Accordingly, only SRO trading facilities and ADF participants are subject to the requirements for automated trading centers. Answer: Under Rule 611(b)(6), the broker-dealer is required to route, simultaneously with execution of the block trade, an ISO to execute against the full displayed size of any protected quotation with a price superior to the block trade price. ( 6) The transaction that constituted the trade-through was effected by a trading center that simultaneously routed an intermarket sweep order to execute against the full displayed size of any protected quotation in the NMS stock that was traded through. A deliberate delay (i.e., a time period in which a response is not sent or a quotation is not updated for no reasonable purpose) would violate the requirements of Rule 600(b)(3). Question 4.10: Routing ISOs Through a Conduit Broker-Dealer or Trading Center. It includes: (1) Rule 610, which addresses access to markets; (2) Rule 611, which provides intermarket price priority for displayed and accessible quotations; (3) Rule 612, which establishes minimum pricing increments; and (4) amendments to the joint-industry plans and rules governing the dissemination of market data. Do these alternative policies and procedures for handling agency block transactions with individually negotiated prices comply with Rule 611(a)? Question 3.11: Stopped Order Exception/Error Correction Transactions. Answer: When routing orders to meet the requirements for ISOs set forth in Rule 600(b)(30), a trading center can decline to route orders to execute against the protected quotations of a trading center experiencing systems problems for which the routing trading center has triggered the self-help exception of Rule 611(b)(1). The affirmative duty of automated trading centers to identify their quotations appropriately is a vitally important element of Regulation NMS. Question 2.02: Procedures for New Automated Trading Centers. Assuming reasonable data handling policies and procedures, compliance by individual Firms with Rule 611 will be assessed based on Firm-Specific Order and Trade Data and Firm-Specific Quotation Data, and not on Network Data (the relevance of Network Data to Rule 611 is discussed in FAQ 6.04 below). At the time of order receipt, the broker-dealer agrees to execute the order at a markets opening price. 35 If one or more of the parties to the agency transaction wished to trade in greater size than the agency transaction, the broker-dealer could participate as principal in a separate transaction. To effect such a specification, the SRO must submit a proposed rule change to the Commission under Section 19 of the Exchange Act. For example, if three trading centers are displaying protected bids that equal the national best bid for a stock, it would be appropriate for a best-price order router to route a sell ISO of any size to any one of them, to any two of them, or to all three. 54389 (Aug. 31, 2006), 71 FR 52829 (Sept. 7, 2006). Facts and circumstances of particular transactions may differ, and the Staff notes that even slight variations may require different responses. In each case, there would be no better-priced protected bids that necessitated the routing of additional sell orders. Question 3.20: Exemption for Print Protection Transactions. 20 See NASD Member Alert, Guidance Relating to Execution Time for Purposes of Compliance with NASD Trade Reporting Rules (June 13, 2007) (available at www.finra.org). 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 NASDAQ's Regulation NMS - NASDAQtrader.com PDF NYSE ARCA, INC. - The New York Stock Exchange The Gospel: Sweeps | Sang Lucci A broker-dealer intends to use the ISO exception to execute an agency cross transaction for two customers at a price inferior to one or more protected quotations. The Firm should synchronize these internal clocks to enable the Firm to reasonably determine through its compliance procedures that the trading desks and order handling systems are executing trades and routing orders in compliance with Rule 611. By marking an order as an ISO, the router indicates to the destination trading center that it has simultaneously routed additional ISOs, as necessary, to any better-priced protected quotations. As discussed in the NMS Release, the term full size includes both the displayed size and the reserve size for such automated quotation.12 The requirement that IOC orders be executed against reserve size is designed to promote efficient intermarket trading by, among other things, minimizing the frequency of unintentional locked or crossed markets. Q: Will The NASDAQ Options MarketSM (NOM) be ready to route outbound ISOs and accept inbound ISOs on August 31st? Waiting one second before re-routing to a trading centers protected quotation, after receiving a partial-fill or no-fill response to an order seeking to execute against the trading centers quotation at the same price, would be one example of a reasonable policy and procedure. These trading centers are either SRO trading facilities, as defined in Rule 600(b)(72), or trading centers that display quotations in FINRAs ADF. Other facts and circumstances, however, could lead to a different result. Order protection rule (Rule 611) Access rule Sub-penny rule Market data rule . 54391 (Aug. 31, 2006), 71 FR 52836 (Sept. 7, 2006) (approving SR-NSX-2006-08 to amend NSX trading rules to provide for a price-time priority market and other related changes). This principal transaction would be reported separately from the agency transaction and would need to comply separately with Rule 611. 19 See NMS Release, 70 FR at 37527 n. 250 (noting that the Commission would work with the industry during implementation to achieve an appropriate resolution of these practical issues). In recent years, industry participants have acquired substantial practical experience with policies and procedures for automated best-price routing strategies. If an order router wishes to execute a large order by sweeping both the protected quotations and depth-of-book quotations at one or more preferred trading centers, it can implement this strategy by routing large-sized IOC/ISOs with aggressive limit prices to the preferred trading centers, while routing additional IOC/ISOs, as necessary, to less preferred trading centers that are priced and sized to execute against only the better-priced protected quotations of those trading centers. Answer: No, Rule 610 and Rule 611 do not apply to odd-lot orders or to the odd-lot portions of mixed-lot orders. A broker-dealer buys a block of an NMS stock as principal from a customer. In this case, the broker-dealer could facilitate the transaction by agreeing to offset any reduction in the size of the agency cross transaction through a simultaneous principal trade with the customer. Accordingly, any order marked as an ISO must fully meet the applicable requirements for ISOs in Rule 600(b)(30), Rule 611(b)(5) and (6), Rule 611(c), and the ISO exception to the SRO locked/crossed rules (see FAQ 5.02 below). Rule 600(b)(8) defines bid or offer as the bid price or offer price for one or more round lots of an NMS security. As a result, Network Data constitutes a common reference point for quotations and trades in NMS stocks that will be readily available to the public, Firms, and regulatory authorities. Answer: In the NMS Release, the Commission stated that, assuming a trading center has implemented reasonable policies and procedures for handling data (see FAQ 6.02 below), a trading centers compliance with Rule 611 will be assessed based on the time that orders and quotations are received, and trades are executed, at that trading center.44 The same standard will be used to assess the compliance of broker-dealers in routing ISOs under Rule 611(c). In addition, a broker-dealer responsible for routing ISOs, but which does not fall within the definition of trading center in Rule 600(b)(78) because it does not execute orders internally as agent or principal, would nevertheless be entitled to use the combined ISO/self-help exceptions if it elects to comply with the requirements applicable to trading centers under Rule 611(a). In limited instances, the broker-dealer may not incur a conversion fee if it is later able to obtain the ADRs through an offsetting purchase from another customer. Rule 6191(a)(7)(C) ("Trade-at Requirement") provides that "Trade-at Intermarket Sweep Order" means a limit order for a Pilot Security that meets the following requirements: (i) When routed to a Trading Center, the limit order is identified as a TAISO; and (ii) simultaneously with the routing of the limit order identified as a TAISO, one . Price-To-Comply Orders comply with the Reg NMS Order Protection Rule and Locked and Crossed market rule by re-pricing to the NBBO. What requirements apply to the automated trading center displaying a protected quotation when it receives an ISO? As part of the broker-dealers periodic surveillance procedures under Rule 611(a)(2), trade prices should be compared with protected quotations at the time of execution, as reliably documented, to affirm that such quotations were not traded through. Would the second leg of the principal transaction qualify for the benchmark exception? In addition, if the conduit is a trading center that both executes trades and routes orders, the trading center must act solely in a routing capacity with respect to conduit ISOs, with no possibility of the trading center executing the conduit ISOs internally. Consequently, automated trading centers must monitor their systems on a real-time basis to assess whether they are functioning properly. 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). In addition, the scope of a problem can vary widely (e.g., a systems problem at a trading center can affect only a single stock, a group of stocks, or all stocks). Question 4.08: Addressing Failure to Provide Immediate Response to a Single Order. Given the latencies in transmitting data among these trading centers, as well as among broker-dealers that route ISOs to execute against the protected quotations displayed by trading centers, how will regulators assess the compliance of trading centers and broker-dealers with Rule 611? Answer: As noted in FAQ 7.01 above, Rule 600(b)(64) defines the term regular trading hours as the time between 9:30 a.m. and 4:00 p.m Eastern Time, or such other time as is set forth in the procedures established pursuant to Rule 605(a)(2) of Regulation NMS. Because of a systems problem or human error, a trading center fails to execute a customer order properly. Consequently, excluding such ISOs from Rule 605 reports should enhance the comparability of order execution quality statistics across different market centers. 24 Securities Exchange Act Release No. 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 . Rule 611(b)(9) provides an exception for the execution of certain stopped orders for which a trading center has guaranteed a price to its customer. For these time periods, the Firm should maintain Firm-Specific Quotation Data so that the effectiveness of its policies and procedures can be adequately evaluated by regulatory authorities. Statistical arbitrage transactions, absent some other derivative or merger arbitrage relationship between component orders, would not satisfy this element of the definition of a qualified contingent trade. A broker-dealers customer submits a not-held order to purchase 100,000 shares of an NMS stock. Answer: Yes, an order router that does not intend to sweep any inferior prices can designate a single order as an ISO when it is routed to a trading center displaying the best-priced quotation for a stock. 57621 (April 4, 2008). The NMS Release notes that, given the requirement that ISOs be routed to execute against protected quotations (even when the displayed size of such protected quotation may be less than the order routers total trading interest), the trading centers that benefit from this protection for their quotations should be required to provide fair and efficient access to the full size available for the quotation. Moreover, if a primary routing system experiences problems that render it incapable of routing ISOs to execute against one or more better-priced protected quotations, a trading center or broker-dealer will not be able to continue to take advantage of the various ISO exceptions unless its routing arrangements have incorporated at least one reasonable alternative means of routing the required ISOs to the appropriate automated trading centers. Is there an exemption from Rule 611 for transactions in non-convertible preferred securities? After the customer and trader manually agree to a price, the trader immediately begins inputting the transaction information into an automated system of the broker-dealer and completes the input in a reasonable time. Finally, Rule 611 promotes intermarket price protection by restricting "trade-throughs" - the execution of trades on one venue at prices that are inferior to publicly displayed quotations on another venue. To be reliable, the documentation must be generated simultaneously with the time of execution and not be subject to retrospective alteration. PDF Trade Reporting Modifier Chart - FINRA.org 12 See NMS Release at 37534 n. 313 (an automated quotation must be immediately and automatically accessible up to its full size, which will include both the displayed and reserve size of the quotation). Conversely, compliance reviews targeted on the problem areas may reveal weaknesses in the Firms policies and procedures that the Firm could correct with timely action. It provides that the SRO maintaining the primary listing for an NMS security shall specify the regular trading hours for such security if they are to be other than 9:30 to 4:00. In addition, if the ISO is also marked as IOC (which triggers the requirements for automated quotations in Rule 600(b)(3)), the trading center must provide an order execution up to the full size of its protected quotation at a price that is at least as good as the price of its protected quotation. In addition, the same policies and procedures for systems assessment and response and for objective parameters should be used for the self-help exception of both Rule 611 and the SRO lock/cross rules. 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). If the customer order is long, but the broker-dealer does not have a long position in the NMS stock, should the broker-dealer nonetheless mark the ISOs as short exempt? 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. Similarly, in cases where some ADRs are available in the market to satisfy the customers order, the broker-dealers sale of ADRs to the customer would qualify for the benchmark exception if the price was based on the volume-weighted average of (1) the ADR Equivalent Price for converted ADRs, and (2) the price of any ADRs purchased in the market to help fill the customers order. Answer: As noted in FAQ 6.01 above, compliance by individual Firms with Rule 611 will be based on that Firms own data, assuming that the Firm has implemented reasonable data handling policies and procedures. Would the second legs of the riskless principal transactions be considered separate transactions for purposes of compliance with Rule 611? How should market participants implement the self-help exception to the SRO lock/cross rules? The anticipated fee for converting the ordinary shares to ADRs represents either: (1) the actual fee charged by a third party for the conversion (which amount is passed on in its entirety from the customer to the third party), or (2) a reasonable estimate by the broker-dealer of the likely cost of such conversion based on externally observable circumstances that do not result in reasonably determinable compensation to the broker-dealer. In particular, the broker-dealer reasonably can refer to quoted prices at the time of input to determine compliance with Rule 611 for manually negotiated transactions. Order Modifying the Exemption for Qualified Contingent Trades from Rule To address this problem, the broker-dealer implements a policy and procedure pursuant to which the broker-dealers personnel affirm that the transaction price was at or within the best protected quotations at some point during the 20-second period up to and including the time the transaction terms are captured in the automated system.
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