Feb 28, 2023
In 2005, the U.S. Securities and Exchange Commission (the "SEC") adopted Regulation NMS, the first major reorganization to the rules and regulations governing the equity markets in thirty years. One of the goals of Regulation NMS was to update the requirements for consolidating, distributing, and displaying market information since the number of trading firms and the number of market data products drastically increased over the previous thirty years.
What is the Vendor Display Rule?
Under Rule 603(c) of Regulation NMS (the "Vendor Display Rule"), securities information processors ("SIPs"), brokers, and dealers that display market information with respect to NMS stock must display a consolidated display when "a trading or order-routing decision can be implemented."
Who has to comply with the Vendor Display Rule?
Generally, securities information processors ("SIPs") and broker-dealers (including introducing firms) that provide NMS stock quotation information to customers in contexts where a trading or order-routing decision can be implemented must comply with the Vendor Display Rule.
Certain foreign broker-dealers that limit their activities to those permitted under Rule 15a-6 of the Securities Exchange Act of 1934 may be exempt from registering as broker-dealers in the US and having to comply with certain other obligations such as the Vendor Display Rule.
What is NMS Stock?
The term "NMS stock" means "any NMS security other than an option." An "NMS security" is "any security or class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan, or an effective national market system plan for reporting transactions in listed options."
What is a consolidated display?
A "consolidated display" means "(i) the prices, sizes, and market identifications of the national best bid and national best offer for a security; and (ii) consolidated last sale information for a security." "Consolidated last sale information" means "the price, volume, and market identification of the most recent transaction report for a security that is disseminated pursuant to an effective national market system plan."
When must a consolidated display be shown to a customer?
Under the Vendor Display Rule, a consolidated display must be shown when trading or order routing decisions could be implemented.
What are some examples of such contexts?
The SEC has stated that such contexts include when market data is provided to broker-dealer customers in applications from which trading decisions can be implemented as well as in displays that facilitate order routing by broker-dealers. The Vendor Display Rule does not apply "when market data is provided on a purely informational website that does not offer any trading or order-routing capability."
If I'm subject to the Vendor Display Rule, can I still use data feeds other than SIP feed?
Yes, however, you must use SIP data when trading or order routing decisions could be implemented to comply with the Vendor Display Rule.
In 2015, BATS Global Markets, Inc. (“BATS”) sought a no-action request from the SEC staff of the Division of Trading and Markets (the “Staff”) with respect to its broker-dealer subscribers using its BATS One Feed, which offered a subset of consolidated market data, to comply with the Vendor Display Rule. The broker-dealer subscriber would enter any customer order into an automated system that relies on consolidated market data in making its trading and order-routing decision, and the order would remain subject to the firm’s best execution obligations.
In its response letter, the Staff denied the no-action relief request. The Staff made clear it’s belief “that when a registered representative of a broker-dealer provides a quotation to a customer this typically is done in a context where the customer uses that information to make a trading decision (including a decision regarding whether or not to trade, or the terms of the trade such as a limit price).” The Staff noted that, in adopting Regulation NMS, the SEC stated that, “[p]articularly for retail investors, the [national best bid and national best offer, or NBBO] continues to retain a great deal of value in assessing the current market for small trades and the quality of execution of such trades.” Consequently, even if a broker-dealer consolidates market data using proprietary data feeds, it must also use the SIP data feeds that provides all of the consolidated market data necessary to comply with the Vendor Display Rule.
Are there examples of penalties for not complying with the Vendor Display Rule?
Yes, notably, Robinhood was fined $57 million by FINRA in June 2021 for, among other things, not complying with the Vendor Display Rule. The FINRA complaint alleged that, from January 2018 through March 2019, among other FINRA violations, Robinhood’s website and mobile applications did not provide certain consolidated display information required under the Vendor Display Rule, such as identifiers for the markets displaying the best bid and best offer and where the last reported sale occurred. Additionally, from January 2018 through November 2019, Robinhood’s website did not display the size of the last reported sale. Therefore, Robinhood violated the Vendor Display Rule and FINRA Rule 2010.
FINRA stated, “This action sends a clear message—all FINRA member firms, regardless of their size or business model, must comply with the rules that govern the brokerage industry, rules which are designed to protect investors and the integrity of our markets. Compliance with these rules is not optional and cannot be sacrificed for the sake of innovation or a willingness to ‘break things’ and fix them later.”
Market data regulation can be complicated. Polygon is here to help. Our market data specialists will guide you through every step so that you can focus on the bigger picture.
Disclaimer: Nothing in this blog post should be construed as legal advice. The material published is intended for informational and educational purposes only. Please seek the advice of an attorney, and do not apply any of the generalized material to your individual facts or circumstances without speaking to an attorney.
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