Withdrawal of Quotations and Voluntary Termination of Registration

Registration is easy to lose by accident. A quote pulled without permission, or a quote not re-entered fast enough after a halt, both end a market maker's registration in that security, and either route bars re-registration in that security for 20 business days, absent an excused withdrawal.

When Must an ADF Trading Center Get Permission Before Withdrawing?

An ADF Trading Center that wishes to withdraw quotations in a security must contact ADF Operations to obtain excused withdrawal status prior to withdrawing its quotations. The rule carves out one situation: instances when the center is unable to submit automated quotations to the Alternative Display Facility (ADF).

An ADF Trading Center is a Registered Reporting ADF Market Maker, or a Registered Reporting ADF ECN (an electronic communications network), that is a trading center under the national market system rules and is certified to display its quotations or orders through the facility.

That second term also covers a member that is an alternative trading system displaying orders there.

In that situation, and in a second one the rule adds, the sequence reverses. If an ADF Trading Center cannot submit automated quotations, or is unable to immediately and automatically respond to orders as the ADF quote and order access rule requires, it must immediately withdraw its quotations and promptly contact ADF Operations.

The permission itself is discretionary. An excused withdrawal of quotations may be granted by ADF Operations upon satisfying one of the conditions the rule specifies.

Exam Tip: Gotchas

• Satisfying a ground does not create excused status. Every ground below is one on which status may be granted by ADF Operations, not one that confers the status automatically.
• The automated-quotation failure inverts the order of operations. There the firm withdraws immediately and contacts ADF Operations afterwards, rather than asking first.
• The immediate-withdrawal duty covers two failures. It applies where the center cannot submit automated quotations, and where it cannot immediately and automatically respond to orders as the ADF quote and order access rule requires.

On What Grounds May Excused Withdrawal Status Be Granted?

Eight grounds appear across the rule. Six of them run to any ADF Trading Center, and two are available only to a Registered Reporting ADF Market Maker.

A distribution ground sits alongside these. Excused withdrawal status may be granted to a Registered Reporting ADF Market Maker that is a distribution participant, affiliated purchaser, selling security holder or issuer of a distribution of a security that is a covered security subject to a restricted period under Regulation M.

Two conditions attach to it:

• The withdrawal request. Unless another member has assumed responsibility in writing for compliance with the withdrawal of quotations rule, the market maker provides a written request to FINRA, in the form FINRA specifies, no later than the business day before the first complete trading session of the one-day or five-day restricted period, unless later notification is necessary under the specific circumstances.
• The rescission request. The market maker submits a written request to FINRA to rescind its excused withdrawal status, including the date and time of the pricing of the offering and the offering price, no later than the close of business the next business day following the pricing of the distribution.

The ADF definitions rule delegates six terms used in that ground to Regulation M: affiliated purchaser, covered security, distribution, distribution participant, restricted period, and selling security holder. The restricted period has three branches:

The first two branches end on the person's completion of participation in the distribution; the third ends on completion of the distribution. Regulation M's own restrictions on distribution participants, issuers and selling security holders are covered in the unit on IPOs, secondary offerings and safe harbor.

A denial can be reviewed. Market makers may bring proceedings seeking review of a denial of an excused withdrawal, or of the conditions imposed on their reentry.

Exam Tip: Gotchas

• Religious holidays and vacation both need advance notice and approval. One business day in advance is the notice, and FINRA approval is a separate requirement, so notice alone is not enough.
• Only the vacation ground requires a list of securities. That extra condition appears nowhere in the religious-holiday ground next to it.
• The legal or regulatory ground carries five separate elements. Notification, demonstration, appropriate documentation, a representation that the condition is not permanent in nature, and a ceiling of not more than 60 days.
• Chronic failures inside the firm are excluded by name. The system-failure ground covers a documented problem in a system operated by or on behalf of the center, and expressly excludes chronic failures within the member's control.
• The withdrawal request has an out and an override. Another member may assume responsibility in writing, and later notification is permitted where the specific circumstances require it.

Which Reasons Never Qualify?

The rule names three reasons that do not constitute acceptable grounds for granting excused withdrawal status:

• Pending news.
• A sudden influx of orders or price changes.
• Withdrawing in order to effect transactions with competitors.

Exam Tip: Gotchas

• Volatility is not a ground. A sudden influx of orders or price changes is named as unacceptable, which is exactly the situation a market maker most wants to step away from.
• Pending news is unacceptable even though it is genuinely outside the firm's control. The beyond-control ground does not rescue it, because the rule addresses pending news by name.

How Does a Market Maker or an Electronic Network End Its ADF Registration?

A Registered Reporting ADF Market Maker may voluntarily terminate its registration in a security in two ways:

• Withdrawing its quotations from the Alternative Display Facility and not re-entering them for five minutes.
• Failing to re-enter quotations within 30 minutes of the end of a trading halt.

A market maker that voluntarily terminates its registration in a security may not re-register as a market maker in that security for 20 business days, absent an excused withdrawal specified in the withdrawal of quotations rule.

Withdrawal from participation as a Registered Reporting ADF Market Maker in the Alternative Display Facility constitutes termination of registration as a market maker in that security.

An electronic communications network (ECN) has a different route out. A Registered Reporting ADF ECN may voluntarily withdraw from participation on the ADF by providing written notice, through electronic delivery, to FINRA Market Operations. The withdrawal is effective on the first trading day following that notice, or such other date as the notice specifies.

Status can also end without the member choosing it. A member ceases being a Registered Reporting ADF Market Maker in a designated security, or a Registered Reporting ADF ECN, when it has withdrawn or voluntarily terminated its quotations, or when its quotations have been suspended or terminated by action of FINRA.

FINRA's own power to suspend, condition, limit, prohibit or terminate quoting authority sits in the suspension of quotations by FINRA action rule, and is covered in the unit on disseminating quotes and trade advertisements.

Exam Tip: Gotchas

• Five minutes and 30 minutes measure different events. Five minutes is the gap after an ordinary withdrawal; 30 minutes is the window to re-enter after a trading halt ends.
• The bar runs in business days. Twenty business days is roughly a month of trading, not 20 calendar days.
• An excused withdrawal is what avoids the bar. The re-registration bar applies absent an excused withdrawal specified in the withdrawal of quotations rule, which is why the grounds above matter so much.
• The electronic network's exit is a notice, not a five-minute lapse. Its withdrawal takes effect the first trading day following the electronic written notice, or such other date as the written notice specifies.

What Happens When a Clearing Arrangement Lapses?

Three rules speak to the same facts, and they do different things.

The withdrawal of quotations rule lets ADF Operations grant excused withdrawal status to an ADF Trading Center that fails to maintain a clearing arrangement with a registered clearing agency or with a member of one, thereby terminating its registration as an ADF Trading Center. Its proviso is the trap: if FINRA finds the failure was voluntary, the withdrawal is considered voluntary and unexcused.

That proviso is repeated in the rule's only item of Supplementary Material, which frames the same point around the ADF trade reporting participation rule: if FINRA finds that an ADF Market Maker's failure to maintain a clearing arrangement under that rule is voluntary, the withdrawal of quotations is considered voluntary and unexcused.

The voluntary termination of ADF registration rule closes with a proviso that runs the other way. A Registered Reporting ADF Market Maker that fails to maintain a clearing arrangement with a registered clearing agency or with a member of one, and thereby terminates its registration as a market maker in Nasdaq securities, may register as a market maker at any time after a clearing arrangement has been reestablished.

The participation rule sets the underlying condition and the consequence. Participation in the system is conditioned on the Participant's initial and continuing compliance with five requirements, one of which is membership in, or maintenance of an effective clearing arrangement with a member of, a clearing agency registered under the Securities Exchange Act.

If at any time a Participant, either the Reporting Party or the contra party, fails to maintain a clearing arrangement, it is removed from the system and precluded from participation in the ADF. That lasts until a clearing arrangement is reestablished and notice of the arrangement, with an amended Participant Application Agreement, is filed with FINRA.

Exam Tip: Gotchas

• The 20-business-day bar does not apply to a clearing-arrangement failure that terminates a registration in Nasdaq securities. That market maker may register at any time after a clearing arrangement has been reestablished.
• Lifting the bar is not the same as getting back into the facility. The Participant stays removed and precluded from ADF participation until the arrangement is reestablished and notice, with an amended Participant Application Agreement, is filed with FINRA.
• A voluntary lapse loses the excuse. Excused withdrawal status may be granted for a clearing failure, but if FINRA finds the failure voluntary, the withdrawal is voluntary and unexcused.
• The consequence reaches both sides of a trade. The removal applies to a Participant that is either the Reporting Party or the contra party.

What Should You Check on Exam Day?

• Confirm the firm asked ADF Operations first, unless it could not submit automated quotations or respond immediately and automatically, in which case it withdraws first and contacts them promptly.
• Treat every ground as permissive. Excused withdrawal status may be granted on satisfying a condition; it is never automatic.
• Check the notice-plus-approval pair on religious holidays and vacation, and the list of securities that only vacation requires.
• Separate the two termination triggers: five minutes without re-entry, or 30 minutes after a trading halt ends, then a 20-business-day bar on re-registering as a market maker in that security.
• On a clearing failure, check both consequences: re-registration in Nasdaq securities at any time once reestablished, but removal from the system until notice with an amended agreement is filed.