Exemption Under Rule 608(e) of Regulation NMS from Certain Provisions of the Tick Size Pilot Plan

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON , DC 20549
DIVISION OF
T RADING AND MARKETS February 17, 20 16
Ms. Marcia E. Asquith
Senior Vice President and Corporate Secretary Financial Industry Regulatory Authority, Inc. 1735 K Street, NW Washington, DC 20006 Re: Exemption Under Rule 608(e) of Regulation NMS under the Securities Exchange Act of 1934 from Certain Provisions of the "Plan to Implement a Tick Size Pilot Program" Dear Ms. Asquith, In its letter dated December 9, 2015 , 1 the Financial Industry Regulatory Authority, Inc. (" FINRA"), on behalfofitselfand BATS Exchange, Inc., BATS Y￾Exchange, Inc., Chicago Stock Exchange, Inc., EDGA Exchange Inc., EDGX Exchange, Inc., NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, the Nasdaq Stock Market LLC, New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Area Inc. (collectively, " Participants") requests an exemption from certain data collection requirements set forth in the Plan to Implement a Tick Size Pilot Program ("Tick Size Pilot Plan").2 Specifically, the Participants request that the Commission, pursuant to Rule 608( e) of Regulation NMS under the Securities Exchange Act of 1934 ("Exchange Act"), exempt FINRA and the other Participants from the requirements ofRule 608( c) of Regulation NMS that they comply with, and enforce compliance by its members with:
(I) Appendix B.II.n, which requires the identification ofRetail Investor Orders;3 (II) certain time reporting requirements ofAppendix B.I.a(15) and (22); (II I) the time used for performing certain calculations set forth in Appendix BJ.a(31) through B.I.a(33 ); (IV) the methodology for calculating Market Maker profitability for purposes of
Appendix C.I.b and C.I.c; and (V) the requirement under the Tick Size Pilot Plan that
Participants provide data collected under the Tick Size Pilot Plan within 30 calendar days following the month-end ofthe initial data collection date to the Commission. See letter from Marcia E. Asquith, Senior Vice President and Corporate Secretary, FINRA, to Robert W. Errett, Deputy Secretary, Securities and Exchange Commission ("Commission") dated December 9, 20 15 ("Exemption Request"). 2 See Securities Exchange Act Release No . 74892 (May 6, 2015), 80 FR 27513 (May 13, 2015). 3 Capitalized terms not otherwise defined herein shall have the same meaning as they are defined in the Tick Size Pilot Plan. 1

The Exemption Request notes that FINRA submitted a proposed rule change to implement the data collection requirements set forth in the Tick Size Pilot Plan and that the proposed rule change includes rules that address the items described herein for which FINRA seeks exemption from Rule 608(c) ofRegulation NMS. 4 Rule 608( c) of Regulation NMS requires the Participants to comply with the terms ofthe Tick Size Pilot Plan. 5 Further, Rule 608(c) of Regulation NMS requires each Participant to enforce compliance with the Tick Size Pilot Plan by its members and persons associated with its members. 6 Rule 608( e) of Regulation NMS provides that the Commission may exempt from the provisions ofRule 608 of Regulation NMS , either conditionally or on specified terms and conditions, any self-regulatory organization, if the Commission determines that such exemption is consistent with the public interest, the protection of investors, the maintenance of fair and orderly markets, and the removal of impediments to, and the perfection ofthe mechanisms of, a national market system. 7 As discussed below, the Commission, pursuant to its authority under Rule 608(e) of Regulation NMS , is hereby granting to FINRA a limited exemption from the requirement to comply with certain provisions of the Tick Size Pilot Plan as required under Rule 608(c) of Regulation NMS. 8 Exemption from Certain Provisions of the Tick Size Pilot Plan
I. Exemption from the Requirement to Enforce Compliance with Certain Retail
Investor Order Identification Requirements Under Appendix B.II.n
Appendix B.II. to the Tick Size Pilot Plan lists the columns of information to be
provided with respect to market orders and non-booked portions of Marketable Limit 4 See Securities Exchange Act Release No. 76484 (November 19, 2015), 80 FR 73858 (November 25, 2013) (File No . SR-FINRA-2015-048) ("FINRA Proposal"). Concurrent with the grant ofthis exemption, the Commission is approving the FINRA Proposal. See Securities Exchange Act Release No. 77164 (February 17, 2016). 5 17 CFR 242.608( c). 6 17 CFR 242.608(c). 7 17 CFR 242.608(e). 8 The Commission notes that while the Exemption Request seeks exemptive relief for all ofthe Participants, the Commission is granting exemptive relief only to FINRA. The Commission would consider granting similar limited exemptions to other Tick Size Pilot Plan Participants should they submit proposed rule changes pursuant to Section 19(b) of the Exchange Act that are substantially similar to the FINRA Proposal. 2

Orders. Paragrarh B.II.n provides that a flag (YIN) should be used to identify Retail Investor Orders. In the Exemption Request, the Participants request an exemption from the requirement in Appendix B.II.n for those orders that may satisfy the definition of Retail Investor Order set forth in the Tick Size Pilot Plan but do not utilize the exceptions provided for such orders in Test Groups Two and Three. In the FINRA Proposal, FINRA proposes FINRA Rule 6191(b), Supplementary Material .02 to require Trading Centers to report "Y" when it is relying upon the Retail Investor Order exception in Test Groups Two and Three, and "N" in all other instances. 10 The Commission grants the exemption to FINRA from the requirement in
Appendix B.II.n relating to the identification of Retail Investor Orders for those orders
that satisfy the definition of Retail Investor Order but do not utilize the exceptions set forth in Test Group Two or Test Group Three. Rather, as set forth in the FINRA Rule 6191(b), Supplementary Material .02, FINRA members that operate a Trading Center will be required to identify only those Retail Investor Orders that actually rely on the exceptions provided in Test Group Two and Test Group Three of the Tick Size Pilot Plan with a "Y." All other orders will be reported with an "N." The Commission has determined that this exemption should enhance the utility ofthe Tick Size Pilot Plan data by narrowing the identification of Retail Investor Orders to those that actually utilize the Tick Size Pilot Plan's exceptions. In addition, this exemption could lower implementation costs for FINRA members by not requiring them to identify and report all Retail Investor Orders. Therefore, the Commission finds that granting this exemption is consistent with the public interest, the protection of investors, the maintenance of fair and orderly markets and the removal of impediments to, and the perfection of a national market system.
II. Exemption from the Requirement to Report Certain Order Information in
Microsecond Increments
Appendix B.l.a to the Tick Size Pilot Plan lists the daily market quality statistics
that are to be reported for orders in Pilot Securities. Paragraphs (14), (15), (16), (21), 9 The Tick Size Pilot Plan defines a "Retail Investor Order" as meaning "an agency or riskless principal 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 ofthe market and the order does not originate from a trading algorithm or any other computerized methodology. The Participant that is the Designated Examining Authority of a member of a Participant operating a trading center executing a Retail Investor Order will require such trading center to sign an attestation that substantially all orders to be executed as Retail Investor Orders will qualify as such under the Plan." The Commission notes that FINRA proposes to amend this definition for its members. See Securities Exchange Act Release No. 76483 (November 19, 2015), 80 FR 73853 (November 25, 2015) . 10 See supra note 4. 3

(22), and (23) require that certain information be reported based upon specified time 11 ranges. In the Exemption Request, the Participants indicate that not all Participants and non-Participant Trading Centers currently capture data or report all orders and trades in either microseconds or milliseconds. Accordingly, the Participants request an exemption from the time reporting requirements of Appendix B.l.a(15) and (22). In the FINRA Proposal, FINRA proposes in Supplemental Material .04 to Rule 6191 (b) to provide additional reporting fields and modify certain existing reporting fields to permit Participants and non-Participant Trading Centers to submit data pursuant to
Appendix B.I.a in seconds or such smaller increments as are available. The FINRA
Proposal separates the time requirements in the paragraphs into distinct microsecond and millisecond categories to allow Participants and non-Participant Trading Centers to submit their data under the category that is consistent with their reporting capabilities. 12 The Commission grants the exemption to FINRA from the requirements of paragraphs (15) and (22) of Appendix B.l.a, so long as FINRA complies with, and enforces compliance with FINRA Rule 6191(b), Supplementary Material.04 . The exemption should reduce implementation costs by accommodating the current reporting capabilities of Participant and non-Participant Trading Centers. The Commission notes that Participants and non-Participant Trading Centers will continue to provide the data required under the Tick Size Pilot Plan but in a manner that is consistent wi th their individual capabilities. Therefore, the Commission has determined that this exemption is consistent with the public interest, the protection of investors, the maintenance of fair and orderly markets and the removal ofimpediments to, and the perfection of a national market system.
Ill. Exemption from the Requirement Under Appendix B.l.a(31) through (33) to
Report Certain Information "At the Time of Order Execution" II Specifically, paragraph (14) provides "the cumulative number of share of orders executed from 0 to less than 100 microseconds after time of order receipt;" paragraph (15) provides that "the cumulative number of shares of orders executed from 100 microseconds to less than 100 milliseconds after time of order receipt;" and paragraph (16) provides "the cumulative number of shares of orders executed from 100 milliseconds to less than 1 second after the time of order receipt," should each be reported in separate co lumns. Further, paragraph (21) provides "the cumulative number of shares canceled from 0 to less than 100 microseconds after time of order receipt;" paragraph (22) provides "the cumulative number of shares canceled from 100 microseconds to less than 100 milliseconds after time of order receipt;" and paragraph (23) provides "the cumulative number of shares canceled from 1 00 milliseconds to less than 1 second after the time of order receipt," should each be reported in separate columns. 12 See supra note 4. 4

Appendix B.I.a(31) through (33) provides that certain data be measured and
reported "at the time of order execution." 13 According to the Exemption Request, the Participants believe that this information should be captured at the time of order receipt as evaluating share-weighted average prices at the time of order receipt is more consistent with the goal of observing the effect of the Tick Size Pilot Plan on the liquidity of Pilot Securities. Accordingly, the Participants have requested an exemption from the requirement to calculate this data at the time of order execution. In the FINRA Proposal, FINRA proposes to adopt Supplementary Material.06 to Rule 6191(b) to require FINRA and its members to calculate this data at the time of order receipt. 14 The Commission grants the exemption to FINRA from the requirements in
Appendix B.I.a (31) through (33) to calculate the data at the time of order execution, so
long as FINRA complies with, and enforces compliance with its Rule 6191(b), Supplementary Material .06. The Commission has determined that this exemption is consistent with the public interest, the protection ofinvestors, the maintenance offair and orderly markets and the removal ofimpediments to, and the perfection of a national market system because it will provide data that should facilitate thorough analysis ofthe impact on liquidity ofthe Tick Size Pilot Plan. The Commission also notes that several data elements under current rules, including Rule 605 of Regulation NMS, are captured based at the time of order receipt. Therefore, utilizing the data calculated at the time of order receipt may reduce implementation costs.
IV. Exemption Related to the Methodology for Calculating Market Maker
Profitability Under Appendix C.I.b and C.I.c
Appendix C.I. to the Tick Size Pilot Plan requires Participants that are Designated
Examining Authorities ofMarket Makers to collect certain data from Market Makers related to Market Maker profitability. Thereafter, the relevant Participants are responsible for aggregating the data and providing that data to the Commission as prescribed under Appendix C.II. to the Tick Size Pilot Plan. In the Exemption Request, the Participants propose to calculate Market Maker profitability under Appendix C.I. differently.
Appendix C.I.b ofthe Tick Size Pilot Plan defines raw Market Maker realized
trading profits as "the difference between the market value ofMarket Maker sales (shares sold x price) and the market value ofMarket Maker purchases (shares purchased x price). A LIFO-like method will be used for determining which share prices to use in the calculation." In the Exemption Request, the Participants propose to calculate this statistic 13 Specifically, paragraph (31) provides " [q]uoted size at the National Best Bid and National Best Offer - the share-weighted average ofthe consolidated quoted size at the inside price at the time of order execution;" paragraph (32) provides "[s ]hare-weighted average NBBO Spread at the time of order execution;" and paragraph (33) provides "[s]hare-weighted average BBO Spread of reporting exchange at the time of order execution," shall be reported. 14 See supra note 4. 5

for each trading day on a daily LIFO basis using reported trade prices and including only trades executed on the subject trading day. The daily LIFO calculation shall not include any positions carried over from previous trading days.
Appendix C.I.c of the Tick Size Pilot Plan defines raw Market Maker unrealized
trading profits as "the difference between the purchase or sale price of the end-of-day inventory position ofthe Market Maker and the Closing Price. In [the] case of a short position, the Closing Price from the sale will be subtracted. In the case of a long position, the purchase price will be subtracted from the Closing Price." In the Exemption Request, the Participants propose to calculate daily Market Maker unrealized profitability statistics for each trading day on an average basis. Specifically, the Participants propose to calculate the volume-weighted average price of the excess (deficit) ofbuy volume over sell volume for the current trading day using reported trade prices. Further, the gain (loss) ofthe excess (deficit) ofbuy volume over sell volume shall be determined by using the volume weighted average price compared to the closing price of the security as reported by the Primary Listing Exchange. Participants shall report the number of excess (deficit) shares held by the Market Maker, the volume weighted average price of that excess (deficit) and the closing price ofthe security as reported by the Primary Listing Exchange. In the FINRA Proposal, FINRA proposes to adopt these alternative calculations for Appendix C.l. Specifically, Supplementary Material.11 to FINRA Rule 6191(b) sets forth the alternative calculations for Appendix C.l.b and C.l.c. 15 The Commission grants the exemption to FINRA from the requirement of collecting the data set forth in paragraphs C.l.b and C.I.c to Appendix C.l. ofthe Tick Size Pilot Plan so long as FINRA calculates and provides to the Commission the statistics and data described in its Supplementary Material .11 to its Rule 6191 (b). This calculation should result in a consistent, uniform, and more cost-effective calculation of Market Maker profitability, which should enhance the Commission's ability to assess the impact ofthe Tick Size Pilot Plan on Market Maker profitability. Therefore, the Commission has determined that this exemption is consistent with the public interest, the protection ofinvestors, the maintenance of fair and orderly markets and the removal of impediments to, and the perfection of a national market system.
V. Exemption Related to the Initial Submission of Tick Size Pilot Data to the
Commission
The Tick Size Pilot Plan provides that the data collected by the Participants must be provided to the Commission within 30 calendar days following the month enct. 16 In the Exemption Request, the Participants request an exemption from this requirement for the data collected prior to the start of the Tick Size Pilot Plan. The Participants propose to make their initial submission to the Commission on August 30, 2016 and include data 15 See supra note 4. 16 See Appendix B and Appendix C. 6

from April, May, June and July of2016. The Participants have requested this exemption so that they can conduct testing to ensure the accuracy of the data prior to the first submission to the Commission and publication on their respective websites. The Commission grants the exemption to FINRA from having to submit data set forth in Appendix B and C to the Tick Size Pilot Plan to the Commission within 30 calendar days following the month end during the period before the Pilot Period begins, so long as FINRA submits the data consistent with dates described herein. Accordingly, FINRA must submit its initial submission ofTick Size Pilot Plan data on August 30, 2016 and include data from April, May, June and July of2016. Submission in this manner should provide FINRA with sufficient time to test their systems and ensure the accuracy of the data. Therefore, the Commission has determined that this exemption is consistent with the public interest, the protection of investors, the maintenance of fair and orderly markets and the removal of impediments to, and the perfection of a national market system.

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This exemption is conditioned on the facts and representations presented in your letter. In the event any material change occurs with respect to any ofthe facts or representations presented, the exemption will expire and FINRA must immediately resume operating in accordance with all ofthe provisions in the Tick Size Pilot Plan. For the Commission,

by the Division ofTrading and Markets,

pursuant to delegated authority. 17

David S. Shillman

Associate Director

17 CFR 200.30-3(a)(42).
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