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Potential Impact of Rule SEC Release #34-60515 Regarding Proposal to Extend Regulation NMS Coverage to OTC Securities

FINRA, in August of 2009, filed Release No. 34-60515 with the SEC. FINRA proposes to extend certain NMS protections to quoting and trading in the OTC market for equity securities.

In summary:

  1. Restrictions on sub-penny quoting;
  2. Prohibitions on locked or crossed markets;
  3. Implementation of caps on access fees;
  4. Requirements of transparency of customer limit orders.

FINRA’s goals, part of broadly anticipated changes in financial systems, are proposed as part of efforts to both modernize and achieve higher “quality” in the OTC marketplace.

1. Sub-Penny Quote Restrictions

FINRA addresses both issues of modernization and higher quality by proposing to restrict sub-penny quoting in conjunction with removing the requirement that ATS’s include non-subscriber access fees within its quote. Restricting sub-penny quoting may help prevent the practice of “stepping ahead” of displayed limit orders by trivial amounts.

The proposal will most effect small businesses whose securities trade for under $1.00. Under FINRA’s proposal, market participants will be able to quote in increments ranging from pennies to ten thousandths of a penny depending on the price of the security. There is some doubt as to the appropriateness of this level, however, for MPVs under $1.00.

2. Locked & Crossed-Markets Restrictions

FINRA’s proposal requires members to implement policies and procedures to avoid locking and crossing quotations and to enable the reconciliation of locked or crossed quotations. Displaying locked quotations is inconsistent with the maintenance of fair and orderly markets and prevents market efficiency. FINRA’s proposal aims to enhance investor protections, allowing member firms to immediately post a routed order to full-display size.

3. Capping Access Fees

Current rules limit most alternative trading systems (“ATS”) from charging either access or post-transaction fee to non-subscribers, unless that fee is already included in the ATS’s posted quote. FINRA would improve application of the Interpositioning Rule’ by reflecting access fees. Thus, posted quotes may foster more accurate competitive price quotes, by emphasizing an order-driven market, to encourage ECN competition.

4. Require Immediate Customer Limit Order Displays

Will the new rules competition, provide increased liquidity, and increase transparency? That is FINRA’s hope. Under the proposal, a market maker displaying a priced quote must immediately display customer limit orders that better market displayed price and size. Requirements of displaying customer limit orders may increase quote competition and ultimately narrow spreads. The FINRA goal here, as with most of FINRA’s proposed changes, is squarely aimed at reducing transactional costs.

Attorney Laura Anthony is a Florida securities attorney and the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The Florida corporate and securities attorneys of Legal & Compliance offer specialized legal services to small and mid-size private and public (OTCBB) companies, entrepreneurs, and business professionals throughout the country. Contact us today for a FREE consultation!

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