Sunday, May 8, 2011

New FINRA Rules 6460 on May 9 2011

Of the 3 new rules kicking in on Monday 5/9/11 FINRA 6460 is the one to concentrate on. My legal buddies are referring to it as the “new leap frog rule”. MMs now have to show the full size of any orders that are the high bid or low offer. Before they could hide a large buy order by only showing 5,000 shares of it which was and is the minimum for penny stocks. The key concept here is “forced transparency”. From now on if a “whale” shows a bid for 10 million shares of XXX and it is higher than the previous bid then the MM must either reflect it or jump it by a notch to hide it. The “whale” would then need to jump it to get it to be the high bid. Hence the term leap frog.

If an abusive MM with an enormous preexisting naked short position puts in a large offer to scare buyers aware then he has to place it below the former offer and he’s going to have to honor that sale if the “whale” chooses to take him out. The “whales” are going to get pretty ticked off if the MM representing his order fraudulently makes him pay higher because of his antics needing to be performed to hide the large order. This might violate the “best execution rule” (NASD 2320) wherein a broker has a formal “duty” to find the best market to aim an order towards.

“Whales” want to buy size but a crooked MM sitting on a monstrous naked short position with the fear that XXX just might “have the goods” does not want to sell size. He just wants to fraudulently induce selling and dissuade buying. A variety of the “3Ms” (“market maker manipulations”) are going to be rendered moot. As you can well imagine, a crime as obvious as selling nonexistent shares all day long while pretending to be “injecting liquidity” needs to be done in an environment with no transparency. “Leap frogging” is going to look very, very obvious on a time and sales sheet! There is no better disinfectant than the light of day.

6460. Display of Customer Limit Orders
This version of the rule (or interpretive material) does not become effective until May 9 2011.
(a) Each OTC Market Maker displaying a priced quotation in any OTC Equity Security in an inter-dealer quotation system shall publish immediately a bid or offer that reflects:
(1) The price and the full size of each customer limit order held by the OTC Market Maker that is at a price that would improve the bid or offer of such OTC Market Maker in such security; and
(2) The full size of each customer limit order held by the OTC Market Maker that:
(A) Is priced equal to the bid or offer of such OTC Market Maker for such security;
(B) Is priced equal to the best bid or best offer of the inter-dealer quotation system in which the OTC Market Maker is quoting; and
(C) Represents more than a de minimis change in relation to the size associated with the OTC Market Maker's bid or offer.
(b) The requirements in paragraph (a) of this Rule shall not apply to any customer limit order:
(1) That is executed upon receipt of the order.
(2) That is placed by a customer who expressly requests, either at the time that the order is placed or prior thereto pursuant to an individually negotiated agreement with respect to such customer's orders, that the order not be displayed.
(3) That is an odd-lot order.
(4) That is a block size order, unless a customer placing such order requests that the order be displayed.
(5) That is delivered immediately upon receipt to a national securities exchange or an electronic communications network that widely disseminates such order and that complies with paragraph (c) below with respect to that order.
(6) That is delivered immediately upon receipt to another OTC Market Maker that complies with the requirements of this Rule with respect to that order.
(7) That is an all-or-none order.
(8) That is priced less than $0.0001 per share.
(c) The electronic communications network:
(1) Provides to a national securities exchange, national securities association or inter-dealer quotation system the prices and sizes of the orders at the highest buy price and the lowest sell price for such security entered in, and widely disseminated by, the electronic communications network; and
(2) Provides, to any broker or dealer, the ability to effect a transaction with a priced order widely disseminated by the electronic communications network entered therein by an OTC market maker that is:
(A) Equivalent to the ability of any broker or dealer to effect a transaction with an OTC market maker pursuant to the rules of the applicable national securities exchange, national securities association or inter-dealer quotation system to which the electronic communications network supplies such bids and offers; and
(B) At the price of the highest priced buy order or lowest priced sell order, or better, for the lesser of the cumulative size of such priced orders entered therein by OTC market makers at such price, or the size of the execution sought by the broker or dealer, for such security.
(d) Definitions
For purposes of this Rule, the following definitions shall apply:
(1) Best bid and best offer mean the highest priced bid and the lowest priced offer.
(2) Block size with respect to an order means it is of at least 10,000 shares and has a market value of at least $100,000.
(3) Customer limit order means an order to buy or sell an OTC Equity Security at a specified price that is not for the account of either a broker or dealer; provided, however, that the term customer limit order shall include an order transmitted by a broker or dealer on behalf of a customer.

Via Agoracom Forum Post 

Regulatory Notice 10-42

SEC Approves Amendments to Establish Regulation NMS-Principled Rules in Market for OTC Equity Securities

Effective Dates: FINRA Rules 6434, 6437 and 6450: February 11, 2011; FINRA Rule 6460 and NASD Rule 2320: May 9, 2011

Executive Summary

Effective February 11, 2011, and May 9, 2011, are new FINRA rules that extend certain Regulation NMS protections to quoting and trading of over-the-counter (OTC) Equity Securities. For OTC Equity Securities, these new rules:
  • set forth the permissible pricing increments for the display of quotations and acceptance of orders;
  • require firms to avoid locking and crossing quotations within an inter-dealer quotation system;
  • establish a cap on access fees imposed against a firm’s published quotation; and
  • require an OTC Market Maker, subject to certain exceptions, to display the full size of customer limit orders that improve the price of the marker maker’s displayed quotation or that represent more than a de minimis change in the size of the market maker’s quote if at the best bid or offer (BBO). Source http://www.finra.org/industry/regulation/notices/2010/p122115
Full PDF Notice 

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