The Securities and Exchange Commission has approved the Financial Industry Regulatory Authority’s proposal to require brokers to report details of equities transactions within 10 seconds of execution.
The rule has been 30 seconds. Some brokers had objected that a 10-second rule would not allow enough time to physically type and send in reports for transactions that were handled by hand.
But the rule as approved includes an amendment that stipulates FINRA “will take such factors as the complexity and manual nature of the execution and reporting of the trade into consideration’’ in evaluating “a pattern or practice of late trade reporting.’’
FINRA trade reporting rules currently require that members report OTC transactions in NMS stocks and OTC Equity Securities that are executed during the hours that the FINRA Facilities are open within 30 seconds of execution.7 In addition, members must report the cancellation of a trade within 30 seconds of the time of cancellation if the trade is both executed and cancelled on the same day during normal market hours.
Unexcused Late Reporting
The new trade reporting rules will require FINRA members to report executions or cancellations of trades in National Market System and over-the-counter stocks in no more than 10 seconds.
Transactions not reported within 10 seconds will be marked late. FINRA, which regulates brokers, defines “unexcused late reporting” to be “repeated reports of executions submitted after the required time period without reasonable justification or exceptional circumstances.”
In a comment letter received by the SEC, Christopher Nagy of KOR Trading said 10 seconds represents a significant amount of time given “that the exchanges and trading firms commonly measure performance in microseconds.”
Four commenters, though, raised concerns about manual trading and the ability to input and verify trade data within 10 seconds. That led to FINRA amending its rule filing to require brokers to design policies and procedures that will allow them to adhere to the 10-second rule “as soon as practicable” and to state that it when “a member has such reasonably designed policies, procedures and systems in place, the member will not be viewed as violating the “as soon as practicable” requirement because of delays in trade reporting that are due to extrinsic factors that are not reasonably predictable and where the member does not purposely delay the reporting of the trade.’’
In its February filing to change the 30-second rule, FINRA noted that 99.96 percent of all trades done over the counter were already reported within 10 seconds. Still, FINRA believes the rule is outdated given the speed at which trading occurs. The time it takes to accept, process, and acknowledge or fill an order is under 200 millionths of a second at the Nasdaq Stock Market, for instance. Over-the-counter speed comparisons are not available.
Both the Securities Industry & Financial Markets Association and the Financial Information Forum argued the cost for brokers to update their systems would outweigh any benefit the rule brings.
“FINRA member firms would be required to make substantial systems changes to assure compliance with the new requirements,” Theodore Lazo, SIFMA’s associate general counsel, told the SEC. Yet “FINRA has not explained the regulatory imperative that would justify these costs.”