The Securities and Exchange Commission put off a decision on whether to approve a request by the Financial Industry Regulatory Authority to cut the time in which broker-dealers must report trades done away from the exchanges to 10 seconds.
The SEC has delayed its decision from March 29 to May 13, after encountering objections from broker-dealers and their advocates to cutting the time allowed for reporting off-exchange trades down from 30 seconds.
FINRA first proposed the reduction in February. Since then, the brokerage community has written letters to the SEC requesting it not approve the rule change. They argue the change would be costly and impossible to comply with when trading large blocks of shares, which can require manual input of details.
The SEC, in a filing, said it needed more time to consider the issue given the pushback and the need to hear a rebuttal by FINRA. “The Commission finds it appropriate to designate a longer period within which to take action,” it stated in the filing.
Under the current FINRA rule, brokers must report their trades of both National Market System and over-the-counter securities done outside of the public exchanges within 30 seconds. Under the proposal, firms would have to report these trades within 10 seconds or “as soon as practicable.”
In its February filing, 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 Still, FINRA believes the rule is outdated given the speed at which trading occurs.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.
“Even though the majority of OTC trades are reported within 10 seconds today, market participants have no certainty whether a particular trade reflects the immediate current market,” FINRA told the SEC.
The regulator’s concern is that the consolidated tape “does not distinguish between a trade reported one second after execution and a trade reported 30 seconds after execution.”
Requiring all brokers to report OTC trades within 10 seconds would “enhance market transparency and price discovery,” FINRA told the SEC.
For the brokerages and their advocates, however, such a change would be overkill, they told the SEC in their letters.
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.”
The trade organization asked the SEC not to approve the proposal until FINRA “provides additional information, including an economic analysis, to justify the need for the proposal.”
SIFMA, the FIF, as well as two small institutional brokerages, also argued that the new 10-second threshold would be nearly impossible to meet for firms handling certain block orders that require traders to enter the details of their trades manually.
Although most order and trade information is entered into brokers’ order management systems and FINRA’s trade reporting systems electronically, some trades must be entered manually, the brokers noted. Ten seconds is not enough time to do that.
“Slashing the reporting deadline to a 10-second threshold will simply stretch the bounds of human capabilities,” David Amster, CRT Capital Group’s chief compliance officer, told the SEC.
