The Use of the Alternative Display Facility

The ADF is one of the places a FINRA member can display a quotation without being on an exchange. Almost every obligation that follows in this chapter turns on a handful of defined terms, so this lesson starts with what the facility is and who is inside it.

What Is the Alternative Display Facility?

The alternative display facility (ADF) is a facility operated by FINRA for members that choose to quote or effect trades in ADF-eligible securities otherwise than on an exchange. It collects and disseminates quotations and trade reports, and it compares trades.

Members that use ADF systems for quotation or trade reporting activities must comply with the ADF rules and the ADF trade reporting rules, as well as all other applicable FINRA rules and the federal securities laws. Trade reporting itself is covered in the unit on reporting trades to the designated reporting facility.

FINRA may at any time authorize the use of ADF data systems on a test basis for whatever studies it considers necessary and appropriate.

Exam Tip: Gotchas

• Participation in the ADF is elective. The facility exists for members that choose to quote or effect trades away from an exchange, so nothing pushes a member into it.
• The ADF rules do not displace the rest of the rulebook. A participant complies with them as well as all other applicable FINRA rules and the federal securities laws.
• The test-basis authority has no stated notice period or limit. FINRA may authorize test use at any time, for whatever studies it considers necessary and appropriate.

Who Participates in the ADF?

The ADF definitions rule supplies the terms used across the ADF rules and the ADF trade reporting rules, unless the context requires otherwise. A term it does not define takes its meaning from the FINRA By-Laws and rules and from the definitions in the national market system rules (Regulation NMS).

That same rule also borrows six terms from Regulation M's definitions for the withdrawal of quotations rule: affiliated purchaser, covered security, distribution, distribution participant, restricted period, and selling security holder.

Four terms describe the participants, and they nest.

An ADF trading center is a registered reporting ADF market maker, or a registered reporting ADF ECN, that is a trading center as the national market system rules (Regulation NMS) define that term and that is certified under the ADF quote and order access rule to display its quotations or orders through the ADF.

A member is a registered reporting ADF market maker in only those designated securities for which it is registered as an ADF market maker.

The certification record is the document an ADF trading center must execute and continue to comply with in order to display its quotations through the ADF.

Exam Tip: Gotchas

• An alternative trading system displaying orders in the ADF is swept into the ECN definition. The ADF is not an alternative to an ATS; an ATS can be an ADF participant and then carries the ADF rules alongside Regulation ATS.
• A market maker's status is security by security. Registration in one designated security does not make the member a registered reporting ADF market maker in any other.
• Being a participant is not the same as being a trading center. A trading center must also meet the Regulation NMS trading center definition and be certified to display through the ADF.

Which Securities Are ADF-Eligible?

An ADF-eligible security is an NMS stock as Regulation NMS defines it. Several related definitions describe the securities and the venue.

• A consolidated quotation system (CQS) security is a security eligible for inclusion in the Consolidated Quotation Plan and reported to the Consolidated Tape in accordance with the Consolidated Tape Association Plan.
• Those securities include all common stocks, preferred stocks, long-term warrants, and rights entitling the holder to acquire an eligible security, listed or admitted to unlisted trading privileges on BATS Exchange, NYSE MKT, NYSE Arca or the New York Stock Exchange.
• They also include securities listed on regional stock exchanges that the regional exchange has designated as eligible for reporting to the Consolidated Tape.
• Nasdaq means The NASDAQ Stock Market other than any facilities it operates on behalf of FINRA, and a Nasdaq security is any security listed on The NASDAQ Stock Market.
• Otherwise than on an exchange means a trade effected by a FINRA member otherwise than on or through the facilities of a national securities exchange.

What constitutes a trade on or through a particular national securities exchange is determined by that exchange, in accordance with all applicable statutes, rules and regulations, and with any necessary SEC approval.

A normal unit of trading is the round lot assigned to a security under Regulation NMS. That round lot depends on the security's average closing price on its primary listing exchange during the prior evaluation period.

A security that becomes an NMS stock during an operative period is assigned a round lot of 100 shares. The evaluation period that fixes the assignment, and the operative periods that follow it, are covered in the unit on Regulation NMS.

Exam Tip: Gotchas

• The exchange, not FINRA, decides what counts as a trade on or through its own facilities. FINRA's definition points the question back to the exchange, subject to any necessary SEC approval.
• Nasdaq's definition carves out the facilities it runs for FINRA. A trade on a FINRA facility Nasdaq operates is not a trade on Nasdaq for these purposes.
• A round lot is no longer always 100 shares. Above $250.00 per share it steps down to 40, then 10, then a single share, and only a new NMS stock defaults to 100.

When Does a Firm Stop Being an ADF Participant?

A member ceases to be a registered reporting ADF market maker in a designated security, or a registered reporting ADF ECN, in either of two situations.

1. It has withdrawn or voluntarily terminated its quotations on the ADF, in that security for a market maker.
2. Its quotations have been suspended or terminated by action of FINRA.

A registered reporting ADF ECN may voluntarily withdraw from participation by providing, through electronic delivery, written notice to FINRA Market Operations of its intention to withdraw. The withdrawal is effective upon the first trading day following the provision of that notice, or such other date as the written notice specifies.

Exam Tip: Gotchas

• Ceasing to be a participant has a firm-initiated route and a FINRA-initiated route. A suspension or termination by FINRA action ends the status just as a voluntary withdrawal does.
• The default effective date for a voluntary ECN withdrawal is the first trading day following the notice. The notice itself may specify a different date, so the default is not the only answer.

What Is a Stop Stock Transaction?

A stop stock price is the specified price at which a member and another party agree a stop stock transaction shall be executed. That price is based on the prices at which the security is trading at the time the member receives the order.

The definition adds that the specified price may deviate from current market prices, to factor in the size of the order and the number of shares available at those prices.

A stop stock transaction is any transaction that meets both of two conditions.

1. The transaction is the result of an order in which a member and another party agree that the order will be executed at a stop stock price or better.
2. The order is executed at the stop stock price or better.

The OTC equity definitions state the same term for the OTC Reporting Facility, and the two versions do not read alike. There the agreement limb still allows a stop stock price or better, while the execution limb reads simply that the order is executed at the stop stock price.

The two versions set side by side are covered in the unit on reporting trades to the designated reporting facility.

Exam Tip: Gotchas

• Both limbs of the ADF definition carry the words or better. An answer that keeps them in the agreement and drops them from the execution has stated the OTC Reporting Facility version instead.
• The stop stock price may sit away from the current market by design. The definition builds in a deviation to account for order size and the shares available at those prices.

What Should You Check on Exam Day?

• Confirm the venue in the scenario is the ADF, since the stop stock execution limb differs between it and the OTC Reporting Facility.
• Check whether the participant is a market maker or an electronic communications network, because a market maker's status is security by security.
• On any ADF trading center question, confirm both the Regulation NMS trading center element and certification to display through the facility.
• Read a round-lot question against the price tiers rather than assuming 100 shares.
• Confirm an ECN's voluntary withdrawal date, since the notice may specify a date other than the first trading day following it.