FINRA Rules Related to Quoting & Trading in NMS Stocks

Instructor: Yusuf Abdullah

Yusuf has taught Science and Mathematics at school level and Finance and Economics at University level. He has recently earned his Ph.D in Financial Econometrics field.

This lesson deals with FINRA Rule 6100 Series (Quoting and Trading in NMS Stocks), Rule 6110 (Trading Otherwise than on an Exchange), 6120 (Trading Halts), 6121 (Trading Halts Due to Extraordinary Market Volatility), and 6130 (Transactions Related to Initial Public Offerings).

National Market System (NMS)

Did you know that the National Market System (NMS) regulates the stock exchanges in the USA?

The National Market System (NMS) promotes market transparency by regulating the disclosure and execution of trades by different exchanges. This is done by directing all exchanges to publish or broadcast the quotes (bid and ask) to all investors, including individual and institutional investors. The NMS was established by the Securities Acts Amendments of 1975 and comes under the purview of the National Association of Securities Dealers (NASD) and NASDAQ.

FINRA Rule 6100 Series (Quoting and Trading in NMS Stocks)

Since NMS oversees nearly all stocks in the country, you would think that there would be laws related to securities under the purview of NMS. This is obviously true in a market economy like the USA. FINRA Rule 6100 Series (Quoting and Trading in NMS stocks) is related to a set of rules concerning NMS stocks. The first sub-rules are:

FINRA Rule 6110 (Trading Otherwise than on an Exchange)

FINRA Rule 6110 provides a time frame for publication of trades and quotes that do not occur through exchanges. These trades are known as over-the-counter (OTC) trades and might occur thorough dealers or directly between the buyer and the seller without involving the exchange. The FINRA is required to publish information about such trades for Tier 1 stocks no later than two weeks from the end of the trading week. The trades for Tier 2 stocks have to be published within four weeks. Tier 1 stocks are included in the S&P 500 index, Russell 1000 index and some exchange-traded funds. Tier 2 stocks comprise all NMS securities that are not Tier 1.

Trade information for different dealers or market makers is published along with their exclusive identification known as Market Participant Identification (MPID). In addition to this, any block trade information is also published if deemed required. The members (dealers, brokers, etc.) are required to report transactions of NMS securities under Rule 600(b)(47) of SEC Regulation NMS.

FINRA Rule 6120 (Trading Halts)

FINRA Rule 6120 relates to stopping transactions or enforcing a trading halt in NMS securities if deemed fit by FINRA. Some of the situations that can lead to a trading halt include:

  • New material information that may increase price volatility considerably
  • Extraordinary market activity such as unusually large trades or a series of transactions significantly different from current market prices or valuations
  • Technical issues related to exchange such as quotation, communication or execution system failure

In such events, trading can be halted, and members have to comply with the trading halt. The quotations through the reporting facilities have to be removed or closed down in such an event.

FINRA Rule 6121 (Trading Halts Due to Extraordinary Market Volatility)

This subsection requires members to halt over-the-counter or non-exchange trading for the securities that have been put under trading halt on the exchanges. The trading can resume only when the primary exchange resumes trading or under the following conditions:

  • Trading price bands have been received to address high volatility
  • Trading reference price is available when price bands have not been disseminated

Trading halts will also be applicable when NMS security declines 10% or more in a given day. Primary exchanges will stop trading temporarily when the price falls or rises more than 10%. A higher rise or decline may lead to a permanent stoppage of trading for the day.

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