NASD Issues Guidance for Reg NMS Trade Reporting

As brokers prepare to comply with the Pilot Stocks Phase of Regulation NMS scheduled for July 9th, the NASD issued guidance last week clarifying how member firms should report their trades to the tape. The notice provides guidance on how to use the NASD's new transaction reporting modifiers when brokers are reporting trades that are exceptions or exemptions to Rule 611 of Reg NMS to NASD facilities.Brokers are required to use these new transaction reporting modifiers when they are reporting an exception or an exemption to Rule 611, which is the Order Protection Rule (OPR), at the time of the trade. The full notice, "NASD Trade Reporting Requirements Related to Regulation NMS," is available on the NASD's Web site.

Brokers will need to use these "trade modifiers in cases where they are going to trade through the national best bid and offer (NBBO)," explains Eric Bass, partner at SMART Advisory and Business Consulting LLC and head of the consulting firm's financial services practice who is based in New York.

Also, when the broker dealer is acting as the trading center, (with negotiated block trades, and agency crosses, etc.), such third market trades can further require ISO obligations at any given exchange if the trade is executed outside the NBBO, says Bass.

NASD in its notice said the trade modifiers are operative with each of the NASD's Trade Reporting Facilities or TRFs. Currently four TRFs are operational: the NASD/NASDAQ TRF, the NASD/NSX TRF, the NASD/BSE TRF and the NASD/NYSE TRF. "The trade modifiers apply any time a broker executes a trade outside the NBBO, regardless of whether it is being reported to the NASD TRF or not," explains Bass.

While there are eight bona fide reasons to use exceptions or exemptions, prior to this notice, Bass says, "It was very unclear and subject to interpretation how you would report that to the tape and how you would do it," says Bass.

Two weeks ago, brokers on the Reg NMS Panel at the SIFMA Market Structure Conference, said they were waiting for NASD guidance to clarify trade reporting for block trades involving intermarket sweep orders (ISOs), exchange traded funds, VWAP benchmark trades, ADRs and other types of trades that qualify as exceptions or exemptions to the OPR of Reg NMS. There was a concern that if there were any surprises in the guidance that brokers would not have much time to program their systems in time to comply with the July 9 implementation. Now the NASD has produced a chart with detailed instructions, plus there are two examples of a trade where one is entitled to an exception and one where the trade does not constitute a trade through protected quotations.

"Now firms have what they need to be able to build into their order management systems (and) how to code things properly, " says Bass. And now that firms have the clarification on external reporting, they will know how to report internally as well, says the consultant.

"Trade reporting, both externally and internally, is going to become extremely important," emphasizes Bass. The external trade reporting should match the internal trade reporting, he cautions, because if a trade appears to be out of compliance as an exception, they (brokers) have to defend it," he says, alluding to an audit.

In addition, the NASD is offering a six-month extension for firms that feel they can't comply, notes Bass. "Firms that cannot make the requisite technology changes by the applicable compliance data may request an exemption from NASD in writing," stated the NASD's notice. "NASD will provide specific procedures and the information required to request such an exemption," according to the notice. However, the NASD notice cautions that any exemption will only be granted for good cause shown, and that the duration of any exemption will be determined by NASD and shall not exceed a six-month period. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio