[ by Howard Haykin ] FINRA plans to amend FINRA Rule 6140(h), that addresses the handling of stop orders in NMS stocks.  Having submitted a Rule Filing to the SEC on 5/24, FINRA expects to announce an implementation date no later than 60 days following Commission approval, and implementation would take place no more than 150 days following such SEC approval. Terms and Conditions of FINRA Rule 6140(h). The Rule provides that a member may, but is not obligated to, accept a stop order in a designated security.  The Rule further provides that a stop order becomes a market order (or a stop limit order becomes a limit order) when a transaction takes place at or above the stop price (for a buy stop order) or at or below the stop price (for a sell stop order). While a stop order currently is triggered by a transaction, certain firms, and their customers would prefer alternative triggers for activating a stop or stop limit order.

e.g., when dealing with thinly traded securities, such as certain ETFs, ... quotations, they say, would serve as a better trigger for a stop order because quotations serve as a better indicator of the current price than transactions. Some ETFs trade on a limited basis during the day, although quotations may be continuously updated and would serve as the better indicator of the current market price for these securities. As such, investors in these securities may prefer that their stop order be monitored against quotations instead of waiting for trades.

On the other hand, some members indicate that customers could be disadvantaged by having to use quotations as a triggering mechanism, because doing so may result in an execution at a price that the stock had never traded at that day Risks vs. Benefits. FINRA agrees with both sides of the argument and, therefore, members and their customers should be permitted to consider these factors and determine which order type (and trigger) is appropriate. In this regard, FINRA previously proposed such amendments to Rule 6140(h) - to delete the requirement that transactions at the stop price serve as the only triggering event for stop orders, thereby providing members and customers with the flexibility to tailor their order types. But the SEC did not approve the rule change, because of concerns that the proposed rule did not promote the ability of investors to understand the key attributes of the order and make an informed choice as to whether to use a particular type of order. Rule Changes That FINRA Currently Proposes. In light of the SEC's earlier concerns, FINRA is proposing Rule 5350(a), which would retain the current transaction-based trigger for activating stop and stop limit orders and provide all investors placing a “stop order” or a “stop limit order” with certainty that their order will only be activated by a transaction at the stop price. At the same time, proposed Supplementary Material .01 to the rule would permit members to offer an alternative trigger to activate an order as a market or limit order, so long as such alternative order type is not labeled as a “stop order” or a “stop limit order” and is clearly distinguishable from a stop or 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." Further, in those cases where a member has offered an alternative order type that activates as a market or limit order using an event other than a transaction at the stop price, the customer must be provided with written or electronic advance disclosure of that fact.  One suggestion would be to provide such a disclosure at the time an account is opened

e.g., - when an account is opened,  the member could provide a description of the order type including the triggering event.

FINRA believes that, by requiring that alternative-trigger order types be labeled something other than a “stop” or “stop limit” order and be clearly distinguishable from a stop or stop limit order, members and customers will share a uniform understanding as to what will serve as the triggering event for “stop orders.”

To complement this approach, proposed Supplementary Material .02 to Rule 5350 also would require that, to the extent a member routes a customer stop or stop limit order to another broker-dealer or exchange for handling or execution, the member must take reasonable steps to ensure that the order is handled or executed by the other broker-dealer or exchange in accordance with Rule 5350(a). Similarly, a member that routes to another broker-dealer or exchange other order types using an alternative trigger in accordance with Supplementary Material .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. Finally, FINRA would move the location of the 'stop order' definition  -  from Rule 6140(h) to new Rule 5350, ensuring that the existing and proposed stop order provisions apply uniformly to both OTC Equity Securities9 and NMS stocks. For further details go to:  [FINRA Rule Filings 12-26, 5/24/12].