Regulation NMS Plan to Address Extraordinary Market Volatility Plan Frequently Asked Questions (FAQ)

Section 1: FINRA Rule 6190

1.1 What does FINRA Rule 6190 require?
1.2 How is trading center defined for purposes of the plan and Rule 6190?
1.3 Firm A is an OTC market maker and also a trading center. Firm A, in its capacity as an OTC market maker, receives a customer order to sell and routes the order to an exchange or other trading center. Would Firm A be deemed in violation of Rule 6190 if the order is displayed or executed by the exchange or other trading center in violation of the plan?

Section 2: Scope of Limit Up/Limit Down (LULD) Requirements

2.1 What transactions can be executed outside of the LULD price bands?
2.2 Is the second leg of a riskless principal transaction required to separately comply with the plan?
2.3 Where an agency transaction is effected in two legs (e.g. where Firm A executes a trade as agent on behalf of Firm B and in the second leg, A "flips" the shares to B), is the second leg of the transaction required to separately comply with the plan?
2.4 Are block transactions excluded from the LULD price bands?
2.5 Are firms prohibited from routing non-executable orders, quotes or IOIs to trading centers?

Section 3: Reporting to FINRA's Trade Reporting Facilities (FINRA Facilities)

3.1 Will the FINRA facilities accept reports of OTC transactions in NMS stocks outside of the LULD price bands?
3.2 Will the FINRA facilities disseminate reports of OTC transactions in NMS stocks outside of the LULD price bands?
3.3 Can OTC transactions in NMS stocks be reported to FINRA during a trading pause?
3.4 For trades that are reported late (i.e., outside the time frame prescribed by FINRA rules), is the trade price required to be within the price bands as of the execution time or the report time?
3.5 Will the FINRA facilities accept late reports of OTC transactions in NMS stocks outside of the LULD price bands?
3.6 Are all last sale eligible OTC trades in NMS stocks that are timely reported included in the calculation of reference price under LULD?
3.7 Is FINRA making any trade report modifier changes in connection with LULD?

Section 4: Best Execution and Order Handling

4.1 How do the LULD price bands impact a firm's best execution obligations (e.g., what are a firm's best execution obligations during a limit state)?
4.2 How should firms handle orders under LULD, for example, new or pre-existing orders that are or become non-executable?
4.3 How do the LULD price bands impact a firm's obligations under Rule 5320 and specifically Rule 5320.07? For example, Firm A is holding a limit order to buy at $10.00. The NBB is $10.00 and the lower price band is $10.03. Firm A receives a market sell order. How should this be handled?
4.4 Same scenario as Q4.3, but Firm A is now holding an undisplayed limit order to buy priced at $10.04. The NBB is $10.00 and the lower price band is $10.03. How should this be handled?
4.5 Same scenario as Q4.3, but Firm A is now holding an undisplayed limit order to buy priced at $10.02. The NBB is $10.00 and the lower price band is $10.03. How should this be handled?

Section 1: FINRA Rule 6190

 
1.1 What does FINRA Rule 6190 require?
Rule 6190 requires member firms that are trading centers in NMS stocks to establish, maintain and enforce written policies and procedures that are reasonably designed to comply with the requirements of the plan and specifically to prevent: (1) the execution of trades at prices that are below the lower price band or above the upper price band for an NMS stock, except as permitted under the plan; (2) the display of offers below the lower price band and bids above the upper price band for an NMS stock; and (3) the execution of trades in an NMS stock during a trading pause.
1.2 How is trading center defined for purposes of the plan and Rule 6190?
The term "trading center" is defined as a national securities exchange or national securities association that operates an SRO trading facility, an alternative trading system, an exchange market maker, an OTC market maker, or any other broker or dealer that executes orders internally by trading as principal or crossing orders as agent.1
1.3 Firm A is an OTC market maker and also a trading center. Firm A, in its capacity as an OTC market maker, receives a customer order to sell and routes the order to an exchange or other trading center. Would Firm A be deemed in violation of Rule 6190 if the order is displayed or executed by the exchange or other trading center in violation of the plan?
No. Rule 6190 applies to firms to the extent that they are trading centers and are acting as such with respect to any given trade or quotation; trading centers that route orders to exchanges or other trading centers can rely on the exchange or other trading center to ensure compliance with the plan for such routed orders.

Section 2: Scope of Limit Up/Limit Down (LULD) Requirements

 
2.1 What transactions can be executed outside of the LULD price bands?
Under the Regulation NMS Plan to Address Extraordinary Market Volatility, transactions that (1) do not update the last sale price (except if solely because the transaction was reported late) and (2) are excepted or exempt from the SEC's trade-through rule (Reg NMS Rule 611) can be executed outside the price bands. To qualify, a trade must satisfy both prongs of the exclusion.

FINRA has published two charts to assist firms in identifying these transactions and properly coding when reporting to FINRA.
2.2 Is the second leg of a riskless principal transaction required to separately comply with the plan?
FINRA does not consider the second leg of a riskless principal transaction, which must be executed at the same price as the first leg and is not reported for public dissemination purposes, as a separate transaction for purposes of compliance with the plan. Thus, the second riskless leg would not have to separately comply with the plan (i.e., the price of the second leg would not be required to be within the bands that are in place at the time of execution or allocation of the second leg), provided that the first leg of the transaction complies with the plan (i.e., the price of the first leg must be within the bands that are in place at the time of execution of the first leg).

Firms are reminded that they are prohibited from executing any part of an order during a trading pause, including completing the second leg of a riskless principal transaction or otherwise filling an order with shares received in an execution prior to the pause taking effect.2
2.3 Where an agency transaction is effected in two legs (e.g. where Firm A executes a trade as agent on behalf of Firm B and in the second leg, A "flips" the shares to B), is the second leg of the transaction required to separately comply with the plan?
The second leg would not have to separately comply with the plan (i.e., the price of the second leg would not be required to be within the bands that are in place at the time of execution or allocation of the second leg), provided that the first leg of the transaction complies with the plan (i.e., the price of the first leg must be within the bands that are in place at the time of execution of the first leg). As noted in A2.2, firms are prohibited from effecting the second leg of an agency transaction during a trading pause.
2.4 Are block transactions excluded from the LULD price bands?
No, block transactions must be executed within the price bands, unless they are otherwise excluded from LULD requirements.
2.5 Are firms prohibited from routing non-executable orders, quotes or IOIs to trading centers?
No. The plan applies only to trading centers acting in such capacity. Firms routing orders (including trading centers) can rely on the trading center to which they routed the order, quote or IOI to comply with the plan.

Section 3: Reporting to FINRA's Trade Reporting Facilities (FINRA Facilities)

 
3.1 Will the FINRA facilities accept reports of OTC transactions in NMS stocks outside of the LULD price bands?
The FINRA facilities validate all regular way, last sale eligible trades based on established price validation parameters, and FINRA will adjust the parameters to account for LULD. As is the case under current protocols, a last sale eligible trade that is outside the validation parameters will be rejected, and the firm will be required to confirm the price and re-submit the trade with the price override indicator. FINRA expects that this will occur very infrequently. Firms must have policies and procedures to prevent the execution of trades outside of the price bands and cannot rely on the FINRA facilities as a mechanism for compliance with the plan.

Trades that qualify for the exclusion described in Q2.1 above and are properly modified with the applicable trade reporting modifiers are not subject to the LULD price validation parameters.
3.2 Will the FINRA facilities disseminate reports of OTC transactions in NMS stocks outside of the LULD price bands?
If a trade is re-submitted with the price override indicator discussed in A3.1 above, a FINRA facility will send the trade to the SIP for dissemination, even if the price is outside the LULD price bands. Firms are reminded that the price override indicator should be appended to a trade report only after the trade has been rejected by a FINRA facility. Firms are prohibited from programming their systems to automatically append this indicator to their trade reports prior to rejection of the trade.4
3.3 Can OTC transactions in NMS stocks be reported to FINRA during a trading pause?
No. As is the case today, trades cannot be reported to FINRA during a trading pause. The FINRA facilities will reject all current day reports of trades in securities subject to a trading pause if the report is received during the trading pause and the execution time of the trade occurred while the pause was in effect. However, after the trading pause has been lifted, the FINRA facilities will accept reports of trades that have an execution time that occurred during the pause. Firms must have policies and procedures to prevent the execution of trades during a trading pause and cannot rely on the FINRA facilities as a mechanism for compliance with the trading pause rules.
3.4 For trades that are reported late (i.e., outside the time frame prescribed by FINRA rules), is the trade price required to be within the price bands as of the execution time or the report time?
The trade price must be within the price bands that are in place as of execution time, not as of report time. This applies to trades that are reported late on trade date and trades reported "as/of" on a T+N basis. A transaction is not excluded from the LULD requirements merely because it has been reported late to FINRA. Firms must have policies and procedures to prevent the execution of trades outside of the price bands that are in place at the time of execution, irrespective of when the trade is reported to FINRA.
3.5 Will the FINRA facilities accept late reports of OTC transactions in NMS stocks outside of the LULD price bands?
For trades that are reported late, the price validation and price override protocols described in A3.1 generally apply.
3.6 Are all last sale eligible OTC trades in NMS stocks that are timely reported included in the calculation of reference price under LULD?
Yes. All regular way, last sale eligible trades reported within the time frame prescribed by FINRA rules (currently within 30 seconds of execution) are included in the calculation of the reference price. Trades that are reported late are not included in the calculation of the reference price; however, as noted in A3.4 above, the price must be within the bands that were in effect at the time of execution (not at the time the trade was reported).
3.7 Is FINRA making any trade report modifier changes in connection with LULD?
No. FINRA is not making any trade report modifier changes in connection with LULD at this time.

Section 4: Best Execution and Order Handling

 
4.1 How do the LULD price bands impact a firm's best execution obligations (e.g., what are a firm's best execution obligations during a limit state)?
Rule 5310(a)(1) generally provides that, in any transaction for or with a customer (or a customer of another broker-dealer), firms must use reasonable diligence to ascertain the best market for the subject security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions.5 FINRA recognizes that many factors may affect market conditions, including regulatory restrictions on trading activity. A firm may, for example, be prohibited from promptly executing a marketable customer order if a trading halt is in effect. Similarly, a firm may be precluded from executing an order for an NMS stock outside of the LULD price bands pursuant to the plan. Firms must have policies and procedures governing the execution and priority of pending orders when regulatory restrictions on trading activity are in place, including how the firm will ensure that it meets its obligations under Rule 5310. FINRA notes that as a general matter, a firm's best execution obligations are determined by the particular facts and circumstances involved in any given transaction.
4.2 How should firms handle orders under LULD, for example, new or pre-existing orders that are or become non-executable?
FINRA is not providing any specific guidance on order handling under LULD. Firms should determine, and must communicate with their customers, the manner in which they will handle orders under LULD.
4.3 How do the LULD price bands impact a firm's obligations under Rule 5320 and specifically Rule 5320.07? For example, Firm A is holding a limit order to buy at $10.00. The NBB is $10.00 and the lower price band is $10.03. Firm A receives a market sell order. How should this be handled?
To the extent an order can be executed in conformance with the terms of the order and not prohibited by the LULD bands, it should be executed; however, in this example, there may not be an executable bid to fill the market sell order at the NBB or better. The $10.00 buy order cannot be executed because it is below the lower price band.
4.4 Same scenario as Q4.3, but Firm A is now holding an undisplayed limit order to buy priced at $10.04. The NBB is $10.00 and the lower price band is $10.03. How should this be handled?
Because the $10.04 buy order can be executed and crossed with the market order to sell, crossing these orders satisfies the terms of both orders at an execution price within the price bands.
4.5 Same scenario as Q4.3, but Firm A is now holding an undisplayed limit order to buy priced at $10.02. The NBB is $10.00 and the lower price band is $10.03. How should this be handled?
The $10.02 buy order cannot be executed because it is below the lower price band.

1 See Rule 600(b)(78) of Regulation NMS.
2 See Regulatory Notice 10-30 (June 2010), Question #7.
3 See Trade Reporting Notice 9/17/2010 (Price Validation and Price-Override Protocol).
4 See Trade Reporting Notice 9/17/2010 (Price Validation and Price-Override Protocol).
5 Among the factors that FINRA considers in determining whether a firm has used "reasonable diligence" are: (1) the character of the market for the security (e.g., price, volatility, relative liquidity, and pressure on available communications); (2) the size and type of transaction; (3) the number of markets checked; (4) accessibility of the quotation; and (5) the terms and conditions of the order which result in the transaction, as communicated to the firm and persons associated with the firm.