05.01.2018

FINRA Eyes Making OTC Minimum-Quote Pilot Permanent

05.01.2018

Industry pilots have a way of taking on a life of their own, but the Financial Industry Regulatory Authority looks to make a six-year pilot into a permanent rule change.

The market regulator launched a pilot designed to simplify the minimum-quotation sizes for over-the-counter equities on inter-dealer platforms that support quotations.

FINRA launched the pilot on November 12, 2012, and the SEC approved its extension ten times since its launch. The pilot is set to expire on June 7.

Under the pilot, FINRA reduced the then nine tiers of minimum-quote sizes to six tiers and expanded the rule’s scope to all member quotation on an inter-dealer quotation from just the market markers’ proprietary quotes on such platforms.

As part of the pilot, OTC market makers are not required to display a customer limit order on an inter-dealer quotation system unless doing so would comply with the minimum equitation size applicable to the price of the quotation under the rule.

Based on data collected from the pilot’s start to June 30, 2103, FINRA noted that the pilot had either a neutral or a slightly positive impact regarding market quality compared to the pre-pilot period.

The aggregated tiers witnessed a 13% increase in the number customer limit orders that met the minimum quotation sized to be eligible for display under the pilot, according to FINRA’s filing.

And when the self-regulatory organization extended its analysis from July 1, 2013, to July 21, 2014, the number of limit orders that met the minimum-quote size from the aggregated tiers increased 18.45%.

The regulator also saw a significant increase in the number of customer limit orders in securities priced between $0.20 and $100 that became eligible for display during the initial pilot period.

Additionally, FINRA staff found that time-weighted quoted spreads continued to narrow during the pilot’s first two years and these positive changes in time-weighted quoted spreads between the pre-pilot and the first two years of the pilot were statistically significant for all tiers, according to the SRO’s filing.

All comments on FINRA’s proposal are due by May 22.

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