Each component of the ADR Equivalent Price is integrally related to the conversion process for obtaining the ADRs necessary to fill the customers order and does not include any reasonably determinable compensation for the broker-dealer (see FAQ 3.08 above). Accordingly, any order marked as an ISO must fully meet the applicable requirements for ISOs in Rule 600(b)(30), Rule 611(b)(5) and (6), Rule 611(c), and the ISO exception to the SRO locked/crossed rules (see FAQ 5.02 below). Rule 600(b)(8) defines bid or offer as the bid price or offer price for one or more round lots of an NMS security. SEC Rule 600(b)(30) defines an intermarket sweep order ("ISO") as a limit order for an NMS stock that meets two requirements: (i) it is identified as an ISO; and (ii) the firm routes additional limit orders, as necessary, to execute against the full displayed size of any protected bid, in the case of a limit order to sell, or the full displayed . Given that the order was for the account of a customer, the customer agreed to the correction price, and the correction price was favorable to the customer (i.e., at the time of the error correction transaction, the price was below the national best bid for customer buy orders or above the national best offer for customer sell orders), the error correction transaction qualifies for the stopped order exception. Three Networks disseminate consolidated quotation and transaction data to the public pursuant to joint-SRO market data plans.3 The Network data streams will identify the SRO best bids and best offers that are protected quotations, as well as transactions that are excepted from Rule 611 (see FAQs 1.01 to 1.03 below). As part of a best-price routing strategy, an order router transmits an ISO to execute against a protected quotation at Trading Center A. Trading Centers. For every ISO, there must be at least one broker-dealer or trading center that is responsible under Rule 611(c). Would the transaction qualify for the stopped order exception of Rule 611(b)(9)? Price-To-Comply Orders comply with the Reg NMS Order Protection Rule and Locked and Crossed market rule by re-pricing to the NBBO. How should a broker-dealer determine whether an intra-day volume-weighted average price (VWAP) trade will qualify for the benchmark exception of Rule 611(b)(7)? Given the desire of some block customers to negotiate prices individually, either of the alternative policies and procedures is a reasonable way for the broker-dealer to address the practical difficulties of individually negotiating a price that is intended to be at or within the best protected quotations and capturing the transaction terms in an automated system. For example, if a trading center intends to use the exception in Rule 611(b)(6) to enable such trading center to execute a trade at an inferior price, the trading center must route ISOs to execute against the full displayed size of all better-priced protected quotations. In contrast, the definition of automated quotation in Rule 600(b)(3) is not limited to a particular time period. What is the relevance of Network Data for assessing compliance with Rule 611? Is there an exemption from Rule 611 for certain types of transactions in NMS stocks that are contingent on the execution of related transactions? Finally, Rule 611(c) requires that the Answer: The requirements for automated trading centers are set forth in Rule 600(b)(4). If so, is any broker-dealer responsible for routing ISOs also entitled to bypass a trading center experiencing systems problems that would justify use of the self-help exception? In addition, the customer receiving the favorable price in agency cross transaction (i.e., buying below the price of a protected bid or selling above the price of a protected offer) potentially could decline to participate in the transaction if the size of the agency cross transaction were reduced by any ISO fills. What are examples of matters that need to be addressed in a Firms data handling policies and procedures? 42 70 FR at 37521 n. 194, 37536 n. 321. If an automated trading center has reason to believe that it is not capable, because of systems or other problems, of immediately and automatically transmitting responses to IOC orders and immediately and automatically updating quotations, the trading center is required, at a minimum, to identify such quotations as manual. The broker-dealer agrees to sell the shares to the customer at the volume-weighted average price of the accumulated shares, but also guarantees an execution of the order at no worse than a specified price. Question 3.16: Benchmark Exception/VWAP Trades. A broker-dealer buys a block of an NMS stock as principal from a customer. In particular, the routing arrangements should be highly reliable and incorporate appropriate policies and procedures to monitor performance of routing systems to affirm that they are functioning properly. In recent years, industry participants have acquired substantial practical experience with policies and procedures for automated best-price routing strategies. The order router must assess whether the cause of a problem lies with its own systems or connections and, if so, take immediate steps to resolve the problem appropriately.40. Answer: Whether market participants can route ISOs directly to an ECN that is displaying quotations in an SRO trading facility will depend on the particular context. Orders for which customers request special handling are excluded from the definition of covered orders in Rule 600(b)(15). As part of its policies and procedures reasonably designed to assure compliance with the exception, the broker-dealer must have and maintain reasonable documentation of the externally observable circumstances. Such policies and procedures are likely to evolve as the securities industry gains experience interacting with Regulation NMS-compliant trading systems. Two of the essential steps in routing ISOs are, first, to take a snapshot of the relevant protected quotations and, second, to transmit to the appropriate automated trading centers any ISOs that are necessary to execute against such protected quotations under applicable rules. What would be the consequences if an automated trading center failed to meet the Specifications Date or Trading Phase Date? 18 FAQ 3.23 below addresses policies and procedures reasonably designed to address the practical problems that arise in the context of agency block transactions with non-trade-through prices that are individually negotiated. This document jointly addresses Rule 611 and Rule 610 because the price priority and access issues arising under the two rules often are intertwined.1 On May 18, 2006 and January 24, 2007, the Commission extended the compliance dates for the Rules to a series of five dates, beginning on October 16, 2006.2. The destination trading center is required to execute the ISO at a price at least as favorable as the price of the protected quotation (unless previously executed or withdrawn),15 and any execution at the price of the protected quotation (regardless whether executed against displayed or reserve size) is subject to the fee limitation of Rule 610(c).16. If the customer order is long, but the broker-dealer does not have a long position in the NMS stock, should the broker-dealer nonetheless mark the ISOs as short exempt? 36 Rule 600(b)(16) defines customer as any person that is not a broker or dealer. If a broker-dealer is a party to the transaction (party BD), the arranging broker-dealer may not act in concert with the party BD to facilitate trades between the party BD and its customers. To qualify for the benchmark exception, the trade must be at a price that was not based, directly or indirectly, on the quoted price of the NMS stock at the time of execution and for which the material terms were not reasonably determinable at the time the commitment to execute the order was made. Under these circumstances, both the agency cross transaction and the principal trade would qualify for the ISO exception in Rule 611(b)(6). 2. When the trade is reported to the relevant SRO, however, the price is inferior to a protected quotation. Yes. A broker-dealer that designates an order as an intermarket sweep order has the responsibility of complying with Rules 610 and 611 of Regulation NMS. This change likely will be most significant for Nasdaq-listed stocks for which there currently is no intermarket trade-through rule. SEC Rule 611(b)(6) (Intermarket Sweep Order (outbound)) SEC Rule 611(b)(7) (Benchmark/Derivatively Priced) SEC Rule 611(b)(9) (Stopped Stock) SEC Rule 611(d) (Qualified Contingent Trades) SEC Rule 611(d) (Sub-Penny Trade-Throughs) SEC Rule 611(d) (Error Correction) SEC Rule 611(d) (Print Protection) They presume that the reader will be familiar with the Rules themselves, as well as the defined terms set forth in Rule 600(b) of Regulation NMS. Facts and circumstances of particular transactions may differ, and the Staff notes that even slight variations may require different responses. Question 4.05: Routing ISOs Directly to ECNs. They are not rules, regulations, or statements of the Securities and Exchange Commission (Commission). A broker-dealer operates a trading desk that, among other things, executes customer orders as principal at prices that are manually negotiated between customers and the broker-dealers traders. What is the process for modifying the definition of regular trading hours in Rule 600(b)(64)? Pursuant to Rule 605(a)(2), the SROs jointly participate in a plan (Rule 605 Plan) establishing procedures for market centers to follow in making available to the public the monthly reports required by Rule 605.45 Section X of the Rule 605 Plan establishes procedures for specifying regular trading hours for purposes of the definition in Rule 600(b)(64). As part of the broker-dealers periodic surveillance under Rule 611(a)(2), ISOs should be compared with the relevant protected quotations to affirm that the ISOs were properly routed (see FAQ 6.03 below). The problem could be located in the internal systems of the destination trading center, but it also could be located in the internal systems of the order router or in the connections that the order router used to access the destination trading center. 54391 (Aug. 31, 2006), 71 FR 52836 (Sept. 7, 2006) (approving SR-NSX-2006-08 to amend NSX trading rules to provide for a price-time priority market and other related changes). 30 Securities Exchange Act Release No. 31 The exemption solely addresses the status of a transaction under Rule 611. In addition, the questions and answers reflect current technological and other industry conditions and may require modification in the future if such conditions change materially. For example, the trading center must provide an order execution that meets the firm quote requirements of Rule 602(b). Question 3.02: Documenting Non-Trade-Through Prices (MODIFIED). In this structure, the originating broker-dealer (i.e., a broker-dealer that intends to take advantage of the ISO exception either for itself or on behalf of a customer) would perform the essential ISO routing functions, such as taking a snapshot of protected quotations and transmitting the necessary ISOs to execute against protected quotations. May the broker-dealer execute the principal trade at $50 per share using the benchmark exception under Rule 611(b)(7)? Answer: Yes, the sale of the ADRs to the broker-dealers customer would qualify for the benchmark exception in Rule 611(b)(7). Moreover, if the guaranteed price was added to the order after it was originally accepted, the order would need to be evaluated at the later time to determine whether an execution at the guaranteed price would qualify for the benchmark exception. An intermarket sweep order is typically a large order that gets sent to several exchanges simultaneously for the purpose of quickly taking as much liquidity as possible. Answer: At a minimum, an ISO designation indicates the order routers intention to execute against an automated trading centers protected quotation (assuming that the price of the protected quotation on arrival of the order is within the ISOs limit price). Use of an IOC designation triggers the requirements for automated quotations set forth in Rule 600(b)(3) of Regulation NMS, particularly the requirement that the trading center provide an immediate response to the order (see FAQ 2.03 above). An intermarket sweep order (ISO) is a limit order that automatically executes in a des- . Question 3.15: Benchmark Exception/Conversion of Foreign Ordinary Shares to ADRs (MODIFIED). To fill a large customer order to buy an NMS stock, a broker-dealer effects, as principal, a series of smaller trades to accumulate a position in the stock. Answer: No, Rule 611 does not require Firms to maintain a comprehensive database of Firm-Specific Quotation Data if (1) the Firm has implemented reasonable policies and procedures that include periodic review of its compliance with Rule 611, and (2) the Firm retains sufficient Firm-Specific Quotation Data to demonstrate the reasonableness of its Rule 611 compliance reviews. It contemplates that broker-dealers generally will attempt to accumulate a position to fill a large order in transactions that are subject to Rule 611 to help them meet the benchmark price.21 It therefore allows the broker-dealer to fill the order to the customer in a transaction whose price is benchmarked to a price that is not related, directly or indirectly, to the quoted price of the stock at the time of the transaction and for which the material terms were not reasonably determinable at the time the commitment to execute the order was made. The ADF is the single existing example of an SRO display-only facility, as defined in Rule 600(b)(71). What conditions must a stopped order meet to be exempt from SEC Rule 611? If so, the order is executed automatically at the ECN and reported back through the SRO execution facility. For example, different trading desks or systems at a Firm potentially could use different clocks to assign time-stamps to trades executed by such desks or systems, and these clocks could be different from the clock that is used to assign time stamps to protected quotations as they are received. Id. How should the exchange handle the short sale order? To be protected, a quotation must, among other things, be immediately and automatically accessible and be the best bid or best offer of a national securities exchange or national securities association (collectively, self-regulatory organizations or SROs). Question 4.03: Routing ISOs with Assistance of Third-Party Service Providers. How should the block trading desk execute and report the block trade in compliance with the ISO exception? As defined in Rule 600(b)(57), a protected bid or protected offer must, among other things, be disseminated pursuant to an effective national market system plan. In this respect, Network Data is unlike Firm-Specific Order and Trade Data and Firm-Specific Quotation Data, which will have time stamps that vary to some extent from Firm to Firm. [1] These work against the order-protection rule under regulation NMS. The ISO exception thereby both furthers the price priority objectives of Rule 611 and facilitates best-price routing practices the automated routing of orders to one or more trading centers displaying the best-priced quotations available for an NMS stock at any particular time. The Staff intends to assess compliance by SRO trading facilities and ADF participants with the Specifications Date and Trading Phase Date. It does not, for example, apply to any trades executed by the trading center that are connected with the Print Protection Transaction. For example, an agreement, subsequent to the time of the original commitment to sell the shares as agent, to execute the residual amount of the order at a reasonably determinable price, or at a price that would result in reasonably determinable compensation for the broker-dealer (see FAQ 3.08 above), would not qualify for the benchmark exception. Is there an exemption from Rule 611 for certain transactions that are necessary to correct bona fide errors? Does Regulation NMS require trading centers to cancel any portion of an ISO that cannot be executed immediately? a new Routing Method Code of "I" (Intermarket Sweep Order) became available on June 11, 2007. . priced opening, reopening, or closing transaction by the trading Intermarket Sweep Order (Incoming) This exception makes it possible for a trading center, likely an exchange or ATS, to execute immediately any incoming order identified as an intermarket sweep order (ISO) even if a better-priced protected quote exists at another market center. Answer: Whether an intra-day VWAP trade qualifies for the exception in Rule 611(b)(7) will necessarily depend on the specific facts and circumstances of the trade. They are (1) a limit price, (2) an immediate-or-cancel ("IOC") designation, and (3) an ISO designation. Upon subsequent discovery of the error, the trading center agrees with the customer to correct the error by executing the order at a price that is favorable to the customer at the time of the error correction. Broker-dealer and customer also agree, at a time when the final execution price is not reasonably determinable, that any residual amounts not sold by 3:00 p.m. will be sold by the broker-dealer as principal at the volume-weighted average price of the executions of the order prior to that time. Paragraph (b) of the Rule sets forth exceptions that are designed primarily to promote intermarket price priority. In these cases, the broker-dealer and customer can agree to adjust the VWAP benchmark by including a factor that reflects the variability in achieving actual VWAP. The Staff would recommend that the order exempt industry participants from trade-through and lock/cross responsibilities during the phase-in periods with respect to all trading centers not explicitly identified in the order. Is there an exemption from Rule 611 for certain transactions that enable a trading center to offer print protection to its customers? Quotations will have a condition code B if manual on the bid, A if manual on the offer, and H if manual on both the bid and the offer.4 Quotations without any condition codes will be automated. It presumes that the trading center has complied with all requirements applicable to error transactions, including SRO rules. Under existing regulatory requirements, Firms already are required to maintain their Firm-Specific Order and Trade Data. An intermarket sweep order (ISO) is a digital circumvention of Rule 611 of Regulation NMS. The NMS Release notes that one of the policy objectives of this definition is to treat exchange markets comparably with the ADF. Question 8.03: Effect of Trading Phase Date on Market Participants Other than Automated Trading Centers. Answer: Yes, a broker-dealer responsible for routing ISOs is permitted to retain the services of another entity for assistance in meeting the requirements of Rule 611, but such broker-dealer would remain ultimately responsible for compliance with the Rule.37 For example, Rule 611(c) requires a broker-dealer to take reasonable steps to establish that the ISOs for which it is responsible meet the requirements set forth in the definition of an ISO in Rule 600(b)(30). Systems Assessment and Response. A transaction would qualify as an individually negotiated agency block transaction for purposes of this FAQ if: (1) the broker-dealer arranging the transaction does not participate in such transaction as principal, except as riskless principal in compliance with the relevant SRO rule on riskless principal reporting;35 (2) at least one of the parties individually negotiating the price of the transaction is a customer, as defined in Rule 600(b)(16) of Regulation NMS;36 and (3) the transaction is of block size, as defined in Rule 600(b)(9) of Regulation NMS. 33 Securities Exchange Act Release No. In addition, this response does not address whether the residual principal trade would satisfy any best execution responsibilities that the broker-dealer may owe to its customer. This definition is embedded in the definition of quotation in Rule 600(b)(62), as well as the definition of protected bid or protected offer in Rule 600(b)(57). VDOMDHTMLtml> Intermarket Sweep Order | How to navigate rule 611 | Eventus Intermarket sweep orders are a powerful tool for equity traders but care must be taken when breaking the order protection rule under RegNMS. Answer: Given that the short sale order would be executable at the exchange at a lower price than the protected quotation at the other trading center, the exchange would be allowed to route an ISO to the other trading center that was marked as a short exempt order, thereby freeing the other trading center to execute the order at the higher price of its protected bid without regard to the tick restrictions of Rule 10a-1. 55883 (June 8, 2007), 72 FR 32927 (June 14, 2007). As discussed in FAQ 4.02 above, all ISO routers must adopt routing arrangements that reasonably address the risk of systems problems that could impair the routing function. 19 See NMS Release, 70 FR at 37527 n. 250 (noting that the Commission would work with the industry during implementation to achieve an appropriate resolution of these practical issues). In recent years, many market participants have developed best-price routing practices and have considerable experience in dealing with trading centers when systems problems occur. For example, such rules would need to comply with the relevant SRO rule on the display of locking or crossing quotations (see FAQ 5.01 below). In contrast, when the limit price of an ISO is inferior to the NBBO at time of order receipt, the customer is effectively instructing the trading center that it can execute the order at a price inferior to the NBBO, even if one or more trading centers are displaying better prices. If the customer receiving a price inferior to a protected quotation (i.e., buying at a price above a protected offer or selling at a price below a protected bid) consents to not receiving any better prices obtained through fills of ISOs, the broker-dealer could report the agency cross transaction immediately on the routing of the ISOs because the size of the agency cross transaction would not be reduced by any fills of the ISOs. Answer: Yes, the Commission has issued an order exempting non-convertible preferred securities from Rule 611(a).34 The exemption recognizes that non-convertible preferred securities have characteristics analogous to fixed income instruments. The ISO designation will allow the destination trading center to execute the order immediately, even if another trading center displays a better-priced protected quotation after the ISO is routed and before the ISO is executed by the destination trading center.
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