(New) Disruptive Quoting and Trading Activity

In December 2016, FINRA implemented two new rule changes regarding disruptive quoting and trading activity. The first rule change adopts new Supplementary Material .03 to Rule 5210 (Publication of Transactions and Quotations) to explicitly define and specifically prohibit for purposes of Rule 5210 two types of quoting and trading activity that are deemed to be disruptive. The first type of activity involves a party entering multiple limit orders on one side of the market that changes the level of supply and demand for the security, entering one or more orders on the opposite side of the market that are subsequently executed, and, following the execution, canceling the original limit orders. The second type of activity consists of a party placing an order inside the national best bid and offer, and then submitting an order on the opposite side of the market to execute against another market participant that joined the new inside market.

The second rule change amends the FINRA procedural rules regarding temporary cease and desist orders (TCDOs), found in the Rule 9800 Series, to create a process for FINRA to issue, on an expedited basis, a permanent cease and desist order against a respondent that engages in a frequent pattern or practice of the disruptive quoting and trading activity in Supplementary Material .03 to Rule 5210.

FINRA Regulatory Notice 17-22 (June 2017): FINRA Adopts Rules on Disruptive Quoting and Trading Activity and Expedited Proceedings


SEC Adopts T+2 Settlement Cycle for Securities Transactions

On March 22, 2017, the SEC adopted an amendment to Rule 15c6-1(a) under the Securities Exchange Act of 1934 to shorten by one business day the standard settlement cycle for most broker-dealer securities transactions from three business days after the trade date (T+3), to two business days after the trade date (T+2). September 5, 2017 is the compliance date by which the transition to a T+2 settlement cycle should be completed.

Securities Transaction Settlement Cycle, Securities Exchange Act Release No. 34-80295 (March 22, 2017), 82 FR 15564 (March 29, 2017)


Shortening the Settlement Cycle for Securities to T+2

On February 9, 2017, the SEC approved amendments to FINRA rules to conform to the SEC’s amendment to Rule 15c6-1(a) under the Securities Exchange Act of 1934 to shorten the standard settlement cycle for most broker-dealer transactions from three business days after the trade date (T+3) to two business days after the trade date (T+2) and the industry-led initiative to shorten the settlement cycle from T+3 to T+2. The amendments become effective on September 5, 2017.

FINRA Regulatory Notice 17-19 (May 2017):  SEC Approves Amendments to FINRA Rules to Conform to the Shortened Standard Settlement Cycle for Most Broker-Dealer Transactions From Three Business Days (T+3) to Two Business Days After the Trade Date (T+2)


(New) Clarification of Application of Rule 11140 in Connection With T+2

The SEC approved FINRA’s proposal to address the application of Rule 11140 (Transactions in Securities ‘‘Ex-Dividend,’’ ‘‘Ex-Rights’’ or ‘‘Ex-Warrants’’) as it relates to establishing ex-dividend dates in connection with the implementation of the T+2 settlement cycle on September 5, 2017. To mitigate the potential confusion that may result concerning proper settlement during the transition period, September 5, 2017 should not be designated as an ex-dividend date.

Securities Exchange Action Release No. 81448 (August 21, 2017), 82 FR 40610 (August 25, 2017): Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Clarify Application of FINRA Rule 11140 (Transactions in Securities ‘‘Ex-Dividend,’’ ‘‘Ex-rights’’ or ‘‘Ex-Warrants’’) in Connection With the Implementation of the Shortened Settlement Cycle (T+2) on September 5, 2017


Regulation T And SEA Rule 15c3-3 Extension Of Time Requests Under A T+2 Settlement Cycle

FINRA is updating the Regulatory Extension (REX) system to enable firms to file extension of time requests under a shortened settlement cycle. The SEC has amended Rule 15c6-1(a) under the Securities Exchange Act of 1934 to shorten the standard settlement cycle for most broker-dealer transactions from T+3 to T+2.  Firms may file such requests beginning September 11, 2017, via the batch file process and by completing the currently available online request form that is accessible by logging in to the REX system via the FINRA Firm Gateway.

FINRA Regulatory Notice 17-12 (April 2017):  Regulation T and SEA Rule 15c3-3 Extension of Time Requests under a T+2 Settlement Cycle


Stop Orders

FINRA encourages firms to review their practices regarding stop (or stoploss) orders, with an emphasis on educating investors regarding the risks and benefits of stop orders and special considerations around the use of stop orders during volatile market conditions. To accomplish this, firms should consider, among other things, providing targeted training to registered representatives regarding the risks associated with stop orders and, where appropriate, making alternative recommendations to meet customer objectives. Firms that allow customers to enter stop orders directly online should ensure that they prominently provide clear and comprehensive disclosures to customers at the time of order entry. Firms should also consider implementing systemic safeguards around the use of stop orders.

FINRA Regulatory Notice 16-19 (May 2016):  FINRA Issues Guidance Regarding the Use of Stop
Orders During Volatile Market Conditions


Best Execution Rule

In light of the increasingly automated market for equity securities and standardized options, and recent advances in trading technology and communications in the fixed income markets, FINRA reiterates the best execution obligations that apply when firms receive, handle, route or execute customer orders in equities, options and fixed income securities. FINRA reminds firms of their obligations, as previously articulated by the SEC and FINRA, to regularly and rigorously examine execution quality likely to be obtained from the different markets trading a security.

• FINRA Regulatory Notice 15-46 (November 2015):  Guidance on Best Execution Obligations in Equity, Options and Fixed Income Markets


SEC Issued an Order Approving the National Market System (NMS) Plan to Implement a Tick Size Pilot Program by the National Securities Exchanges and FINRA

On May 6, 2015, the SEC issued an order approving the NMS Plan to implement a Tick Size Pilot Program by the National Securities Exchanges and FINRA. The order approved the NMS Plan for a two-year period and will officially commence on October 3, 2016. The Tick Size Pilot is a data-driven test to evaluate whether or not widening the tick size for securities of smaller capitalization companies would impact trading, liquidity and market quality of those securities. The pilot will consist of a control group and three test groups, with each test group having approximately 400 securities.

• Visit FINRA Tick Size Pilot Program for more information


Limit Up/Limit Down Plan Program

On May 31, 2012, the SEC approved the NMS Plan to Address Extraordinary Market Volatility (Plan), which was filed by FINRA and the other self-regulatory organizations and is designed to address the type of sudden price movements that the market experienced on the afternoon of May 6, 2010. The Plan provides for a market-wide limit up and limit down (LULD) mechanism to prevent trades in NMS stocks from occurring outside of specified price bands, coupled with trading pauses to accommodate more fundamental price moves. The Plan is designed, among other things, to protect investors and promote fair and orderly markets. 

• FINRA Alert on Limit Up/Limit Down (LULD) Plan

FINRA Regulatory Notice 16-26 (July 2016):  FINRA Adopts Amendments Relating to the Regulation NMS Plans to Address Extraordinary Market Volitality

• FINRA Regulatory Notice 13-12 (March 2013):  FINRA Adopts Amendments Relating to Regulation NMS Plan to Address Extraordinary Market Volatility

• FINRA has published two charts to assist members in identifying the types of transactions that are excluded from the price bands under the LULD Plan and FAQs to provide guidance on LULD


Equity Trading Initiatives:  Supervision and Control Practices for Algorithmic Trading Strategies

As algorithmic trading strategies, including high frequency trading strategies, have grown to compose a substantial portion of activity on U.S. securities markets, the potential for these strategies to adversely impact market and firm stability has likewise grown. Although a reasonable supervision and control program may not foresee every potential failure or prevent every undesirable consequence, in an effort to reduce the future occurrence of such potential issues, FINRA is providing guidance on effective supervision and control practices for member firms and market participants that use algorithmic strategies. These effective practices are focused on five general areas: General Risk Assessment and Response; Software/Code Development and Implementation; Software Testing and System Validation; Trading Systems; and Compliance.

FINRA Regulatory Notice 15-09 (March 2015):  Guidance on Effective Supervision and Control Practices for Firms Engaging in Algorithmic Trading Strategies