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February 18, 2010

FINRA Proposal Riles OTC Market

By Peter Chapman

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A proposal by FINRA to expand its business of collecting and disseminating quotes in over-the-counter equities by creating a "quotation consolidation facility" is under fire from OTC dealers and the largest OTC quote service.

Cromwell Coulson

Pink OTC Markets, the dominant collector and distributor of OTC quotes, previously known as Pink Sheets, is charging the Financial Industry Regulatory Authority of trying to "steal its quotes." The vendor maintains that the proposal is an abuse of FINRA's regulatory power, as well as an illegal seizure of private property. Pink OTC is getting support from the New York chapter of the Security Traders Association and others.

See Chart: Dealers' Choice

"Their plan is to steal Pink Quote data and sell it in their data feed," Cromwell Coulson, Pink OTC's president and chief executive officer, said. "The QCF is anti-competitive and a clear land grab by FINRA."

The QCF would be operated by FINRA and collect from dealers or their agents all top-of-book OTC quotes. It would then disseminate the data in real time over the Nasdaq Level One feed. The proposal requires Securities and Exchange Commission approval.

FINRA already collects some quotes from dealers for distribution over the feed, but it does not get all of them. The bids and offers it disseminates represent only a fraction of those available and may not reflect the best prices at any given moment. That is why FINRA believes it needs to consolidate and disseminate all the quotes. A "widely available NBBO" is necessary to ensure best execution and to forestall fragmentation in over-the-counter stocks, FINRA told the SEC. FINRA also said the data can be used as part of its surveillance efforts.

Those quotes FINRA does collect come off of its OTC Bulletin Board interdealer quotation system, a quoting service used by dealers to attract trades from other dealers. At one time, OTCBB had 100 percent of the business, but Pink Quote, introduced by Pink OTC in 2000, has come to dominate.

In December, Pink Quote boasted about 83,000 quote positions, versus 23,500 for OTCBB. The FINRA service has lost half of its quote positions in the last two years as dealers abandon the system for Pink Quote. Recent defectors have been E*Trade, Citi and StockCross.

The situation has become so dire that FINRA has put OTCBB up for sale. An announcement of the sale of the system was expected in January or February. Pink OTC is considered a leading contender to buy the system.

The decline in FINRA's OTCBB business is behind the regulator's decision to require dealers to deliver to it their quotes. The proposal also includes a $4 per security per month fee to be levied on dealers. FINRA will earn revenues from its dissemination of the quotes via its participation in the industry's market data revenue-sharing plan.