[ by Howard Haykin ]

Regulation NMS Plan will be updated on 4/8/13 to address extraordinary market volatility.  FINRA issued this Notice to provide a brief overview of the plan and recent amendments to FINRA rules to facilitate implementation, operation and member firm compliance with the plan. FINRA has also published a set of frequently asked questions providing additional guidance.

Background and Discussion Overview of the Plan.   The SEC approved on 5/31/12 the plan - as filed by FINRA and other SROs - that is designed to address the type of sudden price movements that the market experienced on the afternoon of 5/6/10.  

• The plan provides for a market-wide limit up and limit down (LULD) mechanism, preventing trades in NMS stocks from occurring outside of specified price bands, coupled with trading pauses in the event of more significant and prolonged price moves.

• The plan prohibits the display of offers at prices below the lower price band and bids above the upper price band and the execution of trades outside the price bands.

- The price bands are a certain percentage away from a “reference price,” which is the mean price of regular way, last sale eligible trades for the security over the immediately preceding 5-minute period.  

To account for increased volatility around market open and market close, the percentage parameters are doubled from 9:30 to 9:45 a.m. and from 3:35 to 4:00 p.m. (or in the case of an early scheduled close, during the last 25 minutes of trading). The securities information processor (SIP) for each covered NMS stock calculates and disseminates the applicable upper and lower price bands during regular trading hours.  Go to  RegNote 13-12 for further details.  

Implementation.  The plan will be implemented as a 1-year pilot in 2 phases.

• Phase I, 4/8/13 - this is the initial date of plan operations.  On that date, phase I implementation will begin in select Tier 1 NMS stock symbols, with full phase I implementation expected to be completed 3 months after the initial date of plan operations. During phase I, the price bands will be calculated and disseminated between 9:45 a.m. and 3:30 p.m.
• Phase II begins 6 months after 4/8/13 - Upon phase II implementation, the plan will fully apply to all NMS stocks from 9:30 a.m. to 4:00 p.m. each trading day, except in the case of an early scheduled close.

Amendments to FINRA Rules.   FINRA has amended its rules to facilitate the implementation, operation and member firm compliance with the plan, which mandates that each SRO have a rule requiring compliance by its members with the provisions of the plan -  i.e., that all trading centers in NMS stocks establish, maintain and enforce written policies and procedures that are reasonably designed to comply with LULD and trading pauses. 

To that end, FINRA:  (i) adopted new FINRA Rule 6190 and (ii) amended FINRA Rules 5260 and 6121.  The amendments are effective 4/8/13.  New Rule 6190

New Rule 6190 (Compliance with Regulation NMS Plan to Address Extraordinary Market Volatility).   Requires member firms that are trading centers in NMS stocks to establish, maintain and enforce WSPs reasonably designed to comply with plan  requirement, so as to specifically to prevent:

• execution of trades at prices that are below the lower price band or above the upper price band for an NMS stock, except as permitted under the plan;
• display of offers below the lower price band and bids above the upper price band for an NMS stock; and,
• execution of trades in an NMS stock during a trading pause.  

Amended Rule 5260 (Prohibition on Transactions, Publication of Quotations, or Publication of Indications of Interest During Trading Halts).   Generally prohibits firms from directly or indirectly effecting any transaction or publishing any quotation during a trading halt, including a trading pause.  This rule was amended to permit the display of bids and offers during a trading pause, to the extent permitted under the plan.

Amended Rule 6121.   As discussed above, the plan requires that the primary listing exchange declare a trading pause if the market does not exit a limit state within 15 seconds and also gives the primary listing exchange the discretion to declare a trading pause when a security is in a straddle state.

Pursuant to the amendments, paragraph (a) of Rule 6121.01 (Trading Pauses) reflects the plan’s trading pause provisions and clarifies that if trading in an NMS stock is permitted to resume after a trading pause under the plan, then FINRA may permit the resumption of OTC trading in the security if trading has commenced on at least one other national securities exchange (i.e., when a transaction has been executed on an exchange, not merely when quoting has commenced on the exchange). Consistent with its current policy, FINRA expects that in most cases, it will not resume OTC trading until the primary listing market resumes trading.

In addition, pursuant to the amendments, Rule 6121.01(b) provides that the current trading pause provisions, which provide for halts in individual NMS stocks due to extraordinary market volatility, continue to apply to Tier 1 and Tier 2 NMS stocks until the plan is implemented for those securities. As noted above, phase I of the plan begins on April 8, 2013, for certain Tier 1 NMS stocks. As of that date, Rule 6121.01(b) does not apply to those Tier 1 NMS stocks, but continues to apply to all other Tier 1 and Tier 2 NMS stocks. Upon full implementation of phase I, the trading pause provisions apply only to Tier 2 NMS stocks, and they will no longer be in effect upon full implementation of phase II of the plan.

Clearly Erroneous Transactions.   On 1/30/13 FINRA adopted  new Supplementary Material .03 under Rule 11892 (Clearly Erroneous Transactions in Exchange-Listed Securities) in connection with the operation of the plan.   The amendments became effective on the date of filing.     New Rule 11892.03 provides that the existing provisions of Rule 11892 apply to all OTC transactions involving an exchange-listed security reported to FINRA, including transactions in NMS stocks subject to the plan (except as otherwise provided in Rule 11892.03). Notably, transactions that occur within the LULD price bands could be deemed clearly erroneous to the extent they fall within the existing clearly erroneous thresholds.

For further details, go to:  [FINRA RegNote 13-12, March 2013].