81 FR 9550 - Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Reduce the Synchronization Tolerance for Computer Clocks That Are Used To Record Events in NMS Securities and OTC Equity Securities
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 81, Issue 37 (February 25, 2016)
Federal Register Volume 81, Issue 37 (February 25, 2016)
| Page Range | 9550-9555 | |
| FR Document | 2016-03960 |
[Federal Register Volume 81, Number 37 (Thursday, February 25, 2016)] [Notices] [Pages 9550-9555] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2016-03960] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-77196; File No. SR-FINRA-2016-005] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Reduce the Synchronization Tolerance for Computer Clocks That Are Used To Record Events in NMS Securities and OTC Equity Securities February 19, 2016. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that on February 9, 2016, Financial Industry Regulatory Authority, Inc. (``FINRA'') filed with the Securities and Exchange Commission (``SEC'' or ``Commission'') the proposed rule change as described in Items I, II, and III below, which Items have been prepared by FINRA. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change FINRA is proposing to reduce the synchronization tolerance for members' computer clocks that are used to record events in NMS securities, including standardized options, and OTC Equity Securities. This proposal would not change the current clock synchronization requirement for members' mechanical time stamping devices or computer clocks that are used to record events for securities other than NMS securities or OTC Equity Securities. The text of the proposed rule change is available on FINRA's Web site at http://www.finra.org, at the principal office of FINRA, on the Commission's Web site at http://www.sec.gov, and at the Commission's Public Reference Room. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, FINRA included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. FINRA has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Current FINRA rules require that firms synchronize their business clocks in conformity with procedures prescribed by FINRA. Specifically, FINRA Rule 7430 requires that firms synchronize their business clocks that are used for purposes of recording the date and time of any event that must be recorded pursuant to the FINRA By-Laws or other FINRA rules (e.g., the time a trade was executed or the time an order was received or routed), with reference to a time source as designated by FINRA. As specified in the current OATS technical specifications, all computer system clocks and mechanical time stamping devices must be synchronized to within one second of the NIST atomic clock.\3\ To maintain clock synchronization, clocks should be checked against the NIST atomic clock and re-synchronized, if necessary, at pre-determined intervals throughout the day.\4\ FINRA understands that currently, some firms synchronize their clocks continuously throughout the day, while others do so at various times during the day and still others do so only once a day.\5\ --------------------------------------------------------------------------- \3\ Any time provider may be used for synchronization; however, all clocks and time stamping devices must remain accurate within a one-second tolerance of the NIST clock. This tolerance includes (1) the difference between the NIST standard and a time provider's clock, (2) transmission delay from the source and (3) the amount of drift of the member firm's clock. The OATS technical specifications further specify that computer system and mechanical clocks must be synchronized every business day before market open to ensure that recorded order event timestamps are accurate. \4\ The OATS technical specifications also provide that member firms must document and maintain their clock synchronization procedures. In addition, the technical specifications state that member firms should keep a log of the times when they synchronize their clocks and the results of the synchronization process, including notice of any time a member's clock drifts more than the one second standard. The technical specifications further provide that such logs should be maintained for the period of time and accessibility specified in SEC Rule 17a-4(b), and maintained and preserved for the required time period in paper format or in a format permitted under SEC Rule 17a-4(f). \5\ FINRA generally believes that the firms that synchronize once daily are firms that accept manual orders. --------------------------------------------------------------------------- Given the increasing speed of trading in today's automated markets, FINRA believes the current one second tolerance is no longer appropriate for computer system clocks recording [[Page 9551]] events in NMS securities \6\ and OTC Equity Securities \7\ under FINRA rules. Automated systems have evolved to the point where order placement and trading decisions in these asset classes are made on a millisecond basis, if not finer. Moreover, in many cases firms report events to FINRA's equity trade reporting and audit trail facilities in milliseconds.\8\ --------------------------------------------------------------------------- \6\ The term ``NMS security'' is defined in Rule 600 of Regulation NMS to mean ``any security or class of securities for which transaction reports are collected, processed and made available pursuant to an effective transaction reporting plan, or an effective national market system plan for reporting transactions in listed options. 17 CFR 242.600(b)(46). As Commission staff has noted, the term NMS security generally ``refers to exchange-listed equity securities and standardized options, but does not include exchange-listed debt securities, securities futures, or open-end mutual funds, which are not currently reported pursuant to an effective transaction reporting plan.'' See Division of Trading and Markets Staff's Responses to Frequently Asked Questions Concerning Large Trader Reporting, question 1.1, available at https://www.sec.gov/divisions/marketreg/large-trader-faqs.htm. \7\ The term ``OTC Equity Security'' is defined in FINRA Rule 6420(f) to mean ``any equity security that is not an `NMS stock' as that term is defined in Rule 600(b)(47) of Regulation NMS; provided, however, that the term `OTC Equity Security' shall not include any Restricted Equity Security.'' \8\ See Securities Exchange Act Release No. 71623 (February 27, 2014), 79 FR 12558 (March 4, 2014) (order approving SR-FINRA-2014- 050, FINRA's proposal to require firms to report order and trade information to the FINRA TRFs, ADF, ORF, and OATS in milliseconds, if the firms' systems capture time in milliseconds). See also Regulatory Notice 14-21 (May 2014) (announcing the effective date of millisecond reporting changes); Regulatory Notice 14-47 (November 2014) at page 7, n. 7 (describing the extended implementation schedule for millisecond reporting changes). --------------------------------------------------------------------------- Accordingly, FINRA is proposing to tighten the synchronization requirement for computer system clocks that record events in NMS securities and OTC Equity Securities. The proposal would reduce the drift tolerance for computer clocks that record events in these securities from one second to 50 milliseconds. The proposal would not change the current one second standard for securities other than NMS securities or OTC Equity Securities and would not change the current one second standard for events recorded by mechanical clocks or time stamping devices, as opposed to computer clocks. As a technical matter, the proposal would codify the existing OATS technical specifications cited above, along with the new proposed 50 millisecond standard, in FINRA's Rule 4500 Series (Books, Records and Reports). The purpose of this technical change is to relocate the clock synchronization requirements from OATS rules to a rule set where it is clear the requirements apply to the recording of the date and time of any event that must be recorded under FINRA By-Laws or rules. As noted above, under a combination of Rule 7430 and the OATS technical specifications, the current one second synchronization standard already applies to the recording of the date and time of any event that must be recorded under FINRA By-Laws or rules. Under this proposal, FINRA would consolidate and codify the clock synchronization requirements in new Rule 4590 for clarity and ease of reference. This consolidation would include the current provision in the OATS technical specifications that conveys guidance on recordkeeping to demonstrate compliance with the synchronization standard, which would be codified without material change as Supplementary Material .01 to Rule 4590. In arriving at this proposal, FINRA solicited and received feedback from its industry advisory committees, as well as through a public request for comment. After thoroughly evaluating all of the feedback received, FINRA has determined that the proposed 50 millisecond standard is the best approach given existing technology and FINRA's regulatory needs. In addition, as described in more detail below, FINRA further determined that it should proceed with the proposal now, rather than wait for approval and implementation of the clock synchronization requirements proposed in the National Market System Plan governing the Consolidated Audit Trail (``CAT NMS Plan'').\9\ --------------------------------------------------------------------------- \9\ The CAT NMS Plan, which was submitted by the national securities exchanges and FINRA on February 27, 2015, is available at catnmsplan.com. --------------------------------------------------------------------------- As an initial step, FINRA staff solicited industry input from several of its industry advisory committees prior to publishing the proposal for comment in a Regulatory Notice. These committees were generally supportive. To the extent the committees raised concerns, they focused on the proposal's potential impact on small firms, particularly firms that do not rely on highly automated systems. In response to these concerns, and similar concerns raised in the comment letters discussed below, FINRA modified the proposal to allow for phased implementation which would grant less automated firms up to 18 months to comply with the proposed 50 millisecond standard. In addition, the proposal retains the current one second standard for events recorded by mechanical clocks or time stamping devices, which FINRA believes are more likely to be used by small firms. Next, in November 2014, FINRA published Regulatory Notice 14-47 to request written comments on the proposal. FINRA received eight comment letters in response.\10\ In general, five of the eight commenters supported tightening current clock synchronization requirements, at least to some extent.\11\ Two of the eight commenters opposed the proposal to some extent, questioning either the proposed 50 millisecond standard or the need for FINRA to amend its clock synchronization requirement at this time, before the CAT NMS Plan is approved and implemented.\12\ --------------------------------------------------------------------------- \10\ See Letters from Crews & Associates, January 5, 2015 (``Crews Letter''); FSMLabs, dated January 7, 2015 (``FSMLabs Letter''); Quincy Data, LLC, dated January 9, 2015 (``Quincy Data Letter''); Wiley Bros. Aintree Capital, dated January 9, 2015 (``Wiley Bros. Aintree Capital Letter''); IEX Services LLC, February 12, 2015 (``IEX Letter''); Financial Information Forum, dated February 20, 2015 (``FIF Letter''); Sync-n-Scale, dated February 20, 2015 (``Sync-n-Scale Letter''); and KOR Group LLC, dated February 20, 2015 (``KOR Letter''). \11\ See FSMLabs Letter, Quincy Data Letter, IEX Letter, Sync-n- Scale Letter, and KOR Letter. \12\ See Crews Letter and FIF Letter. --------------------------------------------------------------------------- Of the five commenters that supported tightening clock synchronization requirements at least to some extent, all agreed that a millisecond standard is necessary given the speed of trading in today's markets. For example, according to FSMLabs, FINRA's proposal is ``timely and necessary'' because ``[w]ide use of electronic trading systems and proliferation of trading venues make it impossible to understand market operation or to manage risks without precise and reliable time information.'' \13\ Similarly, IEX stated its belief that ``the proposal represents an important and beneficial advance over the current [one second] standard.'' \14\ --------------------------------------------------------------------------- \13\ See FSMLabs Letter at 6-7. \14\ See IEX Letter at 2. --------------------------------------------------------------------------- The commenters that supported the proposal generally took the view that the proposed 50 millisecond standard would not be overly burdensome to adopt, even for smaller firms. FSMLabs stated that a 50 millisecond standard ``can be met with low cost off-the-shelf software only.'' \15\ According to KOR, ``the technology to perform such high- resolution synchronization is low-cost and has been available for years.'' \16\ Sync-n-Scale took the view that the proposed 50 millisecond standard ``is highly likely not an onerous imposition on market participants in any of the relevant dimensions: financially, technologically and operationally.'' \17\ --------------------------------------------------------------------------- \15\ See FSMLabs Letter at 1. \16\ See KOR Letter at 2. \17\ See Sync-n-Scale Letter at 1. --------------------------------------------------------------------------- Several of these commenters proposed tightening the clock synchronization standard even further, to below 50 [[Page 9552]] milliseconds. For example, FSMLabs said that a one millisecond standard would not impose significant additional costs, while even a one microsecond standard could be practical with low-cost off-the-shelf technology.\18\ KOR agreed that reducing the standard to one millisecond ``would not impose significant additional costs to market participants over a 50 millisecond requirement.'' \19\ And according to IEX, ``the permitted variance could be further reduced consistent with the systems capabilities of most member firms.'' \20\ --------------------------------------------------------------------------- \18\ See FSMLabs Letter at 1. \19\ See KOR Letter at 2. \20\ See IEX Letter at 2. Additionally, another commenter submitted its own proposal, which it said could ``replace CAT requirements.'' Under this commenter's proposal, all matching engines would be time synchronized to an accuracy that is within 10 microseconds of the global time standard, and manual trades would be time stamped within an accuracy of 1 minute. See Quincy Data Letter at 1. --------------------------------------------------------------------------- Two commenters took different views and opposed the proposal. Crews & Associates stated that any standard less than 200 milliseconds is not feasible at any cost, based on the time it takes to receive data packets with updated time information from NIST servers.\21\ The Financial Information Forum (``FIF''), which conducted an industry survey on current synchronization practices and the anticipated costs of tighter synchronization standards, did not take issue with the proposed 50 millisecond standard itself. In fact, FIF supported a 50 millisecond standard; however, FIF suggested that FINRA ``work through the CAT NMS Plan process to achieve [its] clock synchronization objectives and avoid redundant, and potentially conflicting, rule- making.'' \22\ --------------------------------------------------------------------------- \21\ See Crews & Associates Letter at 1. \22\ See FIF Letter at 3. As noted elsewhere in this filing, FIF cautioned that its survey did not necessarily reflect small firms, which it thought would be more likely to have trouble meeting the proposed clock synchronization standard. --------------------------------------------------------------------------- Finally, several of the commenters argued that FINRA should consider different standards for different types of market participants. KOR suggested that highly automated firms--i.e., firms that co-locate their equipment at an exchange datacenter or in a data center with modern clock synchronization technology--should be held to a one millisecond standard, while all other firms should be subject to a 50 millisecond standard.\23\ Crews & Associates said that there should be a separate rule for firms that engage in high frequency trading, although this commenter did not offer a detailed recommendation on how the standards should differ for firms that do and do not engage in HFT.\24\ --------------------------------------------------------------------------- \23\ See KOR Letter at 2. \24\ See Crews & Associates Letter at 2. --------------------------------------------------------------------------- FINRA carefully considered the committee views and written comments. After analyzing this feedback, FINRA believes it is necessary and appropriate to proceed with the proposed 50 millisecond standard for NMS securities and OTC Equity Securities, with a phased implementation that allows less automated firms more time to adjust their systems. FINRA believes that 50 milliseconds is the right standard at this time, given prevailing technology for trading systems and clock synchronization, because it strikes an acceptable balance between audit trail integrity and the costs of compliance. FINRA also believes it is important to apply the same standard to all computer- recorded events, regardless of firm size or activity type. Audit trail integrity relies on the ability to accurately sequence events for a given period of time, including events generated by firms that do not engage in HFT.\25\ --------------------------------------------------------------------------- \25\ While FINRA does not believe it is practicable to adopt different standards for firms that engage in HFT and those that do not, as some commenters suggested, it is proposing to provide less automated firms with more time to adjust their systems to the new proposed standard, as discussed more below. --------------------------------------------------------------------------- FINRA's decision to pursue the proposed 50 millisecond standard is informed in part by the CAT NMS Plan filed in February, 2015. The CAT NMS Plan was required by SEC Rule 613, which directed FINRA and the national securities exchanges to submit a national market system plan to govern the creation, implementation, and maintenance of a consolidated audit trail and central repository.\26\ Rule 613 further contains specific provisions that require the CAT NMS Plan to adopt a clock synchronization standard ``consistent with industry standards.'' \27\ Guided by these provisions, the CAT NMS Plan contains detailed discussion of current clock synchronization practices, as well as the potential costs that broker-dealers would incur under various synchronization standards ranging from 1 second to 100 microseconds.\28\ As part of its cost analysis, the CAT NMS Plan refers to the same FIF survey that accompanied the FIF's comment letter to FINRA on this proposal.\29\ --------------------------------------------------------------------------- \26\ 17 C.F.R Sec. 242.613(a). \27\ 17 CFR Sec. 242.613(d)(1). \28\ See CAT NMS Plan, available at catnmsplan.com, at Appendix C-125. \29\ See CAT NMS Plan at Appendix C-125 to C-126 (citing the FIF Clock Offset Survey, which FIF also attached to its comment letter on this proposal). --------------------------------------------------------------------------- Ultimately, the CAT NMS Plan concluded ``that a clock offset of 50ms represents an aggressive, but achievable, industry standard.'' \30\ FINRA agrees that, at present, while a 50 millisecond standard may impose some costs on firms, it is nevertheless achievable with existing technology, and that it would allow FINRA significantly greater regulatory and surveillance capabilities. Moreover, FINRA recognizes that proposing a standard different from the CAT NMS Plan could create additional and potentially burdensome costs for firms.\31\ --------------------------------------------------------------------------- \30\ See id. \31\ The FIF comment letter supported the view that FINRA should not adopt a standard that is different from what was proposed in the CAT NMS Plan, even if that standard were more lenient and less costly to implement now than the CAT NMS Plan standard. See FIF Letter at 2 (noting that respondents to the FIF Clock Offset Survey ``questioned the benefits of an interim tolerance citing that any changes to the current clock offset would require modifications to systems and processes''). --------------------------------------------------------------------------- But while FINRA believes it is appropriate to propose the same 50 millisecond clock synchronization standard advanced by the CAT NMS Plan, FINRA does not agree with the comment that FINRA should forego this proposal and wait for the CAT NMS Plan to become effective. It may be some time before the clock synchronization requirements of the CAT NMS Plan take effect.\32\ Meanwhile, as the Commission has recognized, a sub-one second clock synchronization standard is an important element of market data reliability.\33\ And FINRA, as a national securities association, relies on the accuracy of market data to fulfill its regulatory obligations. Accordingly, FINRA believes it has a current need to tighten the clock synchronization standard for events that must be recorded pursuant to the FINRA By-Laws or other FINRA rules. --------------------------------------------------------------------------- \32\ The CAT NMS Plan was filed pursuant to Rule 608 of Regulation NMS, which provides the general procedure for national market system plans. Under Rule 608(b)(2), the Commission has 120 days from the date it publishes a national market system plan, or up to 180 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or as to which the sponsors of the plan consent, to approve the plan, with such changes or subject to such conditions as the Commission may deem necessary or appropriate. As proposed, the CAT NMS Plan would become effective upon approval by the Commission and execution by all of the participants that submitted the plan (see CAT NMS Plan, Section 2.1), and the clock synchronization requirements would apply within four months of the effective date (see CAT NMS Plan, Section 6.7(a)(ii)). \33\ See Securities Exchange Act Release No. 67457 (July 17, 2012), 77 FR 45722, 45774 (August 1, 2012) (``Consolidated Audit Trail Adopting Release'') (``The Commission believes that the current industry standard for conducting securities business is more rigorous than one second.''). --------------------------------------------------------------------------- FINRA acknowledges that a tightened clock synchronization standard could impose costs, particularly on small or [[Page 9553]] less automated firms. As a result, FINRA has revised the proposal in response to comments in two ways, in order to minimize the burden associated with the proposed rule and ease implementation. First, FINRA has narrowed the scope of the proposal so that the 50 millisecond standard proposed in this filing would apply only to NMS securities and OTC Equity Securities, and not to fixed income securities. FINRA believes this modification is warranted because fixed income products generally are not traded with the same level of automation as equity or option securities. Moreover, the revised scope would parallel the current scope of the CAT NMS Plan, which, as filed, would apply to NMS securities and OTC Equity Securities, but not debt securities.\34\ FINRA notes that the CAT NMS Plan contemplates whether debt securities may become subject to CAT reporting in the future, and FINRA will continue to consider the appropriate clock synchronization standard for systems that record events in debt securities. --------------------------------------------------------------------------- \34\ See, e.g., CAT NMS Plan at Appendix C-127 (discussing the Plan's applicability to OTC Equity Securities in addition to NMS securities, and whether debt securities may be subject to the CAT NMS Plan in the future). Because the scope of this proposal would align with the scope of the current proposed CAT NMS Plan, FINRA believes that costs incurred by firms to meet the proposed FINRA clock synchronization standard would support the changes needed to meet any future requirement imposed under CAT and, therefore, should not result in duplicative efforts. --------------------------------------------------------------------------- FINRA proposes to adopt a phased implementation for the proposed 50 millisecond standard. If the Commission approves the filing, FINRA will announce the effective date of the proposed rule change in a Regulatory Notice to be published no later than 90 days following Commission approval. FINRA would then require firms with systems that capture time in milliseconds to comply with the new 50 millisecond standard within six months of the effective date; remaining firms that do not have systems which capture time in milliseconds would have 18 months from the effective date to comply with the 50 millisecond standard.\35\ --------------------------------------------------------------------------- \35\ FINRA recognizes that a phased implementation does not necessarily on its own reduce the costs of the proposal. However, a phased implementation could allow firms, particularly smaller or less automated firms, a greater time period over which they can identify and implement the most cost effective clock synchronization solution that meets the standard required by this proposal. FINRA notes that the FIF Clock Offset Survey recommended a delayed implementation and noted that ``[w]hile additional time may not reduce costs, it may ease implementation as firms manage this effort in conjunction with other compliance initiatives.'' See FIF Letter and attached FIF Clock Offset Survey. --------------------------------------------------------------------------- 2. Statutory Basis FINRA believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act,\36\ which requires, among other things, that FINRA rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. FINRA believes that the proposed rule change will bolster FINRA's ability to meet its regulatory obligations as a national securities association. As the Commission has noted, time drift away from a universal, synchronized standard is an important issue to address to enhance the integrity of audit trail data.\37\ FINRA therefore believes it is important to pursue a 50 millisecond standard at this time, for the reasons explained above, so that it can compile more accurate audit trail data and conduct surveillance with more precise time-sequenced data. By doing so, the proposal would facilitate FINRA's efforts to detect and prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. --------------------------------------------------------------------------- \36\ 15 U.S.C. 78o-3(b)(6). \37\ See Consolidated Audit Trail Adopting Release, 77 FR at 45774. --------------------------------------------------------------------------- B. Self-Regulatory Organization's Statement on Burden on Competition FINRA does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. FINRA has undertaken an economic impact assessment, as set forth below, to analyze the regulatory need for the proposed rule change, its potential economic impacts, including anticipated costs and benefits, and the alternatives FINRA considered in assessing how to best meet its regulatory objectives. Economic Impact Assessment A. Regulatory Need FINRA's current rules require members to synchronize their business clocks to within one second of the NIST atomic clock. Considering the speed of trading in today's automated equity and options markets, FINRA believes that the current one second tolerance is no longer appropriate for computer system clocks recording time for events in these securities under FINRA rules. For example, the wide use of automated trading systems entails order placement and trading decisions made on a millisecond, or finer, basis. In such a fast-paced environment, the one second tolerance is insufficient for audit trail and surveillance purposes. Accordingly, FINRA is proposing a tighter synchronization standard for NMS securities and OTC Equity Securities that will give FINRA the capability to better determine the order in which reportable events occur, thereby bolstering its surveillance of the markets and enhancing investor protection. B. Economic Impacts The proposed rule change would impact member firms that receive or route orders or execute trades directly in NMS securities and OTC Equity Securities. As a baseline, FINRA estimates that there are approximately 1,720 firms that would be subject to the proposal.\38\ These firms would be required to synchronize their computer clocks that are used to record applicable events in equity and options securities to within 50 millisecond of the NIST atomic clock. --------------------------------------------------------------------------- \38\ This baseline estimate is intended to capture the total number of firms that received orders in any security subject to OATS reporting, as reflected by the number of unique routing firm market participant identifiers from a recent calendar quarter. --------------------------------------------------------------------------- FINRA understands that some firms already synchronize their computer clocks within 50 milliseconds, and as a result, will not experience any material direct economic impacts as a result of this rule. Additionally, the proposed rule change would not alter the current clock synchronization requirement for members' mechanical time stamping devices. As a result, members solely using mechanical time stamping would not be impacted. Based on FINRA staff's experience, FINRA estimates that only a small fraction of firms use mechanical time stamping devices for trading in NMS securities and OTC Equity Securities. The proposal would be implemented in phases that would allow less automated firms more time to comply with the 50 millisecond clock synchronization standard. Specifically, FINRA would require firms with systems that capture time in milliseconds to comply with the new 50 millisecond standard within six months of the effective date. Of firms that report to OATS, FINRA estimates that there are 736 firms that report some or all of their order events in milliseconds, accounting for 76 percent of OATS-reporting firms and 95 percent of OATS reportable order events (ROE). FINRA further estimates that there are roughly 237 less automated OATS-reporting firms, [[Page 9554]] accounting for 24 percent of OATS-reporting firms and five percent of ROE, that are not currently reporting order events in milliseconds; these firms would have 18 months from the effective date to comply with the proposed standard. For the remainder of firms that would be subject to the proposal but do not currently report to OATS, FINRA believes that the majority rely on systems provided by their clearing firm or are not likely to have systems that capture time in milliseconds, and they would therefore also have 18 months to comply. (i) Anticipated Benefits The proposed rule change would allow FINRA to more accurately determine, with respect to NMS securities and OTC Equity Securities, the sequence of order, quote and trade events across market participants and market centers. By doing so, the proposal would improve FINRA's surveillance program, and as a result, support FINRA's compliance with its regulatory obligations set forth in Section 15A(b)(6) of the Act. In particular, the proposal would enhance FINRA's ability to monitor for manipulative trading practices, including spoofing or layering, and to evaluate best execution and compliance with SEC Regulation NMS, among other things. For example, potentially manipulative trading practices often involve large numbers of orders placed in short periods of time, such that more granular and precise order event sequencing would enhance FINRA's market surveillance abilities. As a result, the proposal would facilitate FINRA's efforts to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and to protect investors and the public interest. (ii) Anticipated Costs Member firms that receive or route orders or execute trades directly in NMS securities and OTC Equity Securities would likely incur costs associated with updating their systems and procedures to comply with a tightened clock synchronization standard. These costs may include costs to develop and maintain software programs that allow and monitor for synchronization within 50 milliseconds. FINRA notes that there are third party software products that could help firms maintain the proposed 50 millisecond standard. Firms may find these software products to be more cost effective than developing and maintaining their own programs. Some firms may also need to update their technology hardware, including servers and event logging platforms, or implement other networking enhancements to achieve the 50 millisecond drift standard. These costs will likely vary across firms depending on their current technology systems and procedures, their business models and the frequency with which they synchronize their clocks, as well as their current drift standards. FINRA's analysis of current practices and potential costs is informed in part by the industry survey that FIF performed and submitted along with its comment on this proposal. The FIF Clock Offset Survey, which is discussed in detail in the CAT NMS Plan, collected information on existing synchronization systems, current clock management costs, and anticipated costs of meeting tighter synchronization standards from 28 firms, including 23 broker-dealers and 5 service bureaus.\39\ The survey found that 39% of responding firms do not already synchronize their clocks to at least a 50 millisecond standard, suggesting that many firms may already have the capacity to meet the proposed standard. --------------------------------------------------------------------------- \39\ See FIF Letter and attached FIF Clock Offset Survey. FINRA notes that the respondents primarily comprised of firms with a significant amount of reportable order events (ROE) in OATS. For example, 64% of the respondents reported 3 million or more ROE/ month. Smaller firms with low ROE/month tiers did not generally respond to the survey. As a result, these survey results may not be representative of the views of smaller firms with less trading activity. The FIF survey notes that an effort is underway to solicit feedback from smaller firms. See the attached FIF Clock Offset Survey. --------------------------------------------------------------------------- The FIF survey estimates an average cost of adopting a 50 millisecond standard would be roughly $550,000 per firm.\40\ FINRA notes, however, that the FIF survey seems to estimate the costs of implementing a synchronization standard with the assumption that synchronization logs would be required to be maintained for more than three years.\41\ Since this FINRA proposal would require synchronization logs to be stored for only three years, FINRA believes the FIF cost estimate may overstate the implementation costs of this aspect of the proposal. FINRA notes further that the FIF survey estimates did not include data from smaller firms and therefore may not be informative as to what small firm implementation costs may be. --------------------------------------------------------------------------- \40\ See id. \41\ See id. at Survey page 12 (noting survey respondent comments about the costs of implementing larger storage requirements to log synchronization events) and 23 (recommending a requirement to log only exceptions for a period of three years to reduce costs). --------------------------------------------------------------------------- Implementation costs would likely vary across firms based on their current clock synchronization systems and procedures, their business models and trading activity. Firms that already synchronize their clocks to the 50 millisecond standard would likely incur much lower implementation costs, whereas other firms with less tight synchronization standards may incur relatively higher costs. As noted above, FINRA is aware of third party clock synchronization software products that could help firms, in particular smaller firms, reduce costs relative to developing and maintaining their own programs. The survey results indicate that the average annual costs of maintaining a 50 millisecond standard are anticipated to be approximately $313,000 per firm and this represents a 31% increase over current annual clock management costs. Based on these survey results, FINRA estimates current annual clock management costs to be approximately $239,000 per firm. Hence the anticipated increase in the annual cost from the current standard to the proposed 50 millisecond synchronization standard is expected to be approximately $74,000 per firm. FINRA notes again, however, that to the extent the FIF survey assumed a more than 3 year log retention period, its maintenance cost estimates may be greater than the maintenance costs of this proposal, which requires that synchronization logs be retained for three years. According to the FIF survey, implementation and maintenance costs would increase significantly for synchronization standards below 50 milliseconds. For instance, survey respondents indicated that a 1 millisecond standard, recommended by some of the commenters on this proposal, would cost over $1.1 million to implement and more than $530,000 to annually maintain.\42\ --------------------------------------------------------------------------- \42\ See id. --------------------------------------------------------------------------- Based on its evaluation of the FIF Clock Offset Survey, as well as the CAT NMS Plan's economic analysis of potential clock synchronization requirements, FINRA believes that a 50 millisecond standard is the best achievable standard at this time. Furthermore, to minimize undue cost burdens, particularly for small or less automated firms, FINRA modified the proposal as described above--specifically, FINRA narrowed the scope of the proposal to apply only to NMS securities and OTC Equity Securities, and FINRA is proposing a phased implementation that would allow less automated firms up to 18 months to come into compliance. In addition, [[Page 9555]] FINRA notes that the scope of this proposal would align with the scope of the CAT NMS Plan that has been filed with the Commission. As such, in the presence of an adopted CAT NMS plan, the costs associated with this proposal are only associated with the timing of the obligation to meet the proposed clock synchronization standard. Accordingly, FINRA believes that costs incurred by firms to meet the proposed FINRA clock synchronization would support the changes needed to meet any future requirement imposed under CAT and therefore, should not result in duplicative efforts. C. Alternatives In considering how to best meet its regulatory objectives, FINRA considered several alternatives to particular features of this proposed rule change. For example, FINRA considered whether to impose less costly 100 or 200 millisecond standards. For the reasons referenced in part above, FINRA chose not to pursue these alternatives. FINRA's decision not to pursue these alternatives is based in part on its own observations. The range of variance among market participants' clocks may be up to twice the permitted synchronization standard; for example, one participant's clocks may drift ahead of the NIST clock by 50 milliseconds, while another's may drift behind by 50 milliseconds, meaning their clocks would be 100 milliseconds apart. FINRA studied OATS data for a single trading day and found a large number of events that occur within any single 100 millisecond window of time. However, FINRA observed that the number of events within 200 or 400 millisecond windows--twice the possible alternative 100 and 200 millisecond standards--increased significantly. Departing from the 50 millisecond standard would therefore cause significantly greater numbers of events to be recorded with less certainty and accuracy. In addition, FINRA notes that the FIF Clock Offset Survey supported the proposed 50 millisecond standard, as opposed to a 100 or 200 millisecond standard. The survey asked respondents about possible reduced burdens if FINRA were to adopt one of these alternative standards in advance of tighter tolerances imposed as part of the CAT NMS Plan. In response, survey respondents ``questioned the benefits of an interim tolerance citing that any changes to the current clock offset would require modifications to systems and processes.'' \43\ --------------------------------------------------------------------------- \43\ See FIF Letter at 2. --------------------------------------------------------------------------- In developing this proposal, FINRA also considered suggestions by commenters regarding different clock synchronization standards depending on the type of market participants (e.g. tighter standard for highly automated or HFT firms and less strict standard for other firms). FINRA believes it is important to apply the same standard to all computer-recorded events, regardless of firm size or activity type, since the integrity of the audit trail relies on the ability to accurately sequence all events for a given period of time, including events generated by firms that do not engage in HFT. As discussed above, FINRA believes that in light of the prevailing technology for trading systems and clock synchronization, 50 milliseconds is the right standard for all participants, and strikes a reasonable balance between audit trail integrity and the costs of compliance. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The proposed rule change was published for comment in Regulatory Notice 14-47 (November 2014). Eight comments were received in response to the Regulatory Notice. A copy of the Regulatory Notice is attached as Exhibit 2a.\44\ Copies of the comment letters received in response to the Regulatory Notice are attached as Exhibit 2c.\45\ The comments are summarized above in Item A. --------------------------------------------------------------------------- \44\ The Commission notes that all references to Exhibit 2a refer to Exhibit 2a to the proposed rule change. \45\ The Commission notes that all references to Exhibit 2c refer to Exhibit 2c to the proposed rule change. --------------------------------------------------------------------------- III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove such proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic CommentsUse the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or Send an email to [email protected]. Please include File Number SR-FINRA-2016-005 on the subject line. Paper Comments Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-FINRA-2016-005. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of FINRA. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-FINRA-2016-005 and should be submitted on or before March 17, 2016. --------------------------------------------------------------------------- \46\ 17 CFR 200.30-3(a)(12). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\46\ Brent J. Fields, Secretary. [FR Doc. 2016-03960 Filed 2-24-16; 8:45 am] BILLING CODE 8011-01-P
![9550 Federal Register / Vol. 81, No. 37 / Thursday, February 25, 2016 / Notices
Electronic Comments SECURITIES AND EXCHANGE summaries, set forth in sections A, B,
COMMISSION and C below, of the most significant
• Use the Commission’s Internet aspects of such statements.
comment form (http://www.sec.gov/ [Release No. 34–77196; File No. SR–FINRA–
rules/sro.shtml); or 2016–005] A. Self-Regulatory Organization’s
Statement of the Purpose of, and
• Send an email to rule-comments@ Self-Regulatory Organizations; Statutory Basis for, the Proposed Rule
sec.gov. Please include File Number SR– Financial Industry Regulatory Change
FINRA–2016–006 on the subject line. Authority, Inc.; Notice of Filing of a
Proposed Rule Change To Reduce the 1. Purpose
Paper Comments Synchronization Tolerance for Current FINRA rules require that
• Send paper comments in triplicate Computer Clocks That Are Used To firms synchronize their business clocks
to Secretary, Securities and Exchange Record Events in NMS Securities and in conformity with procedures
Commission, 100 F Street NE., OTC Equity Securities prescribed by FINRA. Specifically,
Washington, DC 20549–1090. FINRA Rule 7430 requires that firms
February 19, 2016. synchronize their business clocks that
All submissions should refer to File Pursuant to Section 19(b)(1) of the are used for purposes of recording the
Number SR–FINRA–2016–006. This file Securities Exchange Act of 1934 date and time of any event that must be
number should be included on the (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 recorded pursuant to the FINRA By-
notice is hereby given that on February Laws or other FINRA rules (e.g., the
subject line if email is used. To help the
9, 2016, Financial Industry Regulatory time a trade was executed or the time an
Commission process and review your
Authority, Inc. (‘‘FINRA’’) filed with the order was received or routed), with
comments more efficiently, please use
Securities and Exchange Commission reference to a time source as designated
only one method. The Commission will (‘‘SEC’’ or ‘‘Commission’’) the proposed
post all comments on the Commission’s by FINRA. As specified in the current
rule change as described in Items I, II, OATS technical specifications, all
Internet Web site (http://www.sec.gov/ and III below, which Items have been
rules/sro.shtml). Copies of the computer system clocks and mechanical
prepared by FINRA. The Commission is time stamping devices must be
submission, all subsequent publishing this notice to solicit synchronized to within one second of
amendments, all written statements comments on the proposed rule change the NIST atomic clock.3 To maintain
with respect to the proposed rule from interested persons. clock synchronization, clocks should be
change that are filed with the checked against the NIST atomic clock
Commission, and all written I. Self-Regulatory Organization’s
Statement of the Terms of Substance of and re-synchronized, if necessary, at
communications relating to the pre-determined intervals throughout the
the Proposed Rule Change
proposed rule change between the day.4 FINRA understands that currently,
Commission and any person, other than FINRA is proposing to reduce the some firms synchronize their clocks
those that may be withheld from the synchronization tolerance for members’ continuously throughout the day, while
public in accordance with the computer clocks that are used to record others do so at various times during the
provisions of 5 U.S.C. 552, will be events in NMS securities, including day and still others do so only once a
available for Web site viewing and standardized options, and OTC Equity day.5
printing in the Commission’s Public Securities. This proposal would not Given the increasing speed of trading
change the current clock in today’s automated markets, FINRA
Reference Room, 100 F Street NE.,
synchronization requirement for believes the current one second
Washington, DC 20549, on official
members’ mechanical time stamping tolerance is no longer appropriate for
business days between the hours of
devices or computer clocks that are used computer system clocks recording
10:00 a.m. and 3:00 p.m. Copies of such to record events for securities other than
filing also will be available for NMS securities or OTC Equity 3 Any time provider may be used for
inspection and copying at the principal Securities. synchronization; however, all clocks and time
office of FINRA. All comments received The text of the proposed rule change stamping devices must remain accurate within a
will be posted without change; the is available on FINRA’s Web site at one-second tolerance of the NIST clock. This
tolerance includes (1) the difference between the
Commission does not edit personal http://www.finra.org, at the principal NIST standard and a time provider’s clock, (2)
identifying information from office of FINRA, on the Commission’s transmission delay from the source and (3) the
submissions. You should submit only Web site at http://www.sec.gov, and at amount of drift of the member firm’s clock. The
information that you wish to make the Commission’s Public Reference OATS technical specifications further specify that
computer system and mechanical clocks must be
available publicly. All submissions Room. synchronized every business day before market
should refer to File Number SR–FINRA– II. Self-Regulatory Organization’s open to ensure that recorded order event
2016–006 and should be submitted on timestamps are accurate.
Statement of the Purpose of, and 4 The OATS technical specifications also provide
or before March 17, 2016. Statutory Basis for, the Proposed Rule that member firms must document and maintain
For the Commission, by the Division of Change their clock synchronization procedures. In addition,
Trading and Markets, pursuant to delegated the technical specifications state that member firms
In its filing with the Commission, should keep a log of the times when they
authority.31 FINRA included statements concerning synchronize their clocks and the results of the
Brent J. Fields, the purpose of and basis for the synchronization process, including notice of any
time a member’s clock drifts more than the one
mstockstill on DSK4VPTVN1PROD with NOTICES
Secretary. proposed rule change and discussed any second standard. The technical specifications
[FR Doc. 2016–03941 Filed 2–24–16; 8:45 am] comments it received on the proposed further provide that such logs should be maintained
BILLING CODE 8011–01–P rule change. The text of these statements for the period of time and accessibility specified in
may be examined at the places specified SEC Rule 17a–4(b), and maintained and preserved
for the required time period in paper format or in
in Item IV below. FINRA has prepared a format permitted under SEC Rule 17a–4(f).
5 FINRA generally believes that the firms that
1 15 U.S.C. 78s(b)(1). synchronize once daily are firms that accept manual
31 17 CFR 200.30–3(a)(12). 2 17 CFR 240.19b–4. orders.
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![Federal Register / Vol. 81, No. 37 / Thursday, February 25, 2016 / Notices 9551
events in NMS securities 6 and OTC must be recorded under FINRA By-Laws request written comments on the
Equity Securities 7 under FINRA rules. or rules. As noted above, under a proposal. FINRA received eight
Automated systems have evolved to the combination of Rule 7430 and the OATS comment letters in response.10 In
point where order placement and technical specifications, the current one general, five of the eight commenters
trading decisions in these asset classes second synchronization standard supported tightening current clock
are made on a millisecond basis, if not already applies to the recording of the synchronization requirements, at least
finer. Moreover, in many cases firms date and time of any event that must be to some extent.11 Two of the eight
report events to FINRA’s equity trade recorded under FINRA By-Laws or commenters opposed the proposal to
reporting and audit trail facilities in rules. Under this proposal, FINRA some extent, questioning either the
milliseconds.8 would consolidate and codify the clock proposed 50 millisecond standard or the
Accordingly, FINRA is proposing to synchronization requirements in new need for FINRA to amend its clock
tighten the synchronization requirement Rule 4590 for clarity and ease of synchronization requirement at this
for computer system clocks that record reference. This consolidation would time, before the CAT NMS Plan is
events in NMS securities and OTC include the current provision in the approved and implemented.12
Equity Securities. The proposal would OATS technical specifications that Of the five commenters that
reduce the drift tolerance for computer conveys guidance on recordkeeping to supported tightening clock
clocks that record events in these demonstrate compliance with the synchronization requirements at least to
securities from one second to 50 synchronization standard, which would some extent, all agreed that a
milliseconds. The proposal would not be codified without material change as millisecond standard is necessary given
change the current one second standard Supplementary Material .01 to Rule the speed of trading in today’s markets.
for securities other than NMS securities 4590. For example, according to FSMLabs,
or OTC Equity Securities and would not In arriving at this proposal, FINRA FINRA’s proposal is ‘‘timely and
change the current one second standard solicited and received feedback from its necessary’’ because ‘‘[w]ide use of
for events recorded by mechanical industry advisory committees, as well as electronic trading systems and
clocks or time stamping devices, as through a public request for comment. proliferation of trading venues make it
opposed to computer clocks. After thoroughly evaluating all of the impossible to understand market
As a technical matter, the proposal feedback received, FINRA has operation or to manage risks without
would codify the existing OATS determined that the proposed 50 precise and reliable time
technical specifications cited above, millisecond standard is the best information.’’ 13 Similarly, IEX stated its
along with the new proposed 50 approach given existing technology and belief that ‘‘the proposal represents an
millisecond standard, in FINRA’s Rule FINRA’s regulatory needs. In addition, important and beneficial advance over
4500 Series (Books, Records and as described in more detail below, the current [one second] standard.’’ 14
Reports). The purpose of this technical FINRA further determined that it should The commenters that supported the
change is to relocate the clock proceed with the proposal now, rather proposal generally took the view that
synchronization requirements from than wait for approval and the proposed 50 millisecond standard
OATS rules to a rule set where it is clear implementation of the clock would not be overly burdensome to
the requirements apply to the recording synchronization requirements proposed adopt, even for smaller firms. FSMLabs
of the date and time of any event that in the National Market System Plan stated that a 50 millisecond standard
governing the Consolidated Audit Trail ‘‘can be met with low cost off-the-shelf
6 The term ‘‘NMS security’’ is defined in Rule 600
(‘‘CAT NMS Plan’’).9 software only.’’ 15 According to KOR,
of Regulation NMS to mean ‘‘any security or class ‘‘the technology to perform such high-
of securities for which transaction reports are As an initial step, FINRA staff
collected, processed and made available pursuant to solicited industry input from several of resolution synchronization is low-cost
an effective transaction reporting plan, or an its industry advisory committees prior and has been available for years.’’ 16
effective national market system plan for reporting to publishing the proposal for comment Sync-n-Scale took the view that the
transactions in listed options. 17 CFR proposed 50 millisecond standard ‘‘is
242.600(b)(46). As Commission staff has noted, the in a Regulatory Notice. These
term NMS security generally ‘‘refers to exchange- committees were generally supportive. highly likely not an onerous imposition
listed equity securities and standardized options, To the extent the committees raised on market participants in any of the
but does not include exchange-listed debt
concerns, they focused on the proposal’s relevant dimensions: financially,
securities, securities futures, or open-end mutual technologically and operationally.’’ 17
funds, which are not currently reported pursuant to potential impact on small firms,
an effective transaction reporting plan.’’ See particularly firms that do not rely on Several of these commenters proposed
Division of Trading and Markets Staff’s Responses highly automated systems. In response tightening the clock synchronization
to Frequently Asked Questions Concerning Large
to these concerns, and similar concerns standard even further, to below 50
Trader Reporting, question 1.1, available at https://
www.sec.gov/divisions/marketreg/large-trader- raised in the comment letters discussed 10 See Letters from Crews & Associates, January 5,
faqs.htm. below, FINRA modified the proposal to 2015 (‘‘Crews Letter’’); FSMLabs, dated January 7,
7 The term ‘‘OTC Equity Security’’ is defined in
allow for phased implementation which 2015 (‘‘FSMLabs Letter’’); Quincy Data, LLC, dated
FINRA Rule 6420(f) to mean ‘‘any equity security
that is not an ‘NMS stock’ as that term is defined
would grant less automated firms up to January 9, 2015 (‘‘Quincy Data Letter’’); Wiley Bros.
18 months to comply with the proposed Aintree Capital, dated January 9, 2015 (‘‘Wiley Bros.
in Rule 600(b)(47) of Regulation NMS; provided, Aintree Capital Letter’’); IEX Services LLC, February
however, that the term ‘OTC Equity Security’ shall 50 millisecond standard. In addition, 12, 2015 (‘‘IEX Letter’’); Financial Information
not include any Restricted Equity Security.’’ the proposal retains the current one Forum, dated February 20, 2015 (‘‘FIF Letter’’);
8 See Securities Exchange Act Release No. 71623
second standard for events recorded by Sync-n-Scale, dated February 20, 2015 (‘‘Sync-n-
(February 27, 2014), 79 FR 12558 (March 4, 2014) Scale Letter’’); and KOR Group LLC, dated February
(order approving SR–FINRA–2014–050, FINRA’s mechanical clocks or time stamping
mstockstill on DSK4VPTVN1PROD with NOTICES
20, 2015 (‘‘KOR Letter’’).
proposal to require firms to report order and trade devices, which FINRA believes are more 11 See FSMLabs Letter, Quincy Data Letter, IEX
information to the FINRA TRFs, ADF, ORF, and likely to be used by small firms. Letter, Sync-n-Scale Letter, and KOR Letter.
OATS in milliseconds, if the firms’ systems capture Next, in November 2014, FINRA 12 See Crews Letter and FIF Letter.
time in milliseconds). See also Regulatory Notice
14–21 (May 2014) (announcing the effective date of published Regulatory Notice 14–47 to 13 See FSMLabs Letter at 6–7.
14 See IEX Letter at 2.
millisecond reporting changes); Regulatory Notice
15 See FSMLabs Letter at 1.
14–47 (November 2014) at page 7, n. 7 (describing 9 The CAT NMS Plan, which was submitted by
16 See KOR Letter at 2.
the extended implementation schedule for the national securities exchanges and FINRA on
millisecond reporting changes). February 27, 2015, is available at catnmsplan.com. 17 See Sync-n-Scale Letter at 1.
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![9552 Federal Register / Vol. 81, No. 37 / Thursday, February 25, 2016 / Notices
milliseconds. For example, FSMLabs FINRA carefully considered the industry standard.’’ 30 FINRA agrees
said that a one millisecond standard committee views and written comments. that, at present, while a 50 millisecond
would not impose significant additional After analyzing this feedback, FINRA standard may impose some costs on
costs, while even a one microsecond believes it is necessary and appropriate firms, it is nevertheless achievable with
standard could be practical with low- to proceed with the proposed 50 existing technology, and that it would
cost off-the-shelf technology.18 KOR millisecond standard for NMS securities allow FINRA significantly greater
agreed that reducing the standard to one and OTC Equity Securities, with a regulatory and surveillance capabilities.
millisecond ‘‘would not impose phased implementation that allows less Moreover, FINRA recognizes that
significant additional costs to market automated firms more time to adjust proposing a standard different from the
participants over a 50 millisecond their systems. FINRA believes that 50 CAT NMS Plan could create additional
requirement.’’ 19 And according to IEX, milliseconds is the right standard at this and potentially burdensome costs for
‘‘the permitted variance could be further time, given prevailing technology for firms.31
reduced consistent with the systems trading systems and clock But while FINRA believes it is
capabilities of most member firms.’’ 20 synchronization, because it strikes an appropriate to propose the same 50
Two commenters took different views acceptable balance between audit trail millisecond clock synchronization
and opposed the proposal. Crews & integrity and the costs of compliance. standard advanced by the CAT NMS
Associates stated that any standard less FINRA also believes it is important to Plan, FINRA does not agree with the
than 200 milliseconds is not feasible at apply the same standard to all comment that FINRA should forego this
any cost, based on the time it takes to computer-recorded events, regardless of proposal and wait for the CAT NMS
receive data packets with updated time firm size or activity type. Audit trail Plan to become effective. It may be some
information from NIST servers.21 The integrity relies on the ability to time before the clock synchronization
Financial Information Forum (‘‘FIF’’), accurately sequence events for a given requirements of the CAT NMS Plan take
which conducted an industry survey on period of time, including events effect.32 Meanwhile, as the Commission
current synchronization practices and generated by firms that do not engage in has recognized, a sub-one second clock
the anticipated costs of tighter HFT.25 synchronization standard is an
synchronization standards, did not take important element of market data
FINRA’s decision to pursue the
issue with the proposed 50 millisecond reliability.33 And FINRA, as a national
proposed 50 millisecond standard is
standard itself. In fact, FIF supported a securities association, relies on the
informed in part by the CAT NMS Plan
50 millisecond standard; however, FIF accuracy of market data to fulfill its
filed in February, 2015. The CAT NMS
suggested that FINRA ‘‘work through regulatory obligations. Accordingly,
Plan was required by SEC Rule 613,
the CAT NMS Plan process to achieve FINRA believes it has a current need to
which directed FINRA and the national
[its] clock synchronization objectives tighten the clock synchronization
securities exchanges to submit a
and avoid redundant, and potentially standard for events that must be
national market system plan to govern
conflicting, rule-making.’’ 22 recorded pursuant to the FINRA By-
Finally, several of the commenters the creation, implementation, and
maintenance of a consolidated audit Laws or other FINRA rules.
argued that FINRA should consider
trail and central repository.26 Rule 613 FINRA acknowledges that a tightened
different standards for different types of
further contains specific provisions that clock synchronization standard could
market participants. KOR suggested that
require the CAT NMS Plan to adopt a impose costs, particularly on small or
highly automated firms—i.e., firms that
co-locate their equipment at an clock synchronization standard
30 See id.
exchange datacenter or in a data center ‘‘consistent with industry standards.’’ 27
31 The FIF comment letter supported the view
with modern clock synchronization Guided by these provisions, the CAT that FINRA should not adopt a standard that is
technology—should be held to a one NMS Plan contains detailed discussion different from what was proposed in the CAT NMS
millisecond standard, while all other of current clock synchronization Plan, even if that standard were more lenient and
practices, as well as the potential costs less costly to implement now than the CAT NMS
firms should be subject to a 50 Plan standard. See FIF Letter at 2 (noting that
millisecond standard.23 Crews & that broker-dealers would incur under respondents to the FIF Clock Offset Survey
Associates said that there should be a various synchronization standards ‘‘questioned the benefits of an interim tolerance
separate rule for firms that engage in ranging from 1 second to 100 citing that any changes to the current clock offset
microseconds.28 As part of its cost would require modifications to systems and
high frequency trading, although this processes’’).
commenter did not offer a detailed analysis, the CAT NMS Plan refers to 32 The CAT NMS Plan was filed pursuant to Rule
recommendation on how the standards the same FIF survey that accompanied 608 of Regulation NMS, which provides the general
should differ for firms that do and do the FIF’s comment letter to FINRA on procedure for national market system plans. Under
not engage in HFT.24 this proposal.29 Rule 608(b)(2), the Commission has 120 days from
the date it publishes a national market system plan,
Ultimately, the CAT NMS Plan or up to 180 days of such date if it finds such longer
18 See FSMLabs Letter at 1. concluded ‘‘that a clock offset of 50ms period to be appropriate and publishes its reasons
19 See KOR Letter at 2. represents an aggressive, but achievable, for so finding or as to which the sponsors of the
20 See IEX Letter at 2. Additionally, another
plan consent, to approve the plan, with such
commenter submitted its own proposal, which it changes or subject to such conditions as the
25 While FINRA does not believe it is practicable
said could ‘‘replace CAT requirements.’’ Under this Commission may deem necessary or appropriate.
commenter’s proposal, all matching engines would to adopt different standards for firms that engage in As proposed, the CAT NMS Plan would become
be time synchronized to an accuracy that is within HFT and those that do not, as some commenters effective upon approval by the Commission and
10 microseconds of the global time standard, and suggested, it is proposing to provide less automated execution by all of the participants that submitted
manual trades would be time stamped within an firms with more time to adjust their systems to the the plan (see CAT NMS Plan, Section 2.1), and the
mstockstill on DSK4VPTVN1PROD with NOTICES
accuracy of 1 minute. See Quincy Data Letter at 1. new proposed standard, as discussed more below. clock synchronization requirements would apply
21 See Crews & Associates Letter at 1. 26 17 C.F.R § 242.613(a).
within four months of the effective date (see CAT
22 See FIF Letter at 3. As noted elsewhere in this 27 17 CFR § 242.613(d)(1).
NMS Plan, Section 6.7(a)(ii)).
filing, FIF cautioned that its survey did not 28 See CAT NMS Plan, available at 33 See Securities Exchange Act Release No. 67457
necessarily reflect small firms, which it thought catnmsplan.com, at Appendix C–125. (July 17, 2012), 77 FR 45722, 45774 (August 1,
would be more likely to have trouble meeting the 29 See CAT NMS Plan at Appendix C–125 to C– 2012) (‘‘Consolidated Audit Trail Adopting
proposed clock synchronization standard. 126 (citing the FIF Clock Offset Survey, which FIF Release’’) (‘‘The Commission believes that the
23 See KOR Letter at 2.
also attached to its comment letter on this current industry standard for conducting securities
24 See Crews & Associates Letter at 2. proposal). business is more rigorous than one second.’’).
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![Federal Register / Vol. 81, No. 37 / Thursday, February 25, 2016 / Notices 9553
less automated firms. As a result, FINRA 2. Statutory Basis and trading decisions made on a
has revised the proposal in response to FINRA believes that the proposed rule millisecond, or finer, basis. In such a
comments in two ways, in order to change is consistent with the provisions fast-paced environment, the one second
minimize the burden associated with of Section 15A(b)(6) of the Act,36 which tolerance is insufficient for audit trail
the proposed rule and ease requires, among other things, that and surveillance purposes. Accordingly,
implementation. First, FINRA has FINRA rules must be designed to FINRA is proposing a tighter
narrowed the scope of the proposal so prevent fraudulent and manipulative synchronization standard for NMS
that the 50 millisecond standard acts and practices, to promote just and securities and OTC Equity Securities
proposed in this filing would apply only equitable principles of trade, and, in that will give FINRA the capability to
to NMS securities and OTC Equity general, to protect investors and the better determine the order in which
Securities, and not to fixed income public interest. FINRA believes that the reportable events occur, thereby
securities. FINRA believes this proposed rule change will bolster bolstering its surveillance of the markets
modification is warranted because fixed FINRA’s ability to meet its regulatory and enhancing investor protection.
income products generally are not obligations as a national securities B. Economic Impacts
traded with the same level of association. As the Commission has
automation as equity or option The proposed rule change would
noted, time drift away from a universal,
securities. Moreover, the revised scope impact member firms that receive or
synchronized standard is an important
would parallel the current scope of the route orders or execute trades directly in
issue to address to enhance the integrity
CAT NMS Plan, which, as filed, would NMS securities and OTC Equity
of audit trail data.37 FINRA therefore
apply to NMS securities and OTC Securities. As a baseline, FINRA
believes it is important to pursue a 50
Equity Securities, but not debt estimates that there are approximately
millisecond standard at this time, for
securities.34 FINRA notes that the CAT 1,720 firms that would be subject to the
the reasons explained above, so that it
NMS Plan contemplates whether debt proposal.38 These firms would be
can compile more accurate audit trail
securities may become subject to CAT required to synchronize their computer
data and conduct surveillance with
reporting in the future, and FINRA will clocks that are used to record applicable
more precise time-sequenced data. By
continue to consider the appropriate events in equity and options securities
doing so, the proposal would facilitate
clock synchronization standard for to within 50 millisecond of the NIST
FINRA’s efforts to detect and prevent
systems that record events in debt atomic clock.
fraudulent and manipulative acts and FINRA understands that some firms
securities. practices, to promote just and equitable already synchronize their computer
FINRA proposes to adopt a phased principles of trade, and, in general, to clocks within 50 milliseconds, and as a
implementation for the proposed 50 protect investors and the public interest. result, will not experience any material
millisecond standard. If the Commission direct economic impacts as a result of
B. Self-Regulatory Organization’s
approves the filing, FINRA will this rule. Additionally, the proposed
Statement on Burden on Competition
announce the effective date of the rule change would not alter the current
proposed rule change in a Regulatory FINRA does not believe that the
proposed rule change will result in any clock synchronization requirement for
Notice to be published no later than 90 members’ mechanical time stamping
days following Commission approval. burden on competition that is not
necessary or appropriate in furtherance devices. As a result, members solely
FINRA would then require firms with using mechanical time stamping would
systems that capture time in of the purposes of the Act. FINRA has
undertaken an economic impact not be impacted. Based on FINRA staff’s
milliseconds to comply with the new 50 experience, FINRA estimates that only a
millisecond standard within six months assessment, as set forth below, to
analyze the regulatory need for the small fraction of firms use mechanical
of the effective date; remaining firms time stamping devices for trading in
that do not have systems which capture proposed rule change, its potential
economic impacts, including NMS securities and OTC Equity
time in milliseconds would have 18 Securities.
months from the effective date to anticipated costs and benefits, and the
The proposal would be implemented
comply with the 50 millisecond alternatives FINRA considered in
in phases that would allow less
standard.35 assessing how to best meet its regulatory
objectives. automated firms more time to comply
with the 50 millisecond clock
34 See, e.g., CAT NMS Plan at Appendix C–127
Economic Impact Assessment synchronization standard. Specifically,
(discussing the Plan’s applicability to OTC Equity
Securities in addition to NMS securities, and A. Regulatory Need FINRA would require firms with
whether debt securities may be subject to the CAT systems that capture time in
NMS Plan in the future). Because the scope of this FINRA’s current rules require milliseconds to comply with the new 50
proposal would align with the scope of the current members to synchronize their business millisecond standard within six months
proposed CAT NMS Plan, FINRA believes that costs clocks to within one second of the NIST
incurred by firms to meet the proposed FINRA of the effective date. Of firms that report
clock synchronization standard would support the
atomic clock. Considering the speed of to OATS, FINRA estimates that there are
changes needed to meet any future requirement trading in today’s automated equity and 736 firms that report some or all of their
imposed under CAT and, therefore, should not options markets, FINRA believes that order events in milliseconds, accounting
result in duplicative efforts. the current one second tolerance is no
35 FINRA recognizes that a phased for 76 percent of OATS-reporting firms
longer appropriate for computer system and 95 percent of OATS reportable
implementation does not necessarily on its own
reduce the costs of the proposal. However, a phased clocks recording time for events in these order events (ROE). FINRA further
implementation could allow firms, particularly securities under FINRA rules. For
mstockstill on DSK4VPTVN1PROD with NOTICES
estimates that there are roughly 237 less
smaller or less automated firms, a greater time example, the wide use of automated automated OATS-reporting firms,
period over which they can identify and implement trading systems entails order placement
the most cost effective clock synchronization
solution that meets the standard required by this 38 This baseline estimate is intended to capture
proposal. FINRA notes that the FIF Clock Offset compliance initiatives.’’ See FIF Letter and attached the total number of firms that received orders in any
Survey recommended a delayed implementation FIF Clock Offset Survey. security subject to OATS reporting, as reflected by
36 15 U.S.C. 78o–3(b)(6).
and noted that ‘‘[w]hile additional time may not the number of unique routing firm market
reduce costs, it may ease implementation as firms 37 See Consolidated Audit Trail Adopting participant identifiers from a recent calendar
manage this effort in conjunction with other Release, 77 FR at 45774. quarter.
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![Federal Register / Vol. 81, No. 37 / Thursday, February 25, 2016 / Notices 9555
FINRA notes that the scope of this In developing this proposal, FINRA including whether the proposed rule
proposal would align with the scope of also considered suggestions by change is consistent with the Act.
the CAT NMS Plan that has been filed commenters regarding different clock Comments may be submitted by any of
with the Commission. As such, in the synchronization standards depending the following methods:
presence of an adopted CAT NMS plan, on the type of market participants (e.g.
Electronic Comments
the costs associated with this proposal tighter standard for highly automated or
are only associated with the timing of HFT firms and less strict standard for • Use the Commission’s Internet
the obligation to meet the proposed other firms). FINRA believes it is comment form (http://www.sec.gov/
clock synchronization standard. important to apply the same standard to rules/sro.shtml); or
Accordingly, FINRA believes that costs all computer-recorded events, regardless • Send an email to rule-
incurred by firms to meet the proposed of firm size or activity type, since the comments@sec.gov. Please include File
FINRA clock synchronization would integrity of the audit trail relies on the Number SR–FINRA–2016–005 on the
support the changes needed to meet any ability to accurately sequence all events subject line.
future requirement imposed under CAT for a given period of time, including
and therefore, should not result in events generated by firms that do not Paper Comments
duplicative efforts. engage in HFT. As discussed above, • Send paper comments in triplicate
FINRA believes that in light of the to Brent J. Fields, Secretary, Securities
C. Alternatives prevailing technology for trading and Exchange Commission, 100 F Street
In considering how to best meet its systems and clock synchronization, 50 NE., Washington, DC 20549–1090.
regulatory objectives, FINRA considered milliseconds is the right standard for all
several alternatives to particular features participants, and strikes a reasonable All submissions should refer to File
of this proposed rule change. For balance between audit trail integrity and Number SR–FINRA–2016–005. This file
example, FINRA considered whether to the costs of compliance. number should be included on the
impose less costly 100 or 200 subject line if email is used. To help the
C. Self-Regulatory Organization’s Commission process and review your
millisecond standards. For the reasons Statement on Comments on the
referenced in part above, FINRA chose comments more efficiently, please use
Proposed Rule Change Received From only one method. The Commission will
not to pursue these alternatives. Members, Participants, or Others
FINRA’s decision not to pursue these post all comments on the Commission’s
alternatives is based in part on its own The proposed rule change was Internet Web site (http://www.sec.gov/
observations. The range of variance published for comment in Regulatory rules/sro.shtml). Copies of the
among market participants’ clocks may Notice 14–47 (November 2014). Eight submission, all subsequent
be up to twice the permitted comments were received in response to amendments, all written statements
synchronization standard; for example, the Regulatory Notice. A copy of the with respect to the proposed rule
one participant’s clocks may drift ahead Regulatory Notice is attached as Exhibit change that are filed with the
of the NIST clock by 50 milliseconds, 2a.44 Copies of the comment letters Commission, and all written
while another’s may drift behind by 50 received in response to the Regulatory communications relating to the
milliseconds, meaning their clocks Notice are attached as Exhibit 2c.45 The proposed rule change between the
would be 100 milliseconds apart. comments are summarized above in Commission and any person, other than
FINRA studied OATS data for a single Item A. those that may be withheld from the
trading day and found a large number of public in accordance with the
III. Date of Effectiveness of the provisions of 5 U.S.C. 552, will be
events that occur within any single 100 Proposed Rule Change and Timing for
millisecond window of time. However, available for Web site viewing and
Commission Action printing in the Commission’s Public
FINRA observed that the number of
Within 45 days of the date of Reference Room, 100 F Street NE.,
events within 200 or 400 millisecond
publication of this notice in the Federal Washington, DC 20549, on official
windows—twice the possible alternative
Register or within such longer period (i) business days between the hours of
100 and 200 millisecond standards—
as the Commission may designate up to 10:00 a.m. and 3:00 p.m. Copies of the
increased significantly. Departing from
90 days of such date if it finds such filing also will be available for
the 50 millisecond standard would
longer period to be appropriate and inspection and copying at the principal
therefore cause significantly greater
publishes its reasons for so finding or office of FINRA. All comments received
numbers of events to be recorded with
(ii) as to which the self-regulatory will be posted without change; the
less certainty and accuracy.
organization consents, the Commission Commission does not edit personal
In addition, FINRA notes that the FIF will: identifying information from
Clock Offset Survey supported the (A) By order approve or disapprove submissions. You should submit only
proposed 50 millisecond standard, as such proposed rule change, or information that you wish to make
opposed to a 100 or 200 millisecond (B) institute proceedings to determine available publicly. All submissions
standard. The survey asked respondents whether the proposed rule change should refer to File Number SR–FINRA–
about possible reduced burdens if should be disapproved. 2016–005 and should be submitted on
FINRA were to adopt one of these
IV. Solicitation of Comments or before March 17, 2016.
alternative standards in advance of
tighter tolerances imposed as part of the Interested persons are invited to For the Commission, by the Division of
CAT NMS Plan. In response, survey Trading and Markets, pursuant to delegated
mstockstill on DSK4VPTVN1PROD with NOTICES
submit written data, views, and
respondents ‘‘questioned the benefits of authority.46
arguments concerning the foregoing,
an interim tolerance citing that any Brent J. Fields,
changes to the current clock offset 44 The Commission notes that all references to Secretary.
would require modifications to systems Exhibit 2a refer to Exhibit 2a to the proposed rule [FR Doc. 2016–03960 Filed 2–24–16; 8:45 am]
change.
and processes.’’ 43 45 The Commission notes that all references to
BILLING CODE 8011–01–P
Exhibit 2c refer to Exhibit 2c to the proposed rule
43 See FIF Letter at 2. change. 46 17 CFR 200.30–3(a)(12).
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Document Created: 2018-02-02 14:35:27
Document Modified: 2018-02-02 14:35:27
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 81 FR 9550 |
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