PODCAST
Unlocking Transparency: Navigating FINRA’s Market Data Offerings
Behind every market transaction lies a wealth of data. But how can we harness this information?
On this episode, we sit down with two members of the Market Regulation and Transparency Services team, Senior Vice President of Strategic Regulatory Engagement Alex Ellenberg, and Senior Director of Transparency Services Equities Brendan Loonam. They join us to discuss periodic aggregate market data sets, including some new data recently added to FINRA's website, and how FINRA makes this information available to the public in support of its mission of investor protection and market integrity.
Resources mentioned in this episode:
NMS Equity and Option Order Routing Reports (SEC Rule 606(a) Reports)
About NMS Equity and Options Routing Reports (SEC 606(a) Reports)
OTC (ATS & Non-ATS) Transparency
Episode 149: MRTS 2.0: A Redesign for a Rapidly Evolving Market
Listen and subscribe to our podcast on Apple Podcasts, Google Podcasts, Spotify, YouTube or wherever you listen to your podcasts. Below is a transcript of the episode. Transcripts are generated using a combination of speech recognition software and human editors and may contain errors. Please check the corresponding audio before quoting in print.
FULL TRANSCRIPT
00:00 - 00:25
Kaitlyn Kiernan: Behind every market transaction lies a wealth of data. But how can we harness this information? On this episode, two members of the Market Regulation and Transparency Services team join us to discuss periodic aggregate market data sets, including some new data recently added to FINRA's website, and how FINRA makes this information available to the public in support of its mission of investor protection and market integrity.
00:34 - 00:56
Kaitlyn Kiernan: Welcome to FINRA Unscripted. I'm your host, Kaitlyn Kiernan. I'm pleased to welcome to the show two guests from FINRA's Market Regulation and Transparency Services team. Joining me are Alex Ellenberg, Senior Vice President of Strategic Regulatory Engagement, and Brendan Loonam, Senior Director of Transparency Services Equities. Alex and Brendan, welcome to the show.
00:56 - 00:57
Brendan Loonam: Hi, Kaitlyn.
00:57 - 01:06
Kaitlyn Kiernan: To kick us off, can you each briefly introduce yourselves and share how you got to this point in your career with FINRA? Alex, can we start with you?
01:06 - 01:37
Alex Ellenberg: Hey, Kaitlyn, thank you for having us. Really excited to be here today. I started my career in general litigation out of law school. I was at a law firm and spent a year clerking for a federal trial judge. From there, I went to the SEC's Division of Trading and Markets, which regulates a number of areas, including market structure, which is where I worked. And from there I moved over to FINRA, where I spent about seven years in our Office of General Counsel, and for the last three years have been in MRTS.
01:37 - 01:54
Kaitlyn Kiernan: Great. Thanks, Alex. And for anyone from the 2019 Certified Regulatory and Compliance Professional Program, Alex and I were both part of our 2019 cohort, so shout out to any listeners from that cohort. And Brendan, how about you?
01:54 - 02:14
Brendan Loonam: As you said before, I'm a senior director in our Business Services Group within Transparency Services, with a particular focus. I'm working with our TRF exchange business member partners. I work on initiatives related to the Alternative Display Facility, as well as our OTC transparency data products.
02:14 - 02:48
Brendan Loonam: How I got here? I just hit my 20th anniversary at FINRA this year. Prior to that, when I had first gotten out of school, I had worked a number of jobs for broker dealers, working back office, mid office, eventually moving up to the trading desk, and I was on a couple of different trading desk for a couple of years. Then I had an opportunity to come to FINRA. When I first got here, I worked in our participant services group with the focus on doing TRACE outreach, educating people about TRACE report cards. But for the last 17 years or so, it's been particularly focused in the equity space.
02:49 - 02:51
Kaitlyn Kiernan: Great. Well, happy FINRA anniversary.
02:51 - 02:52
Brendan Loonam: Thank you Very much.
02:53 - 03:03
Kaitlyn Kiernan: We are here today to talk about market data, but a very particular type of market data. Alex, can you give us an overview of what we're talking about today?
03:04 - 03:46
Alex Ellenberg: Yes, sure. So as you mentioned, there are different kinds of market data. One important example here is FINRA's TRACE system. That is the system that we use to provide transaction level information to the public about fixed income or bond activity. That is critically important, but that is not what we're talking about today. Today we are talking about another, different kind of very important market data. Specifically, we're talking about periodic aggregate market data sets. And these aggregate data sets complement transaction level data, and provide market participants and the public with important context about where market activity is occurring.
03:47 - 04:08
Kaitlyn Kiernan: So not the TRACE where Brendan started his career. And I understand one example of this kind of aggregate market data set involves so-called 606 Reports on customer order handling, which FINRA just recently began centralizing on its website, FINRA.org. Can you tell us more about this project?
04:08 - 04:45
Alex Ellenberg: So this is an initiative that we've been working toward for a number of years, and we're really excited to see it now in implementation. So generally what we started with is collecting all of these so-called 606 Reports and making them readily available to the public in a single place. 606 Reports provide important information about how broker dealers route their customer orders, and the existence of financial inducements that might influence their routing decisions. In other words, as the SEC intended, these reports help the public evaluate how firms are meeting their duty of best execution.
04:45 - 04:50
Kaitlyn Kiernan: Got it. And can you tell us real quick what is the duty of best ex?
04:51 - 05:29
Alex Ellenberg: So the duty of best ex is critical investor protection requirement that we, FINRA, have codified by rule. And it really requires firms who are acting on behalf of their customers to make sure that the decisions they make on behalf of their customers are seeking best execution for the customers. In other words, like other areas of securities regulation, there are potential conflicts of interest here, and the duty of best ex is meant to ensure that brokers are acting for the benefit of their customers when they take their customers' orders.
05:29 - 05:55
Kaitlyn Kiernan: Got it. Thanks, Alex. And I know that FINRA does a lot, and Market Regulation and Transparency Services in particular does a lot, of surveillance monitoring for compliance with this obligation. But these reports give investors a tool so that they can understand what's happening as well. So it sounds like these 606 Reports were already required by an SEC rule. So what is FINRA's role here?
05:56 - 06:28
Alex Ellenberg: So you're right. The SEC adopted these requirements and what's now called Rule 606(a) of regulation NMS, which is part of the SEC's regulatory framework for a national market system. Hence, NMS. And also, not surprisingly, because these are reports required by Rule 606. That's why they're referred to as 606 Reports. In terms of FINRA's role, while these reports are already out there and required by the SEC, and made public by broker dealers under the SEC's rule, we're bringing them together.
06:28 - 07:06
Alex Ellenberg: And that's actually more of an involved technical exercise then it might sound. And given our focus on the web page delivery and the user experience, we felt it was an important role that we could play to help complement this rule from the SEC. And a little more in terms of the why we're doing this, we're really doing this so that the data can all be together in one place. And by putting it in one place, this facilitates better access for both individual retail investors as well as broker dealer firms, service providers, the press and academics.
07:06 - 08:00
Alex Ellenberg: And it's worth a quick note that 606 Reports are required by this SEC rule to be published in two different formats. One is PDF format and the other is XML format. And the reason I mentioned that is because we've spent some time to think about how we present both formats in our central website. The PDF documents are easily readable by humans like individual investors, and the XML files are structured data files. And this is important because by putting all of this structured data in one central place, we are facilitating better comparative analysis that investors may see done either by academics or the press. And this kind of comparative analysis, with the broad access to the underlying structured data, often accrues to the public's benefit.
08:00 - 08:14
Kaitlyn Kiernan: Thanks, Alex. Yeah. Transparency is at the root of so much of what FINRA does, hence the "transparency services" part of the Market Team's name. But how might investors use these reports?
08:15 - 08:58
Alex Ellenberg: So investors can use the reports to see where their brokers are routing their orders, and any financial incentives that their brokers receive for orders. So, for example, an investor could go to our website and you can easily find it even just by googling FINRA 606. And it should be one of the top links and you'll see a page that we have that explains the broader initiative and has a link that you can click to view the data. And once you do that, you can look up your specific broker and you can see the wholesalers or the exchanges that your broker sends orders to, and the average per share and total net amount of any payments collected by the broker.
08:58 - 09:42
Alex Ellenberg: An investor could also use our centralized website to browse or look up other brokers and compare how their broker performs relative to those other firms. And, one other note, investors benefit from this exercise even if they aren't using these reports directly. Investors may see in financial press or even more broadly circulated press, periodic articles that do in-depth analysis and rank or compare the way brokers perform. And so that is another way that is a little less direct, but very important and meaningful that investors either use the reports or benefit from having them both public and now centralized.
09:42 - 09:51
Kaitlyn Kiernan: That's interesting and sounds like a great addition to FINRA's data offerings. And are there other areas where FINRA is looking to do something similar?
09:52 - 10:47
Alex Ellenberg: This current initiative that we're talking about is what we refer to as our phase one of 606 centralization. And, as we touched on, this phase one involves us bringing all together the 606 Reports that are already required by SEC rule. And these are reports specifically that cover NMS securities, which generally means exchange-listed securities. So for phase two, looking ahead, FINRA also has new requirements that brokers will need to produce similar or 606-like reports for their handling of unlisted stocks, or what we call OTC equity securities. So, like we're doing now, once those new 606-like reports are created by firms for unlisted stocks, we'll also similarly centralize them on our web page.
10:47 - 11:28
Alex Ellenberg: In addition to that, we also will be pursuing a filing with the SEC to host a similar centralized page for what are called 605 Reports. These 605 reports are, not surprisingly, required under Rule 605 of regulation NMS, and these are order execution quality reports. So taken together, 606 Reports help show where a broker that takes customer orders then routes those orders, and the 605 Reports show the resulting execution quality at the venues to which the orders were routed.
11:29 - 11:51
Kaitlyn Kiernan: So it sounds like a lot of exciting developments still to come. Alex, you mentioned one of those developments being work on OTC equity securities, and I understand that FINRA has done other work to bring transparency to the trading volumes that execute in the over-the-counter markets. Brendan, can you talk more about FINRA's OTC transparency data?
11:51 - 12:28
Brendan Loonam: Sure, Kaitlyn. Our OTC Transparency Data product is a unique data set where we publish specified volume information for over-the-counter or OTC transactions in both NMS stocks and OTC equity securities on FINRA.org. All the data is derived from trades that are reported to a FINRA trade reporting facility. So, the Alternative Display Facility, the FINRA Exchange TRFs, or the OTC Reporting Facility, and is basically divided into two categories: transactions occurring on alternative trading systems, or ATSs, and all other equity volume executed over-the-counter by our members.
12:29 - 12:32
Kaitlyn Kiernan: Where would people go to find this kind of data?
12:32 - 13:02
Brendan Loonam: Yeah, Kaitlyn, it's actually on FINRA.org. If anyone is familiar with the website, under the filing and reporting section, there's a link for market transparency reporting tools, and we have a dedicated link to the OTC Transparency Data product. You can see the relevant rules, the link to the actual data itself, any equity ATS information that we have on there, as well as links to quarterly statistics and other technical notices.
13:02 - 13:05
Kaitlyn Kiernan: And what would you see in the data set?
13:05 - 13:30
Brendan Loonam: Well, it's an aggregate data set, meaning you won't get to see individual transaction data, but you can see the trade and share data aggregated about the firm and individual security level. So if you wanted to see how many trades and shares were executed by a particular ATS during a given week, you would be able to look that up. Also, if you wanted to see how many trades and shares were executed in Microsoft, you would be able to see which firms are trading in the security for a particular time period.
13:31 - 13:34
Kaitlyn Kiernan: And how long has this data been available?
13:34 - 14:06
Brendan Loonam: We actually just passed the 10th anniversary of our first data set publication this year. Back in June of 2014, we first started making ATS aggregate data available. Back then, the market share of the over-the-counter trading and listed stocks was around 30%, and there was a lot of interest in where these trades were being executed. At the time, the only places that you could get this information were from private entities. In particular, Rosenblatt Securities had a great publication called "Let There Be Light" and the Tabb Group had their Liquidity Matrix.
14:06 - 14:58
Brendan Loonam: However, all that data submitted to them was on a volunteer basis, and often they had to use estimates in their own methodologies to sort of cobble together a picture of what was taking place off exchange. With the rule that we passed, there was a new requirement where all ATS had to get a unique MPI ID, which is their market participant identifier, to report their trades to FINRA so that we could isolate the ATS trades. In the beginning, firms were required to submit files of their activity, but we have since transitioned to using the information that gets reported directly to our trade reporting facilities. The great thing about our data set is that there's a rule requirement to report this data to us. So it is validated and we have the whole picture. When we published this data back in June 2014, that was the first time ever that the investing public got to see the whole breadth and depth of ATS reporting and the NMS stocks and over-the-counter equities.
14:58 - 15:14
Kaitlyn Kiernan: Mentioning Rosenblatt and Tabb's offerings brings me back to my job as a journalist before FINRA and looking at those products. So, you mentioned that this data also includes data from member firms. When did that happen?
15:14 - 15:47
Brendan Loonam: Yeah, that's right, Kaitlyn. The data set has evolved over time. We introduced non-ATS member data back in April of 2016. These are all the firms that have a reporting obligation to report trades to our trade reporting facilities but are not ATSs. This was a significant milestone because it finally gave everyone a full picture of what was taking place in the over-the-counter market. If you were just to rely on the consolidated tape, you could see that trades were being reported to the TRFs, but you wouldn't have any visibility into where those trades were actually taking place. If you look at our aggregate data, you are able to see the full picture.
15:47 - 15:51
Kaitlyn Kiernan: And is there any other data that's made available here?
15:51 - 16:21
Brendan Loonam: Yes. We also have NMS block data available on the website for both ATSs and non-ATS member firms. A block trade is traditionally a trade that is either 10,000 shares or $200,000 notional. We capture at the firm level how many block trades are being done by each ATS and member firm on a monthly basis. We also provide aggregate statistics for all of our data sets, so you can see in total how many trades and shares are being executed for each set, and some other interesting data points like average trade size.
16:21 - 16:24
Kaitlyn Kiernan: And is there anything else you think we should know about this data?
16:24 - 17:01
Brendan Loonam: Yeah, a few things. This data is not disseminated in real time. We have delays for these reports depending on the security type. For Tier 1 NMS stocks, there's a two-week delay on the weekly reports. For Tier 2 NMS stocks and OTC equity securities, the weekly reports are on a four week delay. The monthly reports we have for non-ATS member activity and for the NMS block reports are on a one-month delayed basis. And to clarify, Tier 1 NMS stocks are all securities in the S&P 500, the Russell 1000 and select exchange traded products or ETPs. Tier 2 NMS stocks include all other NMS stocks.
17:02 - 17:11
Kaitlyn Kiernan: And I know there's been various delays in different FINRA data offerings that have changed and narrowed over time, but why are there delays in this?
17:12 - 17:50
Brendan Loonam: Well, for this data set, there have always been concerns that the data could be used to reverse engineer trading strategies, or that a member firm could have their position exposed in a thinly traded security that someone could look to take advantage of. The delays help mitigate that. Additionally, we have trade volume thresholds that have to be met before we will identify a firm's activity in the symbol data. If you don't average at least 200 trades a day for the report time period in a security, you won't have direct attribution for your activity, and will instead be added to what we call the de minimis pool. In some thinly traded securities, you might only see activity attributed to a de minimis pool.
17:51 - 17:54
Kaitlyn Kiernan: And is there anything else you'd like to share on this data?
17:54 - 18:28
Brendan Loonam: Yes. As I said this data is available on FINRA.org. And the great news is it's free for all to use. We just ask that if anyone is using the data that that they make sure to properly attribute it to FINRA. We see that the exchanges often reference our data sets when putting out market notes or analysis on off-exchange trading, and the SEC references it in their own rulemaking. We keep 27 weeks worth of reports on the website, and five years worth of downloadable reports. Also, we're always looking to enhance the data and provide greater value to the investing public.
18:28 - 18:59
Brendan Loonam: With that in mind, we intend to file a new rule change that will propose some enhancements to the data. These include adding block data for OTC equities, adding aggregate notional data, moving to a Uniform Time Report dissemination schedule, and adding a couple of new reports, including a weekly NMS report that will combine Tier 1 and Tier 2 NMS activity, as well as a monthly ATS report. Optimistic that we can file before the end of the year and, if approved, we will look to make the changes in the first half of 2025.
19:00 - 19:10
Kaitlyn Kiernan: Thanks for sharing that, Brendan. You mentioned how the SEC and the exchanges use this data. Can you provide any context for how others in our financial landscape use this data?
19:11 - 19:35
Brendan Loonam: We've talked to firms in the past, and everyone's always looking to source liquidity where they can meet their best ex obligations, where they're looking to find out who are the firms that are most active in a particular security. So, we've been told by firms that they look at our data sets, and it sort of validates their routing strategies and their routing tables of where they're sending their order flow.
19:36 - 19:46
Kaitlyn Kiernan: So now both Brendan and Alex, you both mentioned new data offerings coming up. Alex, how does FINRA evaluate these kind of new opportunities?
19:46 - 20:18
Alex Ellenberg: You've heard both some really important points that are common in the data offerings that Brendan discussed and that we had discussed earlier. Really, we see these as nice opportunities to complement the existing regulatory framework, whether that is allowing firms to better meet their duty of best execution, or whether that's allowing the public to evaluate whether those firms are meeting their duty of best execution, or it also provides regulators with more comprehensive information.
20:18 - 21:09
Alex Ellenberg: So, we see these, as I mentioned, as really nice opportunities that leverage our role as a unique, not-or-profit, self-regulatory organization. And we're especially interested in areas where this unique regulatory role allows us to bring important information together, particularly where this means bringing data together more completely than it otherwise is in the markets, and making it more freely available than it currently is to the markets. We also look for opportunities where we can leverage our investor education efforts to complement the publication of this data, and help inform investors and the public about key areas of the markets, and allow investors in the public to make better use of the data that we are providing.
21:09 - 21:17
Kaitlyn Kiernan: And to wrap up, why do you think it's so important for FINRA to make this kind of data freely available?
21:18 - 22:10
Alex Ellenberg: This is important information. And as I mentioned, it is information that either was not comprehensive or was not freely available. This is where we really see a unique role for us, given our role as a not-for-profit SRO. This information adds to transparency in the marketplace. Transparency generally is a hallmark of securities regulation, and more specifically in the areas that we've talked about, transparency is a really key ingredient to making the markets more efficient and fair, and reaching our mission of promoting market integrity and investor protection. Putting this all together, we see these as really nice opportunities where we can help make important information more freely available in service of FINRA's mission.
22:10 - 22:48
Kaitlyn Kiernan:
Great. Thanks, Alex. That’s it for this episode of FINRA Unscripted, and that’s it for my time as host of the podcast. Brendan and Alex, thank you so much for joining me as my last guests. And to the listeners, thank you for listening for the last six-and-a-half years. It has been an absolute privilege to host 150 episodes of this podcast, and to have the opportunity to interview 140 unique guests. While this is the end of FINRA Unscripted for me as I take on a new role at FINRA, the show goes on. We will be taking a pause for the holiday season, but FINRA Unscripted will be back with new hosts and new episodes in the new year. Be sure to subscribe to FINRA Unscripted wherever you listen to podcasts to be notified when new episodes air.
22:58 – 23:06
Kaitlyn Kiernan: Today's episode was produced by Margherita Beale and me, Kaitlyn Kiernan, and edited and engineered by John Williams. Be well.
23:06 – 22:11
Outro Music
23:11 - 23:45
Disclaimer: Please note FINRA podcasts are the sole property of FINRA, and the information provided is for informational and educational purposes only. The content of the podcast does not constitute any FINRA Rule or amendment or interpretation to such rules. Compliance with any recommended conduct presented does not mean that a firm or person has complied with the full extent of their obligations under FINRA Rules, the rules of any other SRO or securities laws. This podcast is provided as is. FINRA and its affiliates are not responsible for any human or mechanical errors or omissions. Parties may not reproduce these podcasts in any form without the express written consent of FINRA.