Quick Answer
Members report off-exchange transactions in national market system stocks to FINRA, and off-exchange transactions in OTC equity securities and restricted equity securities to the OTC Reporting Facility. A national market system stock trade may be reported to the Alternative Display Facility or to either Trade Reporting Facility.
Three facts decide where a report goes: what the security is, where the trade was executed, and which facility the member has chosen to use. This lesson settles all three, then covers what FINRA publishes afterward.
Which Trades Must Be Reported to FINRA?
Members are required to report transactions in national market system (NMS) stocks, effected otherwise than on or through a national securities exchange, to FINRA. An NMS stock is any NMS security other than an option, and a security eligible for the Alternative Display Facility (ADF) is defined the same way.
"Otherwise than on an exchange" means a trade effected by a FINRA member otherwise than on or through a national securities exchange.
The determination of what constitutes a trade "on or through" a particular national securities exchange is made by that exchange, in accordance with all applicable statutes, rules and regulations, and with any necessary SEC approval. The same sentence sits in the definitions for both Trade Reporting Facilities.
Exam Tip: Gotchas
- The member does not decide whether its own trade was on an exchange. That determination belongs to the exchange, and the rule ties it to all applicable statutes, rules and regulations, and to any necessary SEC approval.
- An option is never an NMS stock. The definition reaches any NMS security other than an option, so the equity trade reporting rules never pick up a listed option.
Which Facility Takes Which Security?
| Security | Where the report goes |
|---|---|
| NMS stock, executed off-exchange | The Alternative Display Facility |
| NMS stock, executed off-exchange | The FINRA/Nasdaq Trade Reporting Facility |
| NMS stock, executed off-exchange | The FINRA/NYSE Trade Reporting Facility |
| OTC equity security, restricted equity security, secondary market transaction in a non-exchange-listed direct participation program security | The OTC Reporting Facility |
Transactions executed otherwise than on an exchange must be reported to the ADF, unless they are reported to another reporting facility designated by the SEC as being authorized to accept trade reports for trades executed otherwise than on an exchange.
That "unless" makes the ADF the destination only for trades not reported to another SEC-designated reporting facility.
Members may use the FINRA/Nasdaq Trade Reporting Facility (TRF) to report transactions executed otherwise than on an exchange in all NMS stocks, which those rules call "designated securities". The FINRA/NYSE TRF carries the identical permission.
A member that uses either facility must comply with that facility's own two rule series (its facility rules and its participation and trade reporting rules) as well as all other applicable rules, and those series apply only to members using that facility.
Exam Tip: Gotchas
- A Trade Reporting Facility is permissive on its face. Its general rule says members may use the facility for off-exchange NMS stock trades; the duty to report the trade somewhere comes from the trading otherwise than on an exchange rule instead.
- Each facility's rule series binds only the members who use it. A member reporting exclusively to one Trade Reporting Facility is not governed by the other facility's series.
What Does the OTC Reporting Facility Accept?
Members are required to report transactions, other than transactions executed on or through an exchange, in OTC equity securities, including secondary market transactions in non-exchange-listed direct participation program (DPP) securities, and in restricted equity securities, to the OTC Reporting Facility (ORF).
Two definitions carry the whole scope:
- OTC equity security: any equity security that is not an NMS stock; provided, however, that the term does not include any restricted equity security.
- Restricted equity security: any equity security that meets the definition of "restricted security" in the restricted securities resale safe harbor, a definition with several categories, the first being securities acquired from the issuer or an affiliate in a transaction not involving any public offering.
- The first of those eight is securities acquired directly or indirectly from the issuer, or from an affiliate of the issuer, in a transaction or chain of transactions not involving any public offering.
The terms used in the OTC Reporting Facility's reporting rules take the meanings given in those same OTC equity definitions.
The ORF is the FINRA service that accommodates reporting for trades in OTC equity securities executed other than on or through an exchange, for trades in restricted equity securities effected under the qualified institutional buyer resale safe harbor, and the dissemination of last sale reports.
Where those OTC equity securities and restricted equity securities are not eligible for clearance and settlement through the facilities of the National Securities Clearing Corporation, the ORF comparison function will not be available. The facility will still support the entry and dissemination, as applicable, of last sale data on such securities.
Exam Tip: Gotchas
- A restricted equity security is carved out of the OTC equity security definition. The proviso means the two terms never overlap, so a security is one or the other and never both at once.
- Losing the comparison function is not losing the report. Where a security cannot clear and settle at the National Securities Clearing Corporation, last sale entry and dissemination continue without it.
What Does FINRA Publish About a Member's Own Volume?
The lesson on alternative trading system transparency, in the unit on creating, retaining and reporting required records of orders and transactions, sets this same publication beside the alternative trading system figures and the identifier carve-out.
The publication duty here falls on FINRA, not on the member. FINRA will publish on its public web site the Trading Information for each member carrying the trade reporting obligation.
- Trading Information includes two data points at both facilities: the number of shares, and the number of trades, in the security executed by the member with the trade reporting obligation and reported to FINRA.
- Trading Information excludes any alternative trading system (ATS) Trading Information. How FINRA aggregates a member's market participant identifiers (MPIDs) and publishes the alternative trading system figures is covered in the unit on creating, retaining and reporting required records of orders and transactions.
What Should You Check on Exam Day?
- Identify the security first: an NMS stock routes to the ADF or a Trade Reporting Facility, while an OTC equity security or restricted equity security routes to the OTC Reporting Facility.
- Confirm who decided the trade was executed on an exchange; that determination belongs to the exchange, not to the member reporting it.
- Read the OTC equity security definition through its proviso, which excludes any restricted equity security from the term.
- Confirm that Trading Information includes two data points, shares and trades.
- Check whether the security clears at the National Securities Clearing Corporation; if it does not, only the comparison function drops away.