[ by Howard Haykin ]

New Rule 5350 Goes Effective 1/21/13.

The SEC approved FINRA's request to adopt new Rule 5350, Stop Orders, that replaces the stop order provisions of FINRA Rule 6140(h).  Among other things, the rule provides that any order labeled as a “stop order” or a “stop limit order” must be triggered based upon a transaction at the stop price, but firms are permitted to offer alternative order types with different triggers - e.g., a stop order triggered by a quotation at the stop price) - so long as the order type is not labeled as a stop order and is clearly distinguishable from a stop order.

FINRA Staff Contacts. Direct questions to: Racquel Russell, Assistant General Counsel, at (202) 728-8363; or  Scott Trilling, Director, Market Reg., at (240) 386-5113.

Background and Discussion. New FINRA Rule 5350 applies to orders in NMS stocks and OTC Equity Securities, and provides that:

• a firm may, but is not obligated to, accept a stop order or stop limit order. 

• Rule 5350 replaces former Rule 6140(h).

• Rule 5350(a) states that a “stop order” is an order to buy (or sell) that becomes a market order to buy (or sell) when a transaction occurs at or above (below) the stop price, and a “stop limit order” is an order to buy (or sell) that becomes a limit order to buy (or sell) at the limit price when a transaction occurs at or above (below) the stop price.

• Rule 5350.01 further provides that firms may accept order types that activate as a market or limit order using an event other than a transaction at the stop price as the trigger
  • - e.g., using a quotation at the stop price.

• In such cases, the order cannot be labeled a “stop order” or a “stop limit order”;  instead, it must be clearly distinguishable from a “stop order” or a “stop limit order.”
  • - e.g., an alternative order type that triggers using a quotation at the stop price may be labeled a “stop quotation order” or “stop quote order.”

• If a firm chooses to offer such an alternative order type, it must disclose to the customer, in paper or electronic form, prior to the time the customer places the order - e.g., at account opening - a description of that order type including the triggering event. 

• A firm that routes to another B/D or exchange other order types using an alternative trigger in accordance with Rule 5350.01 must take reasonable steps to ensure that the order is handled or executed by the other broker-dealer or exchange in accordance with the terms of the order as communicated to the customer placing the order.

For further details, go to:  [FINRA RegNote 12-50, November 2012].