Daily Rules, Proposed Rules, and Notices of the Federal Government
FINRA proposes to amend its rules governing the handling of stop orders. FINRA Rule 6140(h) currently provides that a member may, but is not obligated to, accept a stop order or a stop limit order in a designated security.
FINRA now proposes to also allow members to offer customers stop orders and stop limit orders that would be triggered by a transaction or by an event other than a transaction (
FINRA proposes permitting a member to accept an order type that activates as a market or limit order using an event other than a transaction at the stop price as the trigger, such as a quotation.
FINRA further proposes that a member that routes a customer stop order or stop limit order to another broker-dealer or exchange for handling or execution must take reasonable steps to ensure that the order is handled or executed by the other broker-dealer or exchange in accordance with proposed Rule 5350(a).
FINRA believes that, given the various risks and benefits of each triggering event, members and their customers should determine the appropriate triggering event for stop orders and stop limit orders.
The Commission received four comment letters on the proposed rule change.
KOR stated that the use of disclosures, especially those requiring affirmative consent, would allow investors flexibility to choose the trigger for stop orders and stop limit orders, and would reduce the burden on the industry to create new order types.
SIFMA stated that, although some of its members would like flexibility in choosing the applicable trigger for stop orders and stop limit orders and others would prefer to have one established trigger point, SIFMA members agree that FINRA should not introduce a new order type to provide for the desired flexibility.
TD Ameritrade raised concerns that FINRA's proposal would create an undue burden on the industry by requiring it to incorporate a new order type without clearly defined benefits, and may create unnecessary investor confusion.
FINRA responds that the proposed rule change addresses concerns related to the potential for investor confusion with respect to the operation of stop orders and stop limit orders, while providing members the flexibility to offer orders types based on other triggers.
FINRA believes the proposed approach--to retain the default trigger while permitting the use of other triggers and requiring disclosure of those triggers--strikes the appropriate balance in addressing the views expressed by FINRA members.
FINRA states that the purpose of the proposed rule change is to make explicit in FINRA rules that firms are permitted to offer stop orders and stop limit orders that are triggered by an event other than a transaction, such as a quotation, as long as that order type is clearly differentiated from stop orders and stop limit orders triggered by a transaction.
After careful review of the proposed rule change, the comment letters received, and FINRA's response, the Commission finds that the proposed rule change is consistent with the requirements of Section 15A(b) of the Act
FINRA's proposal would allow the use of transaction-based stop orders and stop limit orders by providing a uniform definition of "stop order" and "stop limit order" while also allowing member firms to offer order types that are triggered by an event other than a transaction (
While several commenters advocated for an alternative approach and raised concerns regarding a potential burden as a result of the proposal, the Commission believes that FINRA's proposal would allow members flexibility in the types of orders they offer and provide for disclosure to customers regarding the operation of such orders. In this regard, the Commission notes that FINRA weighed various alternatives and took into account extensive input from its members in formulating the proposal.
The Commission believes that FINRA's proposal sufficiently addresses issues regarding FINRA's previous proposed rule change, which would have deleted in its entirety the provisions of FINRA Rule 6140 relating to the handling of stop orders by member firms.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,