March 5, 2013
I write on behalf of CRT Capital Group LLC ("CRT") in response to the Commission's request for comments in connection with File No. SR-FINRA-2013-013 (Notice of Filing of Proposed Rule Change to Require Members to Report OTC Equity Transactions As Soon As Practicable, But No Later Than 10 Seconds, Following Execution). CRT is an institutional broker-dealer that focuses on targeted research and trading of high-yield, convertible and distressed debt and equity, capital structure arbitrage, government securities and securitized products. CRT's clients include major financial asset managers, mutual funds, insurance companies, pension funds and investment companies.
Institutional broker-dealers like CRT often receive client block orders that require oral negotiation and that are subject to inherent delays. Whereas a retail client typically places his or her order well in advance of trade execution, the institutional client often does not. As described below, this fact weighs heavily on the ability of broker-dealers that service institutional clients to report trades within the current 30-second standard.
CRTs clients often place orders on a not held basis with the intent of executing block-sized transactions to minimize the price volatility of the subject security. This process requires CRT to find a source of liquidity and, once that source is found, to negotiate a price that is mutually acceptable to both parties. This course of action often requires CRT to principally show bids and/or offers to accounts that have simply expressed a previous interest in the relevant security as opposed to already having placed an active formal order. The progression which is typically associated with such negotiations is as follows:
a. a CRT trader communicates bids and offers to the CRT salesforce
b. Salespeople then communicate that market to institutional buy-side customers, many of whom do not have an active order placed with CRT
c. once communicated, an account either makes an immediate decision to execute or the buy-side trader shows the bid/offer to the clients portfolio manager
d. once an account agrees to transact at the price shown, the order and the execution are simultaneously established and
e. the salesperson then either manually enters an order for the client into CRT's order management system (OMS) or the client electronically sends the order to CRT through a FIX connection (an electronic protocol that institutional clients utilize to transmit orders and to receive execution reports).
In such cases, both an order and execution are established at the very same instant. Accordingly, CRT sales and trading personnel must race against the clock to ensure that an order ticket has been recorded in the OMS and that the appropriate execution report is transmitted to the tape. The 30-second limit is particularly demanding when rapidly-moving markets are coupled with Reg NMS trade-through requirements. Reg NMS requires trades to either be executed at prices within the then-current NBBO or to be exposed to and swept through the montage for potential price improvement. If the NBBO moves – even a penny – between the time of a negotiated execution and the time of order and execution ticket entry, the OMS will not transmit the execution price to the tape without sweeping it through the montage. For the OMS to accept the non-NBBO negotiated print, the trader must verify the time of the last transaction that was printed at the same price as the non-NBBO negotiated print and then must manually record that time of execution on the corresponding order ticket. Each of the foregoing steps must be performed with virtual flawlessness in order to report the print to the tape within 30 seconds.
These were difficult, but reasonably achievable, exercises under the old 90-second standard and it appears that the trade mechanics that are associated with institutional block transactions were not well enough understood by the industry prior to implementation of the 30-second standard. Further slashing the reporting deadline to a 10-second threshold will simply stretch the bounds of human capabilities. CRT urges the Commission to consider adopting a carve-out mechanism within the proposed rule for negotiated block transactions.