade reports.
Greater than or equal to 0.75% Greater than or 6 0 3 4
but less than 1.25%. equal to 0.75%
but less than
1.00% and more
than 25,000
trade reports.
Greater than or equal to 0.50% Greater than or 6 1 2 6
but less than 0.75%. equal to 0.50%
but less than
0.75% and more
than 25,000
trade reports.
Greater than or equal to 0.25% Greater than or 9 5 10 6
but less than 0.50%. equal to 0.25%
but less than
0.50% and more
than 25,000
trade reports.
Greater than or .............. 1 1 3
equal to 0.20%
but less than
0.25% and more
than 25,000
trade reports.
Greater than or equal to 0.10% Greater than or 20 8 7 7
but less than 0.25%. equal to 0.10%
but less than
0.20% and more
than 25,000
trade reports.
Less than 0.10% and 25,000 or Less than 0.10% 20 22 25 20
more trade reports. and 25,000 or
more trade
reports.
Between 15,001 .............. 9 2 5
and 25,000
trade reports.
Between 5,001 .............. 6 9 4
and 15,000
trade reports.
Less than 0.10% and 100 or Between 101 and 81 66 71 83
more trade reports but fewer 5,000 trade
than 25,000 trade reports. reports.
Less than 0.10% and 1 or more Between 1 and 96 124 111 98
trade reports but fewer than 100 trade
100 trade reports. reports.
Less than 0.10% and no trade No trade reports 0 0 0 0
reports.
----------------------------------------------------------------------------------------------------------------
\1\ Number of firms that would be in each tier had the firm reported 25%, 50% or 100% of its activity to the
FINRA/NYSE TRF. Total activity based on data posted on the OTC Transparency Data website for December 2019.
FINRA has filed the proposed rule change for immediate
effectiveness. The operative date will be March 1, 2020.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b) of the Act,\25\ in general, and Section
15A(b)(5) of the Act,\26\ in particular, which requires, among other
things, that FINRA rules provide for the equitable allocation of
reasonable dues, fees and other charges among members and issuers and
other persons using any facility or system that FINRA operates or
controls. FINRA also believes that the proposed rule change is
consistent with Section 15A(b)(6) of the Act,\27\ which requires, among
other
[[Page 14281]]
things, that FINRA rules must be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest. FINRA also believes that the proposed rule change is
consistent with Section 15A(b)(9) of the Act,\28\ which requires that
FINRA rules not impose any burden on competition that is not necessary
or appropriate.
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\25\ 15 U.S.C. 78o-3(b).
\26\ 15 U.S.C. 78o-3(b)(5).
\27\ 15 U.S.C. 78o-3(b)(6).
\28\ 15 U.S.C. 78o-3(b)(9).
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As a general matter, the proposed fee schedule will be assessed in
the same manner on all FINRA members that are, or elect to become,
FINRA/NYSE TRF Participants. It will not be applied differently to
different sizes of Participants. Different types of Participants will
be treated the same except that, as noted above, Retail Participants
will not be charged a fee. Access to the FINRA/NYSE TRF is offered on
fair and non-discriminatory terms.
The Proposed Rule Change Is an Equitable Allocation of Reasonable Fees
FINRA believes that the proposed rule change is an equitable
allocation of reasonable fees for the following reasons. The Business
Member believes that the proposal to exempt Retail Participants from
the monthly fee is reasonable for several reasons.
Given the recent initiatives by retail brokers to eliminate fees
for executing retail customer transactions, the Business Member
believes that the proposed rule change would demonstrate that the
FINRA/NYSE TRF is sensitive to current and potential Retail
Participants' changing business models and operational costs. In
addition, given the recent determination by the FINRA/Nasdaq TRF not to
charge its retail participants any fees for trade reporting, the
Business Member believes that the proposal is a reasonable means of
strengthening the ability of the FINRA/NYSE TRF to compete for trade
reporting activity, given that the proposal will treat Retail
Participants in the same manner as the competing FINRA TRF, while
offering current and potential Participants more attractive options for
trade reporting. The Business Member notes that even as it proposes to
eliminate trade reporting fees for Retail Participants, such Retail
Participant activity should continue to contribute to operating the
FINRA/NYSE TRF insofar as the FINRA/NYSE TRF will continue to receive a
share of the CTA and UTP SIP transaction credits generated through
retail trade reporting activity that occurs on the FINRA/NYSE TRF.
The Business Member believes that the proposed exemption,
definitions of ``Retail Participant'' and ``Retail Orders'' and
requirements for Retail Participants would be reasonable, as they would
be consistent with the exemption, definitions and requirements for
retail participants of the FINRA/Nasdaq TRF set forth in FINRA Rule
7620A.\29\ Using substantially similar definitions and requirements
would enhance consistency and predictability for potential Retail
Participants.
---------------------------------------------------------------------------
\29\ See note 15 [sic], supra.
---------------------------------------------------------------------------
With respect to Participants that are not Retail Participants, the
proposed structure would take the Trade Report Count into account for
every tier. At the same time, it would reduce the current focus on
Market Share. Specifically, if a Participant had a Trade Report Count
of 25,000 or less, its Market Share would not be a factor in
determining its fee. As a general matter, the proposed fees are
designed such that more active Participants have a higher fee, while
less active Participants pay less. By removing Market Share as a factor
in determining the relevant tier for Participants with Trade Report
Counts of 25,000 or less, the Trade Report Count would become the
determinative factor. The Business Member believes that this proposed
change would be equitable because for Participants with a lower Trade
Report Count, their monthly fee would be tied to the number of trades,
and not their size.
In addition to exempting Retail Participants from the fee, the
proposed changes to Rule 7620B would expand the tier structure from
nine monthly Participant fees to 13. As a result, for a Participant on
the upper edge of a tier range, a relatively small increase in Market
Share would not result in as substantial a fee increase as under the
present structure, thereby adding granularity to the structure and
decreasing the impact of changing tiers.
The proposed fee schedule uses different threshold percentages for
its tiers than the current fee schedule. The Business Member selected
the proposed tiers and fees based on its evaluation of what thresholds
and fees would create a more nuanced structure and would help address
the described issues. In making its evaluation, the Business Member
utilized its activity records and its analysis of the information on
the OTC Transparency Data website.
The Proposed Rule Change Is Not Unfairly Discriminatory
FINRA believes that the proposed rule change is not unfairly
discriminatory for the following reasons.
As proposed, Retail Participants would be exempted from the monthly
fee for using the FINRA/NYSE TRF. The Business Member does not believe
that it would be unfair to do so, as the proposed rule change would
demonstrate that the FINRA/NYSE TRF is sensitive to current and
potential Retail Participants' changing business models and operational
costs. Importantly, the proposed exemption would align the fees of the
FINRA/NYSE TRF with those of the FINRA/Nasdaq TRF, which does not
charge its retail participants any fees for trade reporting.\30\ In
addition, as noted above, the total fees paid by Retail Participants
are relatively small: of the 35 FINRA/NYSE TRF Participants in December
2019, three were Retail Participants. Under the proposed rule, their
monthly fees would go from $2,000 to $0.
---------------------------------------------------------------------------
\30\ See note 15 [sic], supra.
---------------------------------------------------------------------------
The Business Member notes that the proposed changes in the fees for
other Participants were not designed to offset the loss of Retail
Participant trade reporting fees. Indeed, if there were no change in
reporting to the FINRA/NYSE TRF, such that Participants' reporting
volume stayed the same as it was in the final quarter of 2019, under
the proposed fee schedule, the total monthly subscriber fees paid to
the FINRA/NYSE TRF would decrease even if Retail Participants were not
exempted from the monthly fee.
FINRA members currently use the FINRA/NYSE TRF to report
approximately 20% of shares in NMS stocks traded OTC, compared to
approximately 80% for the FINRA/Nasdaq TRF. The Business Member
believes that pricing is the key factor for FINRA members when choosing
which FINRA Facility to use. FINRA members can report their OTC trades
in NMS stocks to a given FINRA Facility's competitors if they deem
pricing levels at the other FINRA Facilities to be more favorable, so
long as they are participants of such other facilities.
The Business Member believes that the proposed fee change may
encourage more FINRA members to become FINRA/NYSE TRF Participants,
including both Retail and non-Retail Participants, and use the FINRA/
NYSE TRF to report trades. Such a change would make the FINRA/NYSE TRF
more competitive with the FINRA/Nasdaq TRF and give members more
[[Page 14282]]
attractive options for trade reporting, potentially encouraging FINRA
members to use the FINRA/NYSE TRF to report more than the approximately
20% of their shares in NMS stocks traded OTC than they currently use it
for.
With respect to Participants that are not Retail Participants, the
proposed structure would take the Trade Report Count into account for
every tier. At the same time, it would reduce the current focus on
Market Share. Specifically, if a Participant had a Trade Report Count
of 25,000 or less, its Market Share would not be a factor in
determining its fee. As a general matter, the proposed fees are
designed such that more active Participants have a higher fee, while
less active Participants pay less. By removing Market Share as a factor
in determining the relevant tier for Participants with Trade Report
Counts of 25,000 or less, the Trade Report Count would become the
determinative factor. The Business Member believes that this proposed
change would not be unfairly discriminatory because for Participants
with a lower Trade Report Count, their monthly fee would be tied to the
number of trades, and not their size.
Finally, the Business Member believes that dividing the proposed
rule into paragraphs (a) and (b) would make Rule 7620B easier for
market participants to understand and to locate relevant information,
thereby increasing the clarity and transparency of the Rule.
B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. In fact, the Business Member
believes that, rather than impose a burden on competition, the proposed
change will benefit competition because it will give all FINRA members
more attractive options for trade reporting. The Commission has
repeatedly expressed its preference for competition over regulatory
intervention in determining prices, products, and services in the
securities markets. In Regulation NMS, the Commission highlighted the
importance of market forces in determining prices and SRO revenues and
recognized that current regulation of the market system ``has been
remarkably successful in promoting market competition in its broader
forms that are most important to investors and listed companies.'' \31\
---------------------------------------------------------------------------
\31\ See note 11 [sic], supra.
---------------------------------------------------------------------------
Intramarket Competition. FINRA members currently use the FINRA/NYSE
TRF to report approximately 20% of shares in NMS stocks traded OTC,
compared to approximately 80% for the FINRA/Nasdaq TRF. Based on the
Business Member's comparison of the information on the OTC Transparency
Data website with its own activity records, the Business Member
understands that few, if any, Participants do all of their reporting on
the FINRA/NYSE TRF.
The Business Member believes that pricing is the key factor for
FINRA members when choosing which FINRA Facility to use. FINRA members
can report their OTC trades in NMS stocks to a given FINRA Facility's
competitors if they deem pricing levels at the other FINRA Facilities
to be more favorable, so long as they are participants of such other
facilities.
The proposed structure would exempt Retail Participants from the
monthly fee for using the FINRA/NYSE TRF. The Business Member believes
that doing so would not be a burden on intramarket competition, as the
proposed rule change would align the fees of the FINRA/NYSE TRF with
those of the FINRA/Nasdaq TRF, which does not charge its retail
participants any fees for trade reporting.\32\ In addition, as noted
above, the total fees paid by Retail Participants are relatively small:
Of the 35 Participants in December 2019, three were Retail
Participants. Under the proposed rule, their monthly fees would go from
$2,000 to $0.
---------------------------------------------------------------------------
\32\ See note 15 [sic], supra.
---------------------------------------------------------------------------
With respect to Participants that are not Retail Participants, the
proposed structure would take the Trade Report Count into account for
every tier. At the same time, it would reduce the current focus on
Market Share. Specifically, if a Participant had a Trade Report Count
of 25,000 or less, its Market Share would not be a factor in
determining its fee. By removing Market Share as a factor in
determining the relevant tier for Participants with Trade Report Counts
of 25,000 or less, the Trade Report Count would become the
determinative factor. The Business Member believes that this proposed
change would make the FINRA/NYSE TRF more competitive for Participants
with a lower Trade Report Count, as their monthly fee would be tied to
the number of trades, and not their size.
The proposed changes to Rule 7620B would expand the tier structure
from nine monthly Participant fees to 13. As a result, for a
Participant on the upper edge of a tier range, a relatively small
increase in Market Share would not result in as substantial a fee
increase as under the present structure. As a result, the proposed
structure would have more granularity than the current structure and
the impact of changing tiers would decrease, making the FINRA/NYSE TRF
more competitive with the FINRA/Nasdaq TRF.
The proposed fee schedule uses different threshold percentages for
its tiers than the current fee schedule. The Business Member selected
the proposed tiers and fees based on its evaluation of what thresholds
and fees would create a more nuanced structure and would help address
the described issues. In making its evaluation, the Business Member
utilized its activity records and its analysis of the information on
the OTC Transparency Data website.
The Business Member does not believe that the proposed fee would
place certain market participants at a relative disadvantage compared
to other market participants, because the proposed fee schedule will be
applied in the same manner to all FINRA members that are, or elect to
become, FINRA/NYSE TRF Participants. It will not apply differently to
different sizes of Participants. Different types of Participants will
be treated the same except that, as noted above, Retail Participants
will not be charged a fee. The proposed fees will be based on a
Participant's activity on the FINRA/NYSE TRF. At the same time, by
expanding the tier structure from nine monthly Participant tiers to 13,
the proposed rule change would create a structure under which
Participants' monthly fees would more closely correspond to the extent
to which they use the FINRA/NYSE TRF in a given month.
As of December 31, 2019, there were 35 Participants, of which 18
were in the $2,000 per month tier. Three of the remaining Participants
were in the $30,000 per month tier, one was in the $17,500 per month
tier, three were in the $10,000 per month tier, five were in the $750
per month tier, and three were in the $250 per month tier. Two were new
Participants not yet subject to fees.\33\ Assuming the number of
Participants remained flat, the average fee incurred during December
2019 was approximately $5,085 per Participant across the 35
Participants.
---------------------------------------------------------------------------
\33\ As noted above, if a new Participant submits the
participant application agreement and reports no shares traded in a
given month, the Participant is not charged the monthly fee for the
first two calendar months in order to provide time to connect to the
FINRA/NYSE TRF.
---------------------------------------------------------------------------
If there were no change in reporting to the FINRA/NYSE TRF, such
that Participants' reporting volume stayed
[[Page 14283]]
the same as it was in the final quarter of 2019, under the proposed fee
schedule, the total monthly subscriber fees paid to the FINRA/NYSE TRF
would decrease. More specifically, assuming there was no change in
reporting to the FINRA/NYSE TRF, under the proposed fee schedule the
average subscriber fee that would have been incurred would have been
approximately $4,478 across the 35 Participants, compared to
approximately $5,085 per Participant under the current fee. Of the 35
Participants, 28 would have no change in their fees and seven
Participants would have a decreased fee or no fee. Of those seven, one
would go from $17,500 to $15,000, one would go from $10,000 to $7,500,
and two would go from $10,000 to $5,000. The three Retail Participants
would go from $2,000 to $0.
The Business Member notes that the proposed changes in the fees for
other Participants were not designed to offset the loss of Retail
Participant trade reporting fees. Indeed, if there were no change in
reporting to the FINRA/NYSE TRF, such that Participants' reporting
volume stayed the same as it was in the final quarter of 2019, under
the proposed fee schedule, the total monthly subscriber fees paid to
the FINRA/NYSE TRF would decrease even if Retail Participants were not
exempted from the monthly fee.
Participants may potentially alter their trading activity in
response to the proposed rule change. Specifically, those Participants
that would incur higher fees may refrain from reporting to the FINRA/
NYSE TRF and may choose to report to another FINRA Facility.
Alternatively, such firms may continue reporting or new firms may start
reporting to the FINRA/NYSE TRF if they find that the proposed net cost
of reporting and other functionalities provided represent the best
value to their business.\34\ The net effect on any individual
Participant of the proposed change in reporting fees will depend on
whether it is a Retail Participant and, if not, its Trade Report Count
and, for five tiers, its Market Share.
---------------------------------------------------------------------------
\34\ The FINRA/NYSE TRF does not impose a fee on new
Participants, and so a FINRA member that opts to become a
Participant would not incur an additional cost from the FINRA/NYSE
TRF. In some cases, a new Participant may incur incidental costs to
connect to the FINRA/NYSE TRF, but those are not charged by the
FINRA/NYSE TRF. An existing Participant that ceases to be a
Participant is not subject to any change fee by the FINRA/NYSE TRF.
---------------------------------------------------------------------------
Lastly, the Business Member notes that Retail Participants and
other Participants do not typically compete for the same business. As a
result, the Business Member does not expect the proposed change to
create a competitive advantage for Retail Participants relative to
other Participants.
Intermarket Competition. The FINRA/NYSE TRF operates in a
competitive environment. The proposed fee would not impose a burden on
competition on other FINRA Facilities that is not necessary or
appropriate. The FINRA Facilities have different pricing and compete
for FINRA members' trade report activity. The pricing structures of the
FINRA/NYSE TRF and other FINRA Facilities are publicly available,
allowing FINRA members to make rational decisions regarding which FINRA
Facility they use to report OTC trades in NMS stocks.
FINRA members can choose among four FINRA Facilities when reporting
OTC trades in NMS stocks: The FINRA/NYSE TRF, the two FINRA/Nasdaq
TRFs, or ADF. FINRA members can report their OTC trades in NMS stocks
to a given FINRA Facility's competitors if they determine that the fees
and credits of another FINRA Facility are more favorable, so long as
they are participants of such other facility.
The Business Member believes that in such an environment the FINRA/
NYSE TRF must adjust its fees to be competitive with other FINRA
Facilities and to attract Participant reporting. By making the FINRA/
NYSE TRF more competitive with the FINRA/Nasdaq TRF, the Business
Member believes that the proposed fee change will encourage more FINRA
members to become FINRA/NYSE TRF Participants and use the FINRA/NYSE
TRF, thereby increasing competition among the FINRA Facilities and
giving FINRA members more attractive options for trade reporting.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \35\ and paragraph (f)(2) of Rule 19b-4
thereunder.\36\ At any time within 60 days of the filing of the
proposed rule change, the Commission summarily may temporarily suspend
such rule change if it appears to the Commission that such action is
necessary or appropriate in the public interest, for the protection of
investors, or otherwise in furtherance of the purposes of the Act. If
the Commission takes such action, the Commission shall institute
proceedings to determine whether the proposed rule should be approved
or disapproved.
---------------------------------------------------------------------------
\35\ 15 U.S.C. 78s(b)(3)(A).
\36\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change 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 protected]. Please include
File No. SR-FINRA-2020-006 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 No. SR-FINRA-2020-006. 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 website (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 website 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 the filing also will be available for inspection
and copying at the principal office of FINRA. All comments received
will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File No. SR-FINRA-2020-006, and should be submitted on
or before April 1, 2020.
[[Page 14284]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\37\
---------------------------------------------------------------------------
\37\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-04902 Filed 3-10-20; 8:45 am]
BILLING CODE 8011-01-P