DGL REVISED PRA Rule 602 SS - June 2013 (3)

SUPPORTING STATEMENT
for the Paperwork Reduction Act Collection Submission
for Rule 602 of Regulation NMS
A.

Justification
1.

Necessity of Information Collection

Section 11A(a)(2) of the Securities Exchange Act of 1934 (“Exchange Act”)
directs the Securities and Exchange Commission (“Commission”) to use its authority
under the Exchange Act to facilitate the establishment of a national market system in
which, among other things, brokers, dealers, and investors have access to information on
securities quotations and transactions. Moreover, the Commission is authorized, under
Sections 11A(c)(1)(B) and (F) of the Exchange Act, to assure the prompt, accurate and
reliable distribution of quotation information and to assure the fairness and usefulness of
the form and content of such information. To achieve these statutory objectives, the
Commission promulgated Rule 11Ac1-1, designated as Rule 602 of Regulation NMS, 17
CFR 242.602. 1
Rule 602 contains two related collections of information. The first collection of
information is found in Rule 602(a). This reporting requirement obligates each national
securities exchange and national securities association to make available to quotation
vendors for dissemination to the public the best bid, best offer, and aggregate quotation
size for each “subject security,” as defined under the Rule. The second collection of
information is found in Rule 602(b). This reporting requirement obligates each exchange
member and over-the-counter (“OTC”) market maker that is a “responsible broker or
dealer,” as defined under the Rule, to communicate to an exchange or association its best
bids, best offers, and quotation sizes for subject securities. 2
2.

Purpose and Use of the Information Collection

Each of the collections is necessary to achieve the statutory objective of
disseminating high-quality quotation information to the public. Brokers, dealers, other
1

Regulation NMS redesignated the national market system rules previously
adopted under Section 11A of the Exchange Act. Securities Exchange Release
No. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005).

2

Under Rule 602(b)(5), electronic communications networks (“ECNs”) have the
option of reporting to an exchange or association for public dissemination, on
behalf of customers that are OTC market makers or exchange market makers, the
best-priced orders and the full size for such orders entered by market makers on
the ECN, to satisfy such market makers’ reporting obligation under Rule 602(b).
Since this reporting requirement is an alternative method of meeting the market
makers’ reporting obligation, and because it is directed to nine or fewer persons
(ECNs), this collection of information is not subject to OMB review under the
Paperwork Reduction Act (“PRA”).

market participants, and members of the public rely on the quotation information required
by Rule 602 to determine the best price and market for execution of investor orders. In
the absence of these collections of information, investors may not be aware of the best
bids and offers available from all significant market participants in securities. Not
requiring the information would impair the opportunity for investors to have their orders
executed in the best market, which is another important objective of the national market
system set forth in Section 11A(a)(1)(C)(iv) of the Exchange Act.
3.

Consideration Given to Information Technology

Improved information technology facilitates the dissemination of quotation
information in an accurate and timely fashion. Such technology enables persons subject
to Rule 602 to collect the required information electronically. Thus, the Commission
believes that improved technology reduces the burden imposed by these information
collections.
4.

Duplication

The required information is not duplicative of any other information collection.
5.

Effect on Small Entities

The 16 national securities exchanges and one national securities association
obligated to report under Rule 602(a) are not small entities as defined by Commission
rules. For the reporting obligations under Rule 602(b), only 30 of the 2076 exchange
members are small entities. In addition, as noted in Section 12 of this submission, all
OTC market makers currently comply with the Rule by providing their quotations to an
exchange of which they are a member. Thus, the proportion of respondents under Rule
602(b) that are small entities is very low. In addition, an OTC market maker must have
an executed volume of more than 1% of the aggregate reported volume in an exchangetraded security to trigger the quoting requirements of Rule 602(b). Small broker-dealers
that are OTC market makers are likely to cross this 1% reporting threshold in a small
number of NMS stocks. Accordingly, their burden of collection is likely to be
significantly less than the average burden of collection for all respondents under Rule
602(b).

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6.

Consequences of Not Conducting Collection

The information is collected as each quotation is communicated. Accordingly,
any less frequent collection would deprive the public of information on the best prices for
a security and undermine the purposes of Rule 602.
7.

Inconsistencies with Guidelines in 5 CFR 1320.5(d)(2)

There are no special circumstances. This collection is consistent with the
guidelines in 5 CFR 1320.5(d)(2).
8.

Consultations Outside the Agency

The required Federal Register notice with a 60 day comment period soliciting
comments on this collection of information was published. No public comments were
received.
9.

Payment or Gift

Not applicable.
10.

Confidentiality

No assurances of confidentiality are necessary because the information will be
made available to the public.
11.

Sensitive Questions

Not applicable. Rule 602 does not require information of a sensitive nature. The
information collection does not include any Personally Identifiable Information (PII).
12.

Burden of Information Collection

The aggregate reporting burden under Rule 602 is 27,750 hours annually, which is
comprised of 4,250 hours relating to Rule 602(a) and 23,500 hours relating to Rule
602(b), as explained in further detail below.
a.

Rule 602(a)

For the reporting obligation under Rule 602(a), the respondents are the sixteen
national securities exchanges and one national securities association. 3 The Commission
3

The sixteen national securities exchanges registered with the Commission under
Section 6(a) of the Exchange Act are: BATS Exchange Inc.; BATS Y Exchange,
Inc.; BOX Options Exchange LLC; Chicago Board Options Exchange,
Incorporated; C2 Options Exchange, Incorporated; Chicago Stock Exchange, Inc.;
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estimates that each exchange or association on average will respond (i.e., disseminate and
update bids, offers, and quotation sizes to quotation vendors) approximately
49,408,510,743 times per year. 4 The Commission estimates that the average annual time
burden for each national securities exchange or national securities association is 250
hours 5 which results in an annual aggregate burden for all respondents under Rule 602(a)
of 4,250 hours (250 x 17). 6
b.

Rule 602(b)

For the reporting obligation under Rule 602(b), the respondents are exchange
members and OTC market makers.
With respect to exchange members, the highly automated trading systems now
operated by securities exchanges have transformed the nature of trading and the
communication of quotations on an exchange. Exchange members that communicate a
quotation on an exchange through its automated systems necessarily will also have
communicated that quotation to the exchange in compliance with Rule 602(b). As a
result, the communication of quotations through an exchange’s electronic trading system
effectively means that members currently have no reporting burden under Rule 602(b) for
these quotations. While a few exchanges continue to operate manual trading floors in
conjunction with their automated trading systems, the Commission believes that these
exchanges have provided their floor members with automated means to communicate on
the exchange any quotations that would fall within the requirements of Rule 602(b), and
that such automated communication on the exchange also would comply with Rule
602(b). The manual trading floors generally are used for more specialized types of
EDGA Exchange, Inc.; EDGX Exchange, Inc.; International Securities Exchange
LLC; The Nasdaq Stock Market LLC; NASDAQ OMX BX, Inc.; NASDAQ
OMX PHLX, Inc.; National Stock Exchange, Inc.; New York Stock Exchange
LLC; NYSE Amex, Inc.; and, NYSE Arca, Inc. The one national securities
association registered with the Commission under Section 15A of the Exchange
Act is the Financial Industry Regulatory Authority, Inc. (previously, the National
Association of Securities Dealers, Inc.).
4

The Commission derived the average number of responses per national securities
exchange or national securities association as follows: 839,944,682,631 (total
number of responses in 2012) / 17 (the total number of national securities
exchanges and national securities associations in 2013) = average annual number
of responses per respondent under 602(a).

5

The Commission derived the annual time burden for each national securities
exchange or national securities association from the following: 4,250 hours
(aggregate burden for all respondents in hours) / 17 (number of respondents) =
250 hours (total annual burden for each respondent in hours).

6

Accordingly, the time per response under Rule 602(a) is: 49,408,510,743 annual
responses per respondent / 250 annual burden hours per respondent =
approximately 18.22 microseconds per response under Rule 602(a).
4

trading services, such as price improvement auctions and various types of facilitation and
exposure mechanisms for large orders that do not fall within the requirements of Rule
602(b).
With respect to OTC market makers, Rule 602(b) applies to quotations that are
communicated to a broker or dealer or customer otherwise than on an exchange. The
Commission estimates that there currently are approximately 150 OTC market makers
responsible for more than 1% of the trading volume in an exchange-traded security. All
such OTC market makers comply with Rule 602(b) by providing their quotations to an
exchange rather than to an association. 7 The Commission estimates that each OTC
market maker on average will respond 188,000 times per year. This figure is based on a
252 trading day year. The total annual time burden for each OTC market maker is
estimated to be 156.67 hours (188,000 x .00083333). These figures are based on an
estimate of three seconds per response (i.e., the time it takes to update a quote). The
annual aggregate burden for all OTC market makers is estimated to be 23,500 hours
(156.67 x 150). 8
13.

Costs to Respondents

Not applicable.
14.

Costs to Federal Government

There is no estimated operation cost for the federal government associated with
Rule 602.
15.

Changes in Burden
a.

Rule 602(a)

The estimated time burdens have been adjusted upward to reflect the fact that,
since the last time the SEC sought OMB approval for the collection of information
pursuant to Rule 602(a), the number of registered national securities exchanges has
increased from fifteen to seventeen.

7

In 2006, the Commission granted an exemption from Rule 602 that permits OTC
market makers that also are exchange members to provide their best bids and
offers to an exchange, without the necessity of also providing their best bids and
offers to an association.

8

Accordingly, the time per response under Rule 602(b) is: 188,000 annual
responses per respondent / 156.67 annual burden hours per respondent =
approximately 3.00 seconds per response under Rule 602(b).
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b.

Rule 602(b)

The estimated time burdens have been adjusted upward to reflect the fact that,
since the last time the SEC sought OMB approval for the collection of information
pursuant to Rule 602(b), the number of OTC market maker respondents has increased
from 130 to 150.
As discussed in Section 12 of this submission, the use of exchanges’ automated
trading systems by exchange members effectively results in exchange members having
no reporting burden under Rule 602(b).
16.

Information Collection Planned for Statistical Purposes

Not applicable.
17.

Approval to Omit the OMB Expiration Date

The Commission is not seeking approval to omit the expiration date.
18.

Exceptions to Certification

Not applicable. This collection complies with the requirements in 5 CFR 1320.9
B.

Collections of Information Using Statistical Methods
This collection does not involve statistical methods.

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