[Federal Register Volume 81, Number 37 (Thursday, February 25, 2016)]
[Notices]
[Pages 9550-9555]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-03960]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77196; File No. SR-FINRA-2016-005]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Reduce 
the Synchronization Tolerance for Computer Clocks That Are Used To 
Record Events in NMS Securities and OTC Equity Securities

February 19, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 9, 2016, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to reduce the synchronization tolerance for 
members' computer clocks that are used to record events in NMS 
securities, including standardized options, and OTC Equity Securities. 
This proposal would not change the current clock synchronization 
requirement for members' mechanical time stamping devices or computer 
clocks that are used to record events for securities other than NMS 
securities or OTC Equity Securities.
    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal office of FINRA, on the 
Commission's Web site at http://www.sec.gov, and at the Commission's 
Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Current FINRA rules require that firms synchronize their business 
clocks in conformity with procedures prescribed by FINRA. Specifically, 
FINRA Rule 7430 requires that firms synchronize their business clocks 
that are used for purposes of recording the date and time of any event 
that must be recorded pursuant to the FINRA By-Laws or other FINRA 
rules (e.g., the time a trade was executed or the time an order was 
received or routed), with reference to a time source as designated by 
FINRA. As specified in the current OATS technical specifications, all 
computer system clocks and mechanical time stamping devices must be 
synchronized to within one second of the NIST atomic clock.\3\ To 
maintain clock synchronization, clocks should be checked against the 
NIST atomic clock and re-synchronized, if necessary, at pre-determined 
intervals throughout the day.\4\ FINRA understands that currently, some 
firms synchronize their clocks continuously throughout the day, while 
others do so at various times during the day and still others do so 
only once a day.\5\
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    \3\ Any time provider may be used for synchronization; however, 
all clocks and time stamping devices must remain accurate within a 
one-second tolerance of the NIST clock. This tolerance includes (1) 
the difference between the NIST standard and a time provider's 
clock, (2) transmission delay from the source and (3) the amount of 
drift of the member firm's clock. The OATS technical specifications 
further specify that computer system and mechanical clocks must be 
synchronized every business day before market open to ensure that 
recorded order event timestamps are accurate.
    \4\ The OATS technical specifications also provide that member 
firms must document and maintain their clock synchronization 
procedures. In addition, the technical specifications state that 
member firms should keep a log of the times when they synchronize 
their clocks and the results of the synchronization process, 
including notice of any time a member's clock drifts more than the 
one second standard. The technical specifications further provide 
that such logs should be maintained for the period of time and 
accessibility specified in SEC Rule 17a-4(b), and maintained and 
preserved for the required time period in paper format or in a 
format permitted under SEC Rule 17a-4(f).
    \5\ FINRA generally believes that the firms that synchronize 
once daily are firms that accept manual orders.
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    Given the increasing speed of trading in today's automated markets, 
FINRA believes the current one second tolerance is no longer 
appropriate for computer system clocks recording

[[Page 9551]]

events in NMS securities \6\ and OTC Equity Securities \7\ under FINRA 
rules. Automated systems have evolved to the point where order 
placement and trading decisions in these asset classes are made on a 
millisecond basis, if not finer. Moreover, in many cases firms report 
events to FINRA's equity trade reporting and audit trail facilities in 
milliseconds.\8\
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    \6\ The term ``NMS security'' is defined in Rule 600 of 
Regulation NMS to mean ``any security or class of securities for 
which transaction reports are collected, processed and made 
available pursuant to an effective transaction reporting plan, or an 
effective national market system plan for reporting transactions in 
listed options. 17 CFR 242.600(b)(46). As Commission staff has 
noted, the term NMS security generally ``refers to exchange-listed 
equity securities and standardized options, but does not include 
exchange-listed debt securities, securities futures, or open-end 
mutual funds, which are not currently reported pursuant to an 
effective transaction reporting plan.'' See Division of Trading and 
Markets Staff's Responses to Frequently Asked Questions Concerning 
Large Trader Reporting, question 1.1, available at https://www.sec.gov/divisions/marketreg/large-trader-faqs.htm.
    \7\ The term ``OTC Equity Security'' is defined in FINRA Rule 
6420(f) to mean ``any equity security that is not an `NMS stock' as 
that term is defined in Rule 600(b)(47) of Regulation NMS; provided, 
however, that the term `OTC Equity Security' shall not include any 
Restricted Equity Security.''
    \8\ See Securities Exchange Act Release No. 71623 (February 27, 
2014), 79 FR 12558 (March 4, 2014) (order approving SR-FINRA-2014-
050, FINRA's proposal to require firms to report order and trade 
information to the FINRA TRFs, ADF, ORF, and OATS in milliseconds, 
if the firms' systems capture time in milliseconds). See also 
Regulatory Notice 14-21 (May 2014) (announcing the effective date of 
millisecond reporting changes); Regulatory Notice 14-47 (November 
2014) at page 7, n. 7 (describing the extended implementation 
schedule for millisecond reporting changes).
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    Accordingly, FINRA is proposing to tighten the synchronization 
requirement for computer system clocks that record events in NMS 
securities and OTC Equity Securities. The proposal would reduce the 
drift tolerance for computer clocks that record events in these 
securities from one second to 50 milliseconds. The proposal would not 
change the current one second standard for securities other than NMS 
securities or OTC Equity Securities and would not change the current 
one second standard for events recorded by mechanical clocks or time 
stamping devices, as opposed to computer clocks.
    As a technical matter, the proposal would codify the existing OATS 
technical specifications cited above, along with the new proposed 50 
millisecond standard, in FINRA's Rule 4500 Series (Books, Records and 
Reports). The purpose of this technical change is to relocate the clock 
synchronization requirements from OATS rules to a rule set where it is 
clear the requirements apply to the recording of the date and time of 
any event that must be recorded under FINRA By-Laws or rules. As noted 
above, under a combination of Rule 7430 and the OATS technical 
specifications, the current one second synchronization standard already 
applies to the recording of the date and time of any event that must be 
recorded under FINRA By-Laws or rules. Under this proposal, FINRA would 
consolidate and codify the clock synchronization requirements in new 
Rule 4590 for clarity and ease of reference. This consolidation would 
include the current provision in the OATS technical specifications that 
conveys guidance on recordkeeping to demonstrate compliance with the 
synchronization standard, which would be codified without material 
change as Supplementary Material .01 to Rule 4590.
    In arriving at this proposal, FINRA solicited and received feedback 
from its industry advisory committees, as well as through a public 
request for comment. After thoroughly evaluating all of the feedback 
received, FINRA has determined that the proposed 50 millisecond 
standard is the best approach given existing technology and FINRA's 
regulatory needs. In addition, as described in more detail below, FINRA 
further determined that it should proceed with the proposal now, rather 
than wait for approval and implementation of the clock synchronization 
requirements proposed in the National Market System Plan governing the 
Consolidated Audit Trail (``CAT NMS Plan'').\9\
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    \9\ The CAT NMS Plan, which was submitted by the national 
securities exchanges and FINRA on February 27, 2015, is available at 
catnmsplan.com.
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    As an initial step, FINRA staff solicited industry input from 
several of its industry advisory committees prior to publishing the 
proposal for comment in a Regulatory Notice. These committees were 
generally supportive. To the extent the committees raised concerns, 
they focused on the proposal's potential impact on small firms, 
particularly firms that do not rely on highly automated systems. In 
response to these concerns, and similar concerns raised in the comment 
letters discussed below, FINRA modified the proposal to allow for 
phased implementation which would grant less automated firms up to 18 
months to comply with the proposed 50 millisecond standard. In 
addition, the proposal retains the current one second standard for 
events recorded by mechanical clocks or time stamping devices, which 
FINRA believes are more likely to be used by small firms.
    Next, in November 2014, FINRA published Regulatory Notice 14-47 to 
request written comments on the proposal. FINRA received eight comment 
letters in response.\10\ In general, five of the eight commenters 
supported tightening current clock synchronization requirements, at 
least to some extent.\11\ Two of the eight commenters opposed the 
proposal to some extent, questioning either the proposed 50 millisecond 
standard or the need for FINRA to amend its clock synchronization 
requirement at this time, before the CAT NMS Plan is approved and 
implemented.\12\
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    \10\ See Letters from Crews & Associates, January 5, 2015 
(``Crews Letter''); FSMLabs, dated January 7, 2015 (``FSMLabs 
Letter''); Quincy Data, LLC, dated January 9, 2015 (``Quincy Data 
Letter''); Wiley Bros. Aintree Capital, dated January 9, 2015 
(``Wiley Bros. Aintree Capital Letter''); IEX Services LLC, February 
12, 2015 (``IEX Letter''); Financial Information Forum, dated 
February 20, 2015 (``FIF Letter''); Sync-n-Scale, dated February 20, 
2015 (``Sync-n-Scale Letter''); and KOR Group LLC, dated February 
20, 2015 (``KOR Letter'').
    \11\ See FSMLabs Letter, Quincy Data Letter, IEX Letter, Sync-n-
Scale Letter, and KOR Letter.
    \12\ See Crews Letter and FIF Letter.
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    Of the five commenters that supported tightening clock 
synchronization requirements at least to some extent, all agreed that a 
millisecond standard is necessary given the speed of trading in today's 
markets. For example, according to FSMLabs, FINRA's proposal is 
``timely and necessary'' because ``[w]ide use of electronic trading 
systems and proliferation of trading venues make it impossible to 
understand market operation or to manage risks without precise and 
reliable time information.'' \13\ Similarly, IEX stated its belief that 
``the proposal represents an important and beneficial advance over the 
current [one second] standard.'' \14\
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    \13\ See FSMLabs Letter at 6-7.
    \14\ See IEX Letter at 2.
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    The commenters that supported the proposal generally took the view 
that the proposed 50 millisecond standard would not be overly 
burdensome to adopt, even for smaller firms. FSMLabs stated that a 50 
millisecond standard ``can be met with low cost off-the-shelf software 
only.'' \15\ According to KOR, ``the technology to perform such high-
resolution synchronization is low-cost and has been available for 
years.'' \16\ Sync-n-Scale took the view that the proposed 50 
millisecond standard ``is highly likely not an onerous imposition on 
market participants in any of the relevant dimensions: financially, 
technologically and operationally.'' \17\
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    \15\ See FSMLabs Letter at 1.
    \16\ See KOR Letter at 2.
    \17\ See Sync-n-Scale Letter at 1.
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    Several of these commenters proposed tightening the clock 
synchronization standard even further, to below 50

[[Page 9552]]

milliseconds. For example, FSMLabs said that a one millisecond standard 
would not impose significant additional costs, while even a one 
microsecond standard could be practical with low-cost off-the-shelf 
technology.\18\ KOR agreed that reducing the standard to one 
millisecond ``would not impose significant additional costs to market 
participants over a 50 millisecond requirement.'' \19\ And according to 
IEX, ``the permitted variance could be further reduced consistent with 
the systems capabilities of most member firms.'' \20\
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    \18\ See FSMLabs Letter at 1.
    \19\ See KOR Letter at 2.
    \20\ See IEX Letter at 2. Additionally, another commenter 
submitted its own proposal, which it said could ``replace CAT 
requirements.'' Under this commenter's proposal, all matching 
engines would be time synchronized to an accuracy that is within 10 
microseconds of the global time standard, and manual trades would be 
time stamped within an accuracy of 1 minute. See Quincy Data Letter 
at 1.
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    Two commenters took different views and opposed the proposal. Crews 
& Associates stated that any standard less than 200 milliseconds is not 
feasible at any cost, based on the time it takes to receive data 
packets with updated time information from NIST servers.\21\ The 
Financial Information Forum (``FIF''), which conducted an industry 
survey on current synchronization practices and the anticipated costs 
of tighter synchronization standards, did not take issue with the 
proposed 50 millisecond standard itself. In fact, FIF supported a 50 
millisecond standard; however, FIF suggested that FINRA ``work through 
the CAT NMS Plan process to achieve [its] clock synchronization 
objectives and avoid redundant, and potentially conflicting, rule-
making.'' \22\
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    \21\ See Crews & Associates Letter at 1.
    \22\ See FIF Letter at 3. As noted elsewhere in this filing, FIF 
cautioned that its survey did not necessarily reflect small firms, 
which it thought would be more likely to have trouble meeting the 
proposed clock synchronization standard.
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    Finally, several of the commenters argued that FINRA should 
consider different standards for different types of market 
participants. KOR suggested that highly automated firms--i.e., firms 
that co-locate their equipment at an exchange datacenter or in a data 
center with modern clock synchronization technology--should be held to 
a one millisecond standard, while all other firms should be subject to 
a 50 millisecond standard.\23\ Crews & Associates said that there 
should be a separate rule for firms that engage in high frequency 
trading, although this commenter did not offer a detailed 
recommendation on how the standards should differ for firms that do and 
do not engage in HFT.\24\
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    \23\ See KOR Letter at 2.
    \24\ See Crews & Associates Letter at 2.
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    FINRA carefully considered the committee views and written 
comments. After analyzing this feedback, FINRA believes it is necessary 
and appropriate to proceed with the proposed 50 millisecond standard 
for NMS securities and OTC Equity Securities, with a phased 
implementation that allows less automated firms more time to adjust 
their systems. FINRA believes that 50 milliseconds is the right 
standard at this time, given prevailing technology for trading systems 
and clock synchronization, because it strikes an acceptable balance 
between audit trail integrity and the costs of compliance. FINRA also 
believes it is important to apply the same standard to all computer-
recorded events, regardless of firm size or activity type. Audit trail 
integrity relies on the ability to accurately sequence events for a 
given period of time, including events generated by firms that do not 
engage in HFT.\25\
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    \25\ While FINRA does not believe it is practicable to adopt 
different standards for firms that engage in HFT and those that do 
not, as some commenters suggested, it is proposing to provide less 
automated firms with more time to adjust their systems to the new 
proposed standard, as discussed more below.
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    FINRA's decision to pursue the proposed 50 millisecond standard is 
informed in part by the CAT NMS Plan filed in February, 2015. The CAT 
NMS Plan was required by SEC Rule 613, which directed FINRA and the 
national securities exchanges to submit a national market system plan 
to govern the creation, implementation, and maintenance of a 
consolidated audit trail and central repository.\26\ Rule 613 further 
contains specific provisions that require the CAT NMS Plan to adopt a 
clock synchronization standard ``consistent with industry standards.'' 
\27\ Guided by these provisions, the CAT NMS Plan contains detailed 
discussion of current clock synchronization practices, as well as the 
potential costs that broker-dealers would incur under various 
synchronization standards ranging from 1 second to 100 
microseconds.\28\ As part of its cost analysis, the CAT NMS Plan refers 
to the same FIF survey that accompanied the FIF's comment letter to 
FINRA on this proposal.\29\
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    \26\ 17 C.F.R Sec.  242.613(a).
    \27\ 17 CFR Sec.  242.613(d)(1).
    \28\ See CAT NMS Plan, available at catnmsplan.com, at Appendix 
C-125.
    \29\ See CAT NMS Plan at Appendix C-125 to C-126 (citing the FIF 
Clock Offset Survey, which FIF also attached to its comment letter 
on this proposal).
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    Ultimately, the CAT NMS Plan concluded ``that a clock offset of 
50ms represents an aggressive, but achievable, industry standard.'' 
\30\ FINRA agrees that, at present, while a 50 millisecond standard may 
impose some costs on firms, it is nevertheless achievable with existing 
technology, and that it would allow FINRA significantly greater 
regulatory and surveillance capabilities. Moreover, FINRA recognizes 
that proposing a standard different from the CAT NMS Plan could create 
additional and potentially burdensome costs for firms.\31\
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    \30\ See id.
    \31\ The FIF comment letter supported the view that FINRA should 
not adopt a standard that is different from what was proposed in the 
CAT NMS Plan, even if that standard were more lenient and less 
costly to implement now than the CAT NMS Plan standard. See FIF 
Letter at 2 (noting that respondents to the FIF Clock Offset Survey 
``questioned the benefits of an interim tolerance citing that any 
changes to the current clock offset would require modifications to 
systems and processes'').
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    But while FINRA believes it is appropriate to propose the same 50 
millisecond clock synchronization standard advanced by the CAT NMS 
Plan, FINRA does not agree with the comment that FINRA should forego 
this proposal and wait for the CAT NMS Plan to become effective. It may 
be some time before the clock synchronization requirements of the CAT 
NMS Plan take effect.\32\ Meanwhile, as the Commission has recognized, 
a sub-one second clock synchronization standard is an important element 
of market data reliability.\33\ And FINRA, as a national securities 
association, relies on the accuracy of market data to fulfill its 
regulatory obligations. Accordingly, FINRA believes it has a current 
need to tighten the clock synchronization standard for events that must 
be recorded pursuant to the FINRA By-Laws or other FINRA rules.
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    \32\ The CAT NMS Plan was filed pursuant to Rule 608 of 
Regulation NMS, which provides the general procedure for national 
market system plans. Under Rule 608(b)(2), the Commission has 120 
days from the date it publishes a national market system plan, or up 
to 180 days of such date if it finds such longer period to be 
appropriate and publishes its reasons for so finding or as to which 
the sponsors of the plan consent, to approve the plan, with such 
changes or subject to such conditions as the Commission may deem 
necessary or appropriate. As proposed, the CAT NMS Plan would become 
effective upon approval by the Commission and execution by all of 
the participants that submitted the plan (see CAT NMS Plan, Section 
2.1), and the clock synchronization requirements would apply within 
four months of the effective date (see CAT NMS Plan, Section 
6.7(a)(ii)).
    \33\ See Securities Exchange Act Release No. 67457 (July 17, 
2012), 77 FR 45722, 45774 (August 1, 2012) (``Consolidated Audit 
Trail Adopting Release'') (``The Commission believes that the 
current industry standard for conducting securities business is more 
rigorous than one second.'').
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    FINRA acknowledges that a tightened clock synchronization standard 
could impose costs, particularly on small or

[[Page 9553]]

less automated firms. As a result, FINRA has revised the proposal in 
response to comments in two ways, in order to minimize the burden 
associated with the proposed rule and ease implementation. First, FINRA 
has narrowed the scope of the proposal so that the 50 millisecond 
standard proposed in this filing would apply only to NMS securities and 
OTC Equity Securities, and not to fixed income securities. FINRA 
believes this modification is warranted because fixed income products 
generally are not traded with the same level of automation as equity or 
option securities. Moreover, the revised scope would parallel the 
current scope of the CAT NMS Plan, which, as filed, would apply to NMS 
securities and OTC Equity Securities, but not debt securities.\34\ 
FINRA notes that the CAT NMS Plan contemplates whether debt securities 
may become subject to CAT reporting in the future, and FINRA will 
continue to consider the appropriate clock synchronization standard for 
systems that record events in debt securities.
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    \34\ See, e.g., CAT NMS Plan at Appendix C-127 (discussing the 
Plan's applicability to OTC Equity Securities in addition to NMS 
securities, and whether debt securities may be subject to the CAT 
NMS Plan in the future). Because the scope of this proposal would 
align with the scope of the current proposed CAT NMS Plan, FINRA 
believes that costs incurred by firms to meet the proposed FINRA 
clock synchronization standard would support the changes needed to 
meet any future requirement imposed under CAT and, therefore, should 
not result in duplicative efforts.
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    FINRA proposes to adopt a phased implementation for the proposed 50 
millisecond standard. If the Commission approves the filing, FINRA will 
announce the effective date of the proposed rule change in a Regulatory 
Notice to be published no later than 90 days following Commission 
approval. FINRA would then require firms with systems that capture time 
in milliseconds to comply with the new 50 millisecond standard within 
six months of the effective date; remaining firms that do not have 
systems which capture time in milliseconds would have 18 months from 
the effective date to comply with the 50 millisecond standard.\35\
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    \35\ FINRA recognizes that a phased implementation does not 
necessarily on its own reduce the costs of the proposal. However, a 
phased implementation could allow firms, particularly smaller or 
less automated firms, a greater time period over which they can 
identify and implement the most cost effective clock synchronization 
solution that meets the standard required by this proposal. FINRA 
notes that the FIF Clock Offset Survey recommended a delayed 
implementation and noted that ``[w]hile additional time may not 
reduce costs, it may ease implementation as firms manage this effort 
in conjunction with other compliance initiatives.'' See FIF Letter 
and attached FIF Clock Offset Survey.
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2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\36\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. FINRA believes that the proposed rule change will 
bolster FINRA's ability to meet its regulatory obligations as a 
national securities association. As the Commission has noted, time 
drift away from a universal, synchronized standard is an important 
issue to address to enhance the integrity of audit trail data.\37\ 
FINRA therefore believes it is important to pursue a 50 millisecond 
standard at this time, for the reasons explained above, so that it can 
compile more accurate audit trail data and conduct surveillance with 
more precise time-sequenced data. By doing so, the proposal would 
facilitate FINRA's efforts to detect and prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest.
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    \36\ 15 U.S.C. 78o-3(b)(6).
    \37\ See Consolidated Audit Trail Adopting Release, 77 FR at 
45774.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. FINRA has undertaken an 
economic impact assessment, as set forth below, to analyze the 
regulatory need for the proposed rule change, its potential economic 
impacts, including anticipated costs and benefits, and the alternatives 
FINRA considered in assessing how to best meet its regulatory 
objectives.
Economic Impact Assessment
A. Regulatory Need
    FINRA's current rules require members to synchronize their business 
clocks to within one second of the NIST atomic clock. Considering the 
speed of trading in today's automated equity and options markets, FINRA 
believes that the current one second tolerance is no longer appropriate 
for computer system clocks recording time for events in these 
securities under FINRA rules. For example, the wide use of automated 
trading systems entails order placement and trading decisions made on a 
millisecond, or finer, basis. In such a fast-paced environment, the one 
second tolerance is insufficient for audit trail and surveillance 
purposes. Accordingly, FINRA is proposing a tighter synchronization 
standard for NMS securities and OTC Equity Securities that will give 
FINRA the capability to better determine the order in which reportable 
events occur, thereby bolstering its surveillance of the markets and 
enhancing investor protection.
B. Economic Impacts
    The proposed rule change would impact member firms that receive or 
route orders or execute trades directly in NMS securities and OTC 
Equity Securities. As a baseline, FINRA estimates that there are 
approximately 1,720 firms that would be subject to the proposal.\38\ 
These firms would be required to synchronize their computer clocks that 
are used to record applicable events in equity and options securities 
to within 50 millisecond of the NIST atomic clock.
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    \38\ This baseline estimate is intended to capture the total 
number of firms that received orders in any security subject to OATS 
reporting, as reflected by the number of unique routing firm market 
participant identifiers from a recent calendar quarter.
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    FINRA understands that some firms already synchronize their 
computer clocks within 50 milliseconds, and as a result, will not 
experience any material direct economic impacts as a result of this 
rule. Additionally, the proposed rule change would not alter the 
current clock synchronization requirement for members' mechanical time 
stamping devices. As a result, members solely using mechanical time 
stamping would not be impacted. Based on FINRA staff's experience, 
FINRA estimates that only a small fraction of firms use mechanical time 
stamping devices for trading in NMS securities and OTC Equity 
Securities.
    The proposal would be implemented in phases that would allow less 
automated firms more time to comply with the 50 millisecond clock 
synchronization standard. Specifically, FINRA would require firms with 
systems that capture time in milliseconds to comply with the new 50 
millisecond standard within six months of the effective date. Of firms 
that report to OATS, FINRA estimates that there are 736 firms that 
report some or all of their order events in milliseconds, accounting 
for 76 percent of OATS-reporting firms and 95 percent of OATS 
reportable order events (ROE). FINRA further estimates that there are 
roughly 237 less automated OATS-reporting firms,

[[Page 9554]]

accounting for 24 percent of OATS-reporting firms and five percent of 
ROE, that are not currently reporting order events in milliseconds; 
these firms would have 18 months from the effective date to comply with 
the proposed standard. For the remainder of firms that would be subject 
to the proposal but do not currently report to OATS, FINRA believes 
that the majority rely on systems provided by their clearing firm or 
are not likely to have systems that capture time in milliseconds, and 
they would therefore also have 18 months to comply.
(i) Anticipated Benefits
    The proposed rule change would allow FINRA to more accurately 
determine, with respect to NMS securities and OTC Equity Securities, 
the sequence of order, quote and trade events across market 
participants and market centers. By doing so, the proposal would 
improve FINRA's surveillance program, and as a result, support FINRA's 
compliance with its regulatory obligations set forth in Section 
15A(b)(6) of the Act. In particular, the proposal would enhance FINRA's 
ability to monitor for manipulative trading practices, including 
spoofing or layering, and to evaluate best execution and compliance 
with SEC Regulation NMS, among other things. For example, potentially 
manipulative trading practices often involve large numbers of orders 
placed in short periods of time, such that more granular and precise 
order event sequencing would enhance FINRA's market surveillance 
abilities. As a result, the proposal would facilitate FINRA's efforts 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, and to protect investors and 
the public interest.
(ii) Anticipated Costs
    Member firms that receive or route orders or execute trades 
directly in NMS securities and OTC Equity Securities would likely incur 
costs associated with updating their systems and procedures to comply 
with a tightened clock synchronization standard. These costs may 
include costs to develop and maintain software programs that allow and 
monitor for synchronization within 50 milliseconds. FINRA notes that 
there are third party software products that could help firms maintain 
the proposed 50 millisecond standard. Firms may find these software 
products to be more cost effective than developing and maintaining 
their own programs. Some firms may also need to update their technology 
hardware, including servers and event logging platforms, or implement 
other networking enhancements to achieve the 50 millisecond drift 
standard. These costs will likely vary across firms depending on their 
current technology systems and procedures, their business models and 
the frequency with which they synchronize their clocks, as well as 
their current drift standards.
    FINRA's analysis of current practices and potential costs is 
informed in part by the industry survey that FIF performed and 
submitted along with its comment on this proposal. The FIF Clock Offset 
Survey, which is discussed in detail in the CAT NMS Plan, collected 
information on existing synchronization systems, current clock 
management costs, and anticipated costs of meeting tighter 
synchronization standards from 28 firms, including 23 broker-dealers 
and 5 service bureaus.\39\ The survey found that 39% of responding 
firms do not already synchronize their clocks to at least a 50 
millisecond standard, suggesting that many firms may already have the 
capacity to meet the proposed standard.
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    \39\ See FIF Letter and attached FIF Clock Offset Survey.
    FINRA notes that the respondents primarily comprised of firms 
with a significant amount of reportable order events (ROE) in OATS. 
For example, 64% of the respondents reported 3 million or more ROE/
month. Smaller firms with low ROE/month tiers did not generally 
respond to the survey. As a result, these survey results may not be 
representative of the views of smaller firms with less trading 
activity. The FIF survey notes that an effort is underway to solicit 
feedback from smaller firms. See the attached FIF Clock Offset 
Survey.
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    The FIF survey estimates an average cost of adopting a 50 
millisecond standard would be roughly $550,000 per firm.\40\ FINRA 
notes, however, that the FIF survey seems to estimate the costs of 
implementing a synchronization standard with the assumption that 
synchronization logs would be required to be maintained for more than 
three years.\41\ Since this FINRA proposal would require 
synchronization logs to be stored for only three years, FINRA believes 
the FIF cost estimate may overstate the implementation costs of this 
aspect of the proposal. FINRA notes further that the FIF survey 
estimates did not include data from smaller firms and therefore may not 
be informative as to what small firm implementation costs may be.
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    \40\ See id.
    \41\ See id. at Survey page 12 (noting survey respondent 
comments about the costs of implementing larger storage requirements 
to log synchronization events) and 23 (recommending a requirement to 
log only exceptions for a period of three years to reduce costs).
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    Implementation costs would likely vary across firms based on their 
current clock synchronization systems and procedures, their business 
models and trading activity. Firms that already synchronize their 
clocks to the 50 millisecond standard would likely incur much lower 
implementation costs, whereas other firms with less tight 
synchronization standards may incur relatively higher costs. As noted 
above, FINRA is aware of third party clock synchronization software 
products that could help firms, in particular smaller firms, reduce 
costs relative to developing and maintaining their own programs.
    The survey results indicate that the average annual costs of 
maintaining a 50 millisecond standard are anticipated to be 
approximately $313,000 per firm and this represents a 31% increase over 
current annual clock management costs. Based on these survey results, 
FINRA estimates current annual clock management costs to be 
approximately $239,000 per firm. Hence the anticipated increase in the 
annual cost from the current standard to the proposed 50 millisecond 
synchronization standard is expected to be approximately $74,000 per 
firm. FINRA notes again, however, that to the extent the FIF survey 
assumed a more than 3 year log retention period, its maintenance cost 
estimates may be greater than the maintenance costs of this proposal, 
which requires that synchronization logs be retained for three years.
    According to the FIF survey, implementation and maintenance costs 
would increase significantly for synchronization standards below 50 
milliseconds. For instance, survey respondents indicated that a 1 
millisecond standard, recommended by some of the commenters on this 
proposal, would cost over $1.1 million to implement and more than 
$530,000 to annually maintain.\42\
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    \42\ See id.
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    Based on its evaluation of the FIF Clock Offset Survey, as well as 
the CAT NMS Plan's economic analysis of potential clock synchronization 
requirements, FINRA believes that a 50 millisecond standard is the best 
achievable standard at this time. Furthermore, to minimize undue cost 
burdens, particularly for small or less automated firms, FINRA modified 
the proposal as described above--specifically, FINRA narrowed the scope 
of the proposal to apply only to NMS securities and OTC Equity 
Securities, and FINRA is proposing a phased implementation that would 
allow less automated firms up to 18 months to come into compliance. In 
addition,

[[Page 9555]]

FINRA notes that the scope of this proposal would align with the scope 
of the CAT NMS Plan that has been filed with the Commission. As such, 
in the presence of an adopted CAT NMS plan, the costs associated with 
this proposal are only associated with the timing of the obligation to 
meet the proposed clock synchronization standard. Accordingly, FINRA 
believes that costs incurred by firms to meet the proposed FINRA clock 
synchronization would support the changes needed to meet any future 
requirement imposed under CAT and therefore, should not result in 
duplicative efforts.
C. Alternatives
    In considering how to best meet its regulatory objectives, FINRA 
considered several alternatives to particular features of this proposed 
rule change. For example, FINRA considered whether to impose less 
costly 100 or 200 millisecond standards. For the reasons referenced in 
part above, FINRA chose not to pursue these alternatives.
    FINRA's decision not to pursue these alternatives is based in part 
on its own observations. The range of variance among market 
participants' clocks may be up to twice the permitted synchronization 
standard; for example, one participant's clocks may drift ahead of the 
NIST clock by 50 milliseconds, while another's may drift behind by 50 
milliseconds, meaning their clocks would be 100 milliseconds apart. 
FINRA studied OATS data for a single trading day and found a large 
number of events that occur within any single 100 millisecond window of 
time. However, FINRA observed that the number of events within 200 or 
400 millisecond windows--twice the possible alternative 100 and 200 
millisecond standards--increased significantly. Departing from the 50 
millisecond standard would therefore cause significantly greater 
numbers of events to be recorded with less certainty and accuracy.
    In addition, FINRA notes that the FIF Clock Offset Survey supported 
the proposed 50 millisecond standard, as opposed to a 100 or 200 
millisecond standard. The survey asked respondents about possible 
reduced burdens if FINRA were to adopt one of these alternative 
standards in advance of tighter tolerances imposed as part of the CAT 
NMS Plan. In response, survey respondents ``questioned the benefits of 
an interim tolerance citing that any changes to the current clock 
offset would require modifications to systems and processes.'' \43\
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    \43\ See FIF Letter at 2.
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    In developing this proposal, FINRA also considered suggestions by 
commenters regarding different clock synchronization standards 
depending on the type of market participants (e.g. tighter standard for 
highly automated or HFT firms and less strict standard for other 
firms). FINRA believes it is important to apply the same standard to 
all computer-recorded events, regardless of firm size or activity type, 
since the integrity of the audit trail relies on the ability to 
accurately sequence all events for a given period of time, including 
events generated by firms that do not engage in HFT. As discussed 
above, FINRA believes that in light of the prevailing technology for 
trading systems and clock synchronization, 50 milliseconds is the right 
standard for all participants, and strikes a reasonable balance between 
audit trail integrity and the costs of compliance.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The proposed rule change was published for comment in Regulatory 
Notice 14-47 (November 2014). Eight comments were received in response 
to the Regulatory Notice. A copy of the Regulatory Notice is attached 
as Exhibit 2a.\44\ Copies of the comment letters received in response 
to the Regulatory Notice are attached as Exhibit 2c.\45\ The comments 
are summarized above in Item A.
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    \44\ The Commission notes that all references to Exhibit 2a 
refer to Exhibit 2a to the proposed rule change.
    \45\ The Commission notes that all references to Exhibit 2c 
refer to Exhibit 2c to the proposed rule change.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-FINRA-2016-005 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2016-005. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of FINRA. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FINRA-2016-005 and should be 
submitted on or before March 17, 2016.
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    \46\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\46\
Brent J. Fields,
Secretary.
[FR Doc. 2016-03960 Filed 2-24-16; 8:45 am]
 BILLING CODE 8011-01-P