[Federal Register Volume 84, Number 34 (Wednesday, February 20, 2019)]
[Rules and Regulations]
[Pages 5202-5306]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-27982]



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Vol. 84

Wednesday,

No. 34

February 20, 2019

Part II





Securities and Exchange Commission





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17 CFR Parts 200 and 242





Transaction Fee Pilot for NMS Stocks; Final Rule

  Federal Register / Vol. 84 , No. 34 / Wednesday, February 20, 2019 / 
Rules and Regulations  

[[Page 5202]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200 and 242

[Release No. 34-84875; File No. S7-05-18]
RIN 3235-0761


Transaction Fee Pilot for NMS Stocks

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'' or 
``SEC'') is adopting a new rule of Regulation National Market System 
(``Regulation NMS'') under the Securities and Exchange Act of 1934 
(``Exchange Act'') to conduct a Transaction Fee Pilot (``Pilot'') for 
National Market System (``NMS'') stocks to study the effects that 
exchange transaction fee-and-rebate pricing models may have on order 
routing behavior, execution quality, and market quality. We expect the 
data generated by the pilot, combined with data from existing sources, 
will facilitate an empirical evaluation of whether the existing 
exchange transaction-based fee and rebate structure is operating 
effectively to further statutory goals.

DATES: 
    Effective date: April 22, 2019 through December 29, 2023.
    Compliance date: As designated by Notice pursuant to 17 CFR 
242.610T(c)(2).

FOR FURTHER INFORMATION CONTACT: Richard Holley III, Assistant 
Director; Johnna Dumler, Special Counsel; Erika Berg, Special Counsel; 
or Benjamin Bernstein, Special Counsel, each with the Division of 
Trading and Markets, Securities and Exchange Commission, 100 F Street 
NE, Washington, DC 20549, or at (202) 551-5777.

SUPPLEMENTARY INFORMATION: The Commission is adopting new 17 CFR 
242.610T (Rule 610T) to conduct a Transaction Fee Pilot for NMS stocks.

Table of Contents

I. Executive Summary of Rule 610T
II. Discussion of Rule 610T
    A. Focus on Exchange Pricing Models and the Distortions They Can 
Cause
    1. Exchange Fee Models and Regulatory Framework
    2. Impact of Exchange Fee Models
    3. Focus on Exchange Fee Models
    4. Non-Exchange Trading Centers
    5. Options Exchanges
    B. Securities
    1. The Share Price Threshold of Pilot Securities
    2. The Duration of Pilot Securities
    3. Selecting Pilot Securities From All NMS Stocks
    4. The Ability of Issuers to Opt Out of the Pilot
    C. Pilot Design
    1. Need for a Pilot
    2. Pilot Design
    3. No Overlap With Tick Size Pilot
    4. Stratified Selection of Pilot Securities
    5. Number of NMS Stocks Included in Each Test Group
    6. Reduction to the Pilot Size
    7. Fee Cap Test Groups
    8. Control Group
    9. Alternative Designs
    10. Metrics To Assess the Pilot
    D. Timing and Duration
    1. Disclosure Initiatives and the Pilot
    2. Automatic Sunset at Year One
    3. Pre- and Post-Pilot Periods
    4. Early Termination
    5. Inclusion of a Phase-In Period
    E. Data
    1. Pilot Securities Exchange Lists and Pilot Securities Change 
Lists
    2. Exchange Transaction Fee Summary
    3. Order Routing Data
    F. Implementation
    G. The Commission's Authority To Conduct the Pilot
III. Paperwork Reduction Act
    A. Summary of Collection of Information
    B. Proposed Use of Information
    C. Respondents
    D. Total Initial and Annual Reporting and Recordkeeping Burdens
    1. Pilot Securities Exchange Lists and Pilot Securities Change 
Lists
    2. Exchange Transaction Fee Summaries
    3. Order Routing Datasets
    E. Collection of Information Is Mandatory
    F. Confidentiality of Responses to Collection of Information
    G. Retention Period for Recordkeeping Requirements
IV. Economic Analysis
    A. Background and Market Failures
    1. Market Failure at the Broker-Dealer Level
    2. Market Failure at the Exchange Level
    B. Baseline
    1. Current Information Baseline
    2. Current Market Environment
    C. Analysis of Benefits and Costs of Transaction Fee Pilot
    1. Benefits of Transaction Fee Pilot
    2. Costs of the Pilot
    D. Impact on Efficiency, Competition, and Capital Formation
    1. Efficiency
    2. Competition
    3. Capital Formation
    E. Alternatives
    1. Propose Rulemaking Without Conducting a Pilot
    2. Expand Transaction Fee Pilot To Include Non-Exchange Trading 
Centers
    3. Trade-At Test Group
    4. Alternative Pilot
    5. Adjustments to the Transaction Fee Pilot Structure
V. Regulatory Flexibility Analysis
VI. Statutory Authority and Text of the Rule Amendments

I. Executive Summary of Rule 610T

    Congress directed the Commission, through Section 11A of the 
Exchange Act, to facilitate the establishment of a national market 
system and use its broad authority to carry out the objectives of 
Section 11A, including, among others, to assure the economically 
efficient execution of securities transactions.\1\ In furtherance of 
these goals, and as part of its oversight of registered national 
securities exchanges, the Commission periodically undertakes reviews of 
various aspects of market structure and current regulations to evaluate 
whether, in light of changes in technology and business practices, the 
current regulatory framework continues to fairly, effectively, and 
efficiently promote fair and orderly markets, serve the public interest 
and the protection of investors, and promote capital formation.
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    \1\ 15 U.S.C. 78k-1(a)(1)(C)(i). See also supra Section II.G 
(discussing the Commission's authority to conduct the Pilot).
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    As discussed below, one aspect of the current regulatory framework 
focuses on the current pricing and fee structure for transactions in 
securities. As the Commission discussed in its Pilot proposal, the 
predominant transaction pricing structure that developed among equities 
exchanges to attract order flow is the ``maker-taker'' fee model.\2\ 
Specifically, out of thirteen equities exchanges, seven utilize the 
``maker-taker'' fee model, in which they pay a rebate to a provider of 
liquidity and charge a fee to a taker of liquidity. Among the remaining 
exchanges, four utilize a ``taker-maker'' pricing model (also called an 
inverted model) where they charge a fee to a provider of liquidity and 
pay a rebate to a taker of liquidity,\3\ and two have a ``flat fee'' 
model.\4\ In recent years this area has

[[Page 5203]]

attracted considerable attention and generated significant debate, 
focusing on the effects, both positive and negative, that exchange 
transaction-based pricing models may have on market quality and 
execution quality, with some commenters advocating action by the 
Commission.
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    \2\ See Securities Exchange Act Release No. 82873 (March 14, 
2018), 83 FR 13008 (March 26, 2018) (``Proposing Release'' or 
``Proposal'').
    \3\ See Cboe BYX U.S. Equities Exchange Fee Schedule (as of 
December 2018), available at https://markets.cboe.com/us/equities/membership/fee_schedule/byx/; Cboe EDGA U.S. Equities Exchange Fee 
Schedule (as of December 2018), available at https://markets.cboe.com/us/equities/membership/fee_schedule/edga/; Nasdaq 
BX Fee Schedule (as of December 2018), available at https://www.nasdaqtrader.com/Trader.aspx?id=bx_pricing; NYSE National 
Schedule of Fees and Rebates (as of December 2018), available at 
https://www.nyse.com/publicdocs/nyse/regulation/nyse/NYSE_National_Schedule_of_Fees.pdf. EDGA adopted a taker-maker fee 
schedule in July 2018. See Securities Exchange Act Release No. 83643 
(July 16, 2018), 83 FR 34643 (July 20, 2018) (SR-CboeEDGA-2018-012).
    \4\ See Investors Exchange Fee Schedule (as of December 2018), 
available at https://iextrading.com/trading/fees/; NYSE American 
Equities Trading Fees and Price List (as of December 2018), 
available at https://www.nyse.com/publicdocs/nyse/markets/nyse-american/NYSE_America_Equities_Price_List.pdf. NYSE American offers 
rebates to eDMMs in their assigned NYSE American-listed securities.
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    The Commission is uniquely situated and vested with the 
responsibility under Section 11A of the Exchange Act to examine the 
impact that this aspect of our market structure has on our national 
market system. And, in light of the questions raised about the impact 
of these fee models and the amount of attention garnered, we believe 
this is an area ripe for Commission review. But, the Commission 
currently lacks the data necessary to meaningfully analyze the impact 
that exchange transaction fee-and-rebate pricing models have on order 
routing behavior, market and execution quality, and our market 
structure generally. To address this information gap, the Commission 
has designed the Pilot to produce data that will facilitate a more 
thorough understanding of the potential issues associated with exchange 
transaction-based pricing models. In particular, the Commission has 
designed the Pilot to gather data on the effect both current regulatory 
fee caps and rebates have on market quality and execution quality. The 
data gathered will assist the Commission in determining whether any 
changes in the current regulatory framework are appropriate and enable 
the Commission to make more informed and effective policy decisions. 
This, in turn, enables the Commission to carry out the objectives of 
the national market system and oversee the national securities 
exchanges.
    As discussed fully in the proposing release, the Commission 
proposed a pilot to test the effect of exchange transaction fees and 
rebates.\5\ The following chart summarizes the terms of the Pilot as 
adopted, which are discussed in more detail below:
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    \5\ See Proposing Release, supra note 2.

                                      Transaction Fee Pilot for NMS Stocks
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Duration......................   2 years with an automatic sunset at 1 year unless, no later than 30 days prior
                                  to that time, the Commission publishes a notice that the pilot shall continue
                                  for up to 1 additional year; plus a 6-month pre-Pilot Period and 6-month post-
                                                                  Pilot Period.
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Applicable trading centers....   Equities exchanges (including maker-taker & taker-maker) but not ATSs or other
                                                          non-exchange trading centers.
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Pilot securities..............  NMS stocks with average daily trading volumes >=30,000 shares with a share price
                                  >=$2 per share that do not close below $1 per share during the Pilot and that
                                    have an unlimited duration or a duration beyond the end of the post-Pilot
                                                                     Period.
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                                Group..................  Number of NMS      Fee cap..........  Rebates
                                                          stocks.                               permitted?
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Pilot design..................  Test Group 1...........  730..............  $0.0010 fee cap    Yes.
                                                                             for removing and
                                                                             providing
                                                                             displayed
                                                                             liquidity (no
                                                                             cap on rebates).
                                Test Group 2...........  730 (plus          The 17 CFR         No. Rebates and
                                                          appended           242.610(c) (Rule   Linked Pricing
                                                          Canadian           610(c)) $0.0030    Prohibited for
                                                          interlisted        cap continues to   removing and
                                                          stocks).           apply to fees      providing
                                                                             for removing       displayed and
                                                                             displayed          undisplayed
                                                                             liquidity.         liquidity
                                                                                                (except for
                                                                                                specified market
                                                                                                maker activity).
                                Control Group..........  Pilot Securities   The Rule 610(c)    Yes.
                                                          not in Test        cap continues to
                                                          Groups 1 or 2.     apply to fees
                                                                             for removing
                                                                             displayed
                                                                             liquidity (no
                                                                             cap on rebates).
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Pilot data....................        1. Pilot Securities Exchange Lists and Pilot Securities Change Lists.
                                                      2. Exchange Transaction Fee Summary.
                                                           3. Order Routing Datasets.
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II. Discussion of Rule 610T

    In response to its proposal to conduct a Transaction Fee Pilot in 
NMS stocks (the ``Pilot''), the Commission received a number of comment 
letters from a diverse group of commenters, including exchanges, 
investment managers, broker-dealers, and other market participants, as 
well as academics, listed issuers, analytics firms, market observers, 
and industry associations.\6\ As discussed below, after review and 
consideration of the comments received, the Commission is adopting Rule 
610T with certain modifications from that in the proposal.
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    \6\ The Proposal was developed, in part, by reference to a 
recommendation for an access fee pilot submitted to the Commission 
by the Equity Market Structure Advisory Committee (the ``EMSAC''). 
See Proposing Release, supra note 2, at 13009, 13012-14.
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A. Focus on Exchange Pricing Models and the Effects They Can Cause

1. Exchange Fee Models and Regulatory Framework
    Regardless of the fee model, all fees of a registered national 
securities exchange ``exchange'') are subject to the standards and 
process requirements set forth in the federal securities laws.\7\ In 
particular, Section 6 of the Exchange Act requires, among other things, 
that the rules of an exchange provide for the ``equitable allocation'' 
of ``reasonable'' fees and that they not be ``designed to permit unfair 
discrimination.'' \8\ Section 11A of the Exchange Act directs the 
Commission to use its authority to facilitate the establishment of a 
national market system for securities that assures economically 
efficient execution of securities transactions, fair competition, 
availability of information with respect

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to quotations for and transactions in securities, and the 
practicability of brokers executing investors' orders in the best 
market.\9\ In addition, Rule 610(c) of Regulation NMS imposes upon 
exchanges a fee cap of $0.0030 per share for the execution of an order 
against its ``protected quotation.'' \10\
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    \7\ Under the Exchange Act, exchange fee changes are effective 
on the day that the exchange files them with the Commission, and 
neither advance notice nor Commission action is required before an 
exchange may implement a fee change. See 15 U.S.C. 78s(b)(3)(A)(ii). 
The Commission may, within 60 days after an exchange filed its fee 
change with the Commission, summarily suspend the new fee and 
institute proceedings to determine whether to disapprove it. See 15 
U.S.C. 78s(b)(3)(C).
    \8\ See 15 U.S.C. 78f(b)(4)-(5).
    \9\ See 15 U.S.C. 78k-1(a)(1).
    \10\ 17 CFR 242.610(c); Securities Exchange Act Release No. 
51808 (June 9, 2005), 70 FR 37496, 37543-46 (June 29, 2005) (``NMS 
Adopting Release''). See also 17 CFR 242.600(b)(58) (defining 
``protected quotation''); 17 CFR 242.600(b)(57) (defining 
``protected bid or protected offer''); 17 CFR 242.600(b)(3) 
(defining ``automated quotation'').
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    In 2005, when it adopted the fee limitation in Rule 610(c), the 
Commission noted, in part:

    The adopted fee limitation set forth in Rule 610(c) of 
Regulation NMS is designed to preclude individual trading centers 
from raising their fees substantially in an attempt to take improper 
advantage of strengthened protection against trade-throughs and the 
adoption of a private linkage regime. In particular, the fee 
limitation is necessary to address `outlier' trading centers that 
otherwise might charge high fees to other market participants 
required to access their quotations by the Order Protection Rule. It 
also precludes a trading center from charging high fees selectively 
to competitors, practices that have occurred in the market for 
Nasdaq stocks. In the absence of a fee limitation, the adoption of 
the Order Protection Rule and private linkages could significantly 
boost the viability of the outlier business model. Outlier markets 
might well try to take advantage of intermarket price protection by 
acting essentially as a toll booth between price levels. The high 
fee market likely will be the last market to which orders would be 
routed, but prices could not move to the next level until someone 
routed an order to take out the displayed price at the outlier 
market.\11\
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    \11\ NMS Adopting Release, supra note 10, at 37545.

    In light of the considerable debate surrounding exchange fee models 
that pay rebates, which is well documented in the comment letters 
submitted on the proposed Pilot, and the passage of time since the 
Commission first adopted the Rule 610(c) fee cap as part of Regulation 
NMS in 2005, the Commission now seeks to gather data to facilitate an 
empirical assessment of the effect of exchange transaction fees and 
rebates broadly--including the impact and continued appropriateness of 
the Rule 610(c) fee cap \12\--by testing the effects of changes to 
exchange fees and rebates on the markets and market participant 
behavior.
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    \12\ At the time of its adoption in 2005, the fee cap codified 
the then-prevailing fee level set through competition among the 
various trading centers. See NMS Adopting Release, supra note 10, at 
37545 (stating that ``the $0.003 fee limitation is consistent with 
current business practices, as very few trading centers currently 
charge fees that exceed this amount'').
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2. Impact of Exchange Fee Models
    In response to the Proposing Release, the Commission received a 
number of comment letters criticizing existing fee-and-rebate pricing 
models, but also a number of comment letters expressing support for 
those same pricing regimes.\13\
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    \13\ The potential distortions mentioned by the commenters (and 
discussed in this section) include, among others: (1) Conflicts of 
interest faced by routing broker-dealers; (2) excess intermediation 
and potential adverse selection; (3) market fragmentation; (4) 
exchange fee avoidance; (5) complexity; (6) transparency; and (7) 
elevated fees to subsidize rebates.
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    Many commenters focused on one potential distortion--whether 
current pricing models ``present broker-dealers with a potential 
conflict of interest,'' because their ``duty to pursue best execution 
could be compromised when their trading venue decision is driven by the 
economic incentive to minimize access fees paid and maximize rebates 
received.'' \14\ As another commenter explained, ``a broker is 
incentivized to route an order to the venue that pays it the most (or 
costs the least), instead of the venue that has the highest likelihood 
of offering the best execution for its customers, such as the one that 
offers a higher probability of execution or meaningful price 
improvement.'' \15\ As evidence of the potential harm that can result 
from the conflicts presented by exchange rebates, one commenter noted 
that institutional investors ``that specifically instruct brokers to 
remove rebate-driven trading behaviors from their algorithms achieve 
significantly lower trading costs that result in higher returns to 
their investors.'' \16\ One commenter attributed this harm to the 
tendency of rebates to ``affect the length of the order queue of 
passive limit orders on the major maker-taker exchanges, while high 
take fees on these markets make them less attractive for marketable 
orders that cross the spread.'' The commenter argued that the ``net 
result of this perverse pricing dynamic is a lower likelihood of 
execution and a higher likelihood of adverse selection for orders in 
the maker-taker queues,'' because orders at the ``middle or back of the 
queue . . . are less likely to trade at their desired price, and when 
they do trade, the overall market price as reflected by the [National 
Best Bid and Offer (``NBBO'')] is more likely to move against them, 
than when trading on venues that do not pay rebates.'' \17\
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    \14\ Capital Group Letter, at 2. See also, e.g., ICI Letter I, 
at 2; Vanguard Letter, at 2; Invesco Letter, at 2; CFA Letter, at 2; 
Oppenheimer Letter, at 2; Spatt Letter, at 4; AJO Letter, at 1; 
Larry Harris Letter, at 3.
    \15\ Healthy Markets Letter I, at 5. See also, e.g., Copeland 
Letter, at 1; Wellington Letter, at 1; Norges Letter, at 2.
    \16\ Babelfish Letter, at 1-3 (also referencing a Clearpool 
Group study that found that a ``fee sensitive VWAP algorithm 
executed during volatile times incurred seven times as much cost as 
a fee agnostic algorithm''). See also T. Rowe Price Letter, at 2 
(stating that ``[r]etail orders . . . are generally placed on the 
exchange that offers the highest rebate to the broker, but show[s] 
lower execution quality in terms of reduced probability of 
execution''); Capital Group Letter, at 2 (``Our internal trade 
analysis suggests that execution quality may be negatively impacted 
when broker-dealers' routing decisions are made to minimize access 
fees.'').
    \17\ IEX Letter I, at 6, A-1-A-2; IEX Letter II, at 7; IEX 
Letter IV (appending research to support these views). See also, 
e.g., Babelfish Letter, at 2 (stating that a ``frequently realized 
scenario is that flow sent solely to a high rebate destination waits 
in queue, often winds up canceled because price moves away, and then 
receives an inferior price upon the eventual execution''); Larry 
Harris Letter, at 1, 3; Brandes Letter, at 1-2. But see Grasso 
Letter, at 3 (``waiting for a rebate[ ] may be fine'' if ``you have 
low confidence about future prices for a large order and don't mind 
if the order trades slowly while you accumulate shares'').
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    A number of commenters discussed other potential effects of 
exchange pricing models. Some commenters believed that transaction fees 
and rebates contribute to market fragmentation \18\ because they 
encourage investors to ``turn to inverted markets to improve queue 
priority'' \19\ or to ``route orders to non-exchange trading centers to 
avoid the higher access fees that exchanges charge to subsidize the 
rebates they offer.'' \20\ Likewise, one commenter thought that 
``transaction fees and rebates contribute to market complexity through 
the proliferation of new order types . . . designed to exploit 
different transaction pricing models.'' \21\ Other commenters believed 
that ``[t]ransaction fees and rebates . . . undermine market 
transparency because the prices displayed by exchanges--and provided on 
trade reports--do not include fee or rebate information and therefore 
do not fully reflect net trade prices.'' \22\ Finally, some commenters

[[Page 5205]]

asserted that current pricing models unfairly subsidize rebates \23\ or 
benefit sophisticated market participants like market-makers and 
proprietary traders at the expense of other market participants.\24\
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    \18\ See, e.g., ICI Letter I, at 2.
    \19\ Credit Suisse Commentary, at 2. See also, e.g., Larry 
Harris Letter, at 3 (noting that ``orders standing at inverted 
exchanges usually execute before orders standing at the same price 
at maker-taker exchanges'').
    \20\ Capital Group Letter, at 2. See also, e.g., IEX Letter I, 
at 3 (``Excessive take fees . . . have been criticized as leading to 
the migration of some order flow to less-regulated non-exchange 
venues in search of reduced transaction costs, resulting in 
increased market fragmentation and market complexity.'').
    \21\ ICI Letter I, at 2. See also, e.g., Vanguard Letter, at 2 
(indicating that the ``desire to maximize rebate revenue and avoid 
fees created order complexity within the equity markets as traders 
sought profitable trading strategies'').
    \22\ ICI Letter I, at 2. See also, e.g., Goldman Sachs Letter, 
at 3; Invesco Letter, at 2; State Street Letter, at 2; Wellington 
Letter, at 1; Oppenheimer Letter, at 2; Capital Group Letter, at 3.
    \23\ See, e.g., Clearpool Letter, at 3 (stating that ``exchanges 
chase order flow and provide rebates and other pricing incentives to 
the largest trading firms at the expense of smaller market 
participants who cannot take advantage of such rebates and, in 
effect, end up subsidizing the trading of larger firms''); IEX 
Letter I, at 3 (stating that transaction fees are ``used in effect 
to subsidize the payment of rebates,'' which ``results in a 
substantial penalty on investors and other participants who . . . 
have a need for immediate liquidity'').
    \24\ See, e.g., T. Rowe Price Letter, at 2 (stating that rebates 
lead to ``excessive intermediation . . . benefiting short-term 
intermediaries at the expense of long-term investors''); ModernIR 
Letter, at 3 (stating that rebates ``promote[ ] arbitrage, and 
price-setting as its own end,'' leading to a ``paucity of real 
orders''); Larry Harris Letter, at 1, 5-6 (stating that current 
pricing models facilitate ``the execution of various parasitic 
trading strategies by proprietary traders to the detriment of public 
investors''); Capital Group Letter, at 3.
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    Other commenters expressed support for current exchange pricing 
models. For example, one commenter believed that maker-taker pricing 
``provides important benefits to issuers and investors,'' because 
exchanges ``use rebates as a tool to promote displayed liquidity and 
price discovery, which results in competitive bid-ask spreads, saving 
transaction costs that investors may otherwise incur.'' \25\ Another 
commenter argued that rebates can promote displayed liquidity by 
providing ``a payment in exchange for posters of liquidity giving up 
several valuable options,'' including ``the power to decide the time of 
the trade'' and the ability to conceal trading intentions until the 
point of execution.\26\ Building on this idea, one commenter 
characterized ``[a]ccess fee caps and related rebates'' as features 
that ``enable exchanges to compete with non-exchange trading venues by 
essentially subsidizing the posted prices . . . and narrow[ing] the 
NBBO, making it slightly more expensive to either match or improve upon 
those prices off-exchange.'' \27\
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    \25\ State Street Letter, at 2. See also, e.g., Virtu Letter, at 
3; Fidelity Letter, at 3; Nasdaq Letter I, at 9; Cboe Letter I, at 
15-16. See also Nasdaq Letter III, at Exhibit A (providing graphs 
using data from September 2018 on average quoted spread across 
exchanges in S&P 500 stocks and time at the best quote across those 
stocks). But cf. Larry Harris Letter, at 6-9 (acknowledging that 
``quoted spreads are narrower under maker-taker pricing,'' but 
opining that ``the narrower quoted spreads do not benefit the 
public'').
    \26\ Magma Letter, at 3. See also, e.g., NYSE Letter IV, at 2 
(arguing that ``pricing incentives enhance the quality and 
reliability of display markets''); FIA Letter, at 4.
    \27\ FIA Letter, at 3-4. See also NYSE Letter I, at 6 (stating 
that rebates ``allow liquidity providers to quote narrower spreads 
by providing another source of revenue''); Grasso Letter, at 4 
(``the main outcome of exchange pricing seems to be that it forces 
exchanges to compete for customers,'' because it ``keeps their 
margins tight and gives them incentives to improve the quality of 
their offerings'').
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    As commenters fundamentally disagreed about the effect of exchange 
transaction fee models and whether they have a positive or a negative 
impact on the U.S. equities markets, commenters also held conflicting 
views regarding whether and how the Commission should conduct the 
Pilot.
3. Focus on Exchange Fee Models
    Recognizing the unique regulatory framework applicable to exchange 
fees, and the disagreement over the impact of exchange fees and rebates 
on the markets and market participants, the Commission focused its 
proposed Pilot on studying the effect of exchange transaction fees and 
rebates on order routing behavior, execution quality, and market 
quality. Accordingly, the Commission proposed to include within the 
Pilot all equities exchanges regardless of fee model.
    A large number of commenters supported applying the Pilot to all 
equities exchanges.\28\ For example, one commenter believed that the 
Pilot ``should include all equities exchanges . . . because rebates of 
any kind provide inducements to trade and distort markets.'' \29\ A 
different commenter thought that including taker-maker exchanges was 
``both logical and feasible, given that all equities exchanges assess 
fees that are subject to the Exchange Act and its rule filing 
requirements.'' \30\ Other commenters ``agree[d] with the Commission's 
assessment that the Pilot should apply to all equity exchanges . . . 
thus treating all similarly situated exchanges equally,'' because this 
would be ``critically important in determining what impact the 
reduction of access fees or the elimination of rebates will have on 
order routing practices.'' \31\ Some other commenters, however, opposed 
including taker-maker exchanges in the Pilot, noting that Rule 610(c) 
does not apply to taker-maker exchanges.\32\
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    \28\ See, e.g., Joint Asset Managers Letter, at 2; Brandes 
Letter, at 2; Themis Trading Letter I, at 3; AJO Letter, at 1-2; 
OMERS Letter, at 2; Copeland Letter, at 2; Virtu Letter, at 6; 
Nuveen Letter, at 2; BlackRock Letter, at 1; RBC Letter I, at 3; 
Vanguard Letter, at 2; CFA Letter, at 4; Wellington Letter, at 2; 
Joint Pension Plan Letter, at 2; Oppenheimer Letter, at 2; Clearpool 
Letter, at 5 n.8; TD Ameritrade Letter, at 4; Capital Group Letter, 
at 3; Healthy Markets Letter I, at 10; Morgan Stanley Letter, at 3 
n.5; AGF Letter, at 1.
    \29\ AJO Letter, at 1-2.
    \30\ See RBC Letter I, at 3-4.
    \31\ Capital Group Letter, at 3. See also, e.g., Clearpool 
Letter, at 5 n.8; Oppenheimer Letter, at 2; Brandes Letter, at 2; 
Copeland Letter, at 2.
    \32\ See, e.g., Cboe Letter I, at 28.
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    After considering the comments on this issue, the Commission 
continues to believe that focusing the Pilot on equities exchanges 
regardless of fee model is appropriate because it treats alike 
similarly situated entities that all are subject to the same regulatory 
framework and thereby will allow the Commission to evaluate the effect 
of exchange fee-and-rebate pricing models and the continued 
appropriateness of the Rule 610(c) fee cap. Further, it would be 
incongruous to study rebates and fees offered by one type of equities 
exchange (maker-taker), but not another type of equities exchange 
(taker-maker) where the fees of both types of entities are subject to 
the same legal requirements and can introduce the same types of 
distortions that the Pilot seeks to study.
4. Non-Exchange Trading Centers
    As proposed, the Pilot would exclude non-exchange trading centers 
such as alternative trading systems (``ATSs'').\33\ Several commenters 
opined on this aspect of the proposal. A number of commenters agreed 
with the Commission's proposal to exclude non-exchange trading centers 
from the Pilot.\34\ Some of those commenters noted that exchanges are 
subject to various fee-related regulatory provisions that are entirely 
inapplicable to non-exchange trading centers. For example, one 
commenter noted that non-exchange trading centers are not currently 
subject to any access fee caps, and including such trading venues in 
the Pilot ``would have the unintended and harmful effect of 
unnecessarily changing ATS business models . . . .'' \35\
---------------------------------------------------------------------------

    \33\ See Proposing Release, supra note 2, at 13014. As discussed 
in the Proposing Release, the term ``trading center'' as used there 
and throughout this release is a collective term that refers broadly 
to the venues that trade NMS stocks. See id. at 13009 n.7. For 
purposes of this release, the term ``trading center'' includes 
national securities exchanges that are registered with the 
Commission and that trade NMS stocks (referred to herein as 
``equities exchanges'' or ``exchanges''), as well as other types of 
``non-exchange venues'' that trade NMS stocks, including ATSs and 
broker dealers that internalize orders by matching them off-exchange 
with reference to the national best bid and offer.
    \34\ See, e.g., Brandes Letter, at 2; AJO Letter, at 2; MFA 
Letter, at 2; BIDS Letter, at 1-2; BlackRock Letter, at 1; SIFMA 
Letter, at 5; Virtu Letter, at 6; Fidelity Letter, at 10; Citi 
Letter, at 2; Clearpool Letter, at 4-5; Luminex Letter, at 1; Morgan 
Stanley Letter, at 3 n.5.
    \35\ Virtu Letter, at 6. See also, e.g., SIFMA Letter, at 5; 
Clearpool Letter, at 5.
---------------------------------------------------------------------------

    In addition, several commenters emphasized the fundamental ways in 
which the fee structures employed by

[[Page 5206]]

non-exchange trading centers are different from the fee models utilized 
by the equities exchanges and, as a result, concluded that excluding 
non-exchange trading centers was appropriate.\36\ For example, one such 
commenter explained that ``inducements (low fees, no fees, rebates) 
offered by ATSs and other off-exchange venues are not universal across 
all broker-dealers or market participants. Instead, the fees paid (or 
not paid) by market participants to ATSs and other off-exchange venues 
are negotiated between each market participant and the trading venue,'' 
such that ``the number of fee permutations and inconsistencies across 
brokers for any single ATS could be substantial.'' \37\ Still other 
commenters believed that excluding non-exchange trading centers from 
the Pilot was appropriate because ``ATSs are not protected venues, and 
thus free market competition among them constrains their pricing 
power.'' \38\ One commenter supported excluding ATSs because ``there is 
nothing to be gained by including venues that don't have the same 
underlying issues that exchanges present with their rebate and `maker-
taker' pricing models.'' \39\
---------------------------------------------------------------------------

    \36\ See, e.g., Morgan Stanley Letter, at 3 n.5 (stating that 
``many broker-dealer[ ] operators of ATSs generally charge clients 
an overall commission rate (rather than an access fee) for a bundle 
of services, including access to their ATSs''); BIDS Letter, at 1-2, 
AJO Letter, at 2; Healthy Markets Letter I, at 10.
    \37\ AJO Letter, at 2.
    \38\ Citi Letter, at 2. See also, e.g., Fidelity Letter, at 10 
(stating that ``ATS' fee structures are already subject to 
competitive market forces and have more complex pricing models than 
exchanges[,] making their participation in the Proposed Pilot less 
useful''); SIFMA Letter, at 5 (opining that ``competitive forces 
already push access fees [at ATSs] to an appropriate level . . . 
lower than the access fees charged by exchanges,'' because ATS 
access fees ``are included in the total cost consideration of 
trading'').
    \39\ Luminex Letter, at 1.
---------------------------------------------------------------------------

    On the other hand, other commenters expressed concerns with 
omitting non-exchange venues from the Pilot.\40\ One concern was that 
by excluding non-exchange venues, the Pilot data would be incomplete. 
For example, one commenter believed that excluding non-exchange venues 
``could create an imperfect picture of the overall impact of the 
transaction fees put in place under the Pilot program'' and could 
compromise the value and utility of the data collected during the 
Pilot. \41\ Another commenter argued that by excluding non-exchange 
venues, the Pilot will not return ``meaningful data upon which to make 
informed analysis and conclusions'' because it would ``ignore off-
exchange trading representing approximately 39 percent of total U.S. 
equities market trading.'' \42\ This commenter further believed that 
the Pilot would be unable to properly assess the potential conflicts of 
interest because it will not know ``the baseline for remuneration 
occurring off-exchange, or know what impact the Proposal has on that 
baseline[.]'' \43\ One commenter objected to excluding ATSs ``based on 
the fact that the proposed Pilot is a `new regulatory regime' for ATSs 
. . . .'' \44\ While one commenter recognized the complexity involved 
with subjecting non-exchange trading centers to the access fee cap 
under Rule 610(c), it argued that such complexity did not provide a 
sufficient basis to treat exchanges and non-exchange trading centers 
disparately.\45\ A few commenters recommended excluding ATSs, but 
requiring them to submit the required order routing data.\46\
---------------------------------------------------------------------------

    \40\ See, e.g., Nasdaq Letter I, at 2, 5-7; Cboe Letter I, at 
12-13; MFS Letter, at 2; RBC Letter I, at 4; ASA Letter, at 3; 
ViableMkts Letter, at 2; Angel Letter II, at 2.
    \41\ See Wellington Letter, at 2 (acknowledging, however, that 
it is ``impractical for the Commission to include off-exchange 
venues''). See also, e.g., RBC Letter I, at 4; ProAssurance Letter, 
at 2.
    \42\ Nasdaq Letter I, at 2, 5-7. See also, e.g., NYSE Letter I, 
at 2.
    \43\ See Nasdaq Letter I, at 7.
    \44\ See, e.g., Cboe Letter I, at 13.
    \45\ See NYSE Letter I, at 7-8.
    \46\ See, e.g., Better Markets Letter, at 8.
---------------------------------------------------------------------------

    The Commission believes that excluding non-exchange venues from the 
Pilot should not negatively impact the Pilot's data or impact its 
results. As noted above, the Pilot is designed, among other things, to 
assess the effects of exchange fee models. Because exchange fee models 
are materially different both in their structure and regulatory 
treatment, the potential effects that may be associated with exchange 
fee models are not applicable in the same manner to ATSs. Similarly, 
the question of whether rebates narrow the quoted spread is 
inapplicable to ATSs, which do not publicly display an automated 
quotation. Further, ATS activity is not being overlooked as increases 
or decreases in ATS volume during the Pilot will be reflected in other 
existing data sources. Accordingly, Commission researchers (hereinafter 
``researchers'') will be able to assess market-wide changes in order 
flow during the Pilot.
    Further, even if non-exchange venues provided order routing data 
pursuant to the Pilot, researchers would be unable to meaningfully 
correlate changes in an ATS's order flow with the fees of that ATS 
because those fees are bespoke, typically bundled, and are not as 
transparent as exchange fees.\47\ Exchange fees are not only fully 
transparent in published fee schedules, but exchange fee changes must 
be filed with the Commission and thus they have a precise effective 
date attached to each filing. This level of transparency for exchange 
fees and rebates, which is not present for ATSs,\48\ is an important 
component facilitating researchers' ability to draw causal connections 
with the Pilot's results. While obtaining order routing data from ATSs 
might provide interesting insight into their business, it could not be 
meaningfully correlated with ATS fees and fee changes and is not 
necessary to study the Pilot's results. Rather, existing sources of 
data on ATS activity, including data published by the Financial 
Industry Regulatory Authority (``FINRA''), will permit researchers to 
observe changes in ATS activity during the Pilot.
---------------------------------------------------------------------------

    \47\ As noted by several commenters, equities exchanges and non-
exchange trading centers currently employ different fee models. 
While equities exchanges charge transaction-based fees, non-exchange 
trading centers may not charge separate transaction-based fees, but 
instead may use bundled pricing such that a particular order is not 
necessarily associated with a particular fee. See, e.g., Morgan 
Stanley Letter, at 3 n.5 (stating that ``many broker-dealer[ ] 
operators of ATSs generally charge clients an overall commission 
rate (rather than an access fee) for a bundle of services, including 
access to their ATSs''); BIDS Letter, at 1-2, AJO Letter, at 2. See 
also Proposing Release, supra note 2, at 13016. The Commission is 
not aware of any ATSs that currently pay transaction-based rebates.
    \48\ See supra notes 310-312 and accompanying text (discussing 
recent amendments to Regulation ATS and their relevance to the 
proposed Pilot).
---------------------------------------------------------------------------

    Among commenters critical of excluding non-exchange venues, some 
believed it could raise competitive issues to apply the Pilot's pricing 
limitations to the equities exchanges, but not impose the same pricing 
limitations on non-exchange trading centers that trade the same 
equities securities.\49\ One exchange commenter found it 
``inexplicabl[e]'' that the Pilot ``focuses only on exchanges and 
entirely ignores off-exchange venues, which are the venues that are 
most likely to benefit from a pilot that pointedly decreases the 
incentive (i.e., rebates) to post protected quotes on-exchange.'' \50\
---------------------------------------------------------------------------

    \49\ See, e.g., ASA Letter, at 3; Cboe Letter I, at 12, 26-27; 
Nasdaq Letter I, at 5-7; NYSE Letter I, at 3-8.
    \50\ See Cboe Letter I, at 12. See also Nasdaq Letter I, at 6; 
NYSE Letter I, at 3-5; NYSE Letter II, at 12.
---------------------------------------------------------------------------

    Several commenters suggested that the exclusion of non-exchange 
trading centers from the Pilot could ``create incentives for market 
participants to move more order flow to off-exchange platforms,'' 
thereby putting the national securities exchanges at a competitive 
disadvantage as compared to off-exchange trading centers.\51\ However, 
a

[[Page 5207]]

commenter suggested the opposite could happen and that the Pilot might 
actually ``encourage more order flow to gravitate to the exchanges'' 
because the Pilot would reduce the access fee cap on the equities 
exchanges thereby making it less expensive to transact on an 
exchange.\52\
---------------------------------------------------------------------------

    \51\ See, e.g., Wellington Letter, at 2; Oppenheimer Letter, at 
3; Angel Letter II, at 2; Nasdaq Letter I, at 6-7; Cboe Letter I, at 
12; NYSE Letter I, at 3-5; Curtiss-Wright Letter, at 1; ASA Letter, 
at 3.
    \52\ See, e.g., Citi Letter, at 2; Decimus Letter, at 5-6.
---------------------------------------------------------------------------

    The Commission does not believe that the Pilot necessarily will put 
the equities exchanges at a competitive disadvantage or 
disproportionally harm them when competing with non-exchange trading 
centers for investors' orders. Currently, only exchanges are subject to 
the Rule 610(c) fee cap, and Test Group 1 is designed to test a lower 
cap. The Commission does not believe that exchanges charging lower fees 
will necessarily make them less competitive with other venues for 
natural order flow, for example order flow that removes liquidity. 
Rather, it is possible that lower fees in Test Group 1 across all 
exchanges may actually improve their competitive position in attracting 
that order flow,\53\ particularly with respect to fee sensitive routing 
algorithms because, all else being equal, fee sensitive algorithms 
generally seek to minimize trading costs and would likely rank 
exchanges more favorably in their routing tables when exchanges reduce 
their fees to remove liquidity.
---------------------------------------------------------------------------

    \53\ See, e.g., Citi Letter, at 2; Decimus Letter, at 5-6. See 
also, infra Section IV.D ``Impact on Efficiency, Competition and 
Capital Formation'' and note 782 infra and accompanying text.
---------------------------------------------------------------------------

    In addition to testing a lower fee cap level, the Pilot also will 
test a prohibition on rebates and ``Linked Pricing,'' which, as 
discussed further below, is defined as a discount or incentive on 
transaction fee pricing applicable to removing (or providing) liquidity 
that is linked to providing (or removing) liquidity.\54\ The intent of 
this is to gather data to assess, among other things, the effect of 
exchange rebates. Potential distortions, which may be caused or 
exacerbated by exchange rebates, may themselves be placing exchanges at 
a competitive disadvantage, in which case the elimination of rebates 
could improve the competitive position of exchanges, for example if 
taker fees are set at levels independent of the need to subsidize maker 
rebates. Once again, data is needed to empirically assess this issue, 
and the Commission believes that the Pilot is the best way to obtain 
that data.\55\
---------------------------------------------------------------------------

    \54\ See Rule 610T(a)(2).
    \55\ See infra Section IV.A.2. and C.1.a.i.
---------------------------------------------------------------------------

    Further, while exchanges may compete with non-exchange trading 
centers for order flow, exchange fees and the fees of non-exchange 
trading centers are treated very differently under the federal 
securities laws. Indeed, one of the distinguishing features of 
registered national securities exchanges is that--unlike non-exchange 
trading centers--their fees are subject to the principles-based 
standards set forth in the Exchange Act, as well as the rule filing 
requirements thereunder. In particular, the federal securities laws 
require the entirety of each and every fee, due, and charge assessed by 
an exchange to be transparent and publicly posted for all to see, and 
must be an equitable allocation of reasonable dues, fees and other 
charges and not be unfairly discriminatory.\56\ On the other hand, 
similar requirements do not apply to the fees of non-exchange trading 
centers that do not provide public transparency into their full 
itemized fee schedules and typically are individually negotiated on a 
customer-by-customer basis.\57\ By including all equities exchanges 
regardless of fee model, and excluding other types of trading centers, 
the Pilot is designed to include all trading centers whose fees are 
subject to the principles-based standards set forth in the Exchange Act 
as well as the rule filing requirements thereunder.\58\ Thus, the Pilot 
will produce data to empirically evaluate the effects that transaction-
based fees and rebates may have on, and the effects that changes to 
those fees and rebates may have on, order routing behavior, execution 
quality, and market quality more generally.
---------------------------------------------------------------------------

    \56\ See 15 U.S.C. 78f(b)(4)-(5).
    \57\ All exchange fee changes are published for public comment 
and required to be publicly posted on the internet, whereas fees of 
non-exchange trading centers are typically bespoke. Fee changes of 
non-exchange trading centers are not subject to the provisions of 
the federal securities laws requiring that fees be an ``equitable 
allocation'' of ``reasonable'' fees and not ``unfairly 
discriminatory.''
    \58\ See 15 U.S.C. 78f(b)(4)-(5) (requiring, among other things, 
that an exchange's fees be an ``equitable allocation'' of 
``reasonable'' fees and that they not be ``designed to permit unfair 
discrimination.''). In addition, only exchange fees are subject to 
the rule filing requirements under Section 19(b) of the Exchange Act 
and 17 CFR 240.19b-4 (Rule 19b-4) thereunder. See also Proposing 
Release, supra note 2, at 13016.
---------------------------------------------------------------------------

    The Commission believes that subjecting non-exchange trading 
centers to the Pilot would go beyond the scope of the current 
regulatory framework that applies only to exchanges and would not 
further the Commission's evaluation of the impact of the existing 
regulatory regime, including, but not limited to, the Regulation NMS 
fee cap, which applies exclusively to exchange fees and rebates. In 
effect, the Pilot will help the Commission carry out its statutory 
responsibility to assess the effect of exchange fees and rebates, which 
do not apply to non-exchange trading centers.\59\
---------------------------------------------------------------------------

    \59\ While exchange fees are filed with the Commission on Form 
19b-4 and the Commission publishes notice of them for public comment 
and has an opportunity to summarily suspend them within 60 days, the 
Commission's non-action on a fee filing within that period does not 
constitute an endorsement or approval of an exchange fee. Issues 
with fees and how they impact market participants and market 
structure may or may not be obvious at first and adverse effects may 
take time to manifest as the market adjusts to a new fee. The 
Commission, and the exchanges as self-regulatory organizations, must 
enforce their rules and the federal securities laws with the goal of 
protecting investors and the public interest.
---------------------------------------------------------------------------

5. Options Exchanges
    Finally, the Commission proposed to exclude options exchanges from 
the Pilot, because options and equities are materially different types 
of securities. In addition, the access fee cap under Rule 610(c) does 
not currently apply to the options exchanges.\60\
---------------------------------------------------------------------------

    \60\ See Proposing Release, supra note 2, at 13015.
---------------------------------------------------------------------------

    Several commenters agreed with the Commission's exclusion of the 
options exchanges.\61\ No commenters suggested that the Commission 
include options markets in the Pilot. For the reasons noted above and 
discussed in the Proposing Release, the Commission is not including 
options markets within the scope of the Pilot.\62\
---------------------------------------------------------------------------

    \61\ See, e.g., MFA Letter, at 2; SIFMA Letter, at 5; Fidelity 
Letter, at 10.
    \62\ See Proposing Release, supra note 2, at 13015.
---------------------------------------------------------------------------

B. Securities

    As proposed, all NMS stocks \63\ that meet specified initial and 
continuing minimum standards would be eligible for inclusion in the 
Pilot (collectively, ``Pilot Securities'').\64\ The Commission received 
a number of comments regarding the scope of Pilot Securities to be 
included in the Pilot.
---------------------------------------------------------------------------

    \63\ See 17 CFR 242.600(b)(47) (defining ``NMS stock'').
    \64\ See Proposing Release, supra note 2, at 13017. See also 
Proposed Rule 610T(b)(1)(ii).
---------------------------------------------------------------------------

1. The Share Price Threshold of Pilot Securities
    The Commission proposed that an NMS stock must have a minimum 
initial share price of $2 at the time the pre-Pilot Period commences to 
be included in the Pilot and that any Pilot Securities that close below 
$1 at the end of a trading day during the proposed Pilot would be 
removed from the Pilot.\65\
---------------------------------------------------------------------------

    \65\ See Proposing Release, supra note 2, at 13017; Proposed 
Rule 610T(b)(1)(ii). The Commission notes that the proposed language 
in Rule 610T(b)(1)(ii) has been modified slightly. As proposed, Rule 
610T(b)(1)(ii) contained the phrase ``minimum initial share price of 
at least $2 . . . .'' As adopted, the clause ``minimum initial share 
price of $2'' is being substituted for the phrase ``minimum initial 
share price of at least $2'' to delete redundant text. In addition, 
as proposed, Rule 610T(b)(1)(ii) explained that a Pilot Security 
that closes below $1 would be ``removed from the Test Group or the 
Control Group and will no longer be subject to the pricing 
restrictions set forth in (a)(1)-(3). . . .'' As adopted, this 
language is being modified slightly to make it more concise. 
Accordingly, as adopted, this language provides that if the share 
price of a Pilot Security closes below $1 at the end of a trading 
day ``it will be removed from the Pilot.''

---------------------------------------------------------------------------

[[Page 5208]]

    One commenter opposed the $2 initial minimum share price threshold 
as overly restrictive.\66\ Other commenters, however, agreed that the 
securities in the Pilot should have an initial minimum $2 per share 
price threshold at the time of the initial stock selection, because 
this threshold ``will capture virtually all NMS stocks while minimizing 
the risk that securities will drop out of the Pilot . . . .'' \67\ One 
of these commenters believed the proposed thresholds would ``help 
ensure consistency among the Test Groups and limit the risk of data 
anomalies due to changes in the composition of those groups.'' \68\ 
Another commenter noted that the choice of ``$2 and $1 thresholds . . . 
follows the reasonable parameters established during [the] . . . Tick 
Size Pilot'' and asserted that the ``determination to pull out 
securities that close at under $1 during the pilot seems appropriate, 
especially given the fundamentally different fee structures applicable 
to stocks with prices less than $1.00.'' \69\
---------------------------------------------------------------------------

    \66\ See Angel Letter I, at 2.
    \67\ RBC Letter I, at 5. See also, e.g., Better Markets Letter, 
at 6; Healthy Markets Letter I, at 11-12.
    \68\ RBC Letter I, at 5.
    \69\ Healthy Markets Letter I, at 12.
---------------------------------------------------------------------------

    The Commission continues to believe that the proposed share price 
thresholds for Pilot Securities are appropriate. The Commission notes 
that no commenters opposed the proposed $1 minimum continuing price 
threshold, which will exclude such stocks from the Pilot because stocks 
with quotations of less than $1 are subject to different regulatory and 
fee treatment.\70\ The Commission continues to believe that an initial 
$2 share price threshold will best balance the need to include a broad 
set of NMS stocks in the Pilot with the desire to ensure that 
substantially all of the securities selected at the outset of the Pilot 
remain part of their respective Test Groups throughout the duration of 
the Pilot, including during the pre- and post-Pilot periods. The 
Commission does not believe that the $2 threshold is overly restrictive 
because, as discussed in the Proposal, it is uncommon for securities 
priced at $2 or more to fall below $1.\71\ Lowering the initial stock 
selection threshold below $2 could increase the likelihood that 
securities selected for the Pilot get dropped from the Pilot if their 
share price closed below $1 during the Pilot. Such a result would 
change the composition of the Test Groups during the Pilot, which might 
adversely impact the quality of the data produced by the Pilot. For 
these reasons and the reasons discussed in the Proposing Release, the 
Commission adopts as proposed the share price thresholds set forth in 
Rule 610T(b)(1)(ii).
---------------------------------------------------------------------------

    \70\ See Proposing Release, supra note 2, at 13017.
    \71\ See id. at 13017 n.102 (noting that only 4.3% of publicly 
traded common stocks and ETPs with a share price above $2 during 
2012-2016 dropped below $1 in that period).
---------------------------------------------------------------------------

2. The Duration of Pilot Securities
    The Commission proposed that, in order to be included in the Pilot, 
an NMS stock must have an unlimited duration or a duration beyond the 
end of the post-Pilot period in order to be included in the Pilot.\72\ 
No comments were received regarding this condition. For the reasons 
outlined in the Proposing Release, the Commission adopts this aspect of 
the Pilot as proposed.\73\
---------------------------------------------------------------------------

    \72\ See Proposing Release, supra note 2, at 13017; Proposed 
Rule 610T(b)(1)(ii).
    \73\ See Proposing Release, supra note 2, at 13018 n.103.
---------------------------------------------------------------------------

3. Selecting Pilot Securities From All NMS Stocks
    The Commission proposed to select Pilot Securities from among the 
entire universe of NMS stocks, subject to the minimum share price 
threshold and duration requirements. As proposed, the Pilot would 
include a broad and diverse cross-section of securities, including, for 
example, stocks of all market capitalizations as well as ETPs.
    The Commission received comments on the universe of Pilot 
Securities that generally fell into four categories: (1) The inclusion 
of stocks with market capitalizations below $3 billion, (2) the 
inclusion of ETPs, (3) the inclusion of Canadian interlisted stocks, 
and (4) the inclusion of NMS stocks other than stocks of operating 
companies and ETPs. Each of these points is discussed below.
a. Market Capitalization and Liquidity
    The Commission proposed to select Pilot Securities from among NMS 
stocks of all market capitalizations.\74\ A few commenters recommended 
that the Pilot exclude securities with smaller market capitalizations 
and/or thinly-traded securities. One commenter suggested that the 
``majority of securities within the Test Groups should be more liquid'' 
and that thinly-traded securities, if included, ``should be a minority 
of all securities in the Test Groups.'' \75\ Similarly, one exchange 
commenter stated that the Pilot ``should exclude less active stocks as 
the liquidity in such stocks will likely be severely and negatively 
impacted by this Pilot.'' \76\ This commenter asserted that ``[l]ess 
active stocks are highly dependent on professional liquidity providers 
to post liquidity'' and speculated that ``[d]ecreasing incentives for 
liquidity providers to post liquidity in less active stocks will have a 
pronounced impact on liquidity . . . manifest[ing] in significantly 
wider spreads and significantly less depth in these securities.'' \77\ 
Noting that ``many industry participants appear to advocate for 
increased incentives for liquidity provision in thinly-traded stocks,'' 
the commenter did not believe that the Pilot's goals were ``worth the 
risk to liquidity and capital formation that the Commission itself 
identifie[d.]'' \78\
---------------------------------------------------------------------------

    \74\ See id. at 13018. The EMSAC's recommendation was to limit a 
pilot to stocks above $3 billion in market capitalization in order 
to avoid overlap with the Tick Size Pilot. See id. The Commission 
notes, however, that the Tick Size Pilot ended on September 28, 2018 
and the Pilot Period for the Transaction Fee Pilot will not start 
before the post-pilot period for the Tick Size Pilot ends on April 
2, 2019. See Section II.C.3. infra.
    \75\ RBC Letter I, at 6. See also, e.g., Harris Letter, at 1; T. 
Rowe Price Letter, at 4.
    \76\ Cboe Letter I, at 28.
    \77\ Id. See also, e.g., Morgan Stanley Letter, at 4; Leaf 
Letter, at 1.
    \78\ Cboe Letter I, at 19. See also, e.g., Proposing Release, 
supra note 2, at 13069.
---------------------------------------------------------------------------

    Another commenter was similarly concerned that the Pilot would 
``have a significant impact on small to medium issuers since exchanges 
will not be able to provide incentives to market makers to support 
trading in those companies' securities.'' \79\ This commenter stated 
that ``[l]iquidity rebates can be critical for such securities to 
motivate market makers to support the stock with aggressive and 
actionable quotations.'' \80\ Further, the commenter opined that the 
Pilot would ``risk damaging companies' ability to efficiently raise 
capital,'' which it believed would ``particularly harm small and medium 
sized companies, for which the current market structure is already not

[[Page 5209]]

optimized.'' \81\ The commenter further argued that ``incentives 
(rebates) are important to creating two-sided markets across all 
stocks, especially thinly traded stocks.'' \82\
---------------------------------------------------------------------------

    \79\ Nasdaq Letter I, at 8-9.
    \80\ Id. at 3, 9 (alleging that the Pilot was ``arbitrary and 
capricious and not in accordance with law,'' because it gave ``short 
shrift'' to these concerns). See also Virtu Letter, at 7 (expressing 
concern that the Pilot would ``harm investors in . . . less liquid 
ETPs, which will be faced with less liquidity and wider spreads when 
they seek to sell their holdings'').
    \81\ Nasdaq Letter I, at 2. See also ASA Letter, at 5.
    \82\ Nasdaq Letter III, at 1. The commenter provided a chart 
showing how the exchanges compare to each other with respect to 
maintaining a two-sided quote at least 50% of the day. In the chart, 
some of the exchanges with a higher percent of two-sided markets 
more than 50% of the day have taker-maker pricing, in which they 
incentivize the removal of liquidity and charge fees to the provider 
of liquidity. Id. at Exhibit A. But cf. NYSE Letter II, at 9-10 
(arguing that rebates are necessary to promote display of 
liquidity).
---------------------------------------------------------------------------

    Many other commenters supported including a broad scope of Pilot 
Securities. For example, a group of twenty-one asset managers 
submitting a joint letter stated that ``[a]s many NMS stocks as 
possible should be in scope, including those with market 
capitalizations below $3bln,'' in order to create a ``meaningful'' 
dataset.\83\ Another commenter agreed that the Pilot ``should encompass 
the broadest universe of securities, as is feasible, in order to 
maximize the sample size and provide the most robust dataset 
possible,'' further arguing that ``[o]mitting securities of a specific 
market cap seems arbitrary, would provide an incomplete view of the 
overall market, and runs the risk of excluding meaningful data and 
biasing the study.'' \84\
---------------------------------------------------------------------------

    \83\ Joint Asset Managers Letter, at 2. See also, e.g., Spatt 
Letter, at 1-2 (stating that the Pilot was a ``very significant 
improvement over the EMSAC proposal'' and that one of the ``major 
improvements'' was ``the inclusion of lower market value stocks''); 
Healthy Markets Letter I, at 11-12; Wellington Letter, at 2; MFA 
Letter, at 2; Nuveen Letter, at 2; Lipson Letter, at 1; BlackRock 
Letter, at 1; Vanguard Letter, at 2; CFA Letter, at 4; CIEBA Letter, 
at 2; Joint Pension Plan Letter, at 2; Oppenheimer Letter, at 2.
    \84\ AJO Letter, at 2.
---------------------------------------------------------------------------

    Building on these arguments, other commenters believed it was 
important to specifically ``test the argument that rebates are required 
to promote liquidity provision in illiquid stocks.'' \85\ One commenter 
noted that this debate ``has raged for years,'' which is ``the point of 
the pilot: To provide market participants and the Commission with the 
data needed to make those analyses.'' \86\ Another commenter similarly 
asserted that the Pilot should include a broad set of NMS stocks to 
``help settle academic debates on the relative impact of rebates on 
liquid vs. less-liquid stocks and other supposedly beneficial aspects 
of rebates.'' \87\
---------------------------------------------------------------------------

    \85\ Babelfish Letter, at 3.
    \86\ Healthy Markets Letter I, at 13.
    \87\ Better Markets Letter, at 6. See also, e.g., Vanguard 
Letter, at 2 (``By including all NMS stocks, the SEC will receive 
data to analyze the impacts of transaction fees on market quality 
across various types of securities.''); TD Ameritrade Letter, at 6-7 
n.11 (``including securities of small, mid and large cap companies . 
. . will include some data on the impact that varying transaction 
fees will have [on] thinly traded securities'').
---------------------------------------------------------------------------

    Notably, some of these commenters directly challenged the argument, 
set forth by a number of other commenters, that thinly-traded or 
smaller-capitalization NMS stocks would be harmed by the Pilot's 
pricing restrictions. One commenter explained that, ``for less liquid 
stocks, spreads tend to be wider, and as a result rebates become less 
relevant as a matter of simple mathematics.'' \88\ To illustrate the 
point, the commenter referred to a ``stock that typically trades at a 
five-cent quoted spread,'' noting that a ``typical .0025 per share 
rebate would equal one-twentieth of the quoted spread, so in these 
instances a market maker's revenue from capturing the spread would far 
outweigh the contribution of the rebate'' \89\ (emphasis in original). 
Another commenter also questioned the ``significance of liquidity 
rebates for making markets in less liquid/smaller-cap stocks,'' because 
it believed this ``marginal incentive to provide liquidity . . . is 
likely to be weak in the smaller-cap space typically characterized by 
wide bid-ask spreads . . . .'' \90\ To support this argument, the 
commenter referred to ``an empirical study of changes in maker-taker 
arrangements on two European trading venues owned by BATS,'' now owned 
by Cboe Global Markets, which suggested that `` `an elimination of the 
make fee and a reduced take fee cap would result in worse market 
quality for large capitalization stocks but better market quality for 
small capitalization stocks' '' (emphasis in original).\91\ For this 
reason, the commenter asserted that the ``link articulated by the 
opponents of the proposed pilot is at best uncertain and that the pilot 
may in fact result in improved liquidity for smaller-cap stocks'' 
(emphasis in original).\92\ The commenter therefore contended that it 
was ``imperative to include a set of smaller-cap stocks in the pilot, 
as the opponents' claims on the existence of unambiguous harm to 
liquidity appear to be exaggerated and driven by preconceived 
notions.'' \93\
---------------------------------------------------------------------------

    \88\ IEX Letter II, at 7. See also Credit Suisse Commentary, at 
1, 3 (stating that the Pilot ``is likely to affect stocks 
differently depending on their liquidity profile,'' but expecting 
stocks ``with wider spreads'' in Test Groups 2 and 3 ``to continue 
to behave similarly given that their liquidity may be less driven by 
rebate-incentivized trading strategies to begin with''). But cf. 
NYSE Letter II, at 11 (asserting that it was ``untrue'' that 
``spreads for less-liquid securities are not sensitive to rebate 
levels'' and referring to chart showing that NYSE American-listed 
securities, ``which are generally less-liquid securities'' spent 
less average time at the NBBO compared to maker-taker venues).
    \89\ IEX Letter II, at 7.
    \90\ Decimus Letter, at 4-5 (citing Marios Panayides et al., 
Trading Fees and Intermarket Competition 26 (Charles A. Dice Ctr. 
for Research in Fin. Econ., Ohio State Univ., Working Paper No. 
2017-3, 2017, available at, https://ssrn.com/abstract=2910438).
    \91\ Id. at 5.
    \92\ Id.
    \93\ Id.
---------------------------------------------------------------------------

    The Commission believes that the many commenters have, through 
their analysis and ultimate disagreement on this issue, emphasized the 
need for the Pilot to test the effect of transaction fees and rebates 
on NMS stocks of all market capitalizations. It is unclear whether or 
not changes to fees and rebates would harm smaller capitalization or 
thinly-traded NMS stocks.\94\ As some commenters have noted, it also is 
possible that the Pilot may have little effect on smaller-
capitalization or thinly-traded NMS stocks or that the Pilot may even 
improve the liquidity of such stocks.\95\ The Commission also notes 
that a pilot focused solely on large capitalization stocks may not 
produce sufficient data to investigate how changes to transaction fees 
and rebates will affect liquidity or capital formation across the 
market. Because including smaller-capitalization NMS stocks in the 
Pilot will produce a more meaningful dataset to support a broad 
investigation into the effect of transaction fees and rebates on the 
full spectrum of NMS stocks and among different segments of the 
securities market, the Commission adopts this aspect of the rule as 
proposed.
---------------------------------------------------------------------------

    \94\ See, e.g., Proposing Release, supra note 2, at 13065-66, 
and 13069.
    \95\ See, e.g., notes 88-92 supra and accompanying text.
---------------------------------------------------------------------------

    As discussed further below, notwithstanding the decision to include 
all NMS stocks regardless of market capitalization, the Commission 
believes it is appropriate to exclude certain thinly-traded securities 
(e.g., securities that trade fewer than 30,000 shares per day), in part 
because rebates at that level of trading would be low enough to be 
unlikely to impact order routing behavior and researchers would be 
unlikely to get sufficient statistical power to analyze them in 
isolation at those volume levels.\96\
---------------------------------------------------------------------------

    \96\ See supra Section II.C.6 (discussing the exclusion of 
securities that trade fewer than 30,000 shares per day on average 
from Test Groups 1 and 2). See also supra notes 88-92 and 
accompanying text. Accordingly, the Commission notes that many 
thinly-traded securities will be excluded from the Pilot, which 
should assuage commenters' concerns regarding the impact of the 
Pilot on less liquid or thinly-traded securities.

---------------------------------------------------------------------------

[[Page 5210]]

b. The Inclusion of ETPs
    The Commission proposed to select Pilot Securities from among all 
NMS stocks, including ETPs. A number of commenters supported including 
ETPs in the Pilot. Several commenters noted, for example, that 
including ETPs ``would produce a more inclusive analysis of rebates and 
fees across all segments of NMS stocks.'' \97\ One such commenter 
believed that ``the benefits from collecting data that informs long-
term market structure improvements will outweigh any potential 
temporary disadvantage.'' \98\
---------------------------------------------------------------------------

    \97\ BlackRock Letter, at 1. See also, e.g., Fidelity Letter, at 
9.
    \98\ Vanguard Letter, at 2.
---------------------------------------------------------------------------

    On the other hand, a number of commenters expressed concern with 
including ETPs in the Pilot. For example, one commenter stated that 
``[m]any ETP issuers are . . . strongly opposed to the inclusion of 
ETPs in the Pilot'' and suggested that the Commission had not 
``sufficiently explained why it is appropriate to include ETPs in any 
Pilot.'' \99\ This commenter noted that ``exchanges have implemented 
numerous incentive structures designed to promote liquidity and narrow 
spreads in ETPs'' that could be disrupted by the Pilot, ``negatively 
impact[ing] liquidity and spreads in ETPs to the detriment of both new 
and existing investors.'' \100\ Similarly, another commenter expected 
the Pilot to ``result in spreads widening for ETPs holding pilot 
stocks, even if ETPs are not included in the pilot, given that fair 
value calculations rely on underlying constituent pricing,'' and 
therefore cautioned that ``any negative effects of the pilot on 
transaction costs could be intensified for ETP investors.'' \101\ A few 
commenters ``believe[d] that the goals of the pilot can be achieved 
without having to include ETPs in the pilot,'' because ``[t]he effects 
of the pilot on stocks will be sufficient to draw conclusions about 
potential changes to access fee rules.'' \102\
---------------------------------------------------------------------------

    \99\ Cboe Letter I, at 17-18.
    \100\ Id.
    \101\ State Street Letter, at 3.
    \102\ See, e.g., id.
---------------------------------------------------------------------------

    The Commission continues to believe that it is important to include 
ETPs in the Pilot, because excluding them would hamper the Commission's 
ability to gather key data that could be used to inform future 
regulatory action in this area. The Commission does not believe it will 
be able to draw meaningful conclusions about the impact of changes to 
transaction fees and rebates on ETPs by observing the effects of the 
Pilot on other securities, in part because ETPs have a unique create-
and-redeem process that does not apply to other NMS stocks.\103\ 
Nevertheless, ETPs are subject to the same rules and fees that apply to 
all NMS stocks. To the extent that the Pilot results may inform future 
policymaking, Pilot data that includes all types of NMS stocks that 
would be impacted, including ETPs, will be more useful.
---------------------------------------------------------------------------

    \103\ See, e.g., Securities Exchange Act Release No. 75165 (June 
12, 2015), 80 FR 34729, 34732 (June 17, 2015) (Request for Comment 
on Exchange-Traded Products) (discussing the create-and-redeem 
process for ETPs); Transcript of the Division of Trading and 
Markets' Roundtable on Market Structure for Thinly-Traded Securities 
(April 23, 2018), available at https://www.sec.gov/spotlight/equity-market-structure-roundtables/thinly-traded-securities-rountable-042318-transcript.txt (Panel Three discussing ETPs). In particular, 
large volumes in ETPs can be transacted directly with the ETP issuer 
in creation units, making the trading center volume in ETPs less 
relevant to institutional traders that transact in large size 
orders.
---------------------------------------------------------------------------

    Further, some commenters expressed concern regarding the potential 
for competitive effects among certain ETP issuers. As one commenter 
noted, ``if two ETPs with similar underliers or that track the same 
index are placed in the two different [T]est [G]roups, the Pilot would 
inevitably determine winners and losers.'' \104\ Another commenter 
explained that ``ETPs with similar investment strategies are more 
substitutable than stocks of operating companies,'' such that ``market 
quality metrics likely play a greater role in driving flows to ETPs.'' 
\105\ For that reason, ``[i]f competing ETPs are in different test 
groups--and market quality varies among the test groups,'' the 
commenter believed that ``investors might migrate toward products in 
the test groups with better market quality,'' thereby ``tilt[ing] the 
playing field in favor of ETPs that happen to be assigned--at random--
to test groups that perform better at the expense of other products.'' 
\106\
---------------------------------------------------------------------------

    \104\ Morgan Stanley Letter, at 3-4. See also Nasdaq Letter I, 
at 8-9 (stating that the Pilot was ``arbitrary and capricious and 
not in accordance with law,'' in part because the Commission had 
``fail[ed] to consider'' the competitive effects of placing ``ETPs 
tracking similar indexes . . . in different test groups''); Cboe 
Letter I, at 17.
    \105\ ICI Letter I, at 4 n.8.
    \106\ Id. at 4. See also, e.g., NYSE Letter I, at 7; Nasdaq 
Letter I, at 8.
---------------------------------------------------------------------------

    While a few commenters discussed which treatment group would be 
most problematic,\107\ many of the commenters took no position on the 
direction of the presumed competitive impact and did not speculate 
about how (or whether) inclusion in specific Pilot Groups would help or 
harm ETPs.\108\
---------------------------------------------------------------------------

    \107\ See, e.g., Credit Suisse Commentary, at 6 (stating that 
the Pilot could ``unintentionally advantage ETFs in the lower fee 
group''). But cf. Nasdaq Letter I, at 8 (stating that ETPs ``in the 
lower rebate groups would find themselves at a competitive 
disadvantage to their competitors and may lose market share during 
the pilot as a result'').
    \108\ See, e.g., SIFMA Letter, at 4-5; Invesco Letter, at 2-3; 
Morgan Stanley Letter, at 3-4.
---------------------------------------------------------------------------

    To address the potential competitive harm, a few of these 
commenters recommended that the Commission exclude ETPs from the Pilot 
altogether,\109\ while most recommended that the Commission select ETPs 
in a manner that may avoid any potential competitive effects among 
similar ETPs, by: (1) Rotating all of the Pilot Securities through the 
various treatment groups,\110\ (2) rotating only ETPs through the 
various treatment groups,\111\ or (3) placing in the same Test Group 
ETPs tracking similar indexes or holding similar investments.\112\
---------------------------------------------------------------------------

    \109\ See, e.g., Cboe Letter I, at 28; Invesco Letter, at 2-3; 
State Street Letter, at 3; STA Letter, at 4.
    \110\ See, e.g., ICI Letter I, at 4-5, 5 n.10 (suggesting that 
the Commission rotate securities every three to six months); 
Oppenheimer Letter, at 3; Angel Letter II, at 3 (suggesting a 
quarterly rotation). These commenters did not believe that rotation 
would ``adversely affect the validity of pilot data'' or ``impose 
more than a de minimis implementation burden or other costs on 
market participants.'' ICI Letter I, at 4. See also Angel Letter II, 
at 3. These commenters suggested that ``[a]nalysis of individual 
security characteristics before and after a rotation to a new group[ 
] could yield relevant and important results.'' Oppenheimer Letter, 
at 3. See also Angel Letter II, at 3.
    \111\ See, e.g., SIFMA Letter, at 5; State Street Letter, at 4; 
Healthy Markets Letter II, at 8.
    \112\ SIFMA Letter, at 4. See also, e.g., Nuveen Letter, at 2; 
BlackRock Letter, at 2; FIA Letter, at 4; Fidelity Letter, at 9; 
State Street Letter, at 4; STANY Letter, at 4; Healthy Markets 
Letter II, at 8. But cf. Angel Letter II, at 3 (stating that 
``similar ETFs are probably the best natural controls for each 
other, as their underlying portfolios are virtually identical,'' 
such that ``similar ETFs should definitely be in different treatment 
groups to increase the power of the pilot'').
---------------------------------------------------------------------------

    Other commenters criticized these proposed alternatives for 
selecting ETPs. One commenter, for example, questioned ``whether any of 
the proposed remedies would address these concerns effectively or 
fairly.'' \113\ Another commenter expressed concern that the 
suggestions to place ``similar'' ETPs in the same Test Group might be 
too complex to implement, as determining whether ETPs are ``similar'' 
to one another for purposes of Pilot rotation can be extremely 
nuanced.\114\ This commenter explained that an ``effective 
classification should take into account an ETP's underlying index, 
portfolio constituents and asset class to provide an appropriate 
`apples to apples' analysis,'' in addition to ``factors such as assets 
under management, spread size and daily trading volume,'' which the 
commenter believed ``would

[[Page 5211]]

introduce unnecessary complexity into the Proposal.'' \115\
---------------------------------------------------------------------------

    \113\ Schwab Letter, at 3.
    \114\ Invesco Letter I, at 2-3. See also, e.g., Healthy Markets 
Letter II, at 8 (noting that it may be ``difficult to clearly and 
consistently define `similar' ETPs'').
    \115\ Invesco Letter, at 2-3.
---------------------------------------------------------------------------

    The Commission recognizes the concern that securities placed in one 
treatment group could be impacted differently than similar securities 
placed in a different treatment group. While that effect could occur 
for any security (e.g., stocks of different operating companies in the 
same industry), it could potentially be more prominent for ETPs that 
may be substantially similar. Nevertheless, the Commission notes that 
similar ETPs are not necessarily identical and many other factors 
influence investor demand and trading, including expense ratios, 
trading commissions, and existing holdings.
    The Commission has carefully considered the three alternatives 
suggested by the commenters \116\ and declines to adopt them. Rotating 
either (1) all Pilot Securities or (2) only ETPs would increase 
complexity and could increase the costs of the Pilot as the Commission, 
exchanges, and market participants would need to manage a pilot whose 
securities change treatment groups every several months. In particular, 
a rotation design would be considerably more complex than the proposed 
design by, for example, adding more treatment subgroups and requiring 
frequent rotation of those subgroups. Given the choice between a simple 
Pilot design with a short duration, on one hand, and a considerably 
more complex design with a longer duration, on the other hand, the 
Commission prefers to adopt this aspect of the rule as proposed. 
Compared to the alternative designs suggested by some commenters, the 
proposal results in a short narrowly drawn pilot with fewer 
complexities and burdens, which is an outcome supported by many 
commenters.\117\
---------------------------------------------------------------------------

    \116\ The Commission also considered comments providing 
suggestions relevant to the implementation of these three 
alternatives. As discussed above, the Commission is not adopting the 
alternatives.
    \117\ See Section II.D.2 (discussing the duration of the Pilot) 
and Section II.C.5. through 6. (discussing the number of stocks to 
be included in the Pilot) infra.
---------------------------------------------------------------------------

    The Commission also considered the suggestion to group ETPs with 
similar underlying holdings into the same treatment group. While this 
suggestion involves slightly less ongoing complexity than rotating 
securities during the Pilot, the Commission declines to adopt this 
suggestion because it introduces its own complexity in that 
categorizing ETPs according to their underlying holdings (and 
potentially other characteristics) involves the exercise of subjective 
judgment. In addition, grouping similar ETPs can negatively impact the 
representativeness of the different treatment groups, particularly if 
all of the similar ETPs are similar in volume, price, and market 
capitalization. The Commission believes it may learn more from a study 
that compares how different pricing regimes affect similarly-situated 
ETPs, whereas keeping similar ETPs in the same treatment groups could 
reduce the quality and usefulness of Pilot's results by inhibiting the 
ability of researchers to compare treatment groups. While the potential 
exists that similar ETPs in different Pilot treatment groups might 
trade differently during the Pilot, it is not certain--and commenters 
held divergent views concerning--whether and to what extent the Pilot 
would be a contributing factor. Whether the absence of rebates or lower 
fees help or hurt trading in similar ETPs is far from certain, and 
whether investors would base trading decisions on those distinctions is 
unclear. Excluding ETPs to avoid speculative harm would, however, 
decidedly reduce the utility of the Pilot's results to inform future 
policy making. Therefore, the Commission has determined not to adopt a 
requirement to rotate securities or to group like ETPs. For these 
reasons, the Commission adopts the rule as proposed to include ETPs in 
the Pilot.
c. The Inclusion of Canadian Interlisted Stocks
    In the Proposal, the Commission requested comment on the selection 
criteria and whether the Commission should consider inclusion or 
exclusion of certain stocks from the Pilot sample set.\118\ In 
response, several commenters discussed the inclusion of Canadian 
interlisted stocks in the Pilot and recommended that the Commission 
coordinate with Canadian securities regulators to avoid altering the 
trading dynamics between Canada and the U.S. in those securities.\119\ 
For example, one commenter was ``concerned that the inclusion of 
Canadian interlisted stocks in either one of the reduced access fee or 
no rebate test groups may materially impact order flow by encouraging 
transactions to move away from U.S. exchanges and on to Canadian 
exchanges.'' \120\ Other commenters suggested that the Commission 
coordinate with the Canadian Securities Administrators to avoid 
``dramatic differences in the trading economics on inter-listed stocks 
between Canadian and U.S. markets.'' \121\
---------------------------------------------------------------------------

    \118\ See Proposing Release, supra note 2, at 13019 (Questions 
#5 and 8). See also id. at 13013 n.46 (noting the receipt of a 
letter from the Canadian Security Traders Association proposing a 
cross-border study on the effect of rebates on market quality in 
conjunction with the Canadian Securities Administrators).
    \119\ See, e.g., Fidelity Letter, at 8; OMERS Letter, at 1; FIA 
Letter, at 4; Healthy Markets Letter I, at 35; STA Letter, at 5. 
Canadian interlisted stocks are stocks of Canada-based companies 
that are primarily listed on a Canadian exchange (generally the 
Toronto Stock Exchange), but that choose to also dually-list on a 
U.S. exchange. See https://www.tsx.com/trading/toronto-stock-exchange/fee-schedule/ni-23-101 (for a quarterly list of 
approximately 187 interlisted securities published by the Toronto 
Stock Exchange featuring stocks that are listed on the Toronto Stock 
Exchange or the TSX Venture Exchange).
    \120\ FIA Letter, at 4. See also Fidelity Letter, at 8.
    \121\ See, e.g., STA Letter, at 5.
---------------------------------------------------------------------------

    The Commission also received a comment letter from the academics 
retained by the Canadian Securities Administrators (``CSA'') to assist 
with planning, conducting, and analyzing a Canadian transaction fee 
pilot (``Canadian Pilot'').\122\ According to the CSA researchers, the 
Canadian Pilot likely will propose that, for approximately 180 
interlisted stocks, 90 of them would be included in a no-rebate test 
group with the remaining 90 placed in a control group.\123\ In their 
letter, the CSA researchers requested that the Commission's Pilot treat 
interlisted stocks similarly to their Canadian Pilot proposal--i.e., 
that both pilots place the same 90 interlisted stocks into their 
respective no-rebate group and place the other 90 stocks into their 
respective control group.\124\ By doing so, the CSA researchers believe 
that both pilots will avoid confounding the analysis for each 
respective pilot with respect to interlisted stocks because differences 
in fees and rebates otherwise could incentivize shifts in cross-border 
routing.\125\
---------------------------------------------------------------------------

    \122\ See CSA Letter. The preliminary details of the pilot 
contemplated by the CSA, as reflected in the CSA Letter, were not 
publicly available prior to the Proposing Release.
    \123\ Id. at 1.
    \124\ Id. at 2.
    \125\ Id. at 1-2.
---------------------------------------------------------------------------

    The Commission agrees with the CSA researchers and believes that it 
is appropriate to coordinate with the CSA on a transaction fee pilot in 
order to avoid the potential for distortionary effects between U.S. and 
Canadian markets if rebates in the ``no-rebate'' interlisted stocks 
continue to be allowed on one country's exchanges but not the other.
    Accordingly, in the event that the CSA proceeds with the Canadian 
Pilot concurrently with the Commission's Pilot, the Commission will 
append to the no-rebate Test Group the same Canadian interlisted stocks 
that the CSA selects for its no-rebate treatment group, and the 
remaining interlisted stocks will

[[Page 5212]]

be placed into the Control Group.\126\ Placing the same interlisted 
stocks into the Pilot's no-rebate test group that the Canadian Pilot 
places into its no-rebate test group will avoid the potential to alter 
the trading dynamics between Canadian exchanges and U.S. exchanges in 
those stocks that otherwise could result if not all exchanges were 
subject to the same conditions, which should support the integrity of 
the no-rebate test groups in both pilots.\127\ Coordination also will 
avoid the potential for the Commission's Pilot to interfere with the 
ability of Canadian securities regulators to conduct a pilot of their 
own on Canadian-listed stocks which could be adversely impacted in the 
absence of coordination.\128\ The Commission appreciates the interest 
expressed by the CSA researchers in coordinating on a pilot with 
respect to interlisted stocks, and looks forward to cooperating with 
the CSA on this important data-gathering initiative in a manner that 
benefits both nations' securities markets.
---------------------------------------------------------------------------

    \126\ In the event that the Canadian pilot does not go forward 
or does not commence simultaneously with the Commission's Pilot, 
interlisted stocks will be placed at the Pilot's outset into the 
Control Group. Placing interlisted stocks in the Control Group will 
preserve the status quo for interlisted stocks and avoid altering 
the trading dynamics in them between U.S. and Canadian exchanges, 
which will avoid adversely impacting Test Groups 1 and 2 with 
respect to those stocks. If the Canadian pilot does go forward, but 
the interlisted stocks that will be included in its no-rebate test 
group are not known by the Commission at the time the Commission 
issues the initial List of Pilot Securities, the Commission may 
separately issue a subsequent list identifying the interlisted 
stocks that will be appended to Test Group 2 or the Control Group 
for the remainder of the Pilot.
    \127\ See, e.g., Proposing Release, supra note 2, at 13024 
(discussing the design of proposed Test Group 3 and the prohibition 
in Linked Pricing to support the integrity of a no-rebate test 
group). See also CSA Letter, at 1 (expressing concern that ``the 
results of the Canadian Pilot may be statistically and economically 
inconclusive'' without coordination with the Pilot).
    \128\ See CSA Letter, at 1.
---------------------------------------------------------------------------

d. The Inclusion of Other Types of NMS Stocks
    A few commenters addressed the inclusion of other types of NMS 
stocks, such as American Depositary Receipts (``ADRs''), rights, and 
warrants. One commenter supported the proposed broad scope of Pilot 
Securities and believed that ``analysis of . . . ADRs could provide 
additional insight into the effect rebates and fees have on liquidity, 
spreads and the overall trade experience.'' \129\ Another commenter 
objected to the Commission's proposal to include rights and warrants in 
the Pilot, but did not explain the basis for its objection.\130\ As 
noted above, however, most commenters expressed general support for a 
Pilot that includes all NMS stocks.\131\
---------------------------------------------------------------------------

    \129\ Oppenheimer Letter, at 3.
    \130\ TD Ameritrade Letter, at 4.
    \131\ See, e.g., Vanguard Letter, at 2; Joint Pension Plan 
Letter, at 2; Oppenheimer Letter, at 2.
---------------------------------------------------------------------------

    The Commission continues to believe that it is appropriate to 
select Pilot Securities from among the overall universe of NMS stocks. 
Accordingly, the Commission will include all types of NMS stocks in the 
Pilot, subject to the selection criteria described below. The 
Commission believes this is appropriate because exchange fees and 
rebates apply to all NMS stocks, as does the fee cap under Rule 610(c). 
Aligning the scope of the Pilot with the scope of equities fees and the 
equities fee cap will best facilitate analysis of the impact of changes 
to transaction fees and rebates on different segments of the securities 
market. Excluding from its scope any categories of NMS stocks would 
deprive the Commission of data to inform future regulatory action 
regarding this segment of the market. For those reasons, the Commission 
adopts this aspect of the Pilot as proposed, subject to the selection 
methodology described below in Section II.C.
4. The Ability of Issuers To Opt Out of the Pilot
    The Commission solicited comment as to whether issuers should be 
allowed to request that their securities not be included in one of the 
Pilot's Test Groups (i.e., ``opt out'') and the potential impact that 
such an approach might have on the extent and quality of the data 
collected by the Pilot.\132\
---------------------------------------------------------------------------

    \132\ See Proposing Release, supra note 2, at 13019.
---------------------------------------------------------------------------

    Several commenters argued that issuers should be permitted to opt 
out of participation in the Pilot based on process concerns. For 
example, one commenter's ``largest concern [was] that the genesis of 
the proposal . . . deliberately excluded issuer representation'' by 
``excluding the NYSE and Nasdaq from participation on the [EMSAC].'' 
\133\ This commenter asserted that the ``exclusion . . . from 
participation in the pre-proposal discussions renders the `Opt Out' 
option absolutely essential.'' \134\ Another commenter suggested that 
the Commission could address such concerns by ``conven[ing] a summit 
for issuers and perhaps [creating] a series of webcasts . . . to 
explain the purpose of the test,'' as well as by ``form[ing] an Issuer 
Advisory Committee that can weigh data and let companies opt into or 
out of a test.'' \135\
---------------------------------------------------------------------------

    \133\ Issuer Network Letter I, at 2 (emphasis omitted) and 
Issuer Network Letter II. See also Cboe Letter I, at 14-15 
(criticizing the Pilot as ``based on recommendations made by a 
committee that, however well-meaning, was flawed in its 
construction'' because it lacked ``exchange or issuer 
representation''); Home Depot Letter, at 2 (stating that the EMSAC 
``did not include any input from issuers or issuer advocates . . . 
like NYSE and Nasdaq'' and that it was ``difficult'' for ``issuers . 
. . to understand how this Pilot could be implemented without input 
from the issuers . . . it will directly impact''); ModernIR Email, 
at 1 (stating that a ``study . . . crafted without input or choice 
for issuers . . . would be an inexcusable travesty'').
    \134\ Issuer Network Letter I, at 2, 7 (emphasis omitted).
    \135\ ModernIR Email, at 1. See also Issuer Network Letter I, at 
7 (suggesting that the Commission ``[p]lace the Access Fee Pilot on 
hold for 90 days while [it] gathers a Blue Ribbon Panel . . . of a 
dozen or so NYSE and Nasdaq listed company financial executives so 
that we might conduct a comprehensive review'' of the Pilot 
(emphasis omitted)).
---------------------------------------------------------------------------

    The Commission's proposal was subject to a full notice-and-comment 
rulemaking process during which the Commission received a large number 
of comments from the public, including issuers and their listing 
exchanges. While the EMSAC recommendation was one of many inputs that 
informed the Commission's development of the Pilot, the Commission's 
Pilot differs substantially from EMSAC's recommendation as numerous 
commenters have recognized.\136\ Accordingly, the Commission believes 
that issuers, as well as other market participants, have had ample 
opportunity to participate in the consideration of the Commission's 
proposal for the Pilot.
---------------------------------------------------------------------------

    \136\ The EMSAC held meetings open to the public, which were 
publicly webcast, as it was developing its recommendations. To 
promote awareness of those meetings, the Commission issued press 
releases to announce those meetings, which included the agenda for 
those meetings. See, e.g., SEC Press Release 2015-216 (announcing 
the agenda for an October 27, 2015 EMSAC meeting, highlighting the 
discussion of fees and rebates, and soliciting comments from the 
public thereon), available at https://www.sec.gov/news/pressrelease/2015-216.html. The Commission also published meeting minutes and 
transcripts of the full EMSAC meetings. Finally, the Commission 
provided a mechanism for the public to submit comments to the EMSAC 
for its consideration, and a number of people did submit comments. 
See https://www.sec.gov/comments/265-29/265-29.shtml (comment file 
for File No. 265-29).
---------------------------------------------------------------------------

    Other commenters supported opt out based on specific concerns 
surrounding the potential impact of the Pilot. A number of these 
commenters were listed company issuers that expressed concern about how 
the Pilot would affect trading in their securities.\137\ Commenters

[[Page 5213]]

supporting opt out emphasized the importance of giving issuers the 
ability to avoid potential costs and uncertainty resulting from the 
Pilot.\138\ For example, one commenter believed that the Pilot could 
``caus[e] spreads to widen in securities selected for the test 
groups,'' such that ``companies conducting a repurchase program or 
secondary offering would incur higher costs,'' and the Commission 
received a number of comment letters from listed issuers specifically 
referencing that point and echoing the same concerns.\139\ This 
commenter further argued that ``the Proposal would also harm the 
ability of issuers whose securities are subject to access fee caps to 
compete'' with issuers not subject to the Pilot's exchange fee 
restrictions.\140\
---------------------------------------------------------------------------

    \137\ See, e.g., P&G Letter, at 1; McDermott Letter, at 1; Level 
Brands Letter, at 1; ACCO Letter, at 1; NorthWestern Letter, at 1-2; 
Ethan Allen Letter, at 1; Unitil Letter, at 1; Johnson Letter, at 2; 
Sensient Letter, at 2; Hawaii Letter, at 1; Cott Letter, at 1; Leaf 
Letter, at 1-2; First Majestic Letter, at 1; SIFCO Letter, at 2; 
Weingarten Letter, at 1; Ennis Letter, at 2; Trex Letter, at 1; 
Genesis Letter, at 1; Tredegar Letter, at 1; Energizer Letter, at 1; 
ProAssurance Letter, at 1; Home Depot Letter, at 1; SMP Letter, at 
2; Halliburton Letter, at 1; Era Letter, at 2; Natural Grocers 
Letter, at 2; Newpark Letter, at 2; Knight-Swift Letter, at 2; 
Farmer Mac Letter, at 1; BancorpSouth Letter, at 1-2; Haverty 
Letter, at 1; Ampco-Pittsburgh Letter, at 2; Anixter Letter, at 2; 
Avangrid Letter, at 2; NHC Letter, at 1; HP Letter, at 2; Curtiss-
Wright Letter, at 2; Murphy Letter, at 1.
    \138\ See, e.g., Cboe Letter I, at 29; ASA Letter, at 4-5.
    \139\ See Addendum to Healthy Markets Letter II, at 11 
(attaching an email from NYSE to its listed companies). See also 
note 137 supra.
    \140\ See NYSE Letter I, at 4. In its letter, the commenter 
mentioned analysis it performed on NYSE-listed issuer secondary 
offerings in 2017 that suggested that issuers ``with average spreads 
under 20 basis points paid an average discount to market price of 
2.6%'' and that ``companies with spreads above 20 basis points had 
to discount their offerings nearly twice as much, to 4.9%.'' NYSE 
Letter I, at 14 n.51. It is unclear, however, whether wider spreads 
cause larger offering discounts or whether they are simply 
correlated with them. For example, smaller companies that are less 
well capitalized may have a wider spread compared to a larger, 
better capitalized company, which could result in spreads being 
correlated with a company's cost of capital (i.e., wider spreads 
could be a reflection of a company's relative credit risk and cost 
of capital, not a driver of it).
---------------------------------------------------------------------------

    Many other commenters opposed opt out.\141\ Some of these 
commenters dismissed the concerns described above regarding the 
potential costs on issuers whose stock is included in the Pilot.\142\ 
For example, one commenter disagreed with the notion that ``rebates are 
needed to incentivize market makers to quote tight spreads'' in the 
stocks of certain issuers who had submitted comment letters.\143\ This 
commenter explained that the ``fifth of a cent rebate is not 
incentivizing a tight bid-ask spread in these issuers' stocks,'' 
because that rebate represents an insignificant portion of their 
average spread.\144\ Another commenter disagreed with the suggestion 
that the Pilot would have a negative impact on issuers, arguing that 
such position ``directly contradicts the public support by investors 
for the Pilot.'' \145\ This commenter opined that the ``fundamental 
forces of supply and demand that affect . . . the relative 
attractiveness of individual public company stocks will be in no way 
impaired if . . . exchanges are precluded from paying a rebate, or 
required to accept a lower access fee.'' \146\
---------------------------------------------------------------------------

    \141\ See, e.g., Joint Asset Managers Letter, at 2; Citi Letter, 
at 5; AJO Letter, at 2; Lipson Letter, at 1.
    \142\ See supra notes 138-140 and accompanying text.
    \143\ Themis Trading Letter II, at 3.
    \144\ Id. at 2-3.
    \145\ IEX Letter II, at 3. See also, e.g., Joint Pension Plan 
Letter, at 2 (stating that the ``asset manager/asset owner community 
is heavily supportive of such a pilot,'' which should ``provide the 
necessary confidence to all public companies to be included''); ICI 
Letter II, at 2 (``market structure is not a primary consideration 
guiding the investment decisions of long-term investors''); Joint 
Asset Managers Letter, at 2; Healthy Markets Letter II, at 2. But 
cf. NYSE Letter II, at 4 (stating that ``many buy-side 
institutions'' supporting the Pilot ``are willing to experiment with 
real-world public companies and end investors to `get the data,' 
even if the expected impact of limiting or eliminating rebates will 
be a deterioration of the public quote'').
    \146\ IEX Letter II, at 3-4.
---------------------------------------------------------------------------

    Other commenters asserted that opt out would ``adversely affect the 
quality of the data and the credibility of the Pilot,'' which could 
weaken the findings that could be drawn from it.\147\ One commenter 
explained that opt out ``would undercut the ability of economists to 
draw sharp inferences based upon performance differences between the 
treated and control stocks'' and that the ``non-random character of 
`opt outs' '' could ``disproportionately reflect firms that were 
especially responsive to feedback from the listing exchange or could 
disproportionately reflect less liquid stocks, which would be 
especially important for the access fee pilot.'' \148\
---------------------------------------------------------------------------

    \147\ RBC Letter I, at 6. See also, e.g., LATEC Letter, at 2; 
Joint Pension Plan Letter, at 2; MFS Letter, at 3; Clearpool Letter, 
at 8.
    \148\ Spatt Letter, at 3. See also, e.g., Healthy Markets Letter 
I, at 12; CII Letter, at 4.
---------------------------------------------------------------------------

    One listed issuer, which is a large investment manager, 
``welcome[d] the opportunity for [its] stock to be included in the 
Pilot, with the ultimate goal of improving the overall market to be one 
where prices can be set by long-term investors without distortion from 
speculative market participants.'' \149\ This issuer did not ``expect 
that a reduction or outright removal of rebates will have any 
significant or harmful effects on the quality of prices displayed in 
the public lit market, interfere with genuine liquidity and price 
formation, or negatively impact [its] stock's trading volume, spread or 
displayed size.'' \150\
---------------------------------------------------------------------------

    \149\ T. Rowe Price Letter, at 4. The issuer explained that its 
stock, ``on average, trades about 1.5 million shares daily, with an 
average displayed size of 200 shares and a spread of nearly $0.07,'' 
with ``40% of [its] average daily volume occur[ring] as displayed on 
exchange volume.'' Id. at 4-5.
    \150\ Id. at 5.
---------------------------------------------------------------------------

    Finally, two commenters further argued that opt out would be 
inconsistent with the existing market structure. One of these 
commenters observed that ``[i]ssuers currently have no say over 
exchanges' policies'' and that ``exchanges that modify their access 
fees dozens of times a year do not survey issuers or permit them to 
opt-out of these fee changes or creation of order types.'' \151\ The 
other commenter opined that opt out ``may set an unfortunate precedent 
that would allow an issuer to pick and choose among those aspects of 
the National Market System that it likes while rejecting other aspects 
that it may find less attractive to it, but [which] are necessary to 
the smooth functioning of [the] United States public equity markets.'' 
\152\
---------------------------------------------------------------------------

    \151\ Better Markets Letter, at 7.
    \152\ MFS Letter, at 3.
---------------------------------------------------------------------------

    After careful consideration, the Commission does not believe that 
issuers should be permitted to opt out of participation in the Pilot. 
While the Commission understands issuers' concerns, allowing issuers to 
opt out could undermine the representativeness of the Pilot's treatment 
groups and potentially bias the Pilot's results, depending on the 
number and characteristics of issuers that opt out. In turn, 
researchers would be less able to rely on the data to perform analyses 
and draw specific conclusions about the impact of the Pilot, thereby 
limiting the usefulness of the Pilot's data to the Commission and 
future regulatory initiatives.\153\ Although some commenters believe 
that issuers may incur potential costs or endure competitive harms 
depending on which of the Pilot's treatment groups their stock is in, 
other commenters have argued that such effects are unlikely to 
manifest. The Commission does not believe it is appropriate to 
implement an opt out provision that could frustrate the collection of 
useful and representative data based solely on concerns expressed by 
some commenters regarding uncertain harms. It is precisely because of 
this uncertainty that the Commission believes it is necessary to 
conduct the Pilot to study these contested issues through an objective 
empirical review of exchange transaction fees and rebates. For those 
reasons, the Commission

[[Page 5214]]

adopts this aspect of the Pilot as proposed.
---------------------------------------------------------------------------

    \153\ See, e.g., Short Sale Position and Transaction Reporting, 
Study by the Staff of the Division of Economic and Risk Analysis, 
June 5, 2014, at 66-67 (discussing selection bias in the context of 
an ``opt in'' voluntary pilot design).
---------------------------------------------------------------------------

C. Pilot Design

1. Need for a Pilot
    As a threshold issue, commenters disagreed about whether the 
Commission should conduct any kind of pilot study of transaction fees 
and rebates. One commenter, for example, characterized the proposed 
Pilot as ``a solution in search of problem'' and claimed that the 
Commission ``has provided no evidence that existing fee practices are 
harming investors or interfering with fair competition.'' \154\ Another 
commenter believed that the Pilot was unnecessary, but for the opposite 
reason--namely, that there is ample evidence of the negative effects of 
exchange rebate pricing models, such that the Commission should instead 
take immediate action to ban them.\155\
---------------------------------------------------------------------------

    \154\ Cboe Letter I, at 5. See also, e.g., Virtu Letter, at 1-2; 
Nasdaq Letter I, at 12-13. But cf. MFA Letter, at 2 (stating that 
``regulators should periodically assess market practices and 
regulations to ensure that U.S. equity markets continue to remain 
efficient, liquid, fair, resilient and transparent for all market 
participants'').
    \155\ See Larry Harris Letter, at 9-10.
---------------------------------------------------------------------------

    Most commenters, however, thought a Commission-led pilot was 
necessary and supported the Commission's proposal to conduct one.\156\ 
These supportive commenters observed that ``market participants have 
heavily debated the effects that transaction-based fees, particularly 
access fees, and rebates may have on the equity markets'' and 
``commend[ed] the SEC for advancing this discussion through a time-
limited, empirical study.'' \157\ Some of those commenters thought a 
Commission-led pilot was necessary because competitive pressures among 
exchanges may serve as a barrier to market-led reforms in this 
area.\158\ The Commission agrees with the commenters that stated that 
the Pilot is necessary because, as reflected in the comments discussed 
above,\159\ there is strong disagreement about the impact of exchange 
fee-and-rebate pricing models but a lack of data to study the issue. 
The Commission believes it is important to further investigate these 
impacts.\160\
---------------------------------------------------------------------------

    \156\ See, e.g., Decimus Letter, at 4 (stating that the Pilot 
``would be valuable in generating concrete information and more 
preferable to back-of-the-envelope calculations based on 
questionable assumptions''); Wellington Letter, at 1 (stating that 
the Commission could only ``draw[ ] definitive conclusions on the 
impact of existing pricing models . . . through an actual 
implementation'' of the Pilot); Verret Letter I, at 4 (stating that 
the Commission ``appears to have considered adoption of a mandatory 
rule to reshape market structure, and determined instead to take the 
more deliberative and less costly approach of an initial pilot 
program to generate more data from which it can determine a path 
forward on market structure reform''); IAC Recommendation, at 2; MFA 
Letter, at 2; ICI Letter I, at 1-2; RBC Letter I, at 2; Joint Asset 
Managers Letter, at 2; Clark-Joseph Letter, at 1; Babelfish Letter, 
at 3; State Street Letter, at 2; Themis Trading Letter II, at 3; IEX 
Letter I, at 2-3.
    \157\ Fidelity Letter, at 2. See also, e.g., Brandes Letter, at 
1 (expressing support for the Pilot and the ``Commission's effort to 
shed light into a subject of heated debate among market 
participants''); Barnard Letter, at 1 (stating that the Pilot was 
``important, as historically there are many views on this topic, but 
a paucity of credible data from which to draw conclusions''); Angel 
Letter II, at 1 (stating that ``various commenters have wildly 
differing perspectives on what will happen under the pilot,'' which 
is ``strong evidence as to why the pilot is necessary'').
    \158\ See, e.g., T. Rowe Price Letter, at 3; Clearpool Letter, 
at 2. The Commission notes that Nasdaq conducted an independent 
access fee experiment in 2015, but the limited nature of that 
experiment makes it difficult to draw conclusions from the data 
gathered by Nasdaq. See Proposing Release, supra note 2, at 13011-
12. See also, e.g., IEX Letter III, at 6 (``Nasdaq's experiment and 
its outcomes aren't a perfect proxy for what is likely to happen in 
the Transaction Fee Pilot. That experiment was done unilaterally and 
only in highly-liquid securities.''); Larry Harris Letter, at 9 
(noting that Nasdaq's ``experimental fee reduction did not occur at 
all trading venues that traded the subject securities,'' 
demonstrating that ``regulatory action is necessary to establish a 
common pricing standard because market forces alone will not do 
it'').
    \159\ See Section II.A.2 for a discussion of these comments.
    \160\ See also Section II.A.2 for a discussion of these impacts.
---------------------------------------------------------------------------

2. Pilot Design
    For each NMS stock that meets the initial criteria to be a Pilot 
Security, discussed above, the Commission proposed to assign it to one 
of three Test Groups, with 1,000 NMS stocks each, or the Control 
Group.\161\ The composition of each Test Group would remain constant 
for the duration of the Pilot, except, as described below, to reflect 
changes to the composition of the groups caused by mergers, delistings, 
or removal from a Test Group due to the share price of a stock closing 
below $1.\162\
---------------------------------------------------------------------------

    \161\ See Proposing Release, supra note 2, at 13019. The 
Commission notes that the proposed language in Rule 
610T(b)(2)(ii)(E) has been modified slightly. As proposed, Rule 
610T(b)(2)(ii)(E) was labeled as ``Test Group.'' As adopted, the 
label ``Pilot Group'' is being substituted for the phrase ``Test 
Group'' to provide additional clarity.
    \162\ See id.
---------------------------------------------------------------------------

    The Commission received a number of comments on the proposed Pilot 
design, discussed below, focusing mainly on the number of securities 
included in each Test Group. After consideration of all the comments 
received and for the reasons discussed below, the Commission is 
adopting two Test Groups that each contain 730 NMS stocks, functionally 
combining proposed Test Groups 1 and 2 into a new Test Group 1 with a 
blended fee cap of $0.0010. Accordingly, for the duration of the Pilot, 
the following pricing restrictions will apply to Test Groups 1 and 2, 
while the Control Group will remain subject to the current access fee 
cap in Rule 610(c):

------------------------------------------------------------------------
                                       Proposed             Adopted
------------------------------------------------------------------------
Fee Cap Test Group 1............  1,000 NMS stocks..  730 NMS stocks.
                                  $0.0015 fee cap     $0.0010 fee cap
                                   for removing &      for removing &
                                   providing           providing
                                   displayed           displayed
                                   liquidity.          liquidity.
Fee Cap Test Group 2............  1,000 NMS stocks..  Not adopted.
                                  $0.0005 fee cap
                                   for removing &
                                   providing
                                   displayed
                                   liquidity.
No Rebate Test Group............  1,000 NMS stocks..  730 NMS stocks
                                                       (plus appended
                                                       Canadian
                                                       interlisted
                                                       stocks).
                                  Rebates and Linked  No change.
                                   Pricing
                                   Prohibited for
                                   removing &
                                   providing
                                   displayed &
                                   undisplayed
                                   liquidity (except
                                   for specified
                                   market maker
                                   activity).
                                  Rule 610(c) cap     No change.
                                   applies.
Control Group...................  Pilot Securities    No change.
                                   not in a Test
                                   Group.
------------------------------------------------------------------------


[[Page 5215]]

3. No Overlap With Tick Size Pilot
---------------------------------------------------------------------------

    \163\ See Proposing Release, supra note 2, at 13019-13020 n.117, 
13020 (describing the proposed composition of the Tick Size Pilot 
overlap subgroups). In the Proposal, the Commission specifically 
solicited comment on whether the Pilot should overlap with the Tick 
Size Pilot. See id. at 13025.
---------------------------------------------------------------------------

    While the Commission's proposed Pilot design took into 
consideration the possibility that the Pilot could have been adopted 
before the end of the Tick Size Pilot Program, the Commission also 
noted that the overlap design would not be necessary if that were not 
the case.\163\
    A few commenters opined on the potential overlap between the 
proposed Pilot and the Tick Size Pilot, disagreeing on whether overlap 
would be appropriate.\164\ However, because the Tick Size Pilot ended 
on September 28, 2018, there no longer is any need for the Transaction 
Fee Pilot to control for potential data distortions that could have 
otherwise resulted from the simultaneous operation of the two pilot 
programs. Accordingly, the Commission is not adopting the proposed Tick 
Size Pilot overlap design.
---------------------------------------------------------------------------

    \164\ Cf., e.g., Clark-Joseph Letter, at 2 (noting that overlap 
``certainly would not be a serious impediment''); SIFMA Letter, at 3 
(arguing against an overlap).
---------------------------------------------------------------------------

    Relatedly, some commenters discussed whether there should be a 
delay between the end of the Tick Size Pilot and the start of the 
proposed Transaction Fee Pilot, with commenters disagreeing on that 
point. For example, one commenter thought a delay would be appropriate 
to allow markets to normalize before conducting a subsequent pilot 
\165\ while another commenter thought markets would revert to their 
baseline state extremely quickly after the Tick Size Pilot ends.\166\
---------------------------------------------------------------------------

    \165\ See Cboe Letter I, at 30.
    \166\ See Healthy Markets Letter I, at 14.
---------------------------------------------------------------------------

    The Tick Size Pilot concluded, but post-pilot data continues to be 
collected until April 2, 2019. However, the Transaction Fee Pilot is 
subject to a one-month implementation period followed by a six-month 
pre-Pilot Period. Accordingly, the core of the Transaction Fee Pilot 
will not commence until after the post-pilot period for the Tick Size 
Pilot ends. By then, the Commission believes that the markets will have 
had sufficient time to normalize and any overlap between the 
Transaction Fee Pilot's pre-Pilot Period and the Tick Size Pilot's 
post-pilot period will be minimal. In both cases, the respective pre- 
and post-pilot periods are collecting benchmark data on the status quo. 
As such, the overlap between them should not compromise either dataset.
    Finally, two commenters recommended that the Commission analyze the 
Tick Size Pilot data prior to proceeding with the Transaction Fee 
Pilot.\167\ While preliminary results from the Tick Size Pilot have 
been made public, the two pilots are sufficiently dissimilar that the 
Commission sees no reason for delay. The Tick Size Pilot tested a wider 
minimum increment (from one cent to five cents) for smaller-
capitalization stocks, whereas the Transaction Fee Pilot will test a 
lower rate for the Rule 610(c) fee cap and a prohibition on exchange 
rebates (which typically are less than one-third of a penny) for stocks 
of all market capitalizations. Accordingly, findings from the Tick Size 
Pilot are not relevant to the design of the Transaction Fee Pilot.
---------------------------------------------------------------------------

    \167\ See Cboe Letter I, at 29; Nasdaq Letter I, at 4.
---------------------------------------------------------------------------

4. Stratified Selection of Pilot Securities
    The Commission proposed to select the stocks to be included in each 
of the Test Groups and the Control Group through stratified sampling in 
a manner that permits comparisons between each Test Group and the 
Control Group.\168\
---------------------------------------------------------------------------

    \168\ See Proposing Release, supra note 2, at 13019.
---------------------------------------------------------------------------

    One commenter expressed support for the proposed approach to 
stratification and noted that it was ``fundamental to the ability to 
undertake causal inference in this setting . . . .'' \169\ In contrast, 
a number of public company commenters expressed concern that stratified 
sampling could result in their stocks being placed in a different Test 
Group from other similar stocks in their ``peer group,'' which could 
complicate comparisons of their stock's performance against peer-group 
metrics.\170\ As discussed above, those commenters supported allowing 
companies to ``opt out'' of the Pilot, which could impact the 
stratification.\171\ Further, as discussed above, some commenters 
recommended that the Commission select ETPs for the Pilot in a manner 
that may avoid any potential competitive effects among similar ETPs, 
either by: (1) Rotating all of the Pilot Securities through the various 
treatment groups, (2) rotating only ETPs through the various treatment 
groups, or (3) grouping ETPs with similar underlying holdings into the 
same treatment group.\172\
---------------------------------------------------------------------------

    \169\ See Spatt Letter, at 3.
    \170\ See, e.g., Mastercard Letter, at 2; Avangrid Letter, at 2; 
Energizer Letter, at 1.
    \171\ See supra Section III.C.4.
    \172\ See supra Section III.C.3.b.
---------------------------------------------------------------------------

    While the Commission understands the concerns of these commenters, 
as discussed above in Section II.B, allowing issuers to opt out of the 
Pilot could undermine the representativeness of the Pilot's treatment 
groups and bias the Pilot's results. Further, also as discussed above 
in Section II.B, rotating ETPs would require the Commission to 
implement a more complex and lengthy design in order to maintain 
sufficient statistical power, both of which would increase the costs 
and complexity of the Pilot--a result viewed unfavorably by most 
commenters. Finally, grouping similar ETPs also could negatively impact 
the stratification of the different treatment groups, particularly if 
all of the similar ETPs are similar in volume, price, and market 
capitalization. In turn, this could reduce the quality and usefulness 
of Pilot's results by inhibiting the ability of researchers to compare 
treatment groups. In order to ensure that the Pilot Securities are 
selected in a way that permits researchers to investigate causal 
connections, it is imperative to stratify the Test Groups so that 
researchers can study the effects of changes in fees and rebates within 
each Test Group, between Test Groups, and between a Test Group and the 
Control Group. In permitting this type of analysis, the Pilot should be 
better able to inform future policy considerations to improve the 
operation of the national market system to the benefit of investors and 
issuers alike. Accordingly, the Commission is adopting the stratified 
sampling construct as proposed.
5. Number of NMS Stocks Included in Each Test Group
    The Commission proposed to include 1,000 Pilot Securities in each 
Test Group (i.e., 3,000 total across three Test Groups) with the 
remainder to be included in the Control Group in order to be 
representative of the overall population of NMS stocks and provide 
sufficient statistical power to identify differences between the Test 
Groups with respect to common stocks and ETPs.\173\
---------------------------------------------------------------------------

    \173\ See Proposing Release, supra note 2, at 13019-20.
---------------------------------------------------------------------------

    Several commenters supported including 1,000 stocks in each Test 
Group, believing that including 1,000 stocks in each Test Group would 
facilitate analysis of transaction fees and rebates on a broad cross 
section of different types of NMS stocks and generate statistically 
significant conclusions.\174\
---------------------------------------------------------------------------

    \174\ See Brandes Letter, at 2; Themis Trading Letter I, at 3; 
Oppenheimer Letter, at 2; Spatt Letter, at 2; IEX Letter I, at 5; 
Verret Letter I, at 4; AGF Letter, at 2; MFA Letter, at 3.
---------------------------------------------------------------------------

    Many commenters, however, thought that the Pilot should include 
fewer

[[Page 5216]]

securities in each Test Group.\175\ Several of these commenters 
believed the Pilot could obtain statistically significant data even 
with fewer stocks in each Test Group.\176\ Other commenters urged the 
Commission to reduce the number of securities included in the Test 
Groups in order to reduce costs associated with the Pilot.\177\ Several 
commenters argued that the Pilot was effectively a large scale change 
to the current equity market structure and that it would be more 
appropriate for a pilot program to apply to a smaller percentage of the 
universe of NMS stocks.\178\ Further to this point, several commenters 
believed that a large Pilot may be difficult to unwind, with one 
commenter stating that an immediate return to current transaction fee 
and rebate dynamics for stocks included in the Test Groups ``could 
prove to be more disruptive to market participants and overall market 
quality than the actual implementation of the Pilot.'' \179\ Some 
commenters also believed the Pilot would negatively impact trading in 
the stocks placed in certain Test Groups, such as by adversely 
impacting spreads, and accordingly recommended including fewer stocks 
so as to limit potential negative consequences.\180\ Of the commenters 
that advocated for reducing the number of Pilot Securities in each Test 
Group, some suggested alternative amounts to be included. Several 
commenters recommended including 100 stocks in each Test Group.\181\ A 
few others suggested that each Test Group include 500 stocks.\182\ One 
commenter recommended ``a more tailored Pilot that includes the 225 
most heavily traded names, 225 mid-cap stocks, 225 small caps and 225 
ETFs would provide statistically significant data without burdening a 
material portion of the market.'' \183\ The Commission has carefully 
considered the concerns expressed by commenters regarding the size of 
the Pilot's Test Groups.\184\ As previously discussed, the Commission 
cannot know in advance the full effects of the Pilot, whether they be 
positive or negative. Indeed, commenters expressed a variety of 
contradicting viewpoints and estimations about the potential impacts of 
the Pilot on the execution quality and market quality of NMS stocks 
that would be included in the Test Groups.\185\
---------------------------------------------------------------------------

    \175\ See Magma Letter, at 3; FIA Letter, at 4; SIFMA Letter, at 
4; Schwab Letter, at 2; Fidelity Letter, at 8-9; Citadel Letter, at 
2; State Street Letter, at 3; Citi Letter, at 5; Clearpool Letter, 
at 7; TD Ameritrade Letter, at 1; STA Letter, at 3-4; STANY Letter, 
at 3; Nasdaq Letter I, at 10; Cboe Letter I, at 27; T. Rowe Price 
Letter, at 4; Mastercard Letter, at 2; NorthWestern Letter, at 1; 
Energizer Letter, at 1; Era Letter, at 1; Knight-Swift Letter, at 2; 
ASA Letter, at 4-5.
    \176\ See Magma Letter, at 3; Schwab Letter, at 2; Fidelity 
Letter, at 8-9; Clearpool Letter, at 7; STA Letter, at 3-4; Cboe 
Letter I, at 27.
    \177\ See SIFMA Letter, at 4; Schwab Letter, at 2; Citadel 
Letter, at 6; Citi Letter, at 5.
    \178\ See Magma Letter, at 3; FIA Letter, at 4; Citi Letter, at 
5; Clearpool Letter, at 7; Nasdaq Letter I, at 10.
    \179\ See Citadel Letter, at 6. See also SIFMA Letter, at 4; 
Citi Letter, at 5.
    \180\ See STA Letter, at 3; STANY Letter, at 3; State Street 
Letter, at 3; TD Ameritrade Letter, at 1, 3; Mastercard Letter, at 
2.
    \181\ See FIA Letter, at 4; Schwab Letter, at 2; State Street 
Letter, at 3; STANY Letter, at 3; Era Letter, at 1; Cboe Letter I, 
at 27.
    \182\ See SIFMA Letter, at 4; Citi Letter, at 5; STA Letter, at 
3.
    \183\ See T. Rowe Price Letter, at 4.
    \184\ See supra notes 175-183 and accompanying text.
    \185\ See, e.g., supra notes 75-93 and accompanying text.
---------------------------------------------------------------------------

    Given this uncertainty, it is crucial that the Pilot be able to 
produce results that are capable of facilitating an empirical review of 
the effect of the prevailing fee structures on the equities markets. To 
achieve this purpose, the Pilot needs to generate a sufficient number 
of observations over its one-year duration to obtain sufficient 
statistical power to identify differences among the Test Groups with 
respect to common stocks and ETPs, thereby permitting researchers to 
investigate causal connections using economic analysis capable of 
finding statistical significance. Statistical power refers to the 
ability for statistical tests to identify differences across samples 
when those differences are indeed significant and broadly is derived 
from the number of observations during a study. In other words, 
statistical power can be present when observing a limited number of 
subjects over a long period of time or a large number of subjects over 
a shorter period of time. Because the Commission desires a shorter 
duration for the Pilot, it therefore needs to have sufficient 
observable data points over the shorter pilot duration. Accordingly, if 
the Pilot does not contain enough securities, it may be incapable of 
producing statistically sound results and will not allow researchers to 
analyze differences in securities.
    With statistical power and a sufficiently large sample size, 
researchers can conduct analysis of what impact (1) reductions in fees 
and (2) reductions in or prohibitions on rebates might have, if any, on 
stocks depending on their trading volume or market capitalization. A 
pilot design that would not provide this meaningful data about the 
impact that billions of dollars of exchange fees and rebates may have 
on the markets and market structure, would not achieve the Commission's 
goal of conducting a pilot capable of facilitating an objective 
empirical view to advance that debate.
    To achieve these aims, using econometric methods designed to allow 
researchers to detect a 10% change with a standard confidence level of 
95%, the Commission has determined that 730 securities in each Test 
Group are needed to enable the Pilot to produce statistically 
meaningful results capable of informing the Commission's future 
policymaking efforts. The Commission believes that a 10% change in 
behavior represents an economically meaningful change that will 
facilitate analysis of the Pilot's results, and therefore is an 
appropriate standard for the Pilot.\186\ The determination to include 
730 securities in each Test Group accounted for the need to obtain 
statistically significant results among stocks of various liquidity 
profiles as well as ETPs. While the number of NMS stocks that will be 
included in each Test Group will be larger than what was recommended by 
some commenters, the Commission believes that a smaller number of 
stocks may not have sufficient statistical power given the Pilot's 
proposed duration.\187\
---------------------------------------------------------------------------

    \186\ A confidence level of 95% is a standard accepted 
confidence level in statistical analyses. See, e.g., William H. 
Greene, Econometric Analysis 1033 (Appendix C.6) (6th ed. 2007) 
(discussing standard confidence levels in academic research).
    \187\ See also note 695 infra.
---------------------------------------------------------------------------

    Furthermore, in response to comments questioning why the Pilot 
included more securities than did the Tick Size Pilot, the Commission 
notes that the Tick Size Pilot featured 400 corporate stocks for each 
of its Test Groups.\188\ Importantly, the Tick Size Pilot did not 
contain ETPs or large-cap stocks. In comparison, the Transaction Fee 
Pilot will contain ETPs and large-cap stocks. Accordingly, in light of 
the significantly higher number of securities eligible for inclusion, 
the Transaction Fee Pilot needs to include considerably more Pilot 
Securities than did the Tick Size Pilot, while continuing to achieve 
the same statistical power for each of those groups of securities.
---------------------------------------------------------------------------

    \188\ See, e.g., Citadel Letter, at 6; TD Ameritrade Letter, at 
2; Cboe Letter I, at 27. See also Securities Exchange Act Release 
No. 74892 (May 6, 2015), 80 FR 27514, 27517 (May 13, 2015) (File No. 
4-657) (order approving the National Market System Plan to Implement 
a Tick Size Pilot Program).
---------------------------------------------------------------------------

    Moreover, while several commenters either implicitly or explicitly 
referenced the EMSAC recommendation to include 100 stocks in each Test 
Group, EMSAC's recommendation differs substantially from the 
Commission's proposal. Notably, the EMSAC recommendation was limited to 
common stocks with a

[[Page 5217]]

market capitalization above $3 billion and did not include ETPs, mid- 
and small-cap stocks, or other types of NMS stocks. In order for the 
Pilot to permit a broader empirical review of the impact of transaction 
fees and rebates on order routing, execution quality, and market 
quality, it is critical that the sample size be representative of the 
population of NMS stocks for which exchange transaction fees and 
rebates are economically meaningful. The Pilot must contain enough 
securities to achieve the statistical power necessary to permit closer 
analysis of the Pilot's results in order to identify differences in 
order routing behavior, market quality, and execution quality among 
subgroups of NMS stocks (e.g., ETPs, or tiers of common stock).
6. Reduction to the Pilot Size
    To respond to commenters' concerns with the size of the Pilot, 
including a recommendation from the SEC's Investor Advisory Committee, 
the Commission has determined to eliminate one Test Group and reduce 
the number of stocks in each Test Group to 730.
    In order to materially reduce the size of the Pilot without 
sacrificing statistical power, the Commission has determined to: (1) 
Only place Pilot Securities in a Test Group if, at the time of 
selection, they trade 30,000 shares or more per day on average and (2) 
eliminate a Test Group.
    With respect to securities that trade fewer than 30,000 shares per 
day, assuming, at an extreme, that such security trades 100% of its 
volume on a maker-taker exchange paying a $0.0030 rebate, then it would 
generate $100 in rebates per day. In addition, for thinly-traded stocks 
with wider spreads, the rebate would be less impactful as it would 
represent a smaller percentage of the quoted spread. This amount of 
rebates would be economically insignificant and would be unlikely to 
impact order routing behaviors of broker-dealers. In addition, this 
level of trade volume makes it unlikely to produce sufficient 
statistical power to analyze the securities in isolation because the 
variability in their quoting and trading characteristics renders it 
unlikely the Pilot would generate a sufficient number of observations 
given the Pilot's proposed duration. In addition, for commenters that 
believe that thinly-traded stocks need rebates to narrow their quoted 
spreads, excluding these securities from the Pilot will allow exchanges 
to continue to apply their current fee schedules to them, which will 
provide another point of reference to analyze when comparing these 
securities to those with slightly higher trading volumes.
    Finally, the Commission believes that eliminating one Test Group 
and functionally combining proposed Test Group 1 and Test Group 2 into 
a new Test Group with a $0.0010 cap will result in decreasing the 
number of NMS stocks included in a Test Group in the Pilot by one-
third, which is integral in reducing the overall size of the Pilot by 
more than one-half. The Commission believes this material reduction 
directly responds to commenters' concerns, while still providing the 
Pilot with a meaningful group in which to test a reduced fee cap and a 
prohibition on rebates and Linked Pricing.
    Accordingly, the Commission believes that the Pilot's design of 730 
NMS stocks per Test Group strikes an appropriate balance by reducing 
the number of stocks in each Test Group and thus mitigating the 
concerns of commenters about potential detrimental impacts that could 
be caused by the proposed larger size of the Pilot,\189\ without 
undermining the ability to obtain useful data to study the impact of 
changes to transaction fees and rebates on order routing behavior, 
execution quality, and market quality for a broad spectrum of stocks. 
It also is large enough to accommodate drop offs among Pilot Securities 
(e.g., due to mergers, bankruptcies, or stocks closing below $1).\190\
---------------------------------------------------------------------------

    \189\ See supra notes 175-180 and accompanying text.
    \190\ See Proposing Release, supra note 2, at n. 102.
---------------------------------------------------------------------------

7. Fee Cap Test Groups
    The Commission proposed that for Pilot Securities in Test Group 1, 
equities exchanges could neither impose, nor permit to be imposed, any 
fee or fees for the display of, or execution against, the displayed 
best bid or offer of such market in NMS stocks that exceeds or 
accumulates to more than $0.0015 per share.\191\ The level proposed for 
Test Group 2 was $0.0005 per share.\192\
---------------------------------------------------------------------------

    \191\ See Proposed Rule 610T(a)(1). See also Proposing Release, 
supra note 2, at 13021-22.
    \192\ See Proposed Rule 610T(a)(2). See also Proposing Release, 
supra note 2, at 13022.
---------------------------------------------------------------------------

    After careful consideration of the comments received, which are 
discussed below, the Commission is eliminating Test Group 2 and 
adopting a revised Test Group 1 with a $0.0010 cap.
a. Fee Cap Level
    Commenters disagreed about the appropriateness or justification for 
the proposed fee cap levels.\193\ For example, one commenter stated 
that ``exchanges currently compete on fees by offering a range of 
access fees and rebates within the confines of the current $0.0030 
access fee cap'' but the fee caps in Test Groups 1 and 2 ``will reduce 
the exchanges' ability to compete on fees by 50% in Test Group 1'' and 
``83% in Test Group 2'' which could be ``to the detriment of investors 
and the public interest.'' \194\ In contrast, regarding proposed Test 
Group 1, another commenter stated that ``[a]t 15 mils, there is still 
room for significant fee differentiation and rebates remain sizeable.'' 
\195\
---------------------------------------------------------------------------

    \193\ See Cboe Letter I, at 16 (stating that the Proposing 
Release ``does nothing to justify how the $0.0015 and $0.0005 fee 
cap levels are appropriate'' and that lowering the current fee cap 
``without meaningful discussion or justification is concerning and 
inappropriate''); Morgan Stanley Letter, at 1. But cf. Healthy 
Markets Letter I, at 15-16 (stating that the fee caps for Test 
Groups 1 and 2 ``appear to be well-justified'').
    \194\ See Cboe Letter I, at 16-17.
    \195\ See Credit Suisse Commentary, at 3.
---------------------------------------------------------------------------

    With respect to Test Group 2, one commenter stated that ``[i]f the 
ultimate intent of the proposal is to determine whether or not reducing 
access fees will have an effect on how brokers route their customers' 
orders, then we fully support the notion of Test Group 2 to see if the 
incentive to avoid access fees is eliminated with a 5 cents per 100 
share cap.'' \196\ Another commenter further stated that ``to the 
extent that rebates have been traditionally funded by exchanges by the 
fees collected,'' then Test Group 2 ``may lead to rebate reductions'' 
and obtaining data on this point is ``part of the reason why a study is 
needed.'' \197\
---------------------------------------------------------------------------

    \196\ See T. Rowe Price Letter, at 2.
    \197\ See Healthy Markets Letter I, at 15-16.
---------------------------------------------------------------------------

    Finally, the Investor Advisory Committee recommended that the 
Commission structure the Pilot's Test Groups ``as simply as possible,'' 
and was not persuaded that, in addition to having the no-rebate Test 
Group, having two additional Test Groups with separate fee caps ``will 
generate enough additional information to justify the additional 
effort.'' \198\ Accordingly, the Investor Advisory Committee 
recommended that the Commission consider having, in addition to the no-
rebate Test Group, only one Test Group with a fee cap and suggested a 
cap of $0.0010.\199\
---------------------------------------------------------------------------

    \198\ IAC Recommendation, at 1.
    \199\ See id. For other commenters suggesting a $0.0010 fee cap, 
see Goldman Sachs Letter and NYSE Letter III.
---------------------------------------------------------------------------

    The Commission appreciates the recommendation of the Investor 
Advisory Committee and agrees with it. As noted above and further 
discussed below, eliminating Test Group 2 will decrease the size of the 
Pilot by one-

[[Page 5218]]

third. New Test Group 1 will have a cap of $0.0010, which adopts the 
Investor Advisory Committee's recommendation and represents a blended 
average of the two fee caps the Commission originally proposed.
    The Commission believes that new Test Group 1 retains the equities 
exchanges' ability to compete through differing fees and rebates, as a 
fee cap of $0.0010 provides exchanges with an opportunity to utilize 
various fee and rebate structures to compete for order flow. As some 
commenters noted, the current access fee cap was set thirteen years ago 
and may represent an outsized portion of transaction costs in light of 
the technological efficiencies achieved by the equities markets in the 
last decade.\200\
---------------------------------------------------------------------------

    \200\ See Citi Letter, at 1-2; Goldman Sachs Letter, at 2.
---------------------------------------------------------------------------

    As revised, new Test Group 1 will facilitate an analysis of the 
extent to which exchanges reduce rebates from their current levels as a 
result of a materially reduced cap on the fees used to subsidize those 
rebates, and the impact of a reduced fee and rebate level on order 
routing behavior, execution quality, and market quality. In addition, 
by materially reducing the fee cap, the Commission believes that new 
Test Group 1 will provide useful data on the extent to which current 
exchange fee levels (bounded by the current access fee cap) serve as a 
disincentive to take liquidity on an exchange. Obtaining useful 
information to better understand the potential impact of a 
significantly reduced access fee cap will ultimately be beneficial to 
investors and the public interest, as it may help illuminate the extent 
to which the current fees and rebates effect the market and the extent 
to which those effects have a detrimental impact on investor 
transaction costs.
b. Applicability to Depth-of-Book and Non-Displayed Liquidity
    As proposed, Test Groups 1 and 2 were designed to isolate and test 
a reduction in the Rule 610(c) fee cap, with all else remaining 
unchanged. In the Proposing Release, the Commission asked whether 
commenters thought the fee caps in Test Groups 1 and 2 also should 
apply to depth-of-book and undisplayed liquidity.\201\ One commenter 
recommended that it should.\202\
---------------------------------------------------------------------------

    \201\ See Proposing Release, supra note 2, at 13025.
    \202\ See Clearpool Letter, at 3 n.6.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission stated that it 
preliminarily believed it was unnecessary for the fee cap Test Groups 
to apply to depth-of-book and undisplayed liquidity because it would be 
highly unlikely for an exchange to begin charging more to access non-
displayed interest or depth-of-book quotes (compared to displayed 
interest), as it would lead to uncertainty for market participants that 
remove liquidity because they typically would not be able to know in 
advance or control with absolute certainty whether they interact with 
non-displayed interest or depth-of-book quotes.\203\ The Commission 
continues to believe it would be unlikely that either maker-taker or 
taker-maker exchanges would begin charging differing fees in such a 
manner.\204\ Furthermore, the Commission notes that the Rule 610(c) 
access fee cap does not currently apply to non-displayed interest or 
depth-of-book quotes. Introducing a new variable into the fee cap Test 
Groups would make it more difficult to isolate the effects of a 
particular change and uncover causal connections. Accordingly, for the 
reasons noted above and discussed in the Proposing Release, the 
Commission is not adopting this suggestion.\205\
---------------------------------------------------------------------------

    \203\ See Proposing Release, supra note 2, at 13023 n.136-37 and 
accompanying text.
    \204\ In the Proposing Release, the Commission acknowledged that 
there were three exchanges that charged different fees for displayed 
and non-displayed liquidity. See id. Currently, there are two, IEX 
and NYSE American. The Commission notes that the differences in fees 
are minimal and because a small portion of exchanges have chosen to 
adopt this fee structure to date, it is unlikely a significant 
portion will choose to do so.
    \205\ See Proposing Release, supra note 2, at 13022-23.
---------------------------------------------------------------------------

c. Prohibiting Rebates and Linked Pricing in Test Groups 1 and 2
    In Test Groups 1 and 2 the Commission did not propose to cap the 
level of rebates, prohibit rebates, or prohibit Linked Pricing, the 
latter two of which it proposed to do in the no-rebate Test Group as 
discussed below.\206\ In response, several commenters advocated for 
applying restrictions on rebates to the fee cap Test Groups, primarily 
in reaction to the potential for exchanges to subsidize their rebates 
at or near current levels from sources other than transaction fee 
revenue.\207\ For example, one commenter stated that ``[t]here is 
already ample evidence to suggest that some exchanges currently use 
revenues from other sources to subsidize their order routing 
incentives, including rebates,'' such that the proposed fee caps may 
have no impact on the level of rebates paid for Pilot Securities in the 
fee cap Test Groups.\208\ This commenter therefore suggested that the 
fee cap Test Groups include two subgroups, one as proposed, and a 
second that would prohibit rebates and Linked Pricing (and also apply 
to depth-of-book and non-displayed liquidity).\209\
---------------------------------------------------------------------------

    \206\ See Section II.C.6.d. infra. See also Proposing Release, 
supra note 2, at 13021-24.
    \207\ See CFA Letter, at 6; Clearpool Letter, at 2-3; Healthy 
Markets Letter I at 27-29.
    \208\ See Healthy Markets Letter I, at 28.
    \209\ See id. at 16.
---------------------------------------------------------------------------

    The Commission has carefully considered these comments and has 
determined not to adopt these additional restrictions. While adding 
more variables or more Test Groups to the Pilot could produce 
informative results, it would directly complicate the Pilot's design 
thus raising the Pilot's costs and burdens. For example, if the 
Commission were to add subgroups to new Test Group 1 to prohibit 
rebates, it likely would have to expand the number of stocks included 
in the treatment groups or expand the duration of the Pilot in order to 
achieve statistical power.\210\ It also would further complicate 
exchange fee schedules and could lead to more variability in exchange 
fees if exchanges customized their pricing differently for each Test 
Group and subgroup. Rather, the Pilot's design represents a 
comparatively simple construct that is easier to implement and manage 
and yet should still facilitate the Commission's ability to analyze the 
impact of fees and rebates on order routing behavior, execution 
quality, and market quality. Achieving these goals, while minimizing 
complexity and burdens, will also assist the Commission as it considers 
potential future policy initiatives informed by the results of the 
Pilot.
---------------------------------------------------------------------------

    \210\ See supra Section II.C.5 discussing the need to generate a 
sufficient number of observations over the Pilot's duration to 
permit researchers to investigate causal connections using economic 
analysis capable of finding statistical significance.
---------------------------------------------------------------------------

    In addition, the fee cap Test Groups were specifically selected to 
provide the exchanges with the continued ability to offer rebates, 
should they so choose, albeit at lower levels, without impacting an 
exchange's ability to maintain its net profit on a per transaction 
basis. The Commission declines to prohibit rebates in new Test Group 1 
as doing so would go beyond the construct and application of the Rule 
610(c) fee cap by introducing additional variables, and thus would 
distinctly alter the status quo in that Test Group, thereby 
complicating the analysis in that treatment group.
    Lastly, the Commission continues to believe that it is unlikely 
that exchanges will offer rebates at their current levels for Pilot 
Securities in new Test Group 1 because exchanges will need to charge 
lower offsetting transaction fees in that group in order to maintain a 
profitable

[[Page 5219]]

pricing model. However, the Commission also recognizes, as did 
commenters, that it is possible that the exchanges may choose to 
subsidize rebates in Test Group 1 from other sources of revenue, which 
could result in rebates exceeding the fee cap in that group. Whether 
and to what extent that would occur in practice would be an important 
result in new Test Group 1, and so the Commission believes the Pilot 
should be structured so as not to preclude that possible result. The 
Commission will closely monitor the fees charged by the exchanges for 
non-transaction services during the Pilot and will consider the Pilot's 
impact on such fees.
d. No-Rebate Test Group
    The Commission proposed that for Pilot Securities in Test Group 3, 
equities exchanges generally would be prohibited from offering rebates, 
either for removing or posting liquidity, and from offering Linked 
Pricing, which, as discussed further below, is defined as a discount or 
incentive on transaction fee pricing applicable to removing (or 
providing) liquidity that is linked to providing (or removing) 
liquidity.\211\ In addition, Test Group 3 would be unique in that its 
restrictions would apply not only to displayed top-of-book \212\ 
liquidity, but also would apply to depth-of-book \213\ and undisplayed 
liquidity.\214\ Transaction fees for securities in Test Group 3 would 
remain subject to the current $0.0030 access fee cap in Rule 610(c) for 
accessing a protected quotation.
---------------------------------------------------------------------------

    \211\ See Proposed Rule 610T(a)(3); Proposing Release, supra 
note 2, at 13022-24.
    \212\ ``Top-of-book'' means the aggregated best bid and best 
offer resting on an exchange; in other words, aggregate interest 
that represents the highest bid (to buy) and the lowest offer (to 
sell). See 17 CFR 242.600(b)(7) (defining ``best bid'' and ``best 
offer'').
    \213\ ``Depth-of-book'' refers to all resting bids and offers 
other than the best bid and best offer; in other words, all orders 
to buy at all price levels less aggressive than the highest priced 
bid (to buy) or all offers to sell at all price levels less 
aggressive than the lowest priced offer (to sell). See 17 CFR 
242.600(b)(8) (defining ``bid'' and ``offer'').
    \214\ ``Undisplayed'' refers to resting orders that are 
``hidden'' and not displayed publicly in the consolidated market 
data. See 17 CFR 242.600(b)(13) (defining ``consolidated display'') 
and (b)(60) (defining ``published bid and published offer'').
---------------------------------------------------------------------------

    After careful consideration of the comments received on Test Group 
3, discussed below, the Commission is adopting Rule 610T(a)(3) as 
proposed, though it is being renamed as ``Test Group 2'' since the 
Commission has reduced the number of Test Groups from three to two.
e. Prohibiting Rebates
    While there was significant disagreement among commenters on this 
aspect of the Pilot, most commenters supported a ``no rebate'' group as 
they believed it was critical to fully examine the effect that 
transaction fees and rebates have on order routing behavior, execution 
quality, and market quality.\215\
---------------------------------------------------------------------------

    \215\ See, e.g., Joint Asset Managers Letter, at 1; Clark-Joseph 
Letter, at 2; Brandes Letter, at 1; CII Letter, at 3; Themis Trading 
Letter I, at 3; AJO Letter, at 3; OMERS Letter, at 2; Copeland 
Letter, at 2; ICI Letter I, at 3; Nuveen Letter, at 2; SIFMA Letter, 
at 3-4; Better Markets Letter, at 2, 5; RBC Letter I, at 3; Vanguard 
Letter, at 2-3; Fidelity Letter, at 9; Invesco Letter, at 2; CFA 
Letter, at 4; MFS Letter, at 2; Wellington Letter, at 2; Joint 
Pension Plan Letter, at 2; Citi Letter, at 2; Oppenheimer Letter, at 
2; Clearpool Letter, at 2; Spatt Letter, at 2; Capital Group Letter, 
at 3; Healthy Markets Letter I, at 17; IEX Letter I, at 5; Verret 
Letter I, at 4; Norges Letter, at 2; AGF Letter, at 1; Decimus 
Letter, at 3; JPMorgan Letter, at 3.
---------------------------------------------------------------------------

    In contrast, several commenters opposed prohibiting equities 
exchanges from paying rebates. Specifically, three of the four exchange 
commenters asserted that it would inhibit the ability of exchanges to 
compete with off-exchange trading venues.\216\ In addition, these three 
commenters, together with other commenters, expressed concerns that 
prohibiting exchanges from paying rebates to liquidity providers would 
widen the quoted bid-ask spread on exchanges, which could raise costs 
on investors.\217\ Several of these commenters believed that 
eliminating rebates for ``less-liquid'' or ``small and medium sized 
companies'' would disproportionately impact the quoted spreads for such 
stocks as they believed that rebates are a more significant incentive 
to provide liquidity for less actively traded securities.\218\ Other 
commenters also expressed concerns that spreads would widen for ETPs, 
specifically less liquid ETPs, if rebates were prohibited or 
significantly reduced.\219\
---------------------------------------------------------------------------

    \216\ See Cboe Letter I, at 7, 15-16; NYSE Letter I, at 3-6; 
Nasdaq Letter I, at 7-8. See also, e.g., Mastercard Letter, at 1-2; 
Capital Group Letter, at 3; Magma Letter, at 2; FIA Letter, at 4.
    \217\ See, e.g., Cboe Letter I, at 7; Nasdaq Letter I, at 9; 
NYSE Letter I, at 6; Magma Letter, at 2; State Street Letter, at 3; 
Morgan Stanley Letter, at 4; Cboe Letter II, at 4-7. See also Nasdaq 
Letter III, at Exhibit A (providing graphs using data from September 
2018 on average quoted spread across exchanges in S&P 500 stocks and 
time at the best quote across those stocks). But cf. Larry Harris 
Letter, at 6-9 (acknowledging that ``quoted spreads are narrower 
under maker-taker pricing,'' but opining that ``the narrower quoted 
spreads do not benefit the public'').
    \218\ See, e.g., Nasdaq Letter I, at 9; NYSE Letter II, at 11; 
RBC Letter I, at 5; Nasdaq Letter III.
    \219\ See, e.g., Virtu Letter, at 7; Schwab Letter, at 3; State 
Street Letter, at 2.
---------------------------------------------------------------------------

    The Commission is aware of the potential for adversely impacting 
smaller capitalization securities, however, the Commission does not 
agree with the commenters that believe that the Pilot necessarily will 
result in such harm, or if there are adverse effects in the trading of 
all or some portion of smaller capitalization securities, that the net 
effect across securities will be negative. Rather, the Commission 
agrees with the many commenters who believed that it is unclear what 
the ultimate net impact of a no-rebate Test Group will be on quoted 
spreads and trading costs for NMS stocks of different market 
capitalizations and trading characteristics.\220\ The purpose of the 
Pilot is to generate results that can offer data-driven insight on 
these questions as a basis for possible future policy making in this 
area. As discussed elsewhere, the revised Pilot has excluded securities 
that trade fewer than 30,000 shares per day, as they are less likely to 
provide actionable data.
---------------------------------------------------------------------------

    \220\ See, e.g., Decimus Letter, at 5 (observing that ``claims 
on the existence of unambiguous harm to liquidity appear to be 
exaggerated and driven by preconceived notions''). See also Section 
IV infra (discussing the uncertainty of the Pilot's outcomes).
---------------------------------------------------------------------------

    This lack of empirical clarity is reflected in the divergent views 
of commenters who offered conflicting predictions of the outcome of a 
no-rebate Test Group. For example, one commenter questioned whether 
rebates were necessary to attract displayed liquidity, opining that 
``[p]ublic data shows that inverted and flat-fee exchanges often have 
quotes on both sides of the NBBO, which shows that market participants 
are willing to pay these exchanges to post quotes at the NBBO based on 
their intrinsic desire to trade and not just in response to an exchange 
rebate'' \221\ (emphasis in original). In response, one exchange 
commenter suggested that Cboe EDGA Exchange, which does not pay 
rebates, has wider spreads for displayed liquidity as compared to Cboe 
EDGX Exchange, which does pay rebates for posting liquidity.\222\ A 
different commenter did not ``anticipate a material widening for the 
most liquid names (where rebates aren't necessary to incentivize 
liquidity providers) or the most illiquid names (where rebates aren't 
sizable enough to incentivize liquidity providers),'' and instead 
anticipated ``a likely outcome of increased spreads for the middle tier 
of

[[Page 5220]]

securities, where rebates have perhaps kept spreads artificially 
narrow.'' \223\
---------------------------------------------------------------------------

    \221\ IEX Letter II, at 7.
    \222\ See NYSE Letter II, at 2. One commenter questioned NYSE's 
analysis in this regard, noting that in general EDGA's volume is 
limited to ``the most liquid names.'' This commenter stated that 
NYSE ``distorts the real likely impact of the [P]ilot'' by including 
spreads on less liquid securities. See Mulson Letter II, at 2.
    \223\ Citi Letter, at 3-4. See also Credit Suisse Commentary, at 
3.
---------------------------------------------------------------------------

    Another commenter believed that quoted prices are ``almost always 
set by natural investors'' and therefore, ``[r]emoving rebates will not 
disrupt the desire of natural investors to post liquidity and tighten 
spreads.'' \224\ In response, one commenter was ``skeptical'' about 
this and stated that ``it is not realistic for the buy-side to be 
continuously active on both sides of the market across all stocks 
impacted by the Transaction Fee Pilot.'' \225\ That said, another 
commenter, which also is a listed issuer, stated that it did not 
``expect that a reduction or outright removal of rebates will have any 
significant or harmful effects on the quality of prices displayed in 
the public lit market, interfere with genuine liquidity and price 
formation, or negatively impact [its] stock's trading volume, spread or 
displayed size.'' \226\
---------------------------------------------------------------------------

    \224\ See Mulson Letter I, at 1. See also IEX Letter II, at 6.
    \225\ NYSE Letter II, at 11.
    \226\ See T. Rowe Price Letter, at 5.
---------------------------------------------------------------------------

    The Commission believes that the significant disagreement among 
commenters on the potential impacts of prohibiting rebates demonstrates 
the need to include a no-rebate bucket in the Pilot. For example, it is 
unclear what effect--if any--the payment of a rebate has on a stock 
that trades over 10 million shares per day with an average natural 
quoted spread width constrained by the minimum trading increment of 
$0.01. Likewise, it is unclear what effect--if any--the payment of a 
rebate has on a stock that trades less than 100,000 shares per day with 
an average quoted spread of $0.10 or more. In either case, the absence 
of rebates may have little or no effect on quotes or competition for 
natural order flow in such securities. Data is needed to empirically 
evaluate commenters' diverging views of the effect of rebates. The 
Pilot is designed to produce this and other data.
    By prohibiting rebates in one Test Group the Pilot should produce 
results that facilitate a direct study of the effect of rebates, 
including on fees, order routing, execution quality, and market 
quality.\227\ The Commission believes that the no-rebate Test Group 
will provide useful information on trading in the absence of rebates 
that will facilitate a data-driven approach to better understand the 
role and effect of rebates in our current market structure. The results 
generated by this Test Group will allow researchers to study the 
relationship between rebates and quoted spreads for stocks of varying 
liquidity profiles and market capitalizations. It also will allow 
market participants to directly test with their own order flow whether, 
in the absence of rebates in the most actively traded stocks, they are 
better able to compete for queue priority and thereby capture the 
quoted spread when posting liquidity.\228\ Therefore, the Commission 
continues to believe that the Pilot will be substantially more 
informative with a no-rebate bucket and the value of generating that 
information to inform the Commission's consideration of the effect of 
exchange transaction fee models justifies proceeding with the Pilot to 
better inform both sides of the rebate debate with data to test their 
hypotheses.
---------------------------------------------------------------------------

    \227\ See Proposing Release, supra note 2, at 13022-23.
    \228\ See, e.g., T. Rowe Price Letter, at 2; Brandes Letter, at 
1-2; Babelfish Letter, at 2.
---------------------------------------------------------------------------

    In summary, the Commission has carefully considered commenters' 
suggested alternatives and whether to include the no-rebate feature in 
the Pilot, and in light of the important regulatory purpose the Pilot 
is designed to achieve, the Commission has determined that, for the 
reasons discussed throughout, it is important to have a Test Group that 
specifically focuses on the removal of rebates and the corresponding 
impact on conflicts of interest, execution quality, and market quality.
    Finally, one commenter asserted that banning rebates ``presents [a] 
misapplication of Rule 610(c)'' because the Commission has never before 
banned rebates.\229\ While neither Rule 610(c), nor any other 
Commission rule, currently prohibits a national securities exchange 
from paying a rebate to provide or remove liquidity, the Commission 
does not believe that the no-rebate Test Group misapplies Rule 610(c), 
or any other rule. The no-rebate Test Group is not based on or related 
to Rule 610(c). Rule 610(c) caps fees for removing a protected 
quotation, whereas the no-rebate Test Group does not further limit fees 
and instead prohibits rebates, among other things. Indeed, the Rule 
610(c) fee cap continues to apply--unchanged and in its entirety--to 
the no-rebate Test Group.
---------------------------------------------------------------------------

    \229\ See Cboe Letter I, at 12-13. See also Section II.G 
(responding to comments regarding the Commission's legal authority 
to conduct the Pilot).
---------------------------------------------------------------------------

    The data generated by the Pilot will help empirically assess, in 
light of changing market conditions, whether the existing transaction-
based fee and rebate structure continues to further the statutory 
goals.\230\ Importantly, while exchanges would retain the ability to 
charge transaction fees as high as the current $0.0030 cap in the no-
rebate Test Group, they would no longer need to charge transaction fees 
at levels priced to offset the rebates they formerly paid. Accordingly, 
the no-rebate Test Group is intended to test, within the current 
Regulation NMS regulatory structure, natural equilibrium pricing for 
transaction fees.
---------------------------------------------------------------------------

    \230\ For example, if take fees are set at levels to subsidize 
maker rebates, and if those rebates have little or no impact on 
quoted spreads of certain NMS stocks, then the take fees on trades 
in those stocks may constitute a tax on takers of liquidity without 
a corresponding benefit to the market.
---------------------------------------------------------------------------

f. Application to Depth-of-Book and Non-Displayed Liquidity
    Several commenters supported applying the prohibition on rebates in 
the no-rebate Test Group to depth-of-book and non-displayed liquidity 
as they believed it would avoid the risk that the Pilot's results could 
be subject to distortions if exchanges continue to offer rebates for 
depth-of-book and non-displayed liquidity.\231\ In contrast, two 
exchange commenters opposed this aspect of the proposal. One 
characterized this aspect of the proposal as an ``unjustified pricing 
restriction[ ]'' that was part of a ``new regulatory scheme . . . .'' 
\232\ The other argued that ``[t]he Proposal lacks internal coherence'' 
in that it excludes ATSs ``because they do not have protected quotes, 
but then includ[es] unlit exchange orders that also are unprotected.'' 
\233\
---------------------------------------------------------------------------

    \231\ See, e.g., Clark-Joseph Letter, at 2; Clearpool Letter, at 
3 n.6; Healthy Markets Letter I, at 18; IEX Letter I, at 7.
    \232\ NYSE Letter I, at 12.
    \233\ Nasdaq Letter I, at 6.
---------------------------------------------------------------------------

    For the reasons stated in the Proposing Release, the Commission 
continues to believe that allowing exchanges to continue to offer 
rebates in the no-rebate Test Group for depth-of-book and non-displayed 
orders could substantially distort the Pilot results.\234\ The no-
rebate Test Group is designed to test the absence of exchange 
transaction rebates. It would weaken the Pilot's results to prohibit 
rebates on displayed orders but allow them on non-displayed orders, as 
the Pilot would not be able to collect data on what would happen in the 
absence of rebates. Only by prohibiting the payment of all rebates in 
one Test Group will the Commission be able to gather data on a pure 
``no rebate'' environment, thereby facilitating a direct observation of 
the impact of rebates on order routing behavior, execution quality, and 
market quality

[[Page 5221]]

when compared to the other Test Group and Control Group.
---------------------------------------------------------------------------

    \234\ See Proposing Release, supra note 2, at 13023.
---------------------------------------------------------------------------

    As noted above, the Commission received a significant number of 
comments in support of directly studying the effects of prohibiting 
rebates.\235\ In order to avoid the potential distortion from a too-
narrowly-tailored Test Group that focuses only on one type of rebate 
but ignores another, the Commission believes that prohibiting rebates 
on all exchange volume--including depth-of-book and non-displayed 
liquidity--is necessary to generate the most useful Pilot results on 
the effect of exchange transaction rebates broadly.
---------------------------------------------------------------------------

    \235\ See supra note 215.
---------------------------------------------------------------------------

    In addition, the Commission believes that the no-rebate Test 
Group's application to depth-of-book and non-displayed orders is 
consistent with the Commission's decision to exclude ATSs, which do not 
have protected quotes.\236\ As discussed above, ATSs are excluded from 
the Pilot based on a number of reasons, including the materially 
different treatment of exchange fees under the current federal 
securities laws and their lack of a protected quotation. With respect 
to the no-rebate Test Group, it would be incoherent for the Commission 
to purport to test a prohibition on exchange transaction-based rebates 
but do so only for some rebates (i.e., on displayed interest) while 
ignoring the potential for exchanges to pay rebates on non-displayed 
liquidity and depth-of-book interest.\237\ The possibility that an 
exchange could offer rebates for non-displayed and depth-of-book 
quotes, while eliminating them on displayed interest, could present a 
loophole with the potential to undermine the design of the no-rebate 
Test Group and distort the Pilot results for the no-rebate Test Group, 
rendering the results of the Pilot's ``no-rebate'' Test Group incapable 
of speaking to the impact of rebates.
---------------------------------------------------------------------------

    \236\ Cf. supra note 233.
    \237\ Price-time priority (where orders are prioritized for 
execution based on ranking by price and, when two orders are at the 
same price, by time of entry), generally does provide the ability 
for an incoming order to bypass non-displayed liquidity.
---------------------------------------------------------------------------

g. Maintaining Rule 610(c) Access Fee Cap
    Two commenters recommended that, unlike Rule 610(c), the no-rebate 
Test Group go beyond Rule 610(c) to also prohibit exchanges from 
charging fees in excess of $0.0030 to provide displayed liquidity.\238\ 
As noted in the Proposing Release, the no-rebate Test Group is designed 
specifically to test, within the current regulatory structure, natural 
equilibrium pricing for transaction fees in an environment where 
exchange transaction-based rebates are prohibited.\239\ While this 
would theoretically allow an exchange to charge fees in excess of 
$0.0030 to provide liquidity, the Commission notes that several 
exchanges stated that one of the perceived benefits in providing 
rebates to liquidity providers is that it facilitates narrower spreads 
and therefore believes it is unlikely exchanges would charge such 
higher fees during the Pilot.\240\
---------------------------------------------------------------------------

    \238\ See Healthy Markets Letter I, at 18; CFA Letter, at 6-7.
    \239\ See Proposing Release, supra note 2, at 13023.
    \240\ See supra notes 217-218 and accompanying text.
---------------------------------------------------------------------------

    One commenter expressed concerns that the no-rebate Test Group 
would ``provide exchanges with the flexibility to propose a variety of 
new fee structures for liquidity-taking orders,'' which could create 
new conflicts for brokers routing customer orders.\241\ Accordingly, 
this commenter believed that the no-rebate Test Group should instead 
impose a fee cap of $0.0002, where the expectation would be that 
rebates would be lowered to a de minimis amount and the Pilot would be 
more symmetrical and thereby more effective in analyzing broker order 
routing practices.\242\ The Commission continues to believe that in 
light of the current debate surrounding the potential conflict of 
interest posed by the payment of rebates and potential effects they may 
have on the markets, including the many comments received in response 
to the Proposal, the Pilot will be substantially more informative with 
a no-rebate bucket than a bucket that dramatically lowers the fee cap 
assuming that rebates would follow. While reducing the fee cap to 
$0.0002 would reduce the likelihood that an exchange would offer 
rebates at current levels (assuming the exchange desired to fund 
transaction-based rebates only through transaction-based fees), 
exchanges would retain the ability to pay rebates and could subsidize 
them from other sources of revenue leading to rebates that greatly 
exceed $0.0002. In contrast, only a complete prohibition on rebates 
will permit researchers to observe directly the impact of rebates on 
order routing behavior, execution quality, and market quality, and 
compare this Test Group to the Control Group and the other Test Group 
where rebates can continue to be offered. Further, imposing a fee cap 
of $0.0002 instead of prohibiting rebates would not allow Test Group 2 
to test, within the current Regulation NMS regulatory structure, 
natural equilibrium pricing for transaction fees, particularly if the 
cap is below where the natural equilibrium price would otherwise be 
found.
---------------------------------------------------------------------------

    \241\ See Citadel Letter, at 5.
    \242\ See id.
---------------------------------------------------------------------------

    Two commenters expressed concern that because exchanges can 
continue to charge access fees of up to $0.0030 per share in the no-
rebate Test Group, they may fail to engage in competition on fees.\243\ 
In contrast, another commenter believed that, in the no-rebate Test 
Group, ``the fee for removing liquidity could still move closer to zero 
in order for exchanges to incentivize takers in the absence of 
rebates.'' \244\ The Commission believes that observing price 
competition in the absence of any distortive effects caused by rebates 
is an important aspect of the Pilot. Accordingly, the no-rebate Test 
Group is intended to test, within our current regulatory structure, 
whether competitive market forces are sufficient to produce natural 
equilibrium pricing for transaction fees in the absence of rebates.
---------------------------------------------------------------------------

    \243\ See Fidelity Letter, at 9; Citadel Letter, at 5.
    \244\ Credit Suisse Commentary, at 4.
---------------------------------------------------------------------------

h. Prohibiting Linked Pricing
    In connection with prohibiting rebates, the no-rebate Test Group 
also would prohibit Linked Pricing, such that an exchange would be 
prohibited from adopting any discounts on transaction fees to remove 
(i.e., ``take'') liquidity where that discount is determined based on 
the broker-dealer's posted (i.e., ``make'') volume on the exchange, 
which would result in the broker-dealer paying a lower take fee in 
return for providing a certain level of liquidity on the exchange.\245\
---------------------------------------------------------------------------

    \245\ See Proposing Release, supra note 2, at 13023. The 
Commission notes that most exchanges also utilize tiering in their 
pricing models in which they offer lower fees or larger credits in 
return for additional volume. See, e.g., Spatt Letter, at 4; RBC 
Letter II, at 4.
---------------------------------------------------------------------------

    Some commenters that addressed the prohibition on Linked Pricing 
were supportive of the proposal and generally believed that the 
prohibition would preserve the integrity of the Pilot and facilitate an 
environment where exchanges are able to set transaction fees at a 
natural equilibrium level.\246\ In contrast, two exchange commenters 
opposed the prohibition.\247\ Specifically, one commenter characterized 
this aspect of the proposal, in conjunction with the prohibition on 
rebates, as an ``unjustified pricing restriction'' that is ``unrelated 
to Regulation NMS's Access

[[Page 5222]]

Fee Cap.'' \248\ As discussed above, the no-rebate Test Group, 
including the Linked Pricing prohibition, is not based exclusively on 
the Rule 610(c) fee cap.
---------------------------------------------------------------------------

    \246\ See, e.g., Capital Group Letter, at 3; IEX Letter I, at 7.
    \247\ See NYSE Letter I, at 12; Cboe Letter I, at 10.
    \248\ NYSE Letter I, at 12.
---------------------------------------------------------------------------

    The Commission continues to believe that prohibiting Linked Pricing 
supports the objective of the no-rebate Test Group, which is to gather 
data on the impact of creating an environment where fee levels are not 
potentially distorted by the rebates they subsidize and rebates do not 
influence routing, particularly for customer orders.\249\ In the 
absence of a Linked Pricing prohibition, exchanges could use make 
(take) volume to subsidize take (make) activity, which could perpetuate 
the cross-subsidization of fees. For example, if an exchange adopts 
Linked Pricing for the no-rebate Test Group securities, it might offer 
a discounted transaction fee to remove liquidity only to those market 
participants that post a certain volume on the exchange. Perpetuating 
this potential distortion could cloud the Pilot results for the no-
rebate Test Group if the Linked Pricing incentive interferes with the 
Pilot's ability to isolate and analyze the impacts on fees and routing 
that the no-rebate Test Group is designed to study.
---------------------------------------------------------------------------

    \249\ See Proposing Release, supra note 2, at 13023-24.
---------------------------------------------------------------------------

    Two commenters recommended that the Commission also prohibit an 
exchange from offering any inducement, including discounts on non-
transaction fees, such as those for market data, co-location, or 
connectivity ports, which are linked to trading volumes in the no-
rebate Test Group.\250\ The Commission is not expanding the application 
of the Linked Pricing prohibition in the manner suggested by these 
commenters. The Pilot, and the no-rebate Test Group specifically, is 
designed to test the extent to which transaction fees and rebates 
create conflicts of interest that influence order routing or introduce 
distortions that impede execution quality and market quality. The Pilot 
is not designed to eliminate or control for all potential inducements 
to transact on a particular market and the Commission believes that 
expanding the Pilot to a wider array of variables could inhibit the 
Pilot's ability to isolate the impacts of exchange transaction-based 
rebates and the effects they may have.\251\
---------------------------------------------------------------------------

    \250\ See RBC Letter I, at 3; MFS Letter, at 2-3.
    \251\ As is the case for any fee or fee change an exchange 
adopts, if an exchange were to propose such a fee change it would 
need to analyze in its Form 19b-4 filing how its fee change 
constitutes an ``equitable allocation'' of ``reasonable'' fees and 
how it is not ``unfairly discriminatory.'' See 15 U.S.C. 
78s(b)(3)(A)(ii).
---------------------------------------------------------------------------

    Further, two commenters requested the Commission to clarify that 
the Linked Pricing prohibition applies across Test Groups such that 
exchanges may not tie rebates or transaction fee discounts in another 
Test Group to volume in the no-rebate Test Group.\252\ As previously 
stated in the Proposal, the no-rebate Test Group is designed to gather 
data on the impact of creating an environment where fee levels are not 
potentially distorted by rebates and rebates do not influence routing. 
In proposing the Linked Pricing prohibition, the Commission recognized 
that a Linked Pricing arrangement could potentially distort transaction 
fee pricing if fees continue to be set at a subsidy level above their 
natural equilibrium, and it also could perpetuate the potential 
conflicts of interest associated with rebates and order routing. Any 
Linked Pricing incentives offered by exchanges that are linked, or 
otherwise related to, posting or removing liquidity in Pilot Securities 
included in the no-rebate Test Group would contradict the Commission's 
intent for the no-rebate Test Group and frustrate the ability of the 
Pilot to generate useful data in that group. Accordingly, the Linked 
Pricing prohibition in Test Group 2 prohibits exchanges from offering 
any discounts or incentives on transaction fees that are linked to 
activity, whether it be posting or removing activity, in any securities 
included in Test Group 2, as well as prohibits exchanges from offering 
Linked Pricing arrangements in Test Group 2 securities that are based 
on, or include, activity in any Pilot Securities.
---------------------------------------------------------------------------

    \252\ See IEX Letter I, at 7-8; Norges Letter, at 2.
---------------------------------------------------------------------------

    In addition, one commenter ``suggest[ed] that the linked pricing 
prohibition should extend to auction fees or any other transaction fees 
charged by the exchange,'' as ``[c]losing auction fees, especially, are 
a significant source of listing market revenue, and . . . discounts on 
these fees could likewise lead to the distortions described by the 
Commission (or even to increases in auction fees to other participants 
to fund the targeted discounts).'' \253\ Because Rule 610T(a)(3) 
prohibits exchanges from providing a discount or incentive on 
transaction fees applicable to removing (providing) liquidity that is 
linked to providing (removing) liquidity, and auction fees are 
``transaction fees,'' the Linked Pricing prohibition applies to auction 
fees. Exchanges will not be permitted to consider make (take) volume 
during intraday trading when calculating auction fees, as such an 
arrangement would perpetuate potential distortions associated with fee-
and-rebate pricing models including the cross-subsidization of fees.
---------------------------------------------------------------------------

    \253\ IEX Letter I, at 7.
---------------------------------------------------------------------------

i. Linked Pricing Market Maker Exception
    The Commission proposed an exception to the Linked Pricing 
prohibition to permit an exchange to adopt new rules to provide non-
rebate Linked Pricing to its registered market makers during the Pilot 
in consideration for the market maker meeting rules-based market 
quality metrics.\254\ The Commission explained that to qualify for this 
limited exception, an exchange would need to propose market making 
standards in a rule change filing submitted pursuant to Section 
19(b)(2) of the Exchange Act, and also would need to propose the fee 
incentive it would provide for meeting those standards.\255\
---------------------------------------------------------------------------

    \254\ See Proposing Release, supra note 2, at 13024.
    \255\ See id. at 13024 n.140.
---------------------------------------------------------------------------

    Several commenters requested further clarification about the market 
maker exception to the prohibition on Linked Pricing. Specifically, one 
commenter recommended that the Commission provide additional detail 
about the types of market quality metrics upon which access to Linked 
Pricing is contingent.\256\ Other commenters believed that it is 
important that any such standards adopted by exchanges be sufficiently 
stringent to prevent market participants from availing themselves of 
Linked Pricing in a manner that would jeopardize the ability of the no-
rebate Test Group to provide valuable data on the impact of the absence 
of rebates (or a rebate-like incentive) on order routing behavior, 
execution quality, and market quality or that would permit market 
participants to unfairly exploit this aspect of the Pilot.\257\
---------------------------------------------------------------------------

    \256\ See Clark-Joseph Letter, at 2-3.
    \257\ See, e.g., Brandes Letter, at 2; Themis Trading Letter I, 
at 3; CFA Letter, at 7; Clearpool Letter, at 4; Healthy Markets 
Letter I, at 33; Decimus Letter, at 6 n.22.
---------------------------------------------------------------------------

    The Commission continues to believe that permitting exchanges to 
adopt rules to offer Linked Pricing to their registered market makers 
for securities in the no-rebate Test Group preserves the ability of an 
exchange to attract market makers through non-rebate incentives and 
thereby helps maintain the baseline framework in which exchanges can 
provide incentives to their registered market makers.\258\ Commenters 
highlighted the importance of ensuring that any new rules that 
exchanges propose to provide Linked Pricing to registered market makers 
in the no-rebate Test Group be designed so as to not inhibit the 
Pilot's ability to

[[Page 5223]]

generate useful data on the impact of rebates on order routing 
behavior, execution quality, and market quality. The Commission agrees 
that if they are not narrowly tailored, these non-rebate incentive 
programs could continue to potentially distort transaction fee pricing, 
particularly if the exchange's fees are set at a subsidy level above 
the natural equilibrium within the current regulatory structure to 
subsidize these market maker incentives.
---------------------------------------------------------------------------

    \258\ See Proposing Release, supra note 2, at 13024.
---------------------------------------------------------------------------

    Rather, the market maker exception to Linked Pricing is intended to 
permit an exchange to impose rules for its registered market makers in 
ways that would improve its market in a meaningful way, such that it 
could use the enhanced liquidity provided by its registered market 
makers to improve its displayed quotation and thereby attract buyers 
and sellers to the exchange.\259\ The non-rebate incentives would only 
apply to trading activity by a registered market maker in its capacity 
as a market maker (i.e., acting as principal), and would not apply to 
any customer activity or activity from other trading desks or business 
units affiliated with the market maker (and possibly using the same 
MPID), be it agency, principal or riskless principal trading, traded by 
or through such market maker. Accordingly, only a registered market 
maker's principal trading activity in its capacity as a registered 
market maker in the no-rebate Test Group would be able to satisfy any 
market quality metrics, and the only trades that would be eligible to 
receive the non-rebate incentive pricing would be a registered market 
maker's principal trades in its capacity as a registered market maker 
in the no-rebate Test Group securities.
---------------------------------------------------------------------------

    \259\ See id. While it will be up to each individual exchange to 
design market quality metrics for offering non-rebate Linked Pricing 
to their registered market makers, such metrics could include, for 
example: (1) Requirements to trade to stabilize the market; (2) 
requirements on consecutive price changes and price continuity; (3) 
material time quoting on both sides of the NBBO; (4) materially 
enhanced quoted depth on both sides of the NBBO; (5) frequency of 
setting an improved BBO on the exchange; (6) frequency of setting an 
improved NBBO; and (7) compliance with narrow maximum quote widths.
---------------------------------------------------------------------------

8. Control Group
    The Commission proposed that Pilot Securities that are not placed 
in one of the Test Groups would be placed in the Control Group.\260\ 
One commenter addressed the Control Group and supported the 
Commission's proposed approach.\261\ The Commission continues to 
believe that a control group is vital to test the effects of fee 
changes in the Test Groups, as a control group subject to the current 
access fee cap would provide an appropriate baseline for analyzing the 
effects of the Pilot against the status quo.\262\ For these reasons and 
the reasons discussed in the Proposing Release, the Commission is 
adopting the Control Group as proposed, which will be subject to the 
current Rule 610(c) access fee cap.\263\
---------------------------------------------------------------------------

    \260\ See Proposing Release, supra note 2, at 13024.
    \261\ See Healthy Markets Letter I, at 19.
    \262\ See id.
    \263\ See 17 CFR 242.610(c). Consistent with Rule 610(c), the 
Control Group will only cap fees for taking (removing) a protected 
quotation; it will not apply to fees for posting liquidity or 
otherwise cap or prohibit rebates. See also Proposing Release, supra 
note 2, at 13024.
---------------------------------------------------------------------------

9. Alternative Designs
a. Include a Trade-At Requirement
    In the Proposing Release, the Commission asked whether the Pilot 
should include a ``trade-at'' provision that would restrict price 
matching of protected quotations.\264\ Several commenters supported 
including a trade-at requirement because they believed doing so would 
increase the amount of liquidity available on exchanges and thereby 
further price discovery.\265\
---------------------------------------------------------------------------

    \264\ See Proposing Release, supra note 2, at 13025. A ``trade 
at'' provision would require that orders be routed to a market with 
the best displayed price or be executed at a materially improved 
price.
    \265\ See e.g., Adorney Letter, at 1; Birch Bay Letter, at 1. In 
addition, in clarifying its position on rebates in equity market 
structure, NYSE stated that it could support a prohibition on 
rebates if ``done in a measured manner that creates an offsetting 
incentive to display liquidity, such as a `Trade At' provision[ ]'' 
which the Pilot does not provide. NYSE Letter II, at 5.
---------------------------------------------------------------------------

    In contrast, other commenters opposed including a trade-at 
requirement as they believed doing so would increase the Pilot's 
complexity; impact the ability of the data to assess the impact of 
transaction fees and rebates on order routing, execution quality, and 
market quality; be inconsistent with, or unnecessary for, a study of 
the issues pertinent to the Pilot; and be anti-competitive.\266\ In 
addition, two commenters noted that a trade-at requirement would not be 
necessary because the reduction in the fee cap ultimately could result 
in more volume being executed on exchanges.\267\
---------------------------------------------------------------------------

    \266\ See, e.g., MFA Letter, at 3; ICI Letter I, at 3; BlackRock 
Letter, at 2; FIA Letter, at 5; SIFMA Letter, at 4; Fidelity Letter, 
at 10; Citadel Letter, at 6-7; Citi Letter, at 3.
    \267\ See SIFMA Letter, at 4; Citi Letter, at 3.
---------------------------------------------------------------------------

    The Commission believes that adding a trade-at requirement would 
unnecessarily complicate the Pilot in a manner that would increase 
costs on market participants and potentially impact the ability of the 
Pilot to isolate the effects of changes in exchange transaction fees 
and rebates. Accordingly, the Commission is not including a trade-at 
requirement in the Pilot. If the Pilot were to also assess the impact 
of a trade-at requirement, it would need to increase the number of Test 
Groups, thereby increasing the number of securities included in the 
Pilot, to be able to isolate the effects of a trade-at requirement 
separately from the effects of changes in exchange transaction fees and 
rebates. The Commission believes any potential benefits from analyzing 
the impact of a trade-at requirement do not justify the additional 
costs that expanding the Pilot would impose. Rather than introduce 
another variable into the Pilot, the Commission believes that the Pilot 
should remain focused on permitting an analysis, in the context of our 
current market structure, of the effect of exchange transaction fees 
and rebates. Further, the Commission notes that the Tick Size Pilot 
featured a trade-at test group, so as that pilot's post-pilot period 
concludes, the Commission will have access to current data to analyze 
the impact of a trade-at prohibition in the context of that pilot.\268\
---------------------------------------------------------------------------

    \268\ See also infra Section IV.E (discussing trade-at).
---------------------------------------------------------------------------

b. No Fee Cap Test Group
    Several commenters advocated for including a Test Group that does 
not cap transaction fees, believing that it is important to test 
whether competition alone can constrain pricing and result in a natural 
equilibrium transaction fee.\269\ One commenter noted that currently 
fees tend to ``cluster'' at the access fee cap imposed by Rule 610(c) 
and as such recommended including an additional Test Group that does 
not cap fees.\270\
---------------------------------------------------------------------------

    \269\ See, e.g., Clark-Joseph Letter, at 2; Nasdaq Letter I, at 
13; Cboe Letter I, at 27-28.
    \270\ See Barnard Letter, at 1. Another commenter recommended 
including a Test Group that did not cap fees because it believed 
that the current structure encourages exchanges to charge fees for 
data feeds and technology services, which the commenter suggests are 
higher than they otherwise would be if transaction fees were not 
capped. See Modern IR Letter, at 3.
---------------------------------------------------------------------------

    When it adopted Rule 610(c), the Commission explained that the 
access fee cap is necessary to, among other things, inhibit the ability 
of exchanges to take advantage of the Order Protection Rule by acting 
as a ``toll booth'' between price levels and ensure that quotations are 
fair and useful by limiting the ability of high fees to distort the 
price of displayed limit orders.\271\
---------------------------------------------------------------------------

    \271\ NMS Adopting Release, supra note 10, at 37545.
---------------------------------------------------------------------------

    The Commission believes that the no-rebate Test Group will permit 
analysis of the impact of competitive forces on fees in the absence of 
current practices

[[Page 5224]]

that use fees to subsidize those rebates. Specifically, to the extent 
exchanges will no longer need to charge access fees up to $0.0030 to 
subsidize rebates in that Test Group, the Commission believes that 
competitive forces among the exchanges may result in fees approaching a 
new equilibrium level, within the current regulatory structure, for 
stocks in the no-rebate Test Group.\272\
---------------------------------------------------------------------------

    \272\ See, e.g., Goldman Sachs Letter, at 2 (characterizing 
$0.0030 as an ``outdated benchmark'' that ``is too high and far from 
representative of true prices in the marketplace'').
---------------------------------------------------------------------------

    The Commission notes that the order protection requirements of 17 
CFR 242.611 (Rule 611) will continue to apply to all of the Pilot 
Securities including those in the no-rebate Test Group. As such, the 
basis for imposing a fee cap (summarized above) remains intact during 
the Pilot and the Commission believes that applying the current fee cap 
to the no-rebate Test Group will guard against the possibility, albeit 
highly unlikely, that an outlier exchange could seek to charge 
exorbitant fees for the no-rebate Test Group stocks that would be 
inconsistent with the rationale behind the Rule 610(c) fee cap.\273\
---------------------------------------------------------------------------

    \273\ The Commission notes that the Proposal included a question 
regarding whether a fee cap would continue to be necessary to 
constrain exchange pricing if equilibrium pricing is achieved and 
the Commission expects that some market participants may analyze the 
Pilot results for answers to this question. See Proposing Release, 
supra note 2, at 13025.
---------------------------------------------------------------------------

c. Basis Point Pricing
    Two commenters recommended that, because stock prices have 
increased (i.e., a number of high profile stocks currently trade above 
$100 per share), using basis point pricing may be a better reference 
point than using the current access fee cap because the current access 
fee cap can impact stocks differently based on their price.\274\ 
Specifically, one of these commenters proposed that ``Test Group 1 
contain the same constraints as Test Group 3 but with an access fee 
limitation expressed in basis points.'' \275\ However, the Commission 
believes that doing so would increase the Pilot's complexity and could 
interfere with the Pilot's ability to provide useful data to assess the 
impact of the current exchange fee models on order routing behavior, 
execution quality, and market quality because exchange transaction fees 
and rebates are currently not assessed in basis points and thus this 
would introduce a new variable into the Test Group as it could raise or 
lower the fees depending on a stock's share price, which can vary over 
time. The more variables that are introduced, the more difficult it 
could be to isolate the effects of a particular change and uncover 
causal connections. Accordingly, the Commission is not adopting a 
requirement that one of the Test Groups include an access fee cap 
expressed in basis points.
---------------------------------------------------------------------------

    \274\ See Clearpool Letter, at 3; Cboe Letter II, at 8-9. 
Another commenter also stated that it thought it was ``a worthwhile 
exercise to explore the possibility of a move to basis points. . . . 
'' See Citi Letter, at 6.
    \275\ See Clearpool Letter, at 3.
---------------------------------------------------------------------------

d. Higher Fee Caps and Fees Based on Tick Size
    Four commenters addressed a question in the Proposing Release about 
including a Test Group that would allow for access fees higher than the 
current cap under Rule 610(c).\276\ One of these commenters 
specifically recommended reducing access fees to $0.0005 per share for 
the most liquid securities, while imposing gradually higher access fees 
for stocks of lower liquidity, up to a cap of potentially $0.0050 for 
the least liquid securities.\277\ Another commenter recommended 
including an additional Test Group with an access fee cap of $0.0040, 
believing this would provide data to test whether an increase in the 
fee cap reduces bid-ask spreads in light of the many comments 
contending that spreads will increase in conjunction with lower rebates 
connected to a reduced access fee cap.\278\ In addition, one commenter 
suggested that if tick sizes were set based on the characteristics of 
an individual stock, the transaction fee cap could then be a particular 
percentage of the tick size.\279\ Such an approach could result in an 
access fee cap above $0.0030 per share for certain securities.
---------------------------------------------------------------------------

    \276\ See Nasdaq Letter I, at 13; TD Ameritrade Letter, at 6; 
Angel Letter II, at 2; Cboe Letter II, at 8.
    \277\ See TD Ameritrade Letter, at 6.
    \278\ See Angel Letter II, at 2. See also Cboe Letter II, at 8.
    \279\ See Morgan Stanley Letter, at 3.
---------------------------------------------------------------------------

    The Commission has carefully considered these suggestions. As 
discussed above, other commenters have noted that the current access 
fee cap was set thirteen years ago when markets and technology were 
markedly different.\280\ Indeed, a few commenters argued it was 
outdated and too high.\281\ Accordingly, the Commission does not 
believe that raising the access fee cap to levels that are above what 
trading centers were charging thirteen years ago necessarily is 
consistent with the technological efficiencies that have been realized 
in the intervening years. While market-based solutions and even 
regulatory responses to enhance the investor experience with trading in 
thinly-traded securities are worthy of attention, and were the subject 
of a recent Division of Trading and Markets staff roundtable, the 
Commission does not believe that the Pilot should introduce the 
potential for higher rebates--and the further exacerbated distortions 
that would likely accompany them--when it is attempting to study the 
effect of the current exchange fee models and fee and rebate 
levels.\282\ Accordingly, the Commission is not adopting a higher fee 
cap in any of the Pilot's Test Groups.
---------------------------------------------------------------------------

    \280\ See supra note 200 and accompanying text.
    \281\ See id.
    \282\ See Transcript of the Division of Trading and Markets' 
Roundtable on Market Structure for Thinly-Traded Securities (April 
23, 2018), available at https://www.sec.gov/spotlight/equity-market-structure-roundtables/thinly-traded-securities-rountable-042318-transcript.txt.
---------------------------------------------------------------------------

e. Order Protection Rule
    The Commission solicited comment on whether it would be appropriate 
to suspend the Rule 611 order protection requirements in one or more 
Test Groups.\283\ In response, three commenters opposed eliminating the 
order protection requirements within the Pilot because doing so would 
increase the cost and complexity of the Pilot, and also could 
complicate analysis of the Pilot's results to the extent it clouded the 
focus on transaction fees and rebates.\284\
---------------------------------------------------------------------------

    \283\ See Proposing Release, supra note 2, at 13025.
    \284\ See SIFMA Letter, at 4; JPMorgan Letter, at 3; Schwab 
Letter, at 3 (also stating that eliminating Rule 611 for certain 
Pilot Securities ``would significantly negatively impact retail 
order flow and the quality of trade execution'').
---------------------------------------------------------------------------

    In contrast, one commenter recommended eliminating the order 
protection requirements for securities in the no-rebate Test 
Group.\285\ This commenter stated that prohibiting rebates is 
insufficient to ``remove the perceived or real conflicts on broker 
routing or materially address'' various negative effects that the 
commenter believed Rule 611 has had on the equities markets.\286\
---------------------------------------------------------------------------

    \285\ See T. Rowe Price Letter, at 2-4.
    \286\ See id. at 4.
---------------------------------------------------------------------------

    After considering the comments received, the Commission believes 
that the Pilot should not introduce additional variables by, in this 
case, removing the Rule 611 protected quotation status for automated 
quotations in any particular Test Group. In order to add a new variable 
to the Pilot, the Commission would need to include additional Test 
Groups and increase the number of securities in order to be able to 
isolate separately the effects of each variable that is included

[[Page 5225]]

in the Pilot or else it would create an asymmetric Pilot that would 
make it more difficult to evaluate the data and establish causal 
inferences regarding the impacts of changes to exchange transaction 
fees and rebates. As discussed above, most commenters were critical of 
the Pilot's proposed size. The Commission desires to have a narrowly 
tailored pilot focused on generating useful data on the impact of 
exchange fees and rebates on order routing behavior, execution quality, 
and market quality. Adding another variable to the Pilot would increase 
the Pilot's complexity as well as costs of the Pilot.
f. Other Ideas for Additional Test Groups and Related Questions
    In addition to the above questions, the Commission asked a number 
of other questions in the Proposing Release to solicit commenters' 
opinions on equities market structure issues and whether the Pilot 
should be used as a vehicle to further investigate other related areas. 
The Commission received a few comments on these points. For example, in 
response to a question about whether commenters believe the minimum 
trading increment should be reduced for the most actively traded NMS 
stocks if the Pilot's data suggests that rebates do not significantly 
improve market quality or execution quality for these securities, one 
commenter stated it ``would strongly support inclusion of a half-penny 
spread bucket, or consideration of a separate small-tick pilot for 
highly liquid stocks.'' \287\
---------------------------------------------------------------------------

    \287\ Pragma Letter, at 4. See also Proposing Release, supra 
note 2, at 13025.
---------------------------------------------------------------------------

    Another commenter recommended that the Pilot test a prohibition on 
``tiered pricing,'' whereby exchanges offer lower per share fees or 
greater per share rebates to market participants that transact in 
greater volumes, believing that absent such a prohibition, exchanges 
would continue to offer these incentives, which would serve ``to 
potentially work around the prohibition on offering rebates.'' \288\
---------------------------------------------------------------------------

    \288\ See Clearpool Letter, at 3-4.
---------------------------------------------------------------------------

    Further, one commenter suggested adding a new Test Group ``to test 
an anti-fragmentation policy,'' in which ``the order that sets the SIP 
NBBO receives the execution in all circumstances (e.g., bypassing 
hidden orders). ''\289\
---------------------------------------------------------------------------

    \289\ See Birch Bay Letter, at 2.
---------------------------------------------------------------------------

    The Commission appreciates all of these recommendations. After 
considering these comments, as well as other comments opposed to 
including more NMS stocks in the Pilot, the Commission believes that 
the Pilot should not introduce additional variables. In order to add a 
new variable to the Pilot, the Commission would need to include 
additional Test Groups and materially increase the number of securities 
(or materially increase the Pilot's duration) to be able to isolate 
separately the effects of each variable that is included in the Pilot. 
Otherwise, adding variables would create an asymmetric Pilot that would 
make it more difficult to evaluate the data and establish causal 
inferences regarding the impacts of changes to exchange transaction 
fees and rebates. As discussed above, most commenters were critical of 
the Pilot's proposed size and the Commission similarly desires to have 
a narrowly tailored pilot focused on generating useful data on the 
impact of exchange fees and rebates on order routing behavior, 
execution quality, and market quality. Adding another variable to the 
Pilot would increase the Pilot's size, complexity, and costs.
g. Gradual Reduction of Current Fee Cap Across All Stocks
    One commenter suggested that, rather than conducting the Pilot, the 
Commission should instead consider imposing a ``gradual reduction of 
the current fee cap across all stocks periodically.'' \290\ The 
commenter stated that this approach would facilitate data collection 
and an opportunity ``to observe order routing behavior changes, while 
applying the same economics to all stocks uniformly.'' \291\ 
Furthermore, the commenter stated that if a control group was necessary 
in this scenario ``for comparison purposes'' it would recommend placing 
50% of stocks in the control group and the other 50% in the Test Group 
subject to the gradual reductions in access fees.\292\
---------------------------------------------------------------------------

    \290\ Morgan Stanley Letter, at 2.
    \291\ Id.
    \292\ Id.
---------------------------------------------------------------------------

    The Commission has considered this alternative but believes that 
the Pilot is a preferable approach because it will permit researchers 
to conduct differences-in-differences analysis over a much shorter time 
frame. By establishing stratified treatment groups and simultaneously 
testing different changes in the same variable, the Pilot will reduce 
the impact of events (economic, natural, political, etc.) across time 
and thereby is more conducive to an apples-to-apples comparison of the 
various treatment groups to one another. Pursuing a simultaneous and 
linear gradual reduction, such as that proposed by the commenter, could 
require greatly extending the Pilot's duration depending on the number 
of fee cap levels to be tested. More importantly, this proposed 
alternative would not provide the Commission with the opportunity to 
directly observe the impact of rebates on order routing behavior, 
execution quality, and market quality because it would not necessarily 
include a prohibition on rebates and therefore having a no-rebate 
bucket will be substantially more informative. Lastly, as the 
Commission believes that a Control Group is necessary to ensure the 
usefulness of the Pilot's data, pursuing the proposed structure would 
impact more NMS stocks than the Pilot (as 50% of stocks would be 
included in the Test Group and 50% in the control group).
h. $0.0010 Access Fee
    One commenter recommended that rather than pursuing the Pilot, the 
Commission should instead amend Rule 610(c) to reduce the access fee 
cap to $0.0010 and also ``conduct an abbreviated study of the effects 
of eliminating rebates similar to the criteria of Pilot Test Group 
Three.'' \293\ This commenter stated that ``there is broad 
recognition'' that the access fee cap should be reduced and the Pilot 
will ``be lengthy, complex and costly'' but ``will not yield a 
different conclusion.'' \294\ The commenter stated that reducing the 
access fee cap to $0.0010 would be calibrated with present-day trading 
and execution costs, would better ensure displayed prices reflect the 
actual economic costs of an execution, and would allow exchanges to 
continue maintain their current net capture rates, while also choosing 
to offer rebates to incentivize liquidity provision if they chose to do 
so.\295\
---------------------------------------------------------------------------

    \293\ See Goldman Sachs Letter, at 1-4.
    \294\ Id. at 1.
    \295\ Id.
---------------------------------------------------------------------------

    The Commission believes that its revised Pilot design responds to 
this commenter's core recommendation, though the Commission is 
instituting a $0.0010 fee cap as part of the Pilot and not as an 
amendment to Rule 610(c). The Commission continues to believe that a 
Pilot is necessary to provide data to objectively evaluate the effect 
of exchange fees and rebates. Ultimately, the Pilot will enable a data-
driven analysis of the impact of transaction fees and rebates on order 
routing behavior, execution quality, and market quality, which will 
serve as a valuable precursor to the Commission's consideration of 
future policy making in this area.
10. Metrics To Assess the Pilot
    A number of commenters recommended that the Commission

[[Page 5226]]

more clearly articulate what it believes would constitute a 
``successful'' Pilot and how it will judge whether the Pilot achieves 
that measure of success.\296\ Several of these commenters suggested 
specific metrics or criteria they thought the Commission should analyze 
when evaluating the impact of the Pilot, many of which were measurement 
criteria suggested by EMSAC.\297\ One commenter suggested that the 
Commission provide guidance about how its staff will be evaluating the 
metrics used to determine whether to recommend market structure changes 
to the Commission following the Pilot.\298\ In addition, two commenters 
suggested the Commission designate an independent third party to 
conduct an analysis of the Pilot data upon the Pilot's completion.\299\ 
Another commenter stated that the ``industry should be afforded the 
opportunity to comment'' on the metrics and criteria used to evaluate 
the Pilot.\300\
---------------------------------------------------------------------------

    \296\ See, e.g., State Street Letter, at 2; Fidelity Letter, at 
3-4; Capital Group Letter, at 4; ICI Letter I, at 5; OMERS Letter, 
at 2; MFS Letter, at 2; Virtu Letter, at 8; FIA Letter, at 2; SIFMA 
Letter, at 2-3, 5; TD Ameritrade Letter, at 2; STANY Letter, at 3; 
Morgan Stanley Letter, at 3; Cboe Letter I, at 29; Nasdaq Letter I, 
at 7; NYSE Letter, at 2; Pragma Letter, at 2; ModernNetworks Letter; 
Healthy Markets Letter I, at 35.
    \297\ See, e.g., State Street Letter, at 2-3; Fidelity Letter, 
at 8; Vanguard Letter, at 3; ICI Letter I, at 5; T. Rowe Price 
Letter, at 4; MFS Letter, at 2; BlackRock Letter, at 2-3; SIFMA 
Letter, at 5-6; Morgan Stanley Letter, at 3; Spatt Letter, at 5; 
Cboe Letter I, at 29; IEX Letter I, at 2; Pragma Letter, at 2-3.
    \298\ See SIFMA Letter, at 3. Another commenter requested that 
the Commission clarify the role it expects the Division of Economic 
and Risk Analysis to play in analyzing the Pilot's data and provide 
an anticipated timeline for the issuance of a report on the Pilot 
data. See IEX Letter I, at 2.
    \299\ See Fidelity Letter, at 3, 8; MFS Letter, at 2.
    \300\ See Virtu Letter, at 8.
---------------------------------------------------------------------------

    In response to these comments, the Commission emphasizes that its 
staff will likely not be the sole entity analyzing data related to the 
Pilot. As was the case for the recent Tick Size Pilot, the Commission 
believes that market participants will publish their own analyses of 
the Pilot using data that is uniquely available to them and the metrics 
that they believe are most useful or relevant, and encourages market 
participants to do so.\301\ To the extent that interested parties 
prepare their own analyses, they may submit them to 
[email protected] with the words ``Transaction Fee Pilot 
Analysis'' in the subject line, and the Commission will post those 
reports on its public website.\302\
---------------------------------------------------------------------------

    \301\ For example, institutional firms could study their ability 
to capture the spread when passively posting, and how that is 
impacted within the Pilot's treatment groups.
    \302\ The Commission encourages market participants to disclose 
what sources of data they used for their analyses and describe the 
methodology they used, and to make those reports publicly and freely 
available.
---------------------------------------------------------------------------

    The Commission encourages market participants to make public any 
analysis they perform on their own trading activity, such as non-
proprietary transaction cost analysis (``TCA''), so that it may be 
publicly reviewed and used to help inform the public dialogue 
concerning the effect of exchange fees and rebates.\303\ To the extent 
that independent analyses are made public, they can contribute to the 
Commission's consideration of any future regulatory action in this 
area.
---------------------------------------------------------------------------

    \303\ For example, the Pilot's order routing datasets will 
collect aggregated data, not individual order-by-order level data, 
and reflects the ``child'' orders that are processed by an exchange. 
Thus, the order routing dataset will not capture the entire 
lifecycle of a ``parent'' order from its inception through to 
execution. Accordingly, the Pilot's order routing datasets will not 
by themselves permit analyses on an order-by-order basis, and will 
therefore be unable to assess the execution quality of orders at the 
``parent'' level. If market participants and other interested 
parties conduct parent order-level analyses and make their findings 
public, then the Commission would be able to consider them as it 
assesses the Pilot's ultimate impact on order routing behavior, 
execution quality, and market quality. See, e.g., T. Rowe Price 
Letter, at 4 (recommending that the Commission view analyses of the 
Pilot conducted by registered investment advisers as a ``key 
input'').
---------------------------------------------------------------------------

    Given the valuable input of independent analysis, the Commission 
believes that the success or failure of the Pilot will be determined by 
whether it produces an exogenous shock that generates measurable 
responses capable of providing insight into the effects of fees and 
rebates on the markets and market participant behavior.\304\ In the 
absence of a Commission Pilot that effects change across all equities 
exchanges in a coordinated manner, researchers would be unable to 
collect meaningful, comparative data to test the effects of such 
changes and perform those analyses.\305\
---------------------------------------------------------------------------

    \304\ As noted in the Proposal, the Pilot is designed to produce 
an exogenous shock that simultaneously creates distinct fee 
environments, each of which restricts transaction-based fees or 
rebates differently, enabling synchronized comparisons to the 
current environment for purposes of inferring the existence of 
causal relationships. See Proposing Release, supra note 2, at 13047 
and 53. An exogenous shock to a system occurs when an element of the 
system is changed from without the system. (i.e., the change or 
shock is not under the control or influence of those within the 
system) but can induce endogenous (i.e., within the system) 
responses. In the Pilot's context, the exogenous shock takes the 
form of a reduction of the maximum permissible transaction fees and 
a prohibition on rebates and Linked Pricing on all U.S. equities 
exchanges. See infra Section IV.
    \305\ See infra Section IV.B.1.
---------------------------------------------------------------------------

    Success or failure of the Pilot is thus independent of the outcome 
of the Pilot. For example, a Pilot that shows, with statistical 
significance, that rebates narrow the quoted spread in thinly-traded 
stocks would be equally ``successful'' as a Pilot that shows that 
rebates do not narrow the spread in such stocks. In this sense, the 
``success'' of the Pilot is that it created the conditions that permit 
measurement and analysis of that issue in a manner that helps resolve 
speculative assumptions among the commenters about the impact of fees 
and rebates.
    Furthermore, it is worth noting that the data collected pursuant to 
Rule 610T is only part of what researchers will need to conduct 
analysis of the impact of exchange fees and rebates on the markets. For 
example, the Pilot's order routing datasets contain data to help assess 
order routing and certain aspects of execution quality, but will not 
contain any data on exchange quotations, which is available from 
existing sources. Consequently, researchers will need to use existing 
data sources to assess the impact of the Pilot on exchange quoting 
activity and market quality. As such, to the extent that the Pilot data 
produces null results, for example the Pilot's order routing datasets 
do not show any change in liquidity during the Pilot, the Commission 
believes that independent analysis from market participants, looking at 
order-level data, may nevertheless detect an impact. Even if the Pilot 
produces a null result for some metrics, and third-party analysis is 
not publicly available or does not find an impact, the Commission 
nevertheless believes the Pilot would still be useful to inform future 
policymaking that is intended to benefit investors.\306\
---------------------------------------------------------------------------

    \306\ For example, a result that shows no impact on liquidity 
for a Test Group may still be relevant to the Commission's 
consideration of the effects of transaction fee-and-rebate pricing 
models on order routing behavior, execution quality, and market 
quality and whether the existing exchange transaction-based fee and 
rebate structure continues to further the statutory goals.
---------------------------------------------------------------------------

    In response to commenters' requests for additional insight into the 
types of questions that the Commission hopes the Pilot will be able to 
answer, the Commission believes that the order routing datasets, as 
well as other data that is already readily accessible to researchers, 
should facilitate analysis of the impact of the Pilot through a broad 
spectrum of metrics. In particular, the Commission will consider, and 
encourages others to consider, the following questions in contemplating 
the impact of changes to fees and rebates across the exchanges. These 
questions include, but are not limited to:


[[Page 5227]]


    1. To what extent do access fees and rebates impact routing 
decisions for liquidity-taking orders? Are orders to take liquidity 
more likely to be routed to an exchange (compared to an off-exchange 
venue or ATS) in a lower access fee environment than they are 
currently? To what extent are impacts or changes in routing 
decisions driven by potential conflicts of interest created by 
transaction fees and rebates rather than other factors such as fill 
rates and execution quality?
    2. To what extent do access fees and rebates impact routing 
decisions for liquidity-supplying orders? Are orders to provide 
liquidity less likely to be routed to an exchange (compared to an 
off-exchange venue or ATS) in a lower rebate environment than they 
are currently? To what extent do impacts or changes in order routing 
appear to be driven by potential conflicts of interest caused by 
rebates rather than other factors such as execution quality (e.g., 
fill-rates, time to fill, capturing the quoted spread, adverse 
selection, or reversion)?
    3. What impact does a reduction or elimination in rebates have 
on the NBBO, including spread width and the depth of interest 
displayed at the NBBO? To what extent does a potential decrease in 
depth of interest at the NBBO result in lower fill rates or smaller 
fill sizes for investor orders? Are natural investors better able to 
obtain queue priority in exchange order books, and are they more 
frequently able to capture the quoted spread when posting passively 
(e.g., buy on the bid and sell on the offer)?
    4. Are there common characteristics for securities (e.g., 
average daily trading volume, price, or market capitalization) where 
a reduction or elimination of rebates begins to impact quoted 
spread? If so, what are those common characteristics and at what 
level do reduced rebates begin to have an impact on quoted spread? 
To what extent does a change in quoted spread affect transaction 
costs for investor orders? If quoted spread widens in a security, to 
what extent is the potential spread cost offset by the reduction in 
the transaction fees paid, or a change in the ability to capture the 
quoted spread?
    5. Are there common characteristics for securities where a 
reduction or elimination of rebates does not impact quoted spread? 
If so, what are those common characteristics (e.g., average daily 
trading volume, price, or market capitalization)?
    6. Are there common characteristics for securities (e.g., 
average daily trading volume, price, or market capitalization) where 
a reduction or elimination of rebates begins to impact effective 
spread?
    7. How can we best understand the effects of rebates provided on 
inverted venues (where rebates are paid to takers of liquidity)?
    8. What impact do lower access fees and rebates have on the 
amount of displayed and non-displayed liquidity on exchanges?
    9. In the absence of rebates, do competition and market forces 
operate to produce a market equilibrium (within the current 
regulatory structure) that constrains transaction fees to levels at 
or below today's current access fee cap? What do such market forces, 
and any resultant equilibrium pricing, tell us about the need to 
impose a cap on access fees? Does the Pilot provide any data that 
suggests, in the absence of rebates, an access fee cap would still 
be necessary as long as Rule 611 of Regulation NMS continues to 
impose order protection requirements on exchanges with protected 
quotes?
    10. What is the impact of a lower fee cap on trading volumes on 
each exchange? What is the impact of a lower fee cap on other 
measures of liquidity on each exchange? How should we understand the 
difference between volume and liquidity?
    11. What is the impact of lower rebates on the ability of 
smaller exchanges to attract liquidity-supplying orders?

    By providing a mechanism that is uniquely capable of facilitating 
an empirical review of these and similar questions, the Pilot is an 
essential tool that can further the understanding of an important 
component of equities market structure. While other market structure 
issues also might benefit from a pilot, exchange transaction fees 
currently are a prime focus for empirical study, as evidenced by, among 
other things, the EMSAC's recommendation to the Commission and the 
number and nature of comments the Commission received on its proposal. 
Ultimately, the Commission desires to use the Pilot's results to help 
assess whether (and, if so, in which types of NMS stocks) rebates have 
a positive impact on execution and market quality, or whether they have 
no or little effect or a negative effect.

D. Timing and Duration

1. Disclosure Initiatives and the Pilot
    While a number of commenters urged the Commission to proceed 
expeditiously with its proposed pilot,\307\ other commenters believed 
the Commission should pursue different market structure initiatives 
before conducting the Pilot \308\ or in lieu of the Pilot.\309\ The 
Commission has adopted two of the market structure initiatives 
identified by commenters--namely, proposals to enhance the operational 
transparency of ATSs and to enhance disclosure of order routing 
behavior.\310\
---------------------------------------------------------------------------

    \307\ See, e.g., IEX Letter I, at 1; Joint Pension Plan Letter, 
at 2; Better Markets Letter, at 3; Brandes Letter, at 2; Clearpool 
Letter, at 7.
    \308\ See, e.g., RBC Letter I, at 4; T. Rowe Price Letter, at 4; 
Citi Letter, at 2.
    \309\ See, e.g., Nasdaq Letter I, at 1, 3 (``[A] transaction fee 
experiment is inappropriate at this time because there are 
alternatives and prerequisites the Commission must further 
evaluate.''); NYSE Letter I, at 17-19 (stating that the Commission 
should consider ``less costly and more effective alternatives'' to 
the Pilot); Cboe Letter I, at 12, 22, 27 (recommending that the 
Commission undertake a ``holistic examination of the entire equities 
market framework'' including consideration of ``possible changes to 
the Order Protection Rule [and] the Minimum Tick Increment Rule,'' 
``[s]trengthening and [a]rticulating the Duty of Best Execution,'' 
providing ``greater broker-dealer transparency,'' and adopting 
amendments to Regulation ATS).
    \310\ See, e.g., Nasdaq Letter I, at 1, 3; NYSE Letter, at 17-
18; Cboe Letter I, at 12, 22, 27, Fidelity Letter, at 4. See also 
Securities Exchange Act Release Nos. 83663 (July 18, 2018), 83 FR 
38768 (August 7, 2018) (``Regulation ATS-N'') and 34528 (November 2, 
2018), 83 FR 58338 (November 19, 2018) (``Amendments to Order 
Handling Disclosure'').
---------------------------------------------------------------------------

    While some commenters believed that the information and data from 
those new rules would complement the Pilot and ``improve understanding 
of pilot data,'' \311\ others believed the new rules would instead 
allow the Commission to determine ``whether a problem exists without 
risking the potential negative impact of a pilot'' \312\ or thought 
that potential conflicts of interest in order routing behavior would be 
better addressed through increased transparency and disclosure than by 
the Pilot.\313\ The Commission disagrees. Comments urging the 
Commission to pursue disclosure-based initiatives focused only on one 
narrow aspect of

[[Page 5228]]

the Pilot--studying the conflicts of interest between brokers and their 
customers that are presented when exchanges pay rebates. However, such 
an approach does not adequately advance the Pilot's broader purpose--
obtaining a better understanding of all potential impacts from fees and 
rebates, and how fees and rebates may affect stocks differently 
depending on their liquidity.
---------------------------------------------------------------------------

    \311\ ICI Letter I, at 5-6, 6 n.12; ICI Letter II, at 3. See 
also, e.g., RBC Letter I, at 4; Citi Letter, at 2; Citadel Letter, 
at 3, 7 (stating that ``it is important to first finalize and 
implement . . . Rule 606 enhancements before implementing the 
Pilot'' to ``safeguard the integrity of the Pilot by ensuring that 
any changes to broker-dealer order routing practices that result 
from the increased transparency mandated by amended Rule 606 are 
isolated from any similar changes that result from the design of the 
Pilot''); Spatt Letter, at 4 (stating that the ``the enhanced 
disclosures proposed would strengthen the potential causal inference 
that the response to [the Pilot] would allow''). Some commenters 
questioned whether the Pilot should proceed, because they believed 
that the adoption of Regulation ATS-N and the Amendments to Order 
Handling Disclosure will ``impact the very potential conflicts of 
interest the Commission aims to study . . . .'' Nasdaq Letter II, at 
2-4; see also NYSE Letter IV, at 2-3. As noted in this section, the 
scope of the Pilot is broader than just conflicts of interest. 
Therefore, those initiatives, or the impact they may have on order 
routing behavior, would not provide sufficient data to evaluate the 
effects of transaction fees and rebates on market quality and 
execution quality. See infra Section IV.B.1.
    \312\ Nasdaq Letter I, at 1-2, 4; Nasdaq Letter II, at 2-4 
(suggesting that the adoption of these regulations ``further 
reduce[d] the already weak need for the [Pilot]''). See also, e.g., 
STANY Letter, at 2; ASA Letter, at 5-6; Era Letter, at 1. But cf. 
Verret Letter I, at 4 (stating that the ``collection of data from 
broker-dealers'' or the use of ``existing data contained in [OATS]'' 
were not ``feasible alternatives,'' because a ``randomized trial is 
far superior for the purpose of generating robust statistical 
analysis to inform subsequent rulemaking''); Proposing Release, 
supra note 2, at 13046-47 (outlining the limitations of existing 
data sources).
    \313\ See, e.g., STANY Letter, at 2; FIA Letter, at 3; Grasso 
Letter, at 2. But cf. ICI Letter II, at 3 (noting that disclosure-
based rulemakings ``will not directly reduce the potential for 
exchange transaction pricing models to create conflicts of interest 
for broker dealers, nor will they provide data that would allow an 
institutional investor to measure the impact of fee avoidance on 
routing decisions''); Luminex Letter, at 1; Spatt Letter, at 4; IEX 
Letter II, at 9.
---------------------------------------------------------------------------

    Similarly, some commenters recommended that, either before 
conducting the Pilot or in lieu of the Pilot, the Commission should 
pursue other market initiatives such as enhancing broker-dealers' duty 
of best execution \314\ or undertaking a ``broader review of equity 
market structure,'' including the consideration of possible changes to 
the Order Protection Rule or the Minimum Tick Increment Rule.\315\ 
Other commenters disagreed and did not believe that the Commission 
should delay the Pilot in order to pursue other market structure 
initiatives.\316\ For example, a few commenters advocated proceeding 
with the Pilot because the Pilot may help to inform future policy 
changes in these other areas.\317\ Other commenters characterized the 
``holistic reform'' advocated by other commenters as ``an elusive 
goal'' \318\ in light of market participants' competing interests--one 
that has been used to ``slow down market structure reform for the past 
decade.'' \319\
---------------------------------------------------------------------------

    \314\ See, e.g., Nasdaq Letter I, at 3-4; Fidelity Letter, at 6; 
Cboe Letter I, at 21-22.
    \315\ See Cboe Letter I, at 12; FIA Letter, at 3; Nasdaq Letter 
I, at 4.
    \316\ See, e.g., IEX Letter II, at 9; Better Markets Letter, at 
3; Brandes Letter, at 2; AJO Letter, at 2; OMERS Letter, at 3; 
Clearpool Letter, at 7. Some of these commenters suggested that the 
Pilot should proceed in conjunction with action on other market 
structure initiatives. See, e.g., SIFMA Letter, at 1; Pragma Letter, 
at 3-4.
    \317\ See, e.g., Verrett Letter I, at 5; Better Markets Letter, 
at 3.
    \318\ Brandes Letter, at 2.
    \319\ Themis Trading Letter I, at 6. See also ICI Letter I, at 
3.
---------------------------------------------------------------------------

    The Commission believes that there is no need to delay proceeding 
with the Pilot in order to pursue other potential equity market 
structure initiatives. The Pilot seeks to resolve several equity market 
structure questions that have been debated for several years. 
Similarly, the Commission does not believe that it needs to complete 
the Pilot before proceeding to consider other equity market structure 
initiatives. Other initiatives may implicate equity market structure 
questions that are narrower or broader than, or independent of, 
exchange fee models, such as considering innovative approaches to 
thinly-traded securities. The Commission expects that it will continue 
to evaluate the need for other changes to equity market structure 
during the Pilot.
2. Automatic Sunset at Year One
    The Commission proposed that the Pilot have a duration of one year 
with a maximum period of two years. Specifically, the proposed Pilot 
duration featured an automatic sunset at the end of the first year 
unless, prior to that time, the Commission publishes a notice that the 
Pilot shall continue for up to one additional year.\320\
---------------------------------------------------------------------------

    \320\ See Proposing Release, supra note 2, at 13025. The 
Commission notes that the proposed language in Rule 610T(c)(a)(ii) 
has been modified slightly. As proposed, Rule 610T(c)(1)(ii) 
contained the phrase ``shall continue for up to another year.'' As 
adopted, the phrase ``shall continue for up to one additional year'' 
is being substituted for the phrase ``shall continue for up to 
another year'' to simplify the rule text without substantively 
changing the requirement.
---------------------------------------------------------------------------

    After careful consideration of the comments received, the 
Commission is adopting Rule 610T(c) as proposed. Many commenters 
supported the proposed duration of the Pilot.\321\ For example, one 
commenter asserted that ``each pricing experiment needs to be in place 
for a sufficient length of time to enable the firms to adjust their 
routing logic.'' \322\ Others agreed that the proposed duration would 
reduce the ``desire to `wait out' the Pilot'' and would avoid ``the 
incentive to alter behavior in order to distort the Pilot's results . . 
. .'' \323\ Several commenters supported the automatic sunset provision 
after one-year.\324\
---------------------------------------------------------------------------

    \321\ See, e.g., SIFMA Letter, at 3; AGF Letter, at 2; 
Wellington Letter, at 2. See also RBC Letter I, at 6 (stating ``a 
pilot of at least one year and no more than two years will ensure 
that ample data is collected over time, that the restrictions of the 
various Pilot Test Groups cannot be evaded by delay, and that the 
Pilot does not exist for a period of time beyond which its data 
would be cumulative or of marginal significance relative to data 
produced earlier in the Pilot period'').
    \322\ See Citi Letter, at 5 (stating that ``[c]ost-sensitive 
firms may be able to more quickly adapt to new pricing, while 
liquidity-based routers may need time to collect a new sample set to 
adjust their routing logic,'' such that ``data in the weeks closer 
to the conclusion of the Pilot may more accurately reflect the state 
of the market and what the implications would be if implemented 
long-term''). One commenter, however, did not believe that certain 
``broker-dealers, proprietary traders, and algorithm vendors'' would 
``incorporate the new fees into their routing systems on a timely 
basis, if ever,'' because according to this commenter, ``[c]hanges 
are costly and may prove to be ultimately unnecessary if pricing 
reverts following the termination of the pilot study.'' Larry Harris 
Letter, at 11.
    \323\ Joint Asset Managers Letter, at 2. See also Joint Pension 
Plan Letter, at 2; Brandes Letter, at 2.
    \324\ See, e.g., SIFMA Letter, at 3; CFA Letter, at 6; Fidelity 
Letter, at 9; IEX Letter I, at 4.
---------------------------------------------------------------------------

    A few commenters, however, thought the proposed duration was too 
short and that a minimum two-year pilot would be necessary.\325\ Some 
other commenters believed that the necessary data could be obtained 
within a shorter time frame. Among commenters advocating for a shorter 
Pilot Period, the recommended duration varied and ranged from those who 
felt there would be an ``immediate and measurable impact upon 
implementation'' \326\ to those who felt the appropriate time frame 
should be modified to an absolute maximum of one year.\327\ One 
commenter questioned whether a ``1-2 year pilot that changes fees on 
3,000 names'' was ``really a `pilot' or in fact a de facto imposition 
of a significant reduction of transaction fees[.]'' \328\ Several 
commenters expressed their view that the proposed length of the Pilot 
would ``exacerbate[ ] the negative impact upon the affected issuers.'' 
\329\
---------------------------------------------------------------------------

    \325\ See, e.g., Babelfish Letter, at 3; Healthy Markets Letter 
I, at 19.
    \326\ See TD Ameritrade, at 5; see also, e.g., NorthWestern 
Letter, at 1.
    \327\ See, e.g., FIA Letter, at 4; STANY Letter, at 3-4.
    \328\ Magma Letter, at 3. See also, e.g., Apache Letter, at 1; 
Unitil Letter, at 2.
    \329\ See, e.g., Ethan Allen Letter, at 1; ProAssurance Letter, 
at 2; Knight-Swift Letter, at 2.
---------------------------------------------------------------------------

    One commenter took issue with the proposed length of the Pilot by 
challenging what it believed to be conflicting statements of the 
Commission in its original Proposal. According to the commenter, the 
Commission asserted, on the one hand, that the ``market quickly reacts 
to changes in (and elimination of) pricing changes, but on the other 
hand, claims that the market does not react unless the changes are in 
effect for at least a year.'' \330\ The Commission believes both of 
those statements are correct and do not conflict. While many market 
participants will react promptly to pricing changes, particularly those 
with cost-based routing algorithms, others may need additional time to 
fine tune liquidity-based routing algorithms as order flow changes in 
response to fee changes.\331\ More importantly, however, the Pilot 
needs to be long enough to discourage any market participant inclined 
to resist adapting its behavior to the fee changes.\332\
---------------------------------------------------------------------------

    \330\ NYSE Letter I, at 16.
    \331\ See, e.g., Citi Letter, at 5; Babelfish Letter, at 3.
    \332\ See Proposing Release, supra note 2, at 13071.
---------------------------------------------------------------------------

    A few commenters opposed the one-year sunset provision, but for a 
variety of different reasons. For example, one commenter thought a full 
two-year pilot was necessary, another thought the Commission separately 
has the authority to revise or terminate the Pilot early and does not 
need a sunset

[[Page 5229]]

provision, and a third was critical of the lack of metrics that would 
accompany the automatic sunset.\333\
---------------------------------------------------------------------------

    \333\ See Babelfish Letter, at 3; Healthy Markets Letter I, at 
19; Cboe Letter I, at 19.
---------------------------------------------------------------------------

    After careful consideration of the comments received, the 
Commission is adopting the Pilot's duration as proposed. The Commission 
believes that the Pilot's duration will provide an appropriate balance 
between providing certainty about the maximum duration for the Pilot 
while also allowing flexibility to conduct a Pilot for more than one 
year if necessary to collect representative data. Further, the Pilot's 
duration should be long enough to make it economically worthwhile for 
market participants to adapt their behavior and not ``wait out'' the 
Pilot. In addition, in light of the number of Pilot Securities 
selected, which were selected to ensure sufficient statistical power to 
allow for meaningful analysis, the Pilot's duration will allow for the 
collection of a robust and representative data set over a sufficiently 
long period of time,. The Commission considered a shorter time period 
for the Pilot, but is concerned that short-term or seasonal events 
could unduly impact the Pilot results and therefore data collected over 
a shorter duration may not yield a sufficiently representative dataset 
that would be capable of permitting analysis into the impact of 
transaction-based fees and rebates and the effects that changes to 
those fees and rebates have on order routing behavior, execution 
quality, and market quality. For example, a shorter pilot period could 
be impacted by seasonal idiosyncrasies, macroeconomic factors, or even 
weather events.
    Further, the Commission recognizes that some market participants, 
for example, broker-dealers whose liquidity-focused routing strategies 
are based on, and continually updated based on, several weeks' worth of 
data, will need time to fine tune their revised routing strategies. 
While some market participants may adjust quickly, others, like 
proprietary trading market participants, may wait to see how other 
market participants react before refining their own routing 
strategies.\334\ In other words, it could take a few months before some 
market participants finish calibrating their routing strategies to the 
fees and rebates that the exchanges adopt consistent with the Pilot's 
requirements and adjust them as trading dynamics settle in response to 
those changes. The exchanges also could take a number of weeks to 
settle on new fee models as they see how other exchanges modify their 
fee models to comply with the Pilot's requirements and then respond 
accordingly, which could further delay the time it takes for broker-
dealers to adjust their routing and trading algorithms. Accounting for 
all of this, the Commission intends that the proposed duration of the 
Pilot be long enough to encourage wide participation by all market 
participants (and discourage ``waiting out'' the Pilot) and thereby 
help ensure that the Pilot produces results that are more reliable, 
robust, and useful.
---------------------------------------------------------------------------

    \334\ See, e.g., Citi Letter, at 5.
---------------------------------------------------------------------------

    The Commission also considered extending the Pilot period to two-
years as suggested by several commenters, and as was recommended by the 
EMSAC, but continues to believe that the inclusion of the automatic 
sunset provision at the end of the first year is preferable because it 
will provide flexibility in the event that the Commission believes 
additional time is necessary to ensure the collection of a robust 
dataset with adequate statistical power for analysis, but will allow 
the Pilot to automatically end after one-year in the event that 
sufficient data is collected by that point with sufficient statistical 
power to allow for meaningful analysis.
3. Pre- and Post-Pilot Periods
    The Commission proposed a six-month pre-Pilot Period as well as a 
six-month post-Pilot Period.\335\ During those periods, the Commission 
proposed to require the equities exchanges to collect and make 
available the order routing datasets and Exchange Transaction Fee 
Summaries in order to provide necessary benchmark information against 
which researchers could assess the impact of the Pilot.\336\
---------------------------------------------------------------------------

    \335\ See Proposing Release, supra note 2, at 13025-26. See also 
Proposed Rule 610T(c).
    \336\ Proposed Rule 610T(d) and (e). See also Proposing Release, 
supra note 2, at 13029, 13032. Primary listing exchanges will also 
be required to prepare and publicly post updated Pilot Securities 
Exchange Lists and Pilot Securities Change Lists for the duration of 
the Pilot Period and through the post-Pilot Period. Id. at 13027-28. 
The pre-Pilot data is intended to establish a baseline against which 
to assess the effects of the Pilot, while the post-Pilot Period is 
intended to help assess any post-Pilot effects following the 
conclusion of the Pilot.
---------------------------------------------------------------------------

    Two commenters supported the proposed six-month pre-Pilot and post-
Pilot data collection periods.\337\ In contrast, two commenters 
suggested adopting three-month long pre-Pilot and post-Pilot 
Periods.\338\
---------------------------------------------------------------------------

    \337\ See FIF Letter, at 7, 9; Healthy Markets Letter I, at 19.
    \338\ See IEX Letter I, at 4; FIA Letter, at 4.
---------------------------------------------------------------------------

    The Commission desires to implement the Pilot in a manner that 
imposes the least amount of costs on the exchanges without compromising 
the ability of the Pilot to obtain useful data. The Commission believes 
that six-month pre- and post-Pilot Periods are necessary to establish a 
baseline against which to compare the data collected during the Pilot 
Period and any post-Pilot effects following the conclusion of the 
proposed Pilot. Although the Commission appreciates the desire of 
market participants to expedite the Pilot while constraining costs, the 
Commission considers six months to be necessary to provide the targeted 
statistical power for obtaining baseline data. As discussed above, 
statistical power largely is a function of the number of observations 
over a specified period of time. In order to shorten the pre- and post-
Pilot Periods (e.g., to three months instead of six months) while 
maintaining the same statistical power, the Commission would need to 
increase the number of securities in the Pilot by at least 120 
securities. As discussed above and consistent with the comments it 
received, the Commission desires to limit, not increase, the number of 
securities included in the Pilot. Accordingly, the Commission is not 
adopting a shorter duration for the pre- and post-Pilot Periods.
4. Early Termination
    Proposed Rule 610T did not contain a specific provision regarding 
early termination of the Pilot. Several commenters recommended that the 
Commission develop specific criteria for evaluating the possibility 
that the Pilot may need to be terminated early.\339\ Some recommended 
that the Pilot specifically include a ``kill switch'' to effectuate an 
early termination.\340\ Several commenters supported the need for the 
Commission to address unanticipated negative consequences quickly,\341\ 
but one commenter cautioned that the Commission would need to act in a 
measured manner because the industry would need time to unwind the 
Pilot.\342\ One commenter suggested that the Commission might want to 
terminate the Pilot early if (1) it produced a ``robust statistical 
sample set earlier than a year, such that [the Commission could] end 
the Pilot and proceed to adopt permanent rule changes'' and (2) ``if 
there is unintended impact from the Pilot that warrants a

[[Page 5230]]

stoppage.'' \343\ Other commenters emphasized the need for the 
Commission to closely monitor the impact of the Pilot on retail 
investors in particular.\344\ For example, one commenter argued that if 
the Pilot data suggests ``clear harm to the retail investor in . . . 
relevant execution quality metrics'' like ``quoted spread, depth of 
liquidity, intraday stock volatility, and opportunities for price 
improvement on impacted securities,'' then the Pilot ``should be 
immediately suspended.'' \345\ Another commenter urged the Commission 
to closely monitor the Pilot's effect on thinly-traded stocks and 
establish ``predetermined means for discontinuing the Pilot in the 
event that the reviewed data shows undue harm to market or execution 
quality.'' \346\ However, one commenter noted that the Commission is 
not obligated to ``cease the [P]ilot if the costs to liquidity prove 
significant.'' \347\
---------------------------------------------------------------------------

    \339\ See e.g., SIFMA Letter, at 3; Issuer Network Letter I, at 
4; State Street Letter, at 4; Cboe Letter I, at 28.
    \340\ See Citi Letter, at 4; TD Ameritrade Letter, at 1, 5; 
Morgan Stanley Letter, at 4; Cboe Letter I, at 28-29; Vanguard 
Letter, at 3; STANY Letter, at 4; Angel Letter II, at 3.
    \341\ See Schwab Letter, at 2; Cboe Letter I, at 29.
    \342\ See TD Ameritrade Letter, at 5. See also Morgan Stanley 
Letter, at 4; SIFMA Letter, at 3.
    \343\ See Vanguard Letter, at 3. See also Angel Letter II, at 3 
(noting that the Pilot could be suspended quickly if ``there is 
abundant evidence one way or the other about the results,'' such as 
``a dramatic increase in market quality for one particular treatment 
group,'' in which case ``that particular group's treatment could 
become the new rule,'' or ``if the pilot produces fast and 
unequivocal results showing harm to one particular treatment group, 
that treatment should be halted'').
    \344\ See Schwab Letter, at 2; Citi Letter, at 4.
    \345\ See Schwab Letter, at 2.
    \346\ See STANY Letter, at 4.
    \347\ Verret Letter I, at 5.
---------------------------------------------------------------------------

    The Commission acknowledges the concerns raised by commenters 
regarding the potential for unintended and unanticipated consequences 
to the equities markets that the Pilot may have. The Commission intends 
to carefully monitor for any such effects during the Pilot Period. 
However, the Commission does not believe that it is necessary to add a 
``kill switch'' to Rule 610T because the Commission already has broad 
exemptive authority that obviates the need for a separate kill switch. 
For example, if at any time the Commission believes that the protection 
of investors may be compromised by the Pilot, the Commission has broad 
authority under Section 36 of the Exchange Act to modify or terminate 
the Pilot early.\348\
---------------------------------------------------------------------------

    \348\ See 15 U.S.C. 78mm (setting forth the Commission's 
authority, by rule, regulation or order, to conditionally or 
unconditionally exempt persons, transactions or securities (or 
classes thereof) from any Exchange Act provision, rule or regulation 
if such exemption is necessary or appropriate in the public interest 
and is consistent with the protection of investors).
---------------------------------------------------------------------------

5. Inclusion of a Phase-In Period
    The Commission did not propose a phase-in period for the Pilot. 
Three commenters recommended a phase-in period without elaborating on 
its purpose, though they referenced the EMSAC's recommendation for an 
initial three-month phase-in period involving 10 stocks.\349\ A 
different commenter did not believe that the EMSAC's three-month phase-
in period was necessary.\350\
---------------------------------------------------------------------------

    \349\ See State Street Letter, at 4; TD Ameritrade Letter, at 4; 
STANY Letter, at 3. See also Recommendation for an Access Fee Pilot 
(July 8, 2016), available at https://www.sec.gov/spotlight/emsac/recommendation-access-fee-pilot.pdf (``EMSAC Pilot 
Recommendation'').
    \350\ See AJO Letter, at 2.
---------------------------------------------------------------------------

    The Commission has considered these comments and believes a phase-
in approach is not necessary and unnecessarily would add to the length 
of the Pilot. Although such an approach would allow the markets and 
market participants to implement the required fee changes in a staged 
manner and provide an opportunity to address unforeseen implementation 
issues, the Commission continues to believe that, because exchange fees 
can become immediately effective upon their filing with the Commission, 
the markets and market participants are accustomed to dealing with 
frequent exchange fee changes in which fees can change on all stocks at 
once, or only for a subset of stocks or a subset of trading mechanisms. 
Accordingly, exchanges and market participants should be capable of 
accommodating the terms of the proposed Pilot with the advance notice 
contemplated by the Pilot. Further, although exchanges would be 
required to collect and report certain data, the proposed Pilot would 
not necessitate changes to exchange trading systems, and therefore, the 
Commission continues to believe a phased implementation schedule is not 
necessary to test the types of changes contemplated by the Pilot.
E. Data
    The Commission proposed that certain data be collected and made 
publicly available in order to facilitate the Commission's and 
researchers' ability to assess the impact of the Pilot, as well as to 
promote transparency about the Pilot Securities and to provide basic 
information about equities exchange fees and changes to those fees 
during the Pilot.\351\ The Commission is adopting the Pilot Securities 
Lists, the Exchange Transaction Fee Summary, and the order routing 
datasets subject to the modifications described below.
---------------------------------------------------------------------------

    \351\ See Proposing Release, supra note 2, at 13026.
---------------------------------------------------------------------------

1. Pilot Securities Exchange Lists and Pilot Securities Change Lists
    As proposed, the Commission would publish, approximately one month 
before the start of the Pilot Period, the initial List of Pilot 
Securities, which identifies the securities in the Pilot and their 
designated Test Group (or the Control Group).\352\ Thereafter, each 
primary listing exchange \353\ would publish a freely and publicly 
available daily Pilot Securities Exchange List of the Pilot Securities 
that are primarily listed on its exchange and also publish a Pilot 
Securities Change List of the cumulative changes to that list, and keep 
both lists available on their websites for five years.\354\
---------------------------------------------------------------------------

    \352\ See Proposed Rule 610T(b)(1). See also Proposing Release, 
supra note 2, at 13026. When the Commission publishes this list, the 
pre-Pilot Period will have been in place for approximately five 
months.
    \353\ See Proposed Rule 610T(b)(1)(iii) (defining ``primary 
listing exchange'' for purposes of Rule 610T).
    \354\ See Proposing Release, supra note 2, at 13027-28. The 
Commission notes that the proposed language in Rule 610T(b)(3)(i) 
has been modified slightly. As proposed, Rule 610T(b)(3)(i) 
contained the phrase ``throughout the duration of the Pilot, 
including the post-Pilot Period.'' As adopted, the phrase 
``throughout the end of the post-Pilot Period'' is being substituted 
for the phrase ``throughout the duration of the Pilot, including the 
post-Pilot Period'' to simplify the rule text without substantively 
changing the applicability of the posting requirement.
---------------------------------------------------------------------------

    The Commission received one comment that was supportive of the 
proposed requirements for disseminating and updating the Pilot 
Securities lists, including the pipe-delimited ASCII file format and 
the five year retention period.\355\ This commenter also had ``no 
objections to the proposed posting requirements, providing there is 
adequate data security and controlled access.'' \356\ The Commission is 
not adopting any new requirements for data security with respect to the 
Pilot Securities lists because that data is not private or otherwise 
sensitive in nature and because the exchanges already are subject to 
Regulation SCI governing access to their systems that support 
trading.\357\
---------------------------------------------------------------------------

    \355\ See FIF Letter, at 5.
    \356\ Id.
    \357\ See 17 CFR 242.1001(a)(1). SCI systems include all 
computer, network, electronic, technical, automated or similar 
systems of, or operated by or on behalf of, an SCI entity that 
directly support activities such as trading and order routing, among 
other things. 17 CFR 242.1000.
---------------------------------------------------------------------------

    For the reasons stated in the Proposing Release, the Commission is 
adopting as proposed the requirements in Rule 610T(b) for the primary 
listing exchanges to publicly post on their websites downloadable files 
containing the Pilot Securities Exchange Lists and the Pilot Securities 
Change Lists.\358\ The Commission is adding one additional

[[Page 5231]]

field, ``stratum code,'' to both lists.\359\ As discussed in the 
Proposal and above, the Commission will stratify Pilot Securities as it 
assigns them to the Test Groups and Control Group to ensure that each 
group has a similar composition, which facilitates comparison across 
groups.\360\ As it does so, the Commission will assign a stratum code 
to each Pilot Security that identifies that security's liquidity 
strata. The code is a static value and, as such, will remain constant 
throughout the Pilot. The Commission will include this stratum code on 
the initial List of Pilot Securities that it disseminates. To link each 
Pilot Security and its stratum code, the Commission is requiring the 
primary listing exchanges to include this data element on each Pilot 
Securities Exchange List and Pilot Securities Change List. Including 
this field on each list will clearly identify each Pilot Security's 
liquidity stratum, thereby allowing researchers to control for the fact 
that within some liquidity strata, the ratio of Test Group stocks to 
Control Group stocks is lower than it is for others, which should 
facilitate analysis of the Pilot's data.
---------------------------------------------------------------------------

    \358\ See Proposing Release, supra note 2, 13026-28.
    \359\ The Commission is also modifying the name of the field 
specified in proposed Rule 610T(b)(2)(ii)(E). The Commission 
proposed the field be named ``Test Group.'' As adopted, the field 
will be named ``Pilot Group'' to provide additional clarity.
    \360\ See Proposing Release, supra note 2, 13019, 13051.
---------------------------------------------------------------------------

2. Exchange Transaction Fee Summary
    As proposed, each exchange that trades NMS stocks would be required 
to compile, update monthly, and make freely and publicly available a 
dataset using an XML schema published on the Commission's website that 
contains specified information on its fees and fee changes during the 
Pilot.\361\
---------------------------------------------------------------------------

    \361\ The Commission notes that the proposed language in Rule 
610T(e) has been modified slightly. As proposed, Rule 610T(e) 
contained the phrase ``each national securities exchange that trades 
NMS stocks. . . .'' As adopted, the clause ``that facilitates 
trading in NMS stocks'' is being substituted for the phrase ``that 
trades NMS stocks'' to clarify that exchanges facilitate trading by 
their members in NMS stocks. In addition, the Commission notes that, 
as proposed, Rule 610T(e) contained a parenthetical which explained 
that data requirements set forth in subsection (e) were ``applicable 
to securities having a price greater than $1.'' As adopted, that 
parenthetical has been modified slightly to clarify that the 
requirements of subsection (e) apply to ``securities having a price 
equal to or greater than $1.''
---------------------------------------------------------------------------

    In particular, each exchange would identify, among other things, 
the ``Base'' take fee (rebate), the ``Base'' make rebate (fee), the 
``Top Tier'' take fee (rebate), and the ``Top Tier'' make rebate (fee), 
as applicable, as well as the Pilot Group (i.e., 1, 2, or Control) that 
applies to the fee being reported.\362\ Exchanges also would calculate 
the ``average'' and ``median'' per share fees and rebates, which the 
exchange would compute as the monthly realized average or median per-
share fee paid or rebate received by participants on the exchange 
during the prior calendar month, reported separately for each 
participant category (registered market makers or other market 
participants), Test Group, displayed/non-displayed, and top/depth of 
book.\363\
---------------------------------------------------------------------------

    \362\ See Proposed Rule 610T(e). See also Proposing Release, 
supra note 2, at 13029-30.
    \363\ See Proposing Release, supra note 2, at 13030. See also 
Rule 610T(e).
---------------------------------------------------------------------------

    In the Proposing Release, the Commission asked several questions 
about the Exchange Transaction Fee Summary including questions about 
the proposed form, content, and posting requirements. Commenters 
supported requiring the equities exchanges to publicly post the 
Exchange Transaction Fee Summary as well as the proposed fields 
included in the summaries.\364\
---------------------------------------------------------------------------

    \364\ See, e.g., SIFMA Letter, at 6; Better Markets Letter, at 
7; Spatt Letter, at 4-5; and IEX Letter I, at 9.
---------------------------------------------------------------------------

    Among those questions included in the Proposing Release, the 
Commission specifically asked commenters to suggest types of 
information that should be captured on the Exchange Transaction Fee 
Summary that would be useful to make comparisons across exchanges, and 
a few commenters offered specific suggestions.\365\ Specifically, two 
commenters requested that the Exchange Transaction Fee Summary include 
the number of pricing tiers used by the exchanges, the number of firms 
that were in each tier, and information on transaction costs in each 
tier.\366\ Similarly, another commenter suggested that the Exchange 
Transaction Fee Summary provide context on the Base and Top Tier fees 
by including the number of member firms, by participant type, that 
qualified for the Base and Top Tier fees and rebates reported on the 
Exchange Transaction Fee Summary.\367\
---------------------------------------------------------------------------

    \365\ See Proposing Release, supra note 2, at 13031.
    \366\ See CFA Letter, at 5; Healthy Markets Letter I, at 22.
    \367\ See IEX Letter I, at 9.
---------------------------------------------------------------------------

    While the Commission appreciates these suggestions, it believes 
that adding more granular details about specific pricing tiers, which 
can vary greatly by exchange, would overcomplicate the fee summaries 
such that it would be difficult to standardize the information, thereby 
rendering the data less useful to researchers when comparing exchanges 
for purposes of the Pilot.\368\ Further, with respect to the number of 
members qualifying for the Base and Top Tier fees and rebates, the 
Commission believes that the information that exchanges will report on 
average and median realized fees and rebates should be sufficient for 
purposes of analyzing the Pilot's results, including any changes in 
order routing. We believe that the disclosure of the number of members 
qualifying for the Base and Top Tier fees and rebates would also 
require other disclosures (including, e.g., such member's trade volume 
at each tier) in order to provide context to the information. Providing 
all of these additional data points would increase the costs and 
complexity of the Pilot. The Commission however, does not believe that 
the incremental benefit of this information justifies additional costs 
and complexities. Accordingly, the Commission will not be requiring the 
exchanges to include additional information on their pricing tiers.
---------------------------------------------------------------------------

    \368\ See Proposing Release, supra note 2, at 13030.
---------------------------------------------------------------------------

    As part of its request for comment in the Proposal on what 
additional information would be helpful to include in the Exchange 
Transaction Fee Summary, the Commission specifically asked whether 
other measures beyond average and median fees should be selected.\369\ 
In response, one commenter recommended that in addition to requiring 
the average and median per share fees and rebates, the Commission also 
require the ``mode'' per share fee and rebate (i.e., the most 
frequently paid fee and rebate by each exchange's members), because the 
commenter believed it would ``enable a more accurate comparison of the 
fees and rebates most often applied by each exchange.'' \370\ The 
Commission appreciates this suggestion, but continues to believe that 
for purposes of this Pilot, the proposed information on mean and median 
realized fees and rebates will be sufficient for purposes of analyzing 
the results of the Pilot, including any changes in order routing.
---------------------------------------------------------------------------

    \369\ See Proposing Release, supra note 2, at 13031.
    \370\ See RBC Letter I, at 5.
---------------------------------------------------------------------------

    Lastly, a few commenters requested that the Exchange Transaction 
Fee Summary information be hosted at a central location rather than 
posted on the exchanges' individual websites.\371\ While the Commission 
recognizes that it could be more convenient if the information were 
made available in one central location, because the data must be made 
available unencumbered and in a standardized XML schema format, the 
Commission believes that any person would readily be able to obtain and 
combine the summaries posted by each equities exchange with minimal 
effort.

[[Page 5232]]

Because of this, the Commission is not adopting a requirement on 
exchanges to consolidate this material and make it available in a 
central location.
---------------------------------------------------------------------------

    \371\ See Better Markets Letter, at 7; CFA Letter, at 5; Healthy 
Markets Letter I, at 23.
---------------------------------------------------------------------------

3. Order Routing Data
    To facilitate an examination of the impact of the Pilot on order 
routing behavior, execution quality, and market quality, the Commission 
proposed to require throughout the Pilot (including during the pre-
Pilot Period and the post-Pilot Period) that each equities exchange 
prepare and publicly post a monthly downloadable file containing sets 
of anonymized order routing data in accordance with the specifications 
proposed in Rule 610T(d).\372\ Specifically, Rule 610T(d) would require 
exchanges to provide the order routing information in two datasets--one 
for liquidity-providing orders and one for liquidity-taking orders, 
both aggregated by day, security, and broker-dealer.\373\ The 
Commission further proposed that equities exchanges would be required 
to anonymize the identity of individual broker-dealers before making 
the order routing datasets publicly available, using an anonymization 
key provided by the Commission.\374\
---------------------------------------------------------------------------

    \372\ See Proposing Release, supra note 2, at 13031.
    \373\ Proposed Rule 610T(d)(1)-(2). The Commission notes that 
the proposed language in Rule 610T(d) has been modified slightly. As 
proposed, Rule 610T(d) contained the phrase ``each national 
securities exchange that trades NMS stocks. . . .'' As adopted, the 
clause ``that facilitates trading in NMS stocks'' is being 
substituted for the phrase ``that trades NMS stocks'' to clarify 
that exchanges facilitate trading by their members in NMS stocks.
    \374\ See Proposing Release, supra note 2, at 13032.
---------------------------------------------------------------------------

    A number of commenters supported the proposed requirements 
regarding the order routing datasets, expressing the belief that these 
requirements would provide researchers with useful data that would 
facilitate an analysis of the impact of transaction fees and rebates on 
order routing, execution quality, and market quality.\375\ Several 
commenters believed the data would enable the Commission to make data-
driven decisions on potential future equity market structure policy 
initiatives.\376\ Others specifically supported the website posting 
requirement to make the data freely and publicly available.\377\
---------------------------------------------------------------------------

    \375\ See, e.g., Barnard Letter, at 1; CII Letter, at 2-3; 
Better Markets Letter, at 7; Invesco Letter, at 1-2; Wellington 
Letter, at 1; CFA Letter, at 5; Clearpool Letter, at 6; ICI Letter 
I, at 5; RBC Letter I, at 5; Joint Pension Plan Letter, at 2; 
Oppenheimer Letter, at 2; IEX Letter I, at 10; Capital Group Letter, 
at 4; Healthy Markets Letter I, at 24; Angel Letter, at 1; Verret 
Letter I, at 1, 7; Spatt Letter, at 3.
    \376\ See, e.g., Clark-Joseph Letter, at 1; Nuveen Letter, at 2; 
NYSTRS Letter, at 1; RBC Letter I, at 2; Invesco Letter, at 2; CFA 
Letter, at 1; State Street Letter, at 2; AJO Letter, at 1; Vanguard 
Letter, at 2.
    \377\ See, e.g., AJO Letter, at 3-4; ICI Letter I, at 5; CFA 
Letter, at 5.
---------------------------------------------------------------------------

    In addition, other comments addressed matters such as: Separating 
held and not-held orders in the datasets, separating principal from 
agency orders in the datasets, and not collecting ``parent order'' 
routing information.\378\ Other commenters expressed concern that not 
collecting similar data from non-exchange venues would decrease the 
utility of the data and provide the Commission with an incomplete 
picture of the Pilot's impact.\379\ Other commenters were critical of 
the proposed order routing data requirements because they believed, 
despite the anonymization and aggregation requirements, that publicly 
available data could be reverse engineered to reveal commercially-
sensitive information about individual broker-dealers.\380\ These 
concerns are discussed further, below.
---------------------------------------------------------------------------

    \378\ See infra notes 382, 386, and 395-397.
    \379\ See supra notes 41-46.
    \380\ See infra note 404.
---------------------------------------------------------------------------

a. Held and Not-Held Orders
    The Commission proposed to require exchanges to separate out held 
and not-held orders in the order routing datasets and requested comment 
on whether orders should be separated out in that manner and whether 
there are certain shared characteristics of such orders that would be 
beneficial to assess when analyzing the Pilot data.\381\ In response, 
several commenters stated that exchanges currently do not capture 
whether orders are held or not held.\382\ Two commenters added that 
capturing that information would impose additional costs on market 
participants who would need to update their systems to include this 
information in the order messages they send to exchanges, as well as 
impose additional costs on exchanges to capture and report whether an 
order is held or not held.\383\
---------------------------------------------------------------------------

    \381\ See Proposing Release, supra note 2, at 13031, 13033.
    \382\ See FIA Letter, at 3 fn. 8; FIF Letter, at 6; Citadel 
Letter, at 3 fn. 5; IEX Letter I, at 10.
    \383\ See FIA Letter, at 3 fn. 8; IEX Letter I, at 10.
---------------------------------------------------------------------------

    The Commission has considered these comments and has determined not 
to require the exchanges to separate held and not-held orders in the 
order routing datasets. In proposing to require capture of held and 
not-held orders, the Commission sought to include a data field that is 
readily available to and currently captured by exchanges and that would 
provide insight into the capacity in which a broker-dealer is handling 
orders. In turn, that information could be useful to assess the broker-
dealer's routing of those orders. For example, orders that are ``held 
to the market'' may be routed differently than orders that are ``not 
held'' and for which the broker-dealer exercises more discretion in 
their execution. By separating out these orders, researchers would have 
access to an additional metric that potentially could be helpful in 
analyzing the Pilot data and parsing the results.
    As commenters have indicated, however, broker-dealers do not 
transmit this information to exchanges and exchanges thus do not 
capture it. The Commission does not wish to impose new data collection 
requirements with respect to this Pilot data field, and therefore is 
not adopting this element. However, as detailed below, the Commission 
is adopting a new requirement for exchanges to instead separate out 
orders based on their order capacity (e.g., principal, riskless 
principal, and agency), which information currently is transmitted to 
exchanges by broker-dealers.\384\
---------------------------------------------------------------------------

    \384\ See, e.g., FIX Tag 528 (Order Capacity) under FIX 4.4 and 
Fix Tag 47 (Rule80A) under TIF 4.2, available at http://btobits.com/fixopaedia/index.html.
---------------------------------------------------------------------------

b. Principal Order Flow and Order Capacity
    In response to the Commission's question in the Proposing Release 
about what data are necessary to facilitate an analysis of the 
potential conflicts of interest associated with transaction fees and 
rebates,\385\ several commenters requested that the order routing 
datasets exclude orders marked as principal or riskless principal 
because the potential conflicts of interest posed by exchange 
transaction fees and rebates pose a potential harm primarily when 
broker-dealers are routing orders for customers in an agency capacity 
and may be unduly influenced by exchange fees and rebates to the 
detriment of obtaining the best execution for the customer's 
order.\386\ To the extent a broker-dealer is routing its own 
proprietary order and is unduly influenced by exchange fees and 
rebates, then, at worst, it would only be harming itself. In other 
words, as noted by one commenter, ``a broker may route principal orders 
to maximize rebates and minimize access fees which would not be 
considered a conflict of interest.''\387\
---------------------------------------------------------------------------

    \385\ See Proposing Release, supra note 2, at 13033.
    \386\ See FIA Letter, at 3; SIFMA Letter, at 8; Citadel Letter, 
at 3; Citi Letter, at 5-6.
    \387\ SIFMA Letter, at 8. See also Cboe Letter I, at 3 fn. 8.
---------------------------------------------------------------------------

    Without separating out orders by their order capacity, one 
commenter argued that the order routing datasets could generate 
``misleading results'' because the trades of various market 
participants could be aggregated at the same broker

[[Page 5233]]

due to ``direct market access arrangements,'' and these orders would be 
indistinguishable from customer orders routed by that broker.\388\ In 
this way, agency orders (which are subject to conflicts of interest 
concerns that are relevant to the Pilot) could be mixed in with 
principal orders (which are not subject to conflicts of interest 
concerns that are relevant to the Pilot) and the inability to 
distinguish them could cloud the results. Accordingly, one commenter 
recommended separating principal and agency orders in the order routing 
datasets, while continuing to include both types of order flow.\389\ 
The commenter believed that specifically identifying the extent to 
which orders are principal orders or agency orders ``would further 
facilitate the analysis of order flow and a better understanding of the 
efficacy of the [P]ilot.'' \390\
---------------------------------------------------------------------------

    \388\ See FIA Letter, at 3 fn. 9.
    \389\ See Clearpool Letter, at 6.
    \390\ Id.
---------------------------------------------------------------------------

    After careful consideration of these comments, the Commission has 
determined to require exchanges to separate out orders by order 
capacity (e.g., principal, riskless principal, and agency). Requiring 
exchanges to separately aggregate orders according to their order 
capacity will allow researchers to more precisely parse the data as 
recommended by several commenters, particularly when analyzing the 
potential conflicts of interest in broker-dealer routing presented by 
exchange fee-and-rebate pricing models. For example, researchers will 
be able to separate out and exclude principal orders when studying 
conflicts of interest, as conflicts of interest do not present the 
potential for harmful impact with respect to such orders as they do for 
agency orders where the broker-dealer is routing for others. In 
addition, researchers will be able to include orders of any order 
capacity when studying other questions, such as intermediation, queue 
length, and time to execution, as such issues are relevant to orders of 
any capacity.
    Further, the Commission believes that principal orders should be 
included in the order routing datasets, as the Pilot is designed to 
assess more than just conflicts of interest between brokers and their 
customers in order routing. It also is designed to observe the impact 
of exogenous shocks to transaction fees and rebates on execution 
quality and market quality broadly. Accordingly, the Pilot will provide 
the opportunity to obtain useful data on matters such as 
intermediation, queue length, and time to execution; the impact of fees 
and rebates on liquidity adding and liquidity removing activity; the 
relationship between payment of rebates on making activity (or taking 
activity on an inverted exchange) and fee levels for taking activity 
(or making activity on an inverted exchange); and the impact of fees 
and rebates on order routing behavior generally. Consideration of these 
issues directly implicates principal order flow and, as such, the 
Commission believes it is critical for the aggregated volume statistics 
included in the order routing datasets to include principal orders.
c. Order Designation
    In response to questions in the Proposing Release on specific 
measures and data that would facilitate an analysis of the effects that 
changes to transaction fees and rebates have on order routing behavior, 
execution quality, and market quality, several commenters recommended 
that the Commission analyze the impacts of fees and rebates on various 
aspects of the execution quality of investors' limit orders.\391\ 
Further, on the impact that prohibiting rebates may have on quoted 
spreads and displayed liquidity, commenters also disagreed about the 
willingness and ability for investors, other than those that are 
motivated by rebate capture, to post liquidity in order to capture the 
quoted spread.\392\ In addition, in attempting to utilize transaction 
data to analyze the impact of reduced or eliminated rebates, one 
commenter recommended that the dataset exclude orders that presently 
are not eligible for rebates, such as those designated for 
participation in opening and closing auctions.\393\
---------------------------------------------------------------------------

    \391\ See, e.g., Fidelity Letter, at 8; ICI Letter I, at 5; 
SIFMA Letter, at 5-6; IEX Letter I, at 2. See also Proposing 
Release, supra note 2, at 13033.
    \392\ See supra notes 224-225 and accompanying text.
    \393\ See Mulson Letter I.
---------------------------------------------------------------------------

    While analyzing the impact of reduced or eliminated rebates is one 
potential analysis for which the Pilot's data may be useful, the 
Pilot's purpose is broader in scope. As such, the Commission continues 
to believe that it is appropriate for the order routing datasets to 
capture all liquidity-providing and liquidity-taking orders. However, 
in response to the commenters' recommendations discussed above and in 
an effort to ensure that the order routing data be as useful as 
possible and facilitate an analysis of the impacts of the Pilot, the 
Commission has determined to further refine the order routing dataset 
by requiring exchanges to report separately the volume statistics by 
``order designation,'' which will require exchanges to separate out 
post-only orders as well as auction orders.
    Separating the volume statistics in this manner will allow 
isolation of the cumulative number of post-only orders, which are limit 
orders that include instructions to never remove liquidity, and may be 
more reflective of a rebate-sensitive market participant. With the data 
further refined in this manner, the Commission believes the data will 
be more useful in analyzing the impacts of the Pilot both in comparing 
the pre-Pilot data to the Pilot data and in comparing the data across 
the Test Groups and Control Group during the Pilot. In particular, the 
further refinement will facilitate assessment of the impact of the 
Pilot on the willingness of investors to passively post orders and 
their ability to obtain queue priority (i.e., represent the best price 
in the exchange's limit order book) and capture the quoted spread when 
doing so (i.e., buy on the bid and sell on the offer).\394\
---------------------------------------------------------------------------

    \394\ See supra Section II.C.10.
---------------------------------------------------------------------------

    Furthermore, with respect to auction orders, which are orders 
specifically designated for execution in either an opening or closing 
auction, instead of separating out auction orders, exchanges may 
instead elect to simply exclude them from the order routing datasets, 
as an alternative means of complying with the order designation 
requirement. The Commission has determined to allow the exchanges to 
choose between these two approaches so that they may choose the option 
that is the least burdensome. If exchanges choose to include auction 
order data in the order routing datasets, they will need to comply with 
the requirement by separating orders by order designation, so that 
these orders may be separately identified and accounted for in any 
analyses of the Pilot's data.
    The ability to isolate auction orders recognizes the uniqueness of 
the auction process and will facilitate separation of that data in 
order to study the Pilot's impact on trading during the regular market 
session without potentially biasing the results by including auction 
activity, for which different trading rules, order types, and fees 
apply.

[[Page 5234]]

d. Broker Routing Data
    Several commenters addressed the utility of obtaining order routing 
data from broker-dealers that route customer orders in assessing the 
potential conflicts of interest related to transaction fees and 
rebates.\395\ Several of these commenters explained that obtaining data 
from broker-dealers (in addition to or in place of obtaining such data 
from exchanges) would facilitate an analysis of the impact of 
transaction fees and rebates on order routing behavior and potential 
conflicts of interest from the perspective of customers, as the brokers 
would have information that can be used to assess the execution quality 
of a ``parent order'' and would provide information on the broader 
universe of potential routing destinations, including non-exchange 
trading venues.\396\ One commenter added that investors needed to 
conduct their own analyses of their orders to understand the impact of 
the Pilot on their brokers.\397\
---------------------------------------------------------------------------

    \395\ See, e.g., Healthy Markets Letter I, at 24-25; Pragma 
Letter, at 3; NYSE Letter I, at 9-10; NYSE Letter II, at 12-13; 
Viable Mkts Letter, at 2; Babelfish Letter, at 3.
    \396\ See e.g., Healthy Markets Letter I, at 24-25; Pragma 
Letter, at 3; NYSE Letter I, at 9-10; NYSE Letter II, at 12; Viable 
Mkts Letter, at 2.
    \397\ See Babelfish Letter, at 3.
---------------------------------------------------------------------------

    The Commission is not requiring data collection from broker-dealers 
or non-exchange trading venues. The order routing datasets will include 
aggregated data from exchanges (as opposed to individual order level 
data from broker-dealers) representing the sum totals of the ``child'' 
orders that are processed by an exchange. While the Pilot will not 
capture the entire lifecycle of a ``parent'' order from its inception, 
the Commission believes that its approach will minimize the 
implementation costs on market participants while ensuring that the 
Commission and researchers have useful data on child orders to observe 
the impacts of introducing exogenous shocks to exchange transaction 
fees and rebates. The order routing data provided by the exchanges 
represents the information that would be directly correlated to these 
exogenous shocks. Data that is available elsewhere \398\ will provide 
the ability to understand any observed changes in order flows or market 
share to non-exchange venues during the Pilot.
---------------------------------------------------------------------------

    \398\ See FINRA OTC Transparency Data, available at https://otctransparency.finra.org/.
---------------------------------------------------------------------------

    Further, the Commission agrees with the commenters that noted that 
market participants need to conduct their own analyses of their own 
order flow. If market participants conduct their own analyses, 
including parent order-level analyses, and wish to provide that 
information to the Commission and the public, the Commission would be 
able to consider the information in assessing the Pilot's ultimate 
impact on order routing behavior, execution quality, and market 
quality. The Commission encourages market participants to conduct 
analyses and make the results of their analyses public. The Commission 
also encourages any interested party that prepares an analysis of the 
Pilot to submit it to the Commission for posting on the Commission's 
website.\399\
---------------------------------------------------------------------------

    \399\ See supra note 302 and accompanying text.
---------------------------------------------------------------------------

e. Directed Orders
    Two commenters recommended that the order routing datasets identify 
whether orders are directed or non-directed.\400\ One of these 
commenters believed that directed orders do not feature ``the same 
level of discretion and conflicts of interest that are the primary 
focus of the'' Pilot.\401\ After careful consideration of these 
comments the Commission has determined not to require the order routing 
datasets to identify directed orders. The Commission recognizes that 
researchers may be interested in isolating orders directed by customers 
to specific exchanges because these orders may not be subject to the 
same potential conflicts of interest that may be present when a broker 
chooses where to route a customer order. However, separating out 
directed orders in the datasets (which report aggregated data and not 
order-by-order data) would require exchanges and broker-dealers to 
incur additional costs in preparing the Pilot's order routing data. 
Further, the Pilot is designed to assess more than just conflicts of 
interest between brokers and their customers in order routing, and 
separate identification of directed and non-directed orders is not 
germane to the other questions the Pilot is designed to explore. 
Accordingly, the Commission believes that the additional implementation 
costs that adding such a requirement would impose are not justified by 
any benefits that may accrue from identifying, on an aggregated basis, 
directed orders in the order routing data.
---------------------------------------------------------------------------

    \400\ See Healthy Markets Letter I, at 23-24; Clearpool Letter, 
at 6.
    \401\ Healthy Markets Letter I, at 23.
---------------------------------------------------------------------------

f. Utilizing the Consolidated Audit Trail
    Two commenters recommended that, instead of requiring separate 
order routing datasets, the Commission instead use data that the 
equities exchanges will report to the Consolidated Audit Trail 
(``CAT'').\402\ In the Proposing Release, the Commission stated that if 
the equities exchanges are reporting to the CAT at the time the Pilot 
commences, they would be able to compile the order routing datasets by 
utilizing the data they collect pursuant to the CAT national market 
system plan.\403\ However, there have been delays in the development 
and building of the CAT, and the reporting required by the first phase 
of the CAT NMS Plan has been delayed. Although the exchanges and FINRA 
have recently begun to report certain data to the CAT central 
repository, they continue to work to fully implement the first phase of 
the CAT NMS Plan, including linkages between reported events and 
regulators' query functionality. The Commission believes that it is 
important to proceed with the Pilot and not delay the Pilot until the 
exchanges have begun full reporting to the CAT and the CAT operates in 
a manner that would facilitate the data analysis contemplated by the 
Pilot.
---------------------------------------------------------------------------

    \402\ See Citadel Letter, at 3; TD Ameritrade Letter, at 6. In 
response to the Commission's solicitation of comment in the 
Proposing Release on whether the CAT repository, if it were 
operational, would provide sufficient data to evaluate the Pilot, 
one commenter stated that it believed the data reported from the CAT 
would provide the necessary information with respect to order 
routing data. See FIF Letter, at 2.
    \403\ See Proposing Release, supra note 2, at 13031 n. 172 and 
accompanying text.
---------------------------------------------------------------------------

g. Anonymization and Public Availability
    Several commenters expressed concerns about having the exchanges 
publicly post the order routing datasets, despite the requirement that 
the exchanges anonymize the identities of broker-dealers before making 
the datasets publicly available. These commenters believed that the 
order routing data could potentially be ``reversed engineered'' such 
that market participants might be able to ascertain the identities of 
individual broker-dealers in some circumstances.\404\ In contrast, one 
commenter acknowledged that ensuring confidentiality is ``critical'' 
and was ``pleased to see that the SEC has recognized this in proposing 
anonymizing certain of the proposed data to protect confidential 
information.'' \405\
---------------------------------------------------------------------------

    \404\ See, e.g., FIA Letter, at 3; Virtu Letter, at 7-8; SIFMA 
Letter, at 6; FIF Letter, at 2; Citadel Letter, at 4; Citi Letter, 
at 6; TD Ameritrade Letter, at 5; STANY Letter, at 5; IEX Letter I, 
at 10; Credit Suisse Commentary, at 6; Morgan Stanley Letter, at 4.
    \405\ See Clearpool Letter, at 6-7.
---------------------------------------------------------------------------

    Of the commenters concerned about the potential for reverse 
engineering, one of these commenters provided an example of how the 
information could

[[Page 5235]]

be reverse engineered if ``a market participant could direct a large 
order in a particular symbol to a specific broker-dealer, and then 
identify the presence of that order'' in the order routing 
datasets.\406\ This commenter added that market participants may also 
be able to compare the order routing datasets with reports published 
pursuant to 17 CFR 242.605 (Rule 605 of Regulation NMS) to determine 
the identity of broker-dealers.\407\ Once a broker-dealer's identity is 
likely known, this commenter believed that competitors could use the 
order routing datasets to discern that broker's ``(a) market share and 
activity in a given security, (b) overall routing practices, and (c) 
relative aggressiveness or passiveness in specific securities.'' \408\ 
This commenter also believed that strategies used by institutional 
investors that are customers of broker-dealers ``may also be 
susceptible to reverse-engineering.'' \409\ Another commenter added 
that it believed ``market participants and others will be able to 
identify certain broker-dealers routing strategies by comparing the 
Pilot data to publicly available 17 CFR 242.606 (Rule 606) disclosures, 
or by other means,'' although it did not specify those other 
means.\410\
---------------------------------------------------------------------------

    \406\ Citadel Letter, at 4.
    \407\ See id.
    \408\ Id.
    \409\ Id.
    \410\ See TD Ameritrade Letter, at 5.
---------------------------------------------------------------------------

    Several of the commenters that expressed concern about the public 
availability of the order routing data, despite the proposed 
anonymization requirements, recommended approaches to address their 
concerns. Some of these commenters stated that the Commission should 
receive order routing data at the broker-dealer level, but that the 
public should only have access to data that is further aggregated, such 
that the data would include statistics for firms of similar types or 
business models, or simply aggregate all orders received by the 
exchange.\411\ However, in contrast, two commenters noted that the 
order routing data aggregated by broker would be important to analyses 
undertaken by researchers and therefore should be made more broadly 
available.\412\ Two other commenters suggested that if the order 
routing data aggregated by broker would be helpful for researchers, the 
Commission should provide that data to researchers only if they sign a 
non-disclosure agreement.\413\ In addition, three commenters 
recommended that if order routing datasets are to be made publicly 
available on exchange websites, they should be subject to a 120 day 
delay instead of a 30 day delay.\414\
---------------------------------------------------------------------------

    \411\ See, e.g., Citadel Letter, at 4; Credit Suisse Commentary, 
at 6; IEX Letter I, at 10; Morgan Stanley Letter, at 4; STANY 
Letter, at 5; SIFMA Letter, at 6-7; TD Ameritrade Letter, at 5; FIF 
Letter, at 7.
    \412\ See Lipson Letter, at 1; Spatt Letter, at 3.
    \413\ See Citadel Letter, at 5; Citi Letter, at 6.
    \414\ See SIFMA Letter, at 7; STANY Letter, at 5; Fidelity 
Letter, at 11.
---------------------------------------------------------------------------

    The Commission appreciates commenters' concerns about the need to 
safeguard the confidentiality of the order routing datasets. The 
Commission agrees that if market participants were able to identify 
specific broker-dealers in the datasets, there is the potential that 
the data could be reverse engineered to reveal proprietary information 
about trading attributable to specific broker-dealers. The Commission 
has revised its approach to eliminate the public availability of the 
order routing datasets to help address these concerns, while still 
furthering the goals of the Pilot. More specifically, to address 
commenters' concerns with the public availability of the data and the 
exchanges' role in preparing it for dissemination, the Commission is 
not adopting the requirement for the exchanges to anonymize \415\ and 
publicly post the order routing data.
---------------------------------------------------------------------------

    \415\ Several commenters expressed concerns that the equities 
exchanges would have access to the Broker Dealer Anonymization Key. 
See, e.g., Virtu Letter, at 8; SIFMA Letter, at 7; FIF Letter, at 2; 
STANY Letter, at 5; IEX Letter I, at 10; Morgan Stanley Letter, at 
4. As adopted, the exchanges would not have access to the Broker 
Dealer Anonymization Key, which addresses the commenters' concerns.
---------------------------------------------------------------------------

    The Commission, however, believes it is important for the 
Commission itself to have access to the order routing dataset, so the 
Commission can consider the effects of rebates and transaction-based 
fees on order routing behavior, execution quality, and market quality. 
Accordingly, given the potential for reverse engineering, the Exchanges 
will be required to provide order routing data directly to the 
Commission.
    While the Commission anticipated benefits from market participants, 
researchers, and others in conducting independent analysis of the Pilot 
and its impacts, the Commission has carefully balanced the concerns 
about possible reverse engineering of the order routing data against 
these benefits. The Commission believes that it can assess the effects 
of the transaction-fee and rebate models on order routing behavior and 
thereby achieve this goal of the Pilot without requiring public 
disclosure of order routing data attributable to a specific broker-
dealer.
    The Commission is not adopting the requirement for exchanges to 
make public in an anonymized form the order routing data, but the 
exchanges will instead identify individual broker-dealers by MPID or 
CRD number in the order routing data they send to the Commission. The 
Commission recognizes that order routing data attributable to a 
specific broker-dealer is particularly sensitive and is non-public 
information.\416\ The Commission, however, intends to make public 
analyses, results, and studies using the order routing data. In 
determining whether and how to make public this or any other 
information, the Commission will be sensitive to the concerns 
articulated by commenters and will consider steps such as aggregating 
or anonymizing order routing data.
---------------------------------------------------------------------------

    \416\ The Commission will deem broker-dealer identifying order 
routing data as being subject to a confidential treatment request 
under 17 CFR 200.83 without the need to submit a request. The 
Freedom of Information Act provides at least two potentially 
pertinent exemptions under which the Commission has authority to 
withhold certain information. See 5 U.S.C. 552(b)(4) and (8).
---------------------------------------------------------------------------

    Specifically, the Commission is adopting a requirement for each 
exchange to prepare and transmit directly to the Commission, in pipe-
delimited ASCII format, no later than the last day of each month, a 
file containing sets of order routing data.\417\ While the Commission 
is not requiring the exchanges to anonymize the data and thus will no 
longer provide exchanges with the Broker-Dealer Anonymization Key, the 
Commission is requiring each exchange to provide its order routing data 
by broker-dealers' CRD number and MPIDs in order to provide aggregated 
broker-dealer level data to the Commission to facilitate its analysis 
of the data.\418\
---------------------------------------------------------------------------

    \417\ See Proposing Release, supra note 2, at 13033 (asking 
whether commenters think exchanges should be required to report the 
datasets directly to the Commission). Further, in its Proposal, the 
Commission noted that it considers the order routing data to be 
``regulatory'' information and proposed to prohibit exchanges from 
accessing or using the information for commercial purposes. See id. 
at 13032. The Commission is adopting as proposed the prohibition on 
exchange personnel accessing the data for commercial purposes, as 
exchanges will have access to the information.
    \418\ See id. at 13032. See also Rule 610T(d)(1)(iv) and 
(d)(2)(iv).
---------------------------------------------------------------------------

    The Commission believes that the suggested alternative to further 
aggregate the datasets, for example, to combine the data of several 
firms together or combine all firms together, would seriously 
compromise the ability of researchers to investigate the potential 
conflicts of interest in routing because researchers would not be able 
to see an individual broker-dealer's orders across all exchanges and 
thereby would not be able to assess how any particular broker-dealer 
may have been influenced by fees and rebates at

[[Page 5236]]

different exchanges.\419\ Because broker-dealer level data already is 
consolidated (i.e., the data would not separate out individual customer 
activity), adding another level of consolidation by grouping broker-
dealers together would cloud insight into the potential conflicts of 
interest question, rendering the data potentially useless for the 
purpose of studying conflicts of interest. Accordingly, the Commission 
continues to believe that it needs access to the order routing data in 
its proposed form, without further aggregation of the data.\420\
---------------------------------------------------------------------------

    \419\ See, e.g., CFA Letter, at 5 (believing that ``breaking the 
data out at the broker-dea[le]r level will permit a closer 
examination of how different broker-dealers may change their order 
routing behavior in response to changes in fees and rebates at each 
exchange.''); Lipson Letter, at 1; Spatt Letter, at 3; Better 
Markets Letter, at 7; Healthy Markets Letter I, at 24 fn. 87.
    \420\ The Commission notes that the proposed language in Rule 
610T(d)(1)(vi)(F), (d)(1)(xii)(H), and (d)(2)(vi)(F) has been 
modified slightly. As proposed, Rule 610T(d)(1)(vi)(F) and Rule 
610T(d)(2)(vi)(F) both noted that the order size code at the largest 
share bucket was ``> 10,000.'' As adopted, the largest share bucket 
order size code will be reflected as ``>= 10,000 share bucket.'' In 
addition, as proposed, Rule 610T(d)(1)(xii)(H) set forth a time 
frame of ``> 30 minutes of order receipt.'' As adopted, that time 
frame will be clarified to state that the time frame is ``>=30 
minutes of order receipt.''
---------------------------------------------------------------------------

F. Implementation

    The Commission proposed to publish a notice setting forth the start 
and end dates of the pre-Pilot, Pilot, and post-Pilot Periods.\421\ If 
applicable, the Commission also would publish a notice if it determines 
to suspend the one-year sunset of the Pilot Period.\422\ As discussed 
in the Proposing Release, the start date of the pre-Pilot Period would 
be one month from the date the Commission issues the notice, and the 
end date of the pre-Pilot Period would be six months from the pre-Pilot 
Period's start date. Thus, the Pilot, which is to start at the 
conclusion of the pre-Pilot Period, would begin seven months from the 
date the Commission issues the notice. The post-Pilot Period would 
commence at the conclusion of the Pilot and would end six months from 
the post-Pilot Period's start date. The Commission proposed to publish 
the initial notice setting forth the start date for each of the Pilot's 
three periods, and do so with a one-month minimum advance notice in 
order to allow the equities exchanges to finalize their preparations 
for the Pilot's pre-Pilot Period, as well as provide at least a seven-
month advance notice to market participants of the start date on which 
the Pilot's conditions would go into effect.\423\
---------------------------------------------------------------------------

    \421\ See Proposing Release, supra note 2, at 13033.
    \422\ See id.
    \423\ See id. at 13033-34.
---------------------------------------------------------------------------

    One commenter agreed that a one-month period between the 
Commission's notice and the start of the pre-Pilot Period would be 
``sufficient provid[ed] there are no changes to the Pilot securities 
lists and assigned test/control groups.'' \424\ This commenter also 
agreed that the proposed seven-month period following the Commission's 
notice would be ``sufficient to prepare for the Pilot.'' \425\ However, 
this commenter requested that ``any technical specification materials 
required to support implementation of the Pilot be reviewed with the 
industry and finalized in an expeditious manner, six months prior to 
the launch of the pre-Pilot data gathering phase,'' which the commenter 
believed would ``allow[ ] necessary time for industry firms to properly 
scope necessary development work and assign respective resources.'' 
\426\ Another commenter, however, did not believe that a one month 
period prior to the start of the pre-Pilot period would be sufficient 
for the industry to prepare and instead estimated that ``the 
implementation of the pre-Pilot processing alone [would] take between 
three to four months.'' \427\ As discussed and addressed above, a few 
commenters recommended that the Pilot begin with a limited phase-in 
period with a small number of securities.\428\
---------------------------------------------------------------------------

    \424\ See FIF Letter, at 7-8.
    \425\ See id. at 8.
    \426\ See FIF Letter, at 8.
    \427\ See Cboe Letter I, at 21.
    \428\ See supra notes 349-350 and accompanying text.
---------------------------------------------------------------------------

    After careful consideration of the comments received, the 
Commission continues to believe that the proposed implementation 
approach should provide adequate notice and time for those impacted by 
the Pilot to prepare for its requirements. The Pilot will begin with a 
six-month pre-Pilot period during which exchanges will not need to 
revise their fees to comply with the Pilot. At the conclusion of the 
pre-Pilot Period, exchanges will be required to revise any of their 
fees, which will apply to the Pilot Securities, that currently exceed 
the terms of the Pilot's Test Groups. While the Exchange Act allows 
exchanges to file their fees for immediate effectiveness, exchanges may 
choose to preview their Pilot-related fee changes to their membership 
to provide them with additional time to adjust their order routing 
systems in response to those changes.\429\ The Commission does not 
anticipate that technical specification materials will be required to 
support implementation of the Pilot by broker-dealers because the Pilot 
solely concerns exchange fees which exchanges commonly adjust with 
little or no advance notice though immediately effective fee filings 
with the Commission. Therefore, broker-dealers currently are accustomed 
to accommodating the types of fee changes that would be required to 
comply with the requirements of the Pilot.
---------------------------------------------------------------------------

    \429\ Although broker-dealers will need to account for different 
fee and rebate levels across two Test Groups and the Control Group 
if exchanges maintain different fee and rebate levels across the 
treatment groups, they will have seven months before the start of 
the Pilot Period to update their execution algorithms, including to 
accommodate the prohibition on rebates and Linked Pricing in the no-
rebate Test Group.
---------------------------------------------------------------------------

    Further, the Commission believes that publishing the start date for 
each of the Pilot's three periods in advance, with at least one month's 
advance notice, will provide the exchanges with time to prepare the 
three types of data required by the Pilot. First, because the 
Commission will determine the initial List of Pilot Securities, the 
exchanges will only need to perform the ministerial task of separating 
out their listed issuers and creating the Pilot Securities Exchange 
Lists and Pilot Securities Change Lists. Second, the Exchange 
Transaction Fee Summaries will require each exchange to summarize its 
own fees, for which it is solely responsible, in the specified XML 
format. For the initial Exchange Transaction Fee Summary, which would 
be posted prior to the start of trading on the first day of the pre-
Pilot Period, exchanges would not need to include information that is 
calculated on a look-back basis, because the look-back period for that 
report would pre-date the pre-Pilot Period. Accordingly, preparation of 
the initial Exchange Transaction Fee Summary report should be 
streamlined.\430\ Finally, the order routing datasets, because they 
also are prepared on a look-back basis, will not need to be prepared 
until the end of the second month of the pre-Pilot Period (as it will 
contain data for the first month of the pre-Pilot period).\431\ 
Accordingly, the Commission continues to believe that the proposed time 
frames set forth in Rule 610T(c)(4) are sufficient to allow the 
equities exchanges and market participants to prepare for the 
requirements of the pre-Pilot Period, the Pilot Period, and the post-
Pilot Period.
---------------------------------------------------------------------------

    \430\ The fields in the Exchange Transaction Fee Summary that 
are calculated based on a look-back period to the prior month are: 
Rule 610T(e)(9) (month and year of the average and median figures); 
(12) average take/make; and (13) median take/make.
    \431\ See Proposed Rule 610T(d).

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[[Page 5237]]

    No comments were received regarding the required notice to suspend 
the automatic sunset provision. Accordingly, the Commission adopts this 
aspect of the Pilot for the reasons outlined in the Proposing Release.

G. The Commission's Authority To Conduct the Pilot

    The Commission is adopting the Pilot in furtherance of its 
statutory responsibilities. In 1975, Congress directed the Commission, 
through enactment of Section 11A of the Exchange Act, to use its 
authority under the Exchange Act to facilitate the establishment of a 
national market system to link together the multiple individual markets 
that trade securities. Congress intended the Commission to take 
advantage of opportunities created by new data processing and 
communications technologies to preserve and strengthen the securities 
markets. Congress also directed the Commission to exercise this 
authority ``to carry out'' certain ``objectives,'' which include 
assuring: ``economically efficient execution of securities 
transactions''; ``fair competition among brokers and dealers, among 
exchange markets, and between exchange markets and markets other than 
exchange markets''; the ``availability . . . of information with 
respect to quotations for and transactions in securities''; and '' an 
opportunity . . . for investors' orders to be executed without the 
participation of a dealer.'' \432\ In addition, the Exchange Act 
elsewhere requires that the rules of national securities exchanges (i) 
``provide for the equitable allocation of reasonable dues, fees, and 
other charges among its members and issuers and other persons using its 
facilities,'' (ii) not be designed to ``permit unfair discrimination 
between customers, issuers, brokers, or dealers,'' and (iii) not 
``impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of [the Act].'' \433\
---------------------------------------------------------------------------

    \432\ 15 U.S.C. 78k-1(a)(1)(C), (a)(2); see also id. sec. 78k-
1(c)(1) (stating that self-regulatory organizations shall not make 
use of the mails or any means or instrumentality of interstate 
commerce to collect, process, distribute, publish, or prepare for 
distribution or publication any information with respect to 
quotations to assist, participate in, or coordinate the distribution 
or publication of such information, or to effect any transaction in, 
or to induce or attempt to induce the purchase or sale of, any such 
security in contravention of such rules and regulations as the 
Commission shall prescribe to ``assure the . . . fairness and 
usefulness of the form and content of such information'').
    \433\ 15 U.S.C. 78f(b)(4), (b)(5), (b)(8). The Commission also 
has authority to adopt the Pilot pursuant to Exchange Act Sections 
17(a) [15 U.S.C. 78q(a)] (requiring each exchange to make and keep'' 
for prescribed periods such records, furnish such copies thereof, 
and make and disseminate such reports as the Commission, by rule, 
``prescribes as necessary or appropriate in the public interest, for 
the protection of investors, or otherwise in furtherance of the 
purposes of [the Act]''), and 23(a) [15 U.S.C. 78w(a)] (granting the 
Commission the power to make such rules and regulations as may be 
``necessary or appropriate to implement the provisions of this 
chapter'' for which the Commission is responsible or for the 
execution of the functions vested in the Commission by the Act).
---------------------------------------------------------------------------

    Through these provisions Congress conferred on the Commission 
``broad authority to oversee the SROs' `. . . operation . . .' of the 
national market system.'' \434\ And it is pursuant to this authority 
that the Commission originally adopted Rule 610(c). The Pilot reflects 
the Commission's efforts to evaluate, in light of changing market 
conditions, whether the existing transaction-based fee and rebate 
structure continues to further the statutory goals. In that sense, the 
Pilot follows as an appropriate progression from Rule 610, and it 
represents an important step in the Commission's continuing obligation 
to implement Congress's objectives for the national market system.
---------------------------------------------------------------------------

    \434\ City of Providence, Rhode Island v. BATS Global Mkts., 
Inc., 878 F.3d 36, 41 (2d Cir. 2017).
---------------------------------------------------------------------------

    The Commission disagrees with the suggestion by one commenter that 
the Pilot is inconsistent with Exchange Act Section 19(b)(3)(A), which 
sets out part of the process by which proposed rule changes by self-
regulatory organizations may become effective.\435\ Contrary to the 
commenter's suggestion, nothing in Section 19 interferes with the 
Commission's authority described elsewhere in the Exchange Act. Indeed, 
Section 19 itself makes clear that the Commission retains ultimate 
authority over the rules of registered exchanges, providing that ``[n]o 
proposed rule change [by a self-regulatory organization] shall take 
effect unless approved by the Commission or otherwise permitted in 
accordance with [Section 19(b)]'' \436\ and making clear that the 
Commission retains authority to suspend and institute proceedings to 
approve or disapprove even those exchange rules that are permitted to 
take effect upon filing with the Commission.\437\ Moreover, Section 19 
explicitly permits the Commission to summarily implement or suspend any 
such proposed rule changes if, in the Commission's view, doing so would 
serve the public interest, protect investors, or assist in maintaining 
fair and orderly markets.\438\ And it makes clear that the Commission 
retains authority to amend exchanges' rules on its own initiative.\439\
---------------------------------------------------------------------------

    \435\ See Cboe Letter I, at 10-11. See 15 U.S.C. 78s(b)(3)(A).
    \436\ 15 U.S.C. 78s(b)(1).
    \437\ Id. Sec. 78s(b)(3).
    \438\ Id. Sec. 78s(b)(3)(B), (C).
    \439\ Id. Sec. 78s(c).
---------------------------------------------------------------------------

    Commenters also disagreed about whether the Pilot complied with the 
Commission's statutory obligations under the Administrative Procedure 
Act \440\ (``APA'') and whether the Pilot is consistent with the 
Exchange Act.\441\ For example, working from the premise that the APA 
requires the Commission to `` `examine[ ] the relevant data and 
articulate[ ] a satisfactory explanation for its action including a 
rational connection between the facts found and the choices made,' '' 
\442\ one commenter believed that the Commission ``lacks the 
administrative record,'' ``evidence'' and ``analysis'' that would be 
``needed to justify such drastic government intrusion into free 
markets.'' \443\ Another commenter, however, disputed that notion and 
observed that the Commission had developed the Pilot, in part, by 
relying on ``empirical literature'' that ``is directly on point and 
speaks to the potential distortionary effects that the pilot program is 
designed to study'' and that ``certainly provides strong empirical 
support for further analysis by way of data generated through a pilot 
study.'' \444\ The responding commenter also found it significant that 
the Commission was ``presently in the midst of a formal notice and 
comment process . . . which was informed by years of discussion at, and 
a proposal from, the [EMSAC]'' and that the Commission ``had chosen to 
act via a pilot program rather than a proposal for a long-term rule.'' 
\445\ The commenter therefore believed the

[[Page 5238]]

Commission had fulfilled its statutory obligations in ``determin[ing] 
that, given existing evidence suggesting the distortive effect of 
practices in the market tied to rebates or access fees, a pilot program 
will provide sufficient information to inform potential future 
rulemaking.'' \446\
---------------------------------------------------------------------------

    \440\ 5 U.S.C. 500, et seq.
    \441\ A few commenters suggested that the Pilot ``would not 
withstand judicial scrutiny'' because certain aspects of the Pilot 
were ``arbitrary and capricious and not in accordance with law.'' 
See, e.g., Nasdaq Letter I, at 3. Specifically, these commenters 
challenged the sufficiency of the Commission's economic analysis, 
the exclusion of non-exchange trading centers from the Pilot, the 
inclusion of ETPs in the Pilot, the ability of the Pilot to provide 
the Commission with usable data, and the Commission's decision to 
pursue a Pilot instead of other market structure initiatives. See, 
e.g., Nasdaq Letter I, at 1-4, 8-9, 11; Cboe Letter I, at 12; NYSE 
Letter, at 2-3, 7. These specific concerns are addressed in Section 
IV (discussing the Commission's economic analysis), Section II.A.4 
(discussing the exclusion of non-exchange trading centers from the 
Pilot), Section II.B.3 (discussing the inclusion of ETPs in the 
Pilot), Section II.E (discussing the ability of the Pilot to provide 
the Commission with usable data), notes 307-319 supra (discussing 
the Commission's decision to pursue a Pilot in conjunction with 
other market structure initiatives).
    \442\ Nasdaq Letter I, at 11 (quoting Motor Vehicle Mfrs. Ass'n 
of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 
(1983)).
    \443\ Id. at 11-12.
    \444\ Verret Letter I, at 5-6.
    \445\ Id. at 6.
    \446\ Id. at 5.
---------------------------------------------------------------------------

    The Commission agrees and notes that it has carefully examined 
available data on this issue, engaged in a lengthy and deliberative 
process, and taken into account the recommendations of two independent 
advisory bodies (EMSAC and the Investor Advisory Committee). The 
Commission developed the Pilot through a thorough review of the 
empirical literature, which was cited and discussed in the Proposing 
Release, as well as submitted as comments in response to this 
proposal.\447\ Moreover, as discussed in the Proposal, the EMSAC 
conducted a thorough process to consider, and ultimately formally 
recommend, that a pilot be conducted.\448\ The EMSAC reflected a broad 
and diverse set of perspectives. In addition, EMSAC heard testimony 
from experts during its open meetings (which included as panelists 
senior executives from exchanges) regarding exchange fee models, the 
appropriateness of a transaction fee pilot, and the shape that such a 
pilot should take.\449\ In addition to EMSAC, the independent Investor 
Advisory Committee also submitted a recommendation in support of the 
Pilot.\450\
---------------------------------------------------------------------------

    \447\ See, e.g., Swan Letter; IEX Letter I; NYSE Letter I.
    \448\ See Proposing Release, supra note 2, at 13009 n.6, 13012-
14.
    \449\ See id. at 13009-14.
    \450\ See IAC Recommendation.
---------------------------------------------------------------------------

    After considering all of the available information, the Commission 
has identified a fundamental disagreement among exchanges, market 
participants, academics, and industry experts regarding the impact of 
such fees and rebates on the markets.\451\ This disagreement is further 
exacerbated by the lack of data to evaluate these competing claims. The 
Commission believes that the Pilot is necessary to study the impact of 
exchange fees and rebates to determine whether a regulatory response is 
needed to mitigate the potential distortions that current exchange 
pricing models introduce to order routing behavior, market quality, and 
execution quality.
---------------------------------------------------------------------------

    \451\ See, e.g., Section II.A.2. supra for a discussion of 
comments regarding the impact of current pricing models on market 
quality, execution quality, and order routing.
---------------------------------------------------------------------------

    Some commenters argued that the Pilot's imposition of new fee caps 
constituted ``impermissible government rate-making.'' \452\ For 
example, one exchange commenter stated that ``[g]overnment-imposed 
price controls'' ``reduce choices for market participants,'' ``distort 
competition between over-the-counter venues and exchanges,'' and are 
``costly to administer and lacking in an incentive to be efficient,'' 
such that ``they are only indicated where they overcome severe market 
imperfection such as monopoly ownership of a critical resource.'' \453\ 
As discussed above, another commenter asserted that the Exchange Act 
``plainly contemplates that exchanges, rather than the SEC, will make 
an initial determination as to the price of a particular product or 
service,'' and indicating that ``fee setting is the province of each 
exchange, subject to the competitive forces that naturally control 
fees'' and ``subject to oversight only in particular situations.'' 
\454\
---------------------------------------------------------------------------

    \452\ Nasdaq Letter I, at 2. See also Cboe Letter I, at 1.
    \453\ Nasdaq Letter I, at 5, 11-12. See also Cboe Letter I, at 
11; Mexco Letter, at 1. One commenter agreed that ``price controls 
on access fees indicate something is broken in market structure,'' 
but observed that ``there has been no serious economic analysis, let 
alone a cost-benefit analysis, of what the optimal fee cap (if any) 
should be'' and that the Pilot would ``provide solid evidence that 
can be used to determine the optimal fee cap.'' Angel Letter I, at 
1-2; Angel Letter II, at 2.
    \454\ Cboe Letter I, at 10 (citing 15 U.S.C. 78s(b)(3)(A)(ii), 
which provides that ``a proposed rule change shall take effect upon 
filing with the Commission if designated by the self-regulatory 
organization as. . . establishing or changing a due, fee, or other 
charge imposed by the self-regulatory organization on any person, 
whether or not the person is a member of the self-regulatory 
organization''). This commenter also noted that ``every single 
exchange transaction fee in place today was filed with, and 
processed by, the Commission'' and that any fees that were 
inconsistent with the Exchange Act ``could have been suspended or 
abrogated by the Commission if that were deemed necessary.'' Id. at 
6.
---------------------------------------------------------------------------

    Commenters expanded on this argument by stating that the Commission 
had not sufficiently ``evaluate[d] whether there is any evidence that 
the Commission's objectives in adopting the cap on access fees . . . 
are not being met.'' \455\ One commenter, for example, found it 
``concerning that the fee caps in the proposed Pilot do absolutely 
nothing to further the justification of the original cap and, unlike 
the original access fee cap, are set at levels that completely undercut 
existing rates.'' \456\ Exchange commenters further contended that the 
Pilot imposes ``completely new limitations on exchanges' business'' 
that were ``unrelated to Regulation NMS's Access Fee Cap,'' because the 
Pilot would ``expand[ ] the cap on fees that exchanges may charge for 
execution not only against a protected quote, but for execution against 
any quote on an exchange, including depth-of-book and non-displayed 
orders,'' as well as ``limit . . . the rebates that an exchange pays'' 
and ``pricing that is linked to providing or removing liquidity on an 
exchange.'' \457\
---------------------------------------------------------------------------

    \455\ NYSE Letter I, at 11. This commenter identified the 
relevant ``objectives'' of Rule 610(c) as preventing the exchanges 
from ``undermining Regulation NMS's price protection and linkage 
requirements.'' Id. Another commenter similarly characterized the 
``justification for the fee cap under Rule 610(c)'' as ``the 
existence of sustained market power created by the requirement of 
best execution and the prohibition against trading through,'' which 
would permit exchanges to ``charge high access fees thereby 
undermining Regulation NMS's price protection and linkage 
requirements.'' This commenter believed that the Commission had 
wrongfully assumed ``that the market power presumably wielded by 
equities exchanges is so great that they may charge excessive fees 
now and in the future'' unless ``artificial government price 
constraints'' are imposed. Nasdaq Letter I, at 12-13, 12 n.38. The 
third commenter stated that the ``original fee cap rationale'' was 
to ``address predatory outlier pricing.'' Cboe Letter I, at 14.
    \456\ Cboe Letter I, at 14.
    \457\ NYSE Letter I, at 12. See also Cboe Letter I, at 10 
(stating that it was a ``conflict[ ] with the purposes of the 
Exchange Act and [a] depart[ure] from Commission precedent'' to 
``cap fees for transactions that do not implicate intermarket price 
protection'' and ``ban[ ] linked pricing,'' which has been 
``utilized by exchanges with SEC consent for years'').
---------------------------------------------------------------------------

    The Pilot has two Test Groups, one of which does not cap fees at 
all, but rather leaves in place the current Rule 610(c) fee cap and 
simply prohibits exchanges from paying rebates or offering Linked 
Pricing. The other Test Group does impose a lower fee cap for a small 
portion of NMS stocks (730 out of over 8,000 NMS stocks) for a limited 
period of time, but is doing so to study the effects of exchange fee-
and-rebate pricing models and to gather data to assess the impact on 
the markets and market participants of a revised and lowered cap 
compared to the current cap. Further, the Commission selected an amount 
for that cap that was recommended by commenters, including the Investor 
Advisory Committee.
    As explained above, the existing fee cap was designed, in part, to 
prevent trading centers from charging unreasonably high fees to market 
participants required to honor their quotations by the Order Protection 
Rule.\458\ Because ``[a]ccess fees tend to be highest when markets use 
them to fund substantial rebates to liquidity providers, rather than 
merely to compensate for agency services,'' the Commission was 
concerned that ``the published quotations of [outlier]

[[Page 5239]]

markets would not reliably indicate the true price that is actually 
available to investors or that would be realized by liquidity 
providers.'' \459\ The Commission explained that the fee cap helped 
assure the fairness and usefulness of quotation information; limit the 
extent to which the true price for those who access quotations can vary 
from the displayed price; permit broker-dealers to route orders in a 
manner consistent with the operation of a national market system; and 
protect limit orders and promote best-priced quotations.\460\ 
Accordingly, the Commission imposed a $0.0030 fee cap, which it 
believed reflected a competitive rate that was consistent with current 
business practices at the time (i.e., in 2005).\461\
---------------------------------------------------------------------------

    \458\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496, 37545 (June 29, 2005) (File No. S7-10-04).
    \459\ Id.
    \460\ Id.
    \461\ Id.
---------------------------------------------------------------------------

    In establishing the Rule 610(c) fee cap, the Commission did not, 
however, cede its responsibility to ensure that markets continue to 
function in a fair, transparent, and efficient manner; nor did it state 
that the $0.0030 fee cap could not be revisited if market conditions 
changed. The Pilot is designed to determine, among other things, 
whether such a change has occurred. Despite assertions by one commenter 
that ``powerful competitive forces are clearly present that discourage 
exchanges from exercising unabated pricing power,'' \462\ a $0.0030 fee 
is still consistently charged by many exchanges, raising concerns among 
other commenters that the fee cap is stuck at a non-competitive and, 
perhaps, an artificially high rate.\463\ Several commenters have also 
indicated that current pricing models have resulted in the kind of 
distortive pricing that Rule 610(c) was designed to prevent.\464\ 
Testing lower fee levels, and a no-rebate fee regime,\465\ will help 
the Commission to determine whether further regulatory action is needed 
to achieve the objectives of Rule 610(c) as well as the Commission's 
statutory mandate to oversee the equities markets.
---------------------------------------------------------------------------

    \462\ Nasdaq Letter I, at 13.
    \463\ See, e.g., BlackRock Letter, at 1 (``[T]he existing access 
fee cap is outdated and permits market forces to drive fees and 
rebates to excessive levels relative to the current magnitude of 
commissions and bid-ask spreads.''); Goldman Sachs Letter, at 2 
(identifying a ``well-developed, general consensus amongst market 
participants that a $0.0030 per share Fee Cap is an outdated 
benchmark for execution costs in today's trading environment . . . 
and far from representative of true prices in the marketplace''); 
Citi Letter, at 1-2 (stating that ``today's 30-mil cap on access 
fees that the exchanges can charge to access liquidity on their 
venues represents a more significant percentage of the economics of 
each trade'').
    \464\ See, e.g., ICI Letter I, at 2 (``Transaction fees and 
rebates also undermine market transparency because the prices 
displayed by exchanges--and provided on trade reports--do not 
include fee or rebate information and therefore do not fully reflect 
net trade prices.''); Goldman Sachs Letter, at 3 (stating that 
``displayed prices do not reflect the actual economic costs because 
exchange fees and rebates are not reflected in those prices''); 
Oppenheimer Letter, at 2 (``[T]o the extent that transaction fees 
and rebates obfuscate the actual price bid or offered for a 
security, the `maker-taker' pricing model has the potential to 
undermine price transparency . . . .'').
    \465\ In response to commenters who complained that the Pilot's 
fee cap Test Group applies to fees to provide liquidity, instead of 
being limited to fees to remove liquidity as is the case for Rule 
610(c), and therefore it is ``unrelated'' to the existing fee regime 
and the Rule 610(c) construct, the Commission notes that when it 
adopted the Rule 610(c) fee cap it expressly noted that it would 
``monitor the operation of these rules to assess whether in practice 
. . . broader coverage of the rule is necessary.'' See NMS Adopting 
Release, supra note 10, at 37546.
---------------------------------------------------------------------------

    The Commission's position is echoed by other commenters that found 
the ``suggest[ion] that the Commission lacks the authority to implement 
the Pilot, or that testing a rebate ban or alternative access fee caps 
would constitute an impermissible form of price control . . . 
meritless'' \466\ or ``entirely inaccurate.'' \467\ One commenter, for 
example, noted that the Exchange Act ``provides very broad authority 
for the Commission to regulate all aspects of exchange operation, 
including fee schedules . . . .'' \468\ This commenter further observed 
that ``it makes no sense to attack the Commission's proposal as an 
impermissible form of `rate setting' when the markets have been 
operating with exchange fee limits for more than 10 years.'' \469\ 
Moreover, this commenter asserted that ``exchange criticisms'' 
regarding ``price control[s]'' are ``contradicted by their acceptance 
of th[e] existing price regulation'' in Rule 610(c), which ``may better 
serve their interests than the alternative caps and rebate prohibition 
included in the Pilot.'' \470\
---------------------------------------------------------------------------

    \466\ IEX Letter I, at 6.
    \467\ Verret Letter I, at 2. See also IAC Recommendation, at 1 
(``[T]he purpose of the Pilot is not to consider imposing price 
controls, but instead to consider requiring fees (of whatever size) 
to be structured so as to minimize complexity and agency costs.'').
    \468\ IEX Letter I, at 6-7 (``The fact that the SEC has not 
previously chosen to use its authority to prohibit rebates, or test 
their elimination through a pilot, does not mean it lacks authority. 
. . .''); see also Verret Letter I, at 3.
    \469\ IEX Letter II, at 9. See also Verret Letter I, at 2 
(stating that ``one might properly describe the Reg NMS regime as 
itself a decade-long experiment in price controls'').
    \470\ IEX Letter I, at 7; IEX Letter II, at 9 (``NYSE seems to 
be saying, `We are fine with the current fee regulation, because we 
have been able to operate very profitably under it, but it would be 
illegal to even test different fee restrictions unless you impose 
them on ATSs.''). See also, e.g., Verret Letter I, at 2 (``Exchanges 
appear comfortable when price controls on the liquidity taking side 
benefit their business models, but challenge the Commission's 
authority to implement what they describe as price controls when 
their own business models are negatively impacted.''); Larry Harris 
Letter, at 6 (noting that ``exchange holding companies have a strong 
interest in maintaining the current system'' and that the ``SEC may 
reasonably consider these interests when evaluating comments 
submitted by the exchanges); Themis Trading Letter II, at 3 (stating 
that the Commission should not be ``distracted. . . by conflicted 
stock exchanges desperately fearful that their business models might 
come crashing down'').
---------------------------------------------------------------------------

    A few other commenters believed that the Commission had not 
sufficiently identified or discussed the statutory authority to conduct 
the Pilot.\471\ One commenter stated that the Proposing Release did not 
contain an ``explanation as to how those specific statutory sections 
[cited by the Commission], either individually or collectively, provide 
the Commission with the authority to carry out the Proposal's broad 
rate-setting requirements'' or a ``discussion of the Commission's 
statutory authority at all . . . .'' \472\ This commenter asserted that 
the Commission ``cannot simply skip this analysis or assume it has 
unrestricted authority to conduct pilots on the basis that the Proposal 
is intended to be temporary.'' \473\
---------------------------------------------------------------------------

    \471\ See, e.g., Cboe Letter I, at 9.
    \472\ NYSE Letter I, at 12.
    \473\ Id. See also Cboe Letter I, at 11. For example, the 
commenter noted that the Commission had ``provided no analysis or 
discussion demonstrating its reasoned decision-making of how the 
specific fee structures to be mandated in the Proposal would be 
equitably allocated or reasonable'' under Section 6 of the Exchange 
Act. NYSE Letter I, at 12. See also 15 U.S.C. 78f(b)(4) (requiring 
the rules of an exchange to ``provide for the equitable allocation 
of reasonable dues, fees, and other charges among its members and 
issuers and other persons using its facilities'').
---------------------------------------------------------------------------

    The Commission notes that it followed its standard practice in the 
Proposing Release to identify the statutory authority under which it 
promulgated its Proposal. The Commission has complied with its 
statutory obligations in promulgating the Pilot and has clear statutory 
authority to adopt the Pilot, which the Commission believes furthers 
the purposes of the Exchange Act.\474\
---------------------------------------------------------------------------

    \474\ If any of the provisions of these amendments, or the 
application thereof to any person or circumstance, is held to be 
invalid, such invalidity shall not affect other provisions or 
application of such provisions to other persons or circumstances 
that can be given effect without the invalid provision or 
application.
---------------------------------------------------------------------------

III. Paperwork Reduction Act

    Certain provisions that the Commission is adopting today contain 
``collection of information requirements'' within the meaning of the 
Paperwork Reduction Act of 1995 (``PRA'').\475\ The Commission 
published

[[Page 5240]]

a notice requesting comment on the collection of information 
requirements in the Proposing Release \476\ and submitted relevant 
information to the Office of Management and Budget (``OMB'') for review 
in accordance with the PRA and its implementing regulations.\477\ The 
title of the new collection of information for Rule 610T is 
``Transaction Fee Pilot Data.'' Compliance with these collections of 
information requirements is mandatory. An agency may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless the agency displays a currently valid control 
number. We have applied for an OMB Control Number for this collection 
of information.
---------------------------------------------------------------------------

    \475\ 44 U.S.C. 3501 et seq.
    \476\ See Proposing Release, supra note 2, at 13038-39.
    \477\ 44 U.S.C. 3507; 5 CFR 1320.11.
---------------------------------------------------------------------------

    The Commission requested comment on the collection of information 
requirements in the Proposing Release. The Commission received two 
comment letters on the estimates for the collection of information 
requirements included in the Proposing Release, which are discussed 
below.\478\
---------------------------------------------------------------------------

    \478\ See NYSE Letter I, at 15; Cboe Letter I, at 21.
---------------------------------------------------------------------------

A. Summary of Collection of Information

    The Pilot requires the equities exchanges to prepare four sets of 
data that constitute a collection of information within the meaning of 
the PRA. First, pursuant to Rule 610T(b), the primary listing exchanges 
will be required to prepare and publicly post two sets of data on the 
Pilot Securities listed on their markets--the Pilot Securities Exchange 
Lists and the Pilot Securities Change Lists.\479\ In addition, pursuant 
to Rule 610T(d), all equities exchanges will be required to provide to 
the Commission monthly order routing datasets.\480\ Lastly, pursuant to 
Rule 610T(e), all equities exchanges will be required to prepare and 
publicly post the Exchange Transaction Fee Summaries, which are monthly 
summaries of information concerning fees assessed and rebates paid to 
market participants transacting on the exchange.\481\
---------------------------------------------------------------------------

    \479\ See supra Section II.E.0.
    \480\ See supra Section II.E.3.
    \481\ See supra Section II.E.0.
---------------------------------------------------------------------------

B. Proposed Use of Information

    The data collected during the Pilot, including the Pilot Securities 
Exchange Lists, Pilot Securities Change Lists, Exchange Transaction Fee 
Summaries, and order routing datasets, will allow researchers and 
market participants to have ready access to information that will 
facilitate the study of the impact of an exogenous shock to transaction 
fees and rebates on order routing behavior, execution quality, and 
market quality. In turn, this information should facilitate a data-
driven evaluation of future policy choices.
    In addition, by publishing and maintaining a Pilot Securities 
Exchange List and a Pilot Securities Change List, each primary listing 
exchange would help ensure that the Commission, market participants, 
researchers, and the public have up-to-date information on corporate 
changes to listed issuers that impact the list of Pilot Securities, as 
well as changes to the composition of any of the Test Groups during the 
Pilot.

C. Respondents

    The respondents to this collection of information will be the 
equities exchanges, which are registered national securities exchanges 
that trade NMS stocks. Specifically, Rule 610T(b), which covers the 
Pilot Securities Exchange Lists and Pilot Securities Change Lists, will 
apply to the six primary listing exchanges for NMS stocks. Rule 
610T(d), which requires datasets on order routing, will apply to all 
thirteen equities exchanges that are currently registered with the 
Commission. Rule 610T(e), which requires datasets on fees (rebates) and 
fee (rebate) changes, will apply to all thirteen equities exchanges 
currently registered with the Commission.

D. Total Initial and Annual Reporting and Recordkeeping Burdens

    The burdens associated with the Pilot are described fully below, 
but the below table briefly summarizes the relevant burdens set forth 
in the Proposing Release and in this release.

----------------------------------------------------------------------------------------------------------------
                                                                                  Annual burdens     One-time
                   Category                                  Release                  (hours/     burdens (hours/
                                                                                     exchange)       exchange)
----------------------------------------------------------------------------------------------------------------
Pilot Securities Exchange Lists...............  Proposing Release...............             N/A               8
                                                Adopting Release................             N/A              44
Pilot Securities Change Lists.................  Proposing Release...............             126              12
                                                Adopting Release................             126              12
Exchange Transaction Fee Summaries............  Proposing Release...............              64              86
                                                Adopting Release................              64              86
Order Routing Datasets........................  Proposing Release...............             112              80
                                                Adopting Release................             124              80
----------------------------------------------------------------------------------------------------------------

1. Pilot Securities Exchange Lists and Pilot Securities Change Lists
    Upon publication of the initial List of Pilot Securities by the 
Commission, the primary listing exchanges would be required to 
determine which Pilot Securities are listed on their market and compile 
and publicly post downloadable files containing a list of those 
securities, including all data fields specified in Rule 610T(b)(2)(i) 
on their websites in pipe-delimited ASCII format. The Commission 
preliminarily estimated that each primary listing exchange would incur, 
on average, a one-time burden of approximately 8 burden hours per 
primary listing exchange to compile and publicly post its initial Pilot 
Securities Exchange List.\482\ One commenter stated that it 
``anticipates it could take as many as 44 hours'' to compile the 
initial Pilot Securities Exchange List.\483\ The commenter stated that 
its estimates of the costs associated with the Pilot are based on its 
``prior experience implementing the Tick Size Pilot, and other similar 
initiatives . . . .'' \484\ In light of this comment, the Commission is 
increasing its estimate. While, unlike for the Tick Size Pilot, the 
Commission will prepare the Initial List of Pilot Securities and assign 
them to their

[[Page 5241]]

respective treatment groups, and therefore the exchanges will only need 
to separate out their listed securities into a separate list, the 
Commission nevertheless will increase its estimate as the commenter 
suggested. Accordingly, the Commission estimates that each primary 
listing exchange would incur, on average, a one-time burden of 
approximately 44 burden hours per primary listing exchange to compile 
and publicly post their initial Pilot Securities Exchange List.\485\ 
Accordingly, the Commission believes that the aggregate one-time burden 
associated with the initial Pilot Securities Exchange Lists would be 
264 burden hours.\486\
---------------------------------------------------------------------------

    \482\ See Proposing Release, supra note 2, at 13036. The 
Commission based this estimate on a full-time Compliance Manager and 
Programmer Analyst each spending approximately 4 hours, for a 
combined total of approximately 8 hours, to compile and publicly 
post to an exchange's website a downloadable file containing the 
initial Pilot Securities Exchange List. See id. at 13036 n.186.
    \483\ See NYSE Letter I, at 15.
    \484\ See id.
    \485\ The Commission continues to believe that this will require 
the services a full-time Compliance Manager and Programmer Analyst. 
The Commission estimates that each Compliance Manager and Programmer 
Analyst will each spend approximately 22 hours, for a combined total 
of approximately 44 hours, to compile and publicly post to an 
exchange's website a downloadable file containing the initial Pilot 
Securities Exchange List.
    \486\ 44 burden hours per primary listing exchange x 6 primary 
listing exchanges = 264 burden hours.
---------------------------------------------------------------------------

    After posting its initial Pilot Securities Exchange List, each 
equities exchange will be required to keep current that list to reflect 
any changes, and to also prepare and publicly post on its website until 
the end of the post-Pilot Period the Pilot Securities Change List prior 
to the beginning of trading each trading day. The Commission 
preliminarily estimated that each primary listing market would incur a 
one-time burden of approximately 12 burden hours of internal legal, 
compliance, and information technology operations to develop 
appropriate systems to track and compile changes relevant to Pilot 
Securities listed on its market.\487\ The Commission also preliminarily 
estimated that, once the primary listing exchanges have established 
these systems, on average, each primary listing exchange would incur 
0.5 burden hours daily, or 126 burden hours annually to compile any 
changes related to Pilot Securities, such as name changes or mergers, 
and to publicly post the updated Pilot Securities Exchange Lists and 
Pilot Securities Change Lists on its website prior to the start of each 
trading day.\488\
---------------------------------------------------------------------------

    \487\ The Commission derived the total estimated burdens from 
the following estimates: (Attorney at 4 hours) + (Compliance Manager 
at 4 hours) + (Programmer Analyst at 4 hours) = 12 burden hours. See 
Proposing Release, supra note 2, at 13036.
    \488\ The Commission based this estimate on a full-time 
Compliance Manager and Programmer Analyst together spending 
approximately 30 minutes per trading day updating and posting the 
required lists (approximately 252 trading days x 30 minutes per 
trading day = 7,560 minutes (126 hours)). See id.
---------------------------------------------------------------------------

    One exchange commenter stated that ``the Commission predicts it 
that would take only 12.5 hours to develop and maintain systems to 
comply'' with the requirements to update prior to the start of each 
trading day the Pilot Securities Exchange Lists and Pilot Securities 
Change Lists.\489\ Based on ``its prior experience implementing the 
Tick Size Pilot, and other similar initiatives,'' this commenter 
further stated that it believed ``it could take as many as 300.5 hours 
to develop and maintain those systems.'' \490\ While the commenter did 
not elaborate on how it computed its estimate or whether it represents 
an aggregate burden estimate or an annualized estimate, the commenter 
appears to have misunderstood the burden estimates contained in the 
Proposing Release because the Commission's estimate greatly exceeded 
12.5 hours. Specifically, the Commission's preliminary estimates 
included a one-time burden of 8 hours for primary listing exchanges to 
compile and publicly post the initial Pilot Securities Exchange List, a 
one-time burden of 12 hours for primary listing exchanges to develop 
appropriate systems to track and compile changes to Pilot Securities, 
and an ongoing burden of 126 hours annually to compile any such changes 
and publicly post the updated Pilot Securities Exchange Lists and Pilot 
Securities Change Lists, for an aggregate burden estimate of 335 hours 
per exchange for the entire Pilot.\491\ Assuming that the commenter's 
estimate of 300.5 hours is meant to be an aggregate burden estimate, 
the Commission notes that its revised aggregate burden estimate of 371 
hours exceeds the commenter's estimate.
---------------------------------------------------------------------------

    \489\ NYSE Letter I, at 15.
    \490\ Id. See also Cboe Letter I, at 21 (stating that the 
``implementation and ongoing costs of the Pilot will be 
significantly larger in terms of burden hours and expenditures than 
the Commission estimates,'' but providing no specific analysis or 
alternative estimates).
    \491\ See Proposing Release, supra note 2, at 13036. The 
Commission notes that it has revised its aggregate burden estimate 
upwards to 371 hours for each exchange to address commenter concerns 
that the estimated burden associated with compiling and publicly 
posting the initial Pilot Securities Exchange List was too low.
---------------------------------------------------------------------------

    The Commission's estimates are averages that take into account the 
diverse set of six primary listing exchanges and the expected burdens 
that they would collectively experience as a result of the Pilot. 
Moreover, the Commission expects that the primary listing exchanges 
will be able to leverage their experience and resources from the recent 
Tick Size Pilot to meet the requirements of the Pilot. As noted above, 
unlike for the Tick Size Pilot, the Commission will set the initial 
List of Pilot Securities and the primary listing exchanges only need to 
keep those lists up to date if their listed issuers experience any 
relevant change. Accordingly, the burdens on the primary listing 
exchanges with respect to the lists of Pilot Securities should be less 
than those incurred during the Tick Size Pilot.\492\
---------------------------------------------------------------------------

    \492\ See Proposing Release, supra note 2, at 13027 n.153 and 
accompanying text; note 740 infra.
---------------------------------------------------------------------------

    For those reasons, the Commission continues to believe its estimate 
of the aggregate one-time burden for primary listing exchanges to 
develop appropriate systems to track and compile changes relevant to 
Pilot Securities listed on their markets will be approximately 12 
burden hours for each primary listing exchange, or 72 total burden 
hours, and the average, aggregate annual burden to update and publicly 
post the lists of Pilot Securities will be approximately 126 burdens 
hours for each primary listing exchange, or 756 total burden hours for 
all 6 exchanges.\493\
---------------------------------------------------------------------------

    \493\ 126 burden hours per primary listing exchange x 6 primary 
listing exchanges = 756 burden hours.
---------------------------------------------------------------------------

2. Exchange Transaction Fee Summaries
    The Commission is requiring that each equities exchange publicly 
post on its websites the Exchange Transaction Fee Summary each month, 
using an XML schema published on the Commission's website. The 
Commission believes that all the data necessary to complete the summary 
are currently maintained by the equities exchanges. However, the 
equities exchanges will be required to compute the monthly realized 
average and median per share fees and rebates, each by participant 
type, that qualified for the Base and Top Tier fees and rebates, using 
fee and volume information that the equities exchanges maintain.
    The Commission preliminarily estimated that each equities exchange 
would incur a one-time burden of approximately 80 burden hours of 
internal legal, compliance, information technology, and business 
operations to develop appropriate systems for tracking fee changes, 
computing the monthly averages, and formatting the data and posting it 
on its website.\494\ One commenter objected generally to the 
Commission's burden estimates, but

[[Page 5242]]

did not provide its own estimates of specific burden hours or 
costs.\495\ The Commission continues to estimate that each equities 
exchange will incur a one-time burden of approximately 80 burden hours 
of internal legal, compliance, information technology, and business 
operations to develop appropriate systems for tracking fee changes, 
computing the monthly averages, and formatting the data and posting it 
on its website.\496\ Accordingly, the one-time initial aggregate burden 
for all equities exchanges necessary for the development and 
implementation of the systems needed to capture the transaction fee 
information and post it on their websites in the specified format in 
compliance with Rule 610T(e) will be 1,040 hours.\497\
---------------------------------------------------------------------------

    \494\ See Proposing Release, supra note 2, at 13037. The 
Commission preliminarily estimated that an equities exchange would 
assign responsibilities for review and potential modification of its 
systems and technology to an Attorney, a Compliance Manager, a 
Programmer Analyst and a Senior Business Analyst. The Commission 
estimated the burden of reviewing and potentially modifying its 
systems and technology to be as follows: (Attorney at 20 hours) + 
(Compliance Manager at 20 hours) + (Programmer Analyst at 20 hours) 
+ (Business Analyst at 20 hours) = 80 burden hours per equities 
exchange. See id. at 13037 n.194.
    \495\ Cboe Letter I, at 21 (stating that the ``implementation 
and ongoing costs of the Pilot will be significantly larger in terms 
of burden hours and expenditures than the Commission estimates,'' 
but providing no specific analysis or alternative estimates). But 
cf. Better Markets Letter, at 2 (``All of the data-fields are 
thoughtfully proposed, and the cost of producing them is minimal and 
certainly acceptable given the enormity of the benefits.'' The 
commenter did not provide specific burden hour or cost estimates.).
    \496\ (Attorney at 20 hours) + (Compliance Manager at 20 hours) 
+ (Programmer Analyst at 20 hours) + (Business Analyst at 20 hours) 
= 80 burden hours per equities exchange.
    \497\ 80 burden hours per equities exchange x 13 equities 
exchanges = 1,040 burden hours.
---------------------------------------------------------------------------

    The Commission also preliminarily estimated that, on average, an 
equities exchange would incur an ongoing burden of approximately 40 
burden hours per year, approximately half the estimated burden to 
develop appropriate systems, to monitor and, if necessary, update its 
systems used for compiling, formatting and publicly posting the 
Exchange Transaction Fee Summaries.\498\ One commenter objected 
generally to the Commission's burden estimates, but did not 
specifically explain whether or how this burden estimate was 
incorrect.\499\ The Commission continues to estimate that the annual 
ongoing burdens associated with monitoring and, if necessary, updating 
these systems would be approximately half the burdens of initially 
developing the systems. Accordingly, the Commission continues to 
estimate that an equities exchange will incur an ongoing burden of 
approximately 40 burden hours per year to monitor, and if necessary, 
update its systems used for compiling, formatting and publicly posting 
the Exchange Transaction Fee Summaries.\500\ The average aggregate, 
ongoing, annual burden for all equities exchanges to monitor their 
systems will be 520 hours.\501\
---------------------------------------------------------------------------

    \498\ See Proposing Release, supra note 2, at 13037. (Attorney 
at 10 hours) + (Compliance Manager at 10 hours) + (Programmer 
Analyst at 10 hours) + (Senior Business Analyst at 10 hours) = 40 
burden hours.
    \499\ See note 495 supra.
    \500\ (Attorney at 10.5 hours) + (Compliance Manager at 10.5 
hours) + (Programmer Analyst at 11 hours) + (Senior Business Analyst 
at 10.5 hours) = 40 burden hours.
    \501\ 40 burden hours per equities exchange x 13 equities 
exchanges = 520 burden hours.
---------------------------------------------------------------------------

    The equities exchanges will be required to format, calculate 
certain figures, and post their initial Exchange Transaction Fee 
Summary at the outset of the pre-Pilot Period. As this would be the 
first time an equities exchange would be required to produce and post 
on its website such a summary, the Commission preliminarily estimated 
that it would require approximately 4 burden hours for each equities 
exchange to complete the initial Exchange Transaction Fee Summary and 
perform the necessary calculations.\502\ In addition, each equities 
exchange will be required to make its summary publicly available on its 
website using an XML schema to be published on the Commission's 
website. As the Commission preliminarily believed that the equities 
exchanges had experience applying the XML format to market data,\503\ 
the Commission estimated that initially each equities exchange would 
incur a burden of 2 burden hours specific to the initial Exchange 
Transaction Fee Summary to ensure that it has properly implemented the 
XML schema.\504\ One commenter objected generally to the Commission's 
burden estimates, but did not specifically explain whether or how this 
burden estimate was incorrect.\505\ The Commission continues to 
estimate that each equities exchange will require approximately 4 
burden hours to complete the initial Exchange Transaction Fee 
Summary,\506\ for an aggregate, initial burden of 52 hours to complete 
its initial Exchange Transaction Fee Summary.\507\ The Commission also 
continues to estimate that each equities exchange will incur an initial 
burden of approximately 2 burdens hours for an aggregate, initial 
burden of 26 hours to post that dataset publicly on its website using 
an XML schema to be published on the Commission's website. The total 
aggregate, initial burden to complete the initial Exchange Transaction 
Fee Summary will therefore be 78 burden hours.\508\
---------------------------------------------------------------------------

    \502\ See Proposing Release, supra note 2, at 13037. The 
Commission derived the total estimated burden from the following 
estimates: (Compliance Manager at 2 hours) + (Senior Business 
Analyst at 2 hours) = 4 burden hours per equities exchange. See id. 
at 13037 n.198.
    \503\ See id. at 13037 n.199 and accompanying text.
    \504\ See id. at 13037. The Commission derived the total 
estimated burden from the following estimates, which reflect the 
Commission's preliminary belief that the equities exchanges have 
experience posting information in an XML format on publicly-
available websites: (Compliance Manager at 1 hour) + (Programmer 
Analyst at 1 hour) = 2 burden hours per equities exchange. See id. 
at fn. 200.
    \505\ See note 495 supra.
    \506\ (Compliance Manager at 2 hours) + (Senior Business Analyst 
at 2 hours) = 4 burden hours per equities exchange.
    \507\ 4 burden hours per equities exchange x 13 equities 
exchanges = 52 burden hours.
    \508\ 2 burden hours per equities exchange x 13 equities 
exchanges = 26 burden hours.
---------------------------------------------------------------------------

    Each equities exchange will be required to update the Exchange 
Transaction Fee Summary on a monthly basis to account for changes from 
the prior month, if any, and to report monthly fee and rebate 
information. The Commission preliminarily believed that such updates 
would require fewer burden hours than the initial Exchange Transaction 
Fee Summary, as the equities exchanges would have experience 
calculating necessary data and formatting the reports as required by 
the Rule.\509\ Accordingly, the Commission preliminarily estimated that 
it would require approximately 2 burden hours each month, or 24 burden 
hours on an annualized basis, for each equities exchange to update the 
Exchange Transaction Fee Summary.\510\ This estimate contemplated the 
impact of publicly posting the summary using the XML schema to be 
published on the Commission's website. One commenter objected generally 
to the Commission's burden estimates, but did not specifically explain 
whether or how this burden estimate was incorrect.\511\ The Commission 
continues to estimate that it will require approximately 2 burden hours 
each month, or 24 burden hours on an annualized basis, for each 
equities exchange to update the Exchange Transaction Fee Summary.\512\ 
As such, the equities exchanges will incur an aggregate, annual burden 
of 312 burden hours to update and publicly post on

[[Page 5243]]

their websites the Exchange Transaction Fee Summaries.\513\
---------------------------------------------------------------------------

    \509\ See Proposing Release, supra note 2, at 13037.
    \510\ See id. The Commission derived the total estimated burden 
from the following estimates: (Compliance Manager at 1 hour) + 
(Programmer Analyst at 1 hour) = 2 burden hours per equities 
exchange per month. 2 burden hours per equities exchange per month x 
12 months per year = 24 burden hours per equities exchange per year. 
See id. at 13037 n.203.
    \511\ See note 495 supra.
    \512\ (Compliance Manager at 1 hours) + (Programmer Analyst at 1 
hours) = 2 burden hours per equities exchange per month. 2 burden 
hours per equities exchange per month x 12 months per year = 24 
burden hours per equities exchange per year.
    \513\ 2 burden hours per equities exchange x 13 equities 
exchanges x 12 monthly updates = 312 burden hours per year.
---------------------------------------------------------------------------

3. Order Routing Datasets
    The Commission preliminarily estimated that, on average, there 
would be no paperwork burden to the equities exchanges to capture the 
order routing data required pursuant to Rule 610T(d) to be included in 
the order routing datasets, as the Commission expected that the 
equities exchanges would collect the required data to create the order 
routing datasets by leveraging existing systems and technology already 
in place for the collection and reporting of data.\514\ The Commission 
believes this continues to be true with the changes to the order 
routing datasets, which also involve data elements currently captured 
by existing systems.
---------------------------------------------------------------------------

    \514\ See Proposing Release, supra note 2, at 13038.
---------------------------------------------------------------------------

    The Commission preliminarily believed, however, that the equities 
exchanges would incur an initial one-time burden of 80 burden hours per 
equities exchange to ensure that their systems and technology are able 
to accommodate the proposed requirements to aggregate, anonymize, and 
publicly post the order routing information.\515\ While the exchanges 
will still need to aggregate the data, they no longer will need to 
anonymize and publicly post it and instead will transmit the 
information to the Commission. The Commission continues to believe that 
each equities exchange would incur an initial one-time burden of 80 
burden hours to ensure that its systems and technology are able to 
accommodate the requirements to aggregate and provide to the Commission 
the order routing information. Accordingly, the Commission estimates 
that the aggregate one-time initial burden for ensuring an exchange's 
systems and technology are able to aggregate and provide to the 
Commission the required order routing data in compliance with Rule 
610T(d) will be 1,040 burden hours.\516\
---------------------------------------------------------------------------

    \515\ See id. The Commission preliminarily estimated that an 
equities exchange will assign responsibilities for review and 
potential modification of its systems and technology to an Attorney, 
a Compliance Manager, a Programmer Analyst and a Senior Business 
Analyst. The Commission estimated the burden of reviewing and 
potentially modifying its systems and technology to be as follows: 
(Attorney at 20 hours) + (Compliance Manager at 20 hours) + 
(Programmer Analyst at 20 hours) + (Senior Business Analyst at 20 
hours) = 80 burden hours per equities exchange. See id. at 13038 
n.207.
    \516\ 80 burden hours per equities exchange x 13 equities 
exchanges = 1,040 burden hours.
---------------------------------------------------------------------------

    The Commission also preliminarily estimated that, on average, it 
would take an equities exchange approximately 40 burden hours per year 
to ensure that the systems and technology are up to date so as to 
facilitate compliance with the Rule.\517\ The Commission continues to 
estimate that, on average, it would take an equities exchange 
approximately 40 burden hours per year to ensure that the systems and 
technology are up to date so as to facilitate compliance with the Rule. 
Therefore, the Commission estimates that the aggregate annual burden to 
maintain the systems necessary to aggregate and provide to the 
Commission the required order routing information is approximately 520 
burden hours per year.\518\
---------------------------------------------------------------------------

    \517\ See Proposing Release, supra note 2, at 13038. The 
Commission derived the total estimated burdens from the following 
estimates, which reflected the Commission's preliminary view that 
annual ongoing burdens would be approximately half the burdens of 
initially ensuring an exchange has the appropriate systems to 
capture the required information in the required format: (Attorney 
at 10 hours) + (Compliance Analyst at 10 hours) + (Programmer 
Analyst at 10 hours) + (Business Analyst at 10 hours) = 40 burden 
hours per equities exchange. See id. at 13038 n.209.
    \518\ 40 burden hours per equities exchange x 13 equities 
exchanges = 520 burden hours.
---------------------------------------------------------------------------

    Each equities exchange would incur an ongoing burden associated 
with creating and formatting the order routing datasets each month. The 
Commission noted that the equities exchanges have experience with 
creating similar datasets in accordance with their obligations under 
Rule 605 of Regulation NMS.\519\ The Commission preliminarily believed 
that each equities exchange would incur burdens similar to those 
associated with preparing Rule 605 reports.\520\ Accordingly, the 
Commission preliminarily believed that each equities exchange would 
incur a burden of six burden hours per month, or 72 burden hours per 
year, to prepare and publicly post on its website the order routing 
datasets.\521\ While the order routing datasets will not be publicly 
posted but will instead be provided to the Commission, the Commission 
is requiring the equities exchanges to separate out post-only orders 
and auction-only orders (or exclude auction-only orders if they so 
choose). The Commission estimates that separating out these orders will 
require approximately 1 additional burden hour per month. As such, the 
Commission estimates that each equities exchange will incur a burden of 
approximately seven burden hours per month, or 84 burden hours per 
year, to prepare and provide to the Commission the order routing 
datasets. Therefore, the aggregate, annual burden to prepare and 
provide to the Commission order routing datasets in accordance with 
Rule 610T(d) will be approximately 1,092 burden hours.\522\
---------------------------------------------------------------------------

    \519\ See Proposing Release, supra note 2, at 13038.
    \520\ See id. See also FR Doc. 2016-08552, 81 FR 22143 (April 
14, 2016) (``Request to OMB for Extension of Rule 605 of Regulation 
NMS'').
    \521\ Compliance Manager at 3 hours + Programmer Analyst at 4 
hours = 7 burden hours per month, per equities exchange. 7 burden 
hours per month x 12 months = 84 burden hours per year, per equities 
exchange.
    \522\ 84 burden hours per year x 13 equities exchanges = 1,092 
burden hours.
---------------------------------------------------------------------------

    One exchange commenter stated that ``the Commission allocates 160 
hours associated with producing order routing data,'' but estimated 
that it ``would actually require over 400 hours,'' based on ``its prior 
experience implementing the Tick Size Pilot, and other similar 
initiatives . . . .'' \523\ While the commenter did not elaborate on 
how it computed its estimate or whether it represents an aggregate 
burden estimate or an annualized estimate, the commenter appears to 
have misunderstood the burden estimates contained in the Proposing 
Release because the Commission's estimate exceeds the 160 hours cited 
by the commenter. Specifically, the Commission's preliminary estimate 
included a one-time burden of 80 hours and an ongoing burden of 112 
hours annually,\524\ for an aggregate burden estimate of 416 hours per 
exchange for the entire Pilot.\525\ Second, the commenter does not 
explain how it calculated its estimate of ``over 400 hours,'' break 
down the costs included in this estimate, or specify whether this 
number is an aggregate burden estimate or an annualized estimate. 
Assuming that the commenter's estimate of over 400 hours is meant to be 
an aggregate burden estimate, the Commission notes that its revised 
aggregate burden estimate of 452 hours is substantially similar. The 
Commission notes that exchanges will no longer be required to publicly 
post this data, but will instead transmit the datasets directly to the 
Commission. Moreover, the Commission expects that the exchanges will be 
able to leverage their experience and

[[Page 5244]]

resources from the Tick Size Pilot to meet the requirements of the 
Pilot.\526\
---------------------------------------------------------------------------

    \523\ NYSE Letter I, at 15. See also Cboe Letter I, at 21 
(stating that the ``implementation and ongoing costs of the Pilot 
will be significantly larger in terms of burden hours and 
expenditures than the Commission estimates,'' but providing no 
specific analysis or alternative estimates).
    \524\ The Commission notes that it has revised this estimate 
upwards to 124 burden hours annually.
    \525\ See Proposing Release, supra note 2, at 13038. The 
Commission notes that it has revised this estimate upwards to 452 
burden hours per exchange for the entire Pilot.
    \526\ See Section C.2.a.iii. infra. See also, e.g., Better 
Markets Letter, at 2.
---------------------------------------------------------------------------

    For those reasons, the Commission believes its estimate of the one-
time burden for exchanges to develop and implement appropriate systems 
to aggregate the order routing data will be, on average, 80 burden 
hours for each exchange, and the ongoing annual burden to update these 
systems and to gather and to transmit the relevant data to the 
Commission will be, on average, 124 burden hours for each exchange.

E. Collection of Information Is Mandatory

    All of the collections of information pursuant to Rule 610T would 
be mandatory.

F. Confidentiality of Responses to Collection of Information

    The Commission believes that the broker-dealer specific order 
routing data should be protected from disclosure subject to the 
provisions of applicable law.\527\ The Commission will deem broker-
dealer identifying order routing data as being subject to a 
confidential treatment request under 17 CFR 200.83 without the need to 
submit a request. The Pilot Securities Exchange List, Pilot Securities 
Change List, and the Exchange Transaction Fee Summary would not be 
confidential. Rather, each would be publicly posted by the exchanges.
---------------------------------------------------------------------------

    \527\ See, e.g., 5 U.S.C. 552 et seq.; 15 U.S.C. 78x (governing 
the public availability of information obtained by the Commission).
---------------------------------------------------------------------------

G. Retention Period for Recordkeeping Requirements

    National securities exchanges would be required to retain records 
and information pursuant to 17 CFR 240.17a-1 (Rule 17a-1 under the 
Exchange Act).\528\
---------------------------------------------------------------------------

    \528\ 17 CFR 240.17a-1.
---------------------------------------------------------------------------

IV. Economic Analysis

    As discussed above, the Pilot is designed to produce information on 
the impact of transaction fee-and-rebate pricing models on order 
routing decisions by broker-dealers, as well as their impact on 
execution and market quality.\529\ In recent years, a number of 
academics and market participants have expressed concern that the 
structure of exchange transaction-based fee pricing may lead, for 
example, to potential conflicts of interest between broker-dealers and 
their customers when brokers-dealers route customer orders to trading 
centers offering rebates so that the broker-dealer can capture the 
rebates, even when these venues do not offer high execution 
quality.\530\ However, as discussed in more detail below, the 
Commission cannot determine from existing empirical evidence the 
impact, if any, of exchange transaction fee models on order routing 
decisions by broker-dealers or on market and execution quality.\531\ 
Specifically, determining whether a causal relationship between 
exchanges' transaction fee-and-rebate pricing models and broker-
dealers' behavior is complicated because, for example, such pricing 
models and order routing decisions could be jointly determined and 
order routing decisions could influence fees just as fees could 
influence order routing decisions. Currently available data do not 
permit researchers to isolate these factors and thus identify the 
existence or direction of such a causal relationship, which in turn 
impedes researchers' ability to determine the extent to which conflicts 
may exist and any potential negative impacts may manifest.\532\
---------------------------------------------------------------------------

    \529\ Execution quality generally refers to how favorably 
customer orders are executed. Execution quality measures are similar 
to liquidity measures and tend to include transaction costs, the 
speed of execution, the probability that the trade will be executed, 
and the price impact of the trade. See NMS Adopting Release, supra 
note 10, at 37513-15, 37537-38. Market quality encompasses execution 
quality but also relates more generally to how well the markets 
function. Market quality measures include liquidity, price 
discovery, and volatility in prices. See, e.g., Henrik Bessembinder, 
Trade Execution Costs and Market Quality after Decimalization, 38 J. 
Fin. & Quantitative Analysis 747-77 (2003), https://doi.org/10.2307/4126742https://doi.org/10.2307/4126742; Maureen O'Hara & Mao Ye, Is 
Market Fragmentation Harming Market Quality? 100 J. Fin. Econ. 459-
74 (2011), https://doi.org/10.1016/j.jfineco.2011.02.006.
    \530\ See, e.g., James Angel, Lawrence Harris & Chester Spatt, 
Equity Trading in the 21st Century, 1 Q. J. Fin. (2011), https://doi.org/10.1142/S2010139211000067 (hereinafter ``Angel, Harris, & 
Spatt''); Robert H. Battalio, Shane A. Corwin, & Robert H. Jennings, 
Can Brokers Have It All? On the Relation Between Make-Take Fees and 
Limit Order Execution Quality, 71 J. Fin. 2193-237 (2016), http://onlinelibrary.wiley.com/doi/10.1111/jofi.12422/full (hereinafter 
``Battalio Equity Market Study''); Larry Harris, Maker-Taker Pricing 
Effects on Market Quotations 24-25 (USC Marshall Sch. Bus., Draft 
No. 0.91, 2013), http://bschool.huji.ac.il/.upload/hujibusiness/Maker-taker.pdf (hereinafter ``Harris'').
    \531\ For commenters concurring with this assessment, see, e.g., 
Barnard Letter, at 1 (stating the Pilot ``should provide credible 
analyses of the effects--both positive and negative--of exchange 
fees and rebates on the quality and efficiency of trading.''); 
Better Markets Letter at 2 (stating that the Commission ``lacks 
sufficient data to outlaw rebates'' and believed that the Pilot 
``should fill this data and knowledge gap.'').
    \532\ Many commenters expressed support for the Pilot and the 
utility of the information that may be gained from it. See AJO 
Letter, at 1, CII Letter, at 3, NYSTRS Letter, at 1, ICI Letter I, 
at 1-2, MFS Letter, at 1, Nuveen Letter, at 2, Clark-Joseph Letter, 
at 1, RBC Letter I, at 2, Invesco Letter, at 2, CFA Letter, at 1, 
State Street Letter, at 2, Wellington Letter, at 1, Joint Pension 
Plan Letter, at 2, Oppenheimer Letter, at 2, Angel Letter I, at 1, 
Vanguard Letter, at 2, Verret Letter I, at 1, T. Rowe Price Letter, 
at 1.
---------------------------------------------------------------------------

    Because of the existing lack of empirical evidence regarding the 
potential conflicts of interest and potential effects of exchange fee 
models, additional information would assist the Commission in making 
future regulatory decisions. To remedy the insufficiency of existing 
empirical evidence, the Commission is adopting the Pilot to generate 
data that is otherwise unavailable to study fees and rebates that 
exchanges assess to broker-dealers and observe the impacts of those 
fees and rebates on the markets and market participants. Specifically, 
the Commission expects that the data collected is likely to shed light 
on the extent, if any, to which broker-dealers route orders in ways 
that benefit the broker-dealer but may not be optimal for customers, 
and the extent to which exchange pricing models create distortions that 
may have adverse impacts. The data obtained from the Pilot will inform 
future regulatory initiatives to the ultimate benefit of 
investors.\533\ In addition, the Pilot will provide information about 
other potential economic effects of reducing access fee caps or 
prohibiting rebates and Linked Pricing. For example, the Pilot could 
offer information on whether prohibiting rebates and Linked Pricing 
alters broker-dealer behavior in a manner that affects market quality, 
such as by impacting quoted spreads across NMS stocks.\534\
---------------------------------------------------------------------------

    \533\ See, e.g., Babelfish Letter, at 3; Clearpool Letter, at 2; 
T. Rowe Price Letter, at 1, 3, and Clark-Joseph Letter, at 1.
    \534\ See infra Section V.C.1.a.ii, for further discussion of 
the benefits of studying other economic effects of transaction fees 
and rebates.
---------------------------------------------------------------------------

    The Pilot is uniquely capable of generating empirical evidence that 
is currently lacking because it is designed to provide an exogenous 
shock to transaction fee-and-rebate pricing models across all exchanges 
simultaneously and facilitate the collection of representative data 
across a broad range of securities.\535\ An exogenous shock to a system 
occurs when an element of the system is changed from without the 
system. (i.e., the change or shock is not under the control or 
influence of those within the system) but can induce endogenous (i.e., 
within the system) responses. In the Pilot's context, the exogenous 
shock

[[Page 5245]]

takes the form of a reduction of the maximum permissible transaction 
fees and a prohibition on rebates and Linked Pricing on all U.S. 
equities exchanges. This shock will allow researchers to explore how 
changes to fees and rebates could lead to changes in broker-dealer 
order routing and market and execution quality for a broad sample of 
NMS securities.\536\ Specifically, the reduction in fees or the 
elimination of rebates and Linked Pricing, as required in specific Test 
Groups of the Pilot, may reduce the magnitude or eliminate the 
potential conflict of interest between broker-dealers and their clients 
and the potential distortions introduced by exchange transaction-based 
fees and rebates. These effects would, in turn, be reflected in 
measurable changes to the order routing and execution quality of stocks 
in the Pilot's Test Groups.
---------------------------------------------------------------------------

    \535\ See infra Section V., for discussion of existing studies 
related to these topics and their limitations. See also supra 
Section II.B (discussing the Nasdaq study, which examined a change 
in the access fees and rebates charged by Nasdaq for 14 stocks over 
a four-month period).
    \536\ See, e.g., CII Letter, at 3, NYSTRS Letter, at 1, RBC 
Letter I, at 2, Joint Pension Plan Letter, at 2, Oppenheimer Letter, 
at 2
---------------------------------------------------------------------------

    The terms of the Pilot are discussed in Section II above. Exchanges 
will continue to be permitted to have varying fees within each Test 
Group, and will be permitted to change their fees at their discretion, 
subject to the proposed rule change filing requirements of Section 19 
of the Exchange Act, during the Pilot for securities within each Test 
Group, so long as they comply with the conditions applicable to that 
Test Group.
    In the absence of the Pilot, the Commission believes it is unlikely 
that exchanges would collectively undertake a similar pilot and 
voluntarily coordinate the exogenous shock to fees and rebates across a 
broad set of securities, broker-dealers, and exchanges that would be 
required to analyze the effects of changes to fees and rebates.\537\ By 
imposing the same modifications to fees and rebates on all U.S. 
equities exchanges, the Pilot will allow researchers to obtain data 
that will permit them to examine the impact of changes to fees and 
rebates on the order routing decisions of broker-dealers. If all 
exchanges were not subject to the pilot terms, the pilot data would be 
limited because broker-dealers could redirect their order flow to the 
non-participating exchanges. Accordingly, the Commission believes that 
the Pilot will enable the collection of valuable data that would 
otherwise be unavailable.
---------------------------------------------------------------------------

    \537\ See, e.g., Clearpool Letter, at 2. As discussed above, 
Nasdaq conducted its own fee experiment, but other exchanges did not 
conduct similar experiments simultaneous with Nasdaq.
---------------------------------------------------------------------------

    The Commission is mindful of the costs imposed by, and the benefits 
obtained from, the rules it promulgates. Whenever the Commission 
engages in rulemaking and is required to consider or determine whether 
an action is necessary or appropriate in the public interest, Section 
3(f) of the Exchange Act requires the Commission to consider whether 
the action would promote efficiency, competition, and capital 
formation, in addition to the protection of investors.\538\ Further, 
when making rules under the Exchange Act, Section 23(a)(2) of the 
Exchange Act requires the Commission to consider the impact such rules 
would have on competition.\539\ Section 23(a)(2) of the Exchange Act 
also prohibits the Commission from adopting any rule that would impose 
a burden on competition not necessary or appropriate in furtherance of 
the purposes of the Exchange Act.\540\
---------------------------------------------------------------------------

    \538\ See 15 U.S.C. 77b(b); 15 U.S.C. 78c(f).
    \539\ See 15 U.S.C. 78w(a)(2).
    \540\ Id.
---------------------------------------------------------------------------

    A few commenters challenged the sufficiency of the economic 
analysis contained in the Proposal. For example, one commenter argued 
the proposal was ``arbitrary and capricious'' because the Commission 
failed to consider the economic consequences of its proposal and only 
partially framed the costs and benefits of the Proposal, ignoring 
important and significant factors and costs.\541\ Similarly, another 
commenter believed that the ``cost-benefit analysis contain[ed] 
numerous flaws that are inconsistent with the Commission's obligation 
to provide a `reasoned basis' for its regulations,'' namely that the 
Commission had ``substantially underestimated the costs of the 
Proposal'' and ``fail[ed] to identify any countervailing market benefit 
that justifies imposing . . . harms on . . . exchanges and issuers.'' 
\542\ Another commenter thought the Commission understated the 
potential costs of the Pilot while overstating the benefits.\543\ For 
example, some commenters noted that they anticipated the Pilot would 
result in wider spreads, increased transaction costs, and increased 
broker commissions, all of which would result in added costs to 
investors.\544\ Several commenters thought the Commission failed to 
consider or underestimated the implementation costs of the Pilot,\545\ 
while other commenters challenged these assertions and instead believed 
the Pilot would impose minimal costs on exchanges and broker-dealers, 
particularly in light of the existing processes and technology that 
currently support immediately effective fee changes from the 
exchanges.\546\ Finally, other commenters felt that the economic 
analysis failed to adequately account for the projected costs to 
particular categories of market participant.\547\
---------------------------------------------------------------------------

    \541\ See Nasdaq Letter I, at 3, 11.
    \542\ NYSE Letter I, at 3, 12. See also, e.g., Level Brands 
Letter, at 1; Johnson Letter, at 1; Sensient Letter; Tredegar 
Letter, at 1; Halliburton Letter, at 1.
    \543\ See ASA Letter, at 5. See also T.D. Ameritrade Letter, at 
3 (estimating costs of widening spreads to its clients at 
$24,000,000).
    \544\ NYSE Letter I, at 13. See also TD Ameritrade Letter, at 3 
(estimating costs of widening spreads to its clients at $24,000,000 
annually) and Energizer Letter, at 1.
    \545\ See STANY Letter, at 2; Cboe Letter I, at 21; Nasdaq 
Letter I, at 10; FIA Letter, at 3; Citi Letter, at 5.
    \546\ See, e.g., Vanguard Letter, at 3; Better Markets Letter, 
at 2; Healthy Markets Letter I, at 34; Angel Letter II, at 3.
    \547\ See, e.g., Cboe Letter, at 7 n.14 and 20 (noting failure 
to adequately address lost revenue to exchanges); NYSE Letter I, at 
3; NYSE Letter I, at 3 and 13 (addressing impact on small businesses 
and issuers); Apache Letter, at 2 (noting potential negative cost 
impacts to issuers engaged in secondary offerings or conducting 
share repurchasing programs); Nasdaq Letter I, at 8 (noting 
potential added cost to market makers when pricing arbitrage 
opportunities because of additional complexity in exchange pricing 
models under the Pilot).
---------------------------------------------------------------------------

    Other commenters supported the Commission's analysis. For example, 
one commenter argued that ``differing estimates of costs is not a 
sufficient basis alone to challenge Commission action.'' \548\ This 
commenter argued that the commenters ``tend to ignore the benefit side 
of cost-benefit analysis'' and believed that ``the most significant 
benefit of the pilot is its potential to inform subsequent 
rulemaking,'' such that the ``mere presence of uncertainty in the 
Commission's estimates of potential costs and benefits does not by 
itself open the pilot program to challenge.'' \549\ While acknowledging 
the potential for ``liquidity effects,'' this commenter further noted 
that the Commission ``is merely held to make a reasonable estimate of 
those costs before adopting a pilot program,'' not to ``make a perfect 
estimate'' or ``cease the pilot if the costs to liquidity prove 
significant.'' \550\
---------------------------------------------------------------------------

    \548\ Verret Letter I, at 3-4. See also Verret Letter I, at 7 
(asserting that ``[a]rguments by the Exchanges concerning the pilot 
proposal's failure to quantify costs are irrelevant, in so far as 
the proposal properly identifies where they might at present be 
unquantifiable and particularly where those unquantifiable costs 
relate to the data the pilot is intended to generate.'').
    \549\ Verret Letter I, at 3-4. See also IEX Letter III, at 8, 10 
(arguing that these commenters ignore ``the full range of benefits 
that investors could realize if rebates were banned entirely'').
    \550\ Verret Letter I, at 4-5.
---------------------------------------------------------------------------

    The economic analysis provided in the Proposing Release thoroughly 
described the potential economic effects of the Transaction Fee Pilot, 
including the benefits, costs, and alternatives and

[[Page 5246]]

the potential effect on efficiency, competition, and capital formation.
    Like the Proposing Release, where possible, the Commission has 
quantified below the likely economic effects of the Pilot; however, as 
explained further below, the Commission is unable to quantify all of 
the economic effects because it lacks the information necessary to 
provide reasonable estimates. In some cases, quantification depends 
heavily on factors outside of the control of the Commission, which 
makes it difficult to predict how market participants would act under 
the conditions of the Pilot. For example, because of the flexibility 
that market participants have with respect to the choice of trading 
center for execution of transactions and because those choices can be 
influenced by factors outside of the scope of the Pilot, such as volume 
discounts, the Commission cannot quantify, ahead of the Pilot, the 
economic impact of any changes in order routing decisions by broker-
dealers that may result from the Pilot. Nevertheless, as described more 
fully below, the Commission provides both a qualitative assessment of 
the potential effects and a quantified estimate of the potential 
aggregate initial and aggregate ongoing costs, where feasible.

A. Background and Market Failures

    The Commission's Proposal provided a review of transaction-based 
fee models, including a discussion of the history and mechanics of 
transaction-based pricing and an overview of the concerns about 
potential conflicts of interest between broker-dealers and their 
customers attributed to access fees and rebates assessed by exchanges 
as well as the potential distortions that exchange fee models can 
introduce into market structure.\551\
---------------------------------------------------------------------------

    \551\ See Proposing Release, supra note 2.
---------------------------------------------------------------------------

    The Commission considered whether competition within the broker-
dealer industry, as well as competition among the equities exchanges, 
is sufficient to alleviate potential conflicts of interest presented by 
exchange fees and rebates and also the potential distortions such fee-
and-rebate models may introduce. The Commission believes that 
competition between broker-dealers may not be capable of addressing 
these potential conflicts and distortions for three reasons: asymmetric 
information, switching costs, and a lack of collective action, each of 
which is discussed below. Further, competition between broker-dealers 
is not readily capable of independently resolving the other potential 
concerns presented by exchange fee models, such as excessive 
intermediation, fragmentation, complexity, and cross-subsidization 
because those issues are within the exclusive control of the exchanges. 
The limitations of competition among the equities exchanges is 
discussed in detail below.
1. Market Failure at the Broker-Dealer Level
    The Commission considered whether competition could alleviate 
potential conflicts of interest between investors and broker-dealers, 
as investors choose broker-dealers to place orders on their 
behalf.\552\ To the extent that investors are able to identify broker-
dealers that do not act on potential conflicts of interest in a manner 
inconsistent with the interests of their customers, investors could 
discourage broker-dealers from acting on such conflicts of interest and 
avoid doing business with those broker-dealers that do not offer such 
assurances. However, several commenters opined that competition and 
deference to market forces alone would not be sufficient to challenge 
the ``deeply rooted conflicts of interest'' that they believe are 
present in today's market structure.\553\ For example, one commenter 
noted that many institutional clients are tied to large broker/dealers 
because of the multitude of services that their brokers provide, so 
they cannot simply ``fire their brokers'' if they are unhappy with 
their routing decisions.\554\ Further, the Commission does not believe 
that competition among broker-dealers alone will be sufficient to 
address potential conflicts of interest in order routing decisions 
because of three conditions that are present in today's markets: 
asymmetric information, switching costs, and a lack of collective 
action.
---------------------------------------------------------------------------

    \552\ See Section infra IV.B.2.a.
    \553\ See, e.g., Better Market Letter at 1 (stating ``[p]ayments 
by the exchanges that incentivize and induce routing decisions by 
broker-dealers at the expense of best execution and market quality 
is one of the most entrenched and insidious market practices today, 
and requires forceful and independent intervention by the SEC.''). 
See also Themis Trading Letter at 4-5; Larry Harris Letter at 9; 
Clearpool at 2.
    \554\ See Themis Trading Letter I, at 5.
---------------------------------------------------------------------------

    First, asymmetric information between broker-dealers and their 
customers limits the ability of customers to identify broker-dealers 
that do not act on potential conflicts of interest.\555\ For example, 
customers do not generally have access to information about broker-
dealers' individual sources of revenue.\556\ As discussed below in more 
detail, although disclosures required pursuant to Rule 606 provide 
information about material conflicts of interest related to payment for 
order flow, these disclosures do not provide information on the effect 
of transaction fee-and-rebate pricing models on order routing 
decisions. Moreover, while under Rule 606, a customer may request 
certain information about how her broker routed certain orders on her 
behalf, a customer cannot necessarily use this information to compare 
how these orders would have been treated by broker-dealers other than 
her own. Further while recent amendments to Rule 606 would provide 
customers with limited information about transaction fees paid and 
transaction rebates received by the broker, the disclosure would not 
provide data to enable the customer to assess the impact of exchange 
transaction fees and rebates on market quality and execution quality.
---------------------------------------------------------------------------

    \555\ See Larry Harris Letter, at 3 (noting that most brokerage 
customers do not know about potential broker agency problems and so 
do not know that their brokers may not be representing their orders 
as best they might).
    \556\ While consolidated revenues may be available from Form 10-
K filings for broker-dealers that are public reporting companies, 
broker-dealers do not report revenues attributable to specific 
sources, such as rebates from a particular exchange or payments for 
order flow from a particular venue. For instance, revenues derived 
from commissions and fees are often just reported in aggregate as 
``Commissions and Fees.'' Therefore, even though aggregate revenues 
for some broker-dealers are publicly available, customers do not 
have access to the information on individual sources of revenue that 
could reveal potential conflicts of interest.
---------------------------------------------------------------------------

    Second, even if investors had sufficient information to conclude 
they would be better served by a different broker-dealer, investors may 
face costs in switching broker-dealers.\557\ If these switching costs 
are high relative to the costs that investors anticipate may arise from 
potential conflicts of interest, investors may not switch broker-
dealers even if it appears that their broker-dealer may have acted on 
conflicts of interest.
---------------------------------------------------------------------------

    \557\ These switching costs may be monetary, but may also have a 
time and effort component.
---------------------------------------------------------------------------

    The presence of switching costs also may exacerbate a collective 
action problem among investors.\558\ Investors could provide incentives 
to broker-dealers to eliminate potential conflicts of interest by 
threatening to move accounts away from broker-dealers known to act on 
conflicts of interest. The collective action problem arises because, 
although each customer individually bears a cost to switch accounts, 
the benefits of a successful threat are available to all customers 
whether they would switch or not. If the

[[Page 5247]]

switching costs are high relative to the proportion of customer 
defections necessary to threaten a broker-dealer, customers are 
unlikely to generate enough of a threat to alter broker-dealers' 
behavior.
---------------------------------------------------------------------------

    \558\ Collective action occurs when a number of individuals or 
entities work together to achieve a common objective, such as 
investors acting to reduce the potential conflicts of interest in 
order routing decisions by broker-dealers.
---------------------------------------------------------------------------

2. Market Failure at the Exchange Level
    Several commenters considered whether existing market forces, 
including competition among the equities exchanges, are sufficient to 
address the potential distortions caused by exchange pricing models. 
Some commenters felt that ``some regulatory solution,'' like the Pilot, 
``may be necessary to force market participants, particularly 
exchanges, to change the manner in which they conduct business'' 
because competitive pressures on exchanges may serve as a barrier to 
market-led reforms in this area.\559\ Further, one commenter noted that 
``market forces cause the exchanges to choose maker-taker and inverted 
fee models to the detriment of the public interest'' and therefore 
regulatory action is necessary to address market distortions caused by 
the maker-taker and taker-maker fee models.\560\
---------------------------------------------------------------------------

    \559\ Clearpool Letter, at 2. See also T. Rowe Price Letter, at 
1 (``enthusiastically agree[ing] with the Commission that a pilot is 
necessary to gather data,'' in part because ``exchanges have little 
incentive to reduce the fee cap on their own''). See also Larry 
Harris Letter, at 9 (noting that ``regulatory action is necessary to 
establish a common pricing standard because market forces alone will 
not do it''). Larry Harris Letter, at 6 (noting that ``exchange 
holding companies have a strong interest in maintaining the current 
system'' and that the ``SEC may reasonably consider these interests 
when evaluating comments submitted by the exchanges''); Themis 
Trading Letter II, at 3 (stating that the Commission should not be 
``distracted . . . by conflicted stock exchanges desperately fearful 
that their business models might come crashing down'').
    \560\ See Larry Harris Letter, at 9. See also Themis Trading 
Letter I, at 5 (noting that several exchanges oppose the pilot 
because they are motivated by their ``own profit incentives and not 
what is best for the market'').
---------------------------------------------------------------------------

    Further, the Commission notes that one market conducted a limited 
unilateral access fee experiment in 2015 to test the impact of 
reductions to its fees and rebates on 14 securities traded on its 
market. \561\ Several commenters noted the limited utility of that 
study given its narrow scope and applicability to one market.\562\ The 
fact that no other exchange joined in the 2015 access fee experiment, 
or independently undertook a similar study thereafter, supports the 
view that it is unlikely that competition among the exchanges alone 
would compel the exchanges to study, let alone address, potential 
distortions that may result from their fee and rebate models.
---------------------------------------------------------------------------

    \561\ See Proposing Release, supra note 2, at 13011-12. See also 
Section IV.B.1.a.ii, infra discussing the Nasdaq Experiment in 
greater detail.
    \562\ See, e.g., Themis Trading Letter I, at 3 (stating that a 
``more comprehensive multilateral market-wide approach would be 
needed to yield usable data that could be used to test how lower 
access fees, and a lack of rebates, would impact market quality and 
marketplace behavior'' (emphasis omitted)); IEX Letter III, at 6 
(``Nasdaq's experiment and its outcomes aren't a perfect proxy for 
what is likely to happen in the Transaction Fee Pilot. That 
experiment was done unilaterally and only in highly-liquid 
securities.''); Larry Harris Letter, at 9 (noting that Nasdaq's 
``experimental fee reduction did not occur at all trading venues 
that traded the subject securities,'' demonstrating that 
``regulatory action is necessary to establish a common pricing 
standard because market forces alone will not do it'').
---------------------------------------------------------------------------

B. Baseline

    We compare the economic effects of the rule, including benefits, 
costs, and effects on efficiency, competition, and capital formation, 
to a baseline that consists of the existing regulatory framework and 
market structure. As explained above, by temporarily altering the fee 
and rebate structure for certain NMS stocks (including ETPs), the Pilot 
is designed to produce information on order routing behavior that would 
not otherwise be available. The baseline, therefore, includes the 
existing information available to the Commission in the absence of a 
pilot, which the Commission could use to inform future regulatory 
action.\563\ The baseline also sets out the exchanges' current 
practices with respect to fees and rebates and the regulations 
governing those fees and rebates.
---------------------------------------------------------------------------

    \563\ See supra Section IV.E.1 for the discussion of the 
alternative that the Commission proceed with rulemaking initiatives 
without first conducting the Pilot. That alternative differs from 
the baseline presented here because it directly presumes regulatory 
changes whereas the baseline for the Economic Analysis does not 
presume regulatory changes resulting from the Pilot.
---------------------------------------------------------------------------

1. Current Information Baseline
    While the theoretical studies referenced in the Proposing Release 
suggest that transaction-based fee models create potential issues for 
investors,\564\ limited empirical evidence exists to date about the 
extent that potential conflicts of interest arise from maker-taker and 
taker-maker pricing models and how exchange transaction-based fees and 
rebates impact market and execution quality and affect the integrity 
and structure of the U.S. equity markets.\565\ Consequently, the 
relation between transaction-based pricing and conflicts of interest is 
not well understood.\566\ Additionally, commenters are divided as to 
how to interpret existing knowledge. One Commenter stated that we had 
``much to learn'' \567\ while other commenters felt that there was 
sufficient existing knowledge to move directly to rule making without a 
Pilot.\568\
---------------------------------------------------------------------------

    \564\ See, e.g., Proposing Release supra note 6 at Section IV.A. 
and C.
    \565\ Several commenters supported the Pilot as a necessary step 
to produce data to inform the heavily contested debate surrounding 
the impact of exchange fees and rebates on order routing, market 
quality, and execution quality. See, e.g., Barnard Letter, at 1 
(``historically there are many views on this topic, but a paucity of 
credible data from which to draw conclusions''); Wellington Letter, 
at 1, and Clark-Joseph Letter, at 1.
    \566\ See Nuveen Letter, at 2
    \567\ See e.g., Spatt Letter, at 3
    \568\ See e.g., Larry Harris Letter, at 10
---------------------------------------------------------------------------

    Below, we discuss the existing information currently available to 
the Commission or the public that concerns the relationship between 
transaction-based fee-and-rebate pricing models and order routing 
decisions and we describe the limitations of this information for use 
in policy discussions regarding transaction-based fees and rebates and 
the potential conflicts of interest and potential distortions that may 
accompany them. We then discuss the potential to produce additional 
information regarding the impact of exchange fees and rebates absent 
the Pilot.
    While a number of studies attempt to document the relation between 
transaction-based fees, order routing decisions, and execution quality, 
these studies and available data sources are limited in ways that are 
likely to reduce the strength of conclusions that relate to the impact 
of transaction-based fees and rebates on order routing decisions and 
the existence or magnitude of potential conflicts of interest between 
broker-dealers and their customers. This section details these 
limitations.
a. Limitations of Existing Studies
    Multiple commenters submitted empirical evidence that they argued 
was consistent with conflicts of interest. For example, one Commenter 
cited evidence that trade execution algorithms that are fee sensitive 
tend to have lower execution quality than algorithms that are not fee 
sensitive.\569\ Another Commenter cited existing academic, industry, 
and government sources suggesting the existence of conflicts of 
interest, or of the investing public's perception that there exist 
conflicts of interest.\570\ Another commenter suggested evidence 
existed that routing decisions were not always in the best interest of 
investors by arguing that adverse selection differs by exchange, and 
that this difference can be observed using TAQ data.\571\ Another 
commenter presented their study arguing that

[[Page 5248]]

longer queues lead to increased transaction costs, and connected longer 
queues with the practice of paying rebates.\572\ Another Commenter 
referenced a study suggesting that trading costs vary across 
exchanges.\573\
---------------------------------------------------------------------------

    \569\ See Babelfish Letter, at 2-3
    \570\ See CFA Letter, at 2
    \571\ See Healthy Markets Letter I, at 2, 6
    \572\ See IEX Letter IV, at 9
    \573\ See AGF Letter, at 1
---------------------------------------------------------------------------

    Although the above listed commenters all felt that the evidence did 
suggest that fees and rebates led to conflicts of interest, other 
commenters did not come to the same conclusion. One commenter felt that 
there was ``no evidence that fee practices are harming investors or 
interfering with fair competition'' and consequently felt that a Pilot 
was not justified.\574\ The studies and analysis presented by 
Commenters and the studies discussed below have significant limitations 
with regard to establishing causal links between fees and rebates and 
order routing decisions. These limitations fall primarily into two 
categories: (1) The results of the studies may not be representative, 
and (2) the results of the studies cannot make a causal connection 
needed to inform on potential conflicts of interest.
---------------------------------------------------------------------------

    \574\ See CBOE Letter I, at 5 See also Nasdaq Letter I, at II-12
---------------------------------------------------------------------------

    When a study's results are representative, the results can be 
applied across a broadly defined group. Drawing broad inferences from 
limited samples could be problematic because the results might be 
specific to specific securities, broker-dealers, or trading venues. In 
the context of regulatory decision-making, representative results 
should inform on the potential effects over the scope of the market 
covered by the decision. When results are not representative of the 
full scope of a regulatory decision, that regulatory decision may have 
an unpredictable effect over the part not represented by the results. 
For example, if the results of a study cover only certain types of 
issuers, the results may not apply to all types of issuers and 
therefore, any regulatory changes based on such studies may have 
unanticipated effects on the types of issuers not included in the 
study.
    In addition to limitations in how representative results may be, 
existing studies cannot test for causal relationships between 
transaction fees and order routing decisions, even around fee 
revisions. Because transaction-based fees and order routing decisions 
could be jointly determined, researchers cannot readily disentangle the 
direction of causality, and therefore cannot determine the extent that 
potential conflicts exist. The identification of causal relations 
between fees and order routing decisions becomes increasingly complex 
because exchanges frequently modify their fees.\575\ In practice, 
researchers attempt to identify and measure causal relations in two 
ways: (1) Exogenous shocks and (2) econometric techniques, such as an 
instrumental variables approach.\576\
---------------------------------------------------------------------------

    \575\ Over the last five years, the exchanges, on average, have 
made 34 revisions, or approximately 6.7 revisions per year, to their 
transaction-based fees and rebates. See infra Section IV.B.2.b.
    \576\ The method of instrumental variables is used to estimate 
causal relationships when controlled experiments or exogenous shocks 
are not feasible. An ``instrument'' changes the explanatory variable 
but has no independent effect on the dependent variable, allowing a 
researcher to uncover the causal effect of the explanatory variables 
on the dependent variable of interest.
---------------------------------------------------------------------------

    The Commission disagrees with one commenter who felt that 
sufficient data existed to move forward with regulation prohibiting 
rebates because ``the theory is well-accepted, and no prior evidence 
contradicts it.'' \577\ In the absence of causal data, regulators can 
use theory--and their best judgment based on their expertise--to guide 
their decision making. However, in this case, for the reasons discussed 
throughout this release, the Commission believes that empirically 
assessing the various theories, causal impacts, and effects of the 
transaction fee-and rebate pricing model is appropriate.
---------------------------------------------------------------------------

    \577\ See Harris Letter, at 10.
---------------------------------------------------------------------------

i. Battalio Equity Market Study
    According to the Battalio Equity Market Study, broker-dealers 
appear to trade execution quality of customer orders, as measured by 
the likelihood of and time to execution (and not price), for the 
rebates obtained by providing liquidity to maker-taker venues.\578\ By 
routing orders to exchanges that pay high rebates, broker-dealers may 
engage in rebate capture at the expense of client execution.\579\ Using 
data obtained from mandatory Rule 606 disclosures over a two-month 
window,\580\ the Battalio Equity Market Study also identified that four 
of the ten broker-dealers included in the analysis route limit orders 
exclusively to market makers or to exchanges that offered the largest 
liquidity rebates (and charged the highest access fees). A number of 
tests in the Battalio Equity Market Study also show that low-fee venues 
provide better execution quality for limit orders, as measured by the 
likelihood of an order fill, the speed of execution, and realized 
spreads, relative to high-fee venues, suggesting that order routing 
decisions to high rebate venues are likely to be suboptimal from a 
customer's perspective, and may be indicative of potential conflicts of 
interest.
---------------------------------------------------------------------------

    \578\ The Battalio Equity Market Study's abstract of the paper 
states: ``We identify retail brokers that seemingly route orders to 
maximize order flow payments by selling market orders and sending 
limit order to venues paying large liquidity rebates. . . . [W]e 
document a negative relation between limit order execution quality 
and rebate/fee level. This finding suggests that order routing 
designed to maximize liquidity rebates does not maximize limit order 
execution quality. . . .'' See Battalio Equity Market Study, supra 
note 5307, at 2193.
    \579\ See Battalio Equity Market Study, supra note 5307. See 
also supra Section IV.A.2, for an overview of the potential 
conflicts of interest that emerge.
    \580\ Rule 606 requires broker-dealers to provide quarterly 
reports that provide an overview of their routing practices. See 
Securities Exchange Act Release No. 51808 (November 27, 2000), 65 FR 
75414, (December 1, 2000) (hereinafter ``Disclosure of Order 
Execution and Routing Practices''). See also supra note 310 and 
accompanying text and infra Section IV.B.1.b.i, ``Rule 606 Data.''
---------------------------------------------------------------------------

    Although the Battalio study provides evidence suggestive of 
conflicts of interest, the study has a number of limitations which 
render the Commission unable to use this study to robustly determine 
that rebates cause costly conflicts of interest for broker-dealers. 
First, the Battalio Equity Market Study uses order level data from a 
single broker-dealer to determine the relation between maker-taker fees 
and limit order execution quality.\581\ Analysis based on observation 
of a single broker-dealer may not provide representative results 
because the relation between transaction-based fees and potential 
conflicts of interest may not be generalizable to other broker-dealers. 
For example, over 400 broker-dealers maintain membership with at least 
one U.S. equities exchange.\582\ If the single broker-dealer examined 
in the Battalio Equity Market Study has significantly different order 
routing behavior than the average broker-dealer that routes orders to 
exchanges, the information obtained from examining the relation between 
transaction-based fees and order routing decisions of that broker-
dealer would not be representative of the entire market and therefore 
would provide an incomplete representation of potential conflicts of 
interest.
---------------------------------------------------------------------------

    \581\ The Battalio Equity Market Study, however, does not 
specify whether the limit orders are marketable or non-marketable 
limit orders, as Rule 606 disclosures do not segment these orders. 
See Battalio Equity Market Study, supra note 530.
    \582\ Estimates based on data from Form 1 of the X-17A-5 
filings. As of December 31, 2017, 3,860 broker-dealers that filed 
form X-17A-5. See infra Section IV.B.2.a.
---------------------------------------------------------------------------

    The Battalio Equity Market Study also relies on a sample of Rule 
606 order routing reports obtained directly from the reporting 
entities' websites from a limited sample of ten well-known national 
retail brokers from a single quarterly reporting cycle (October and

[[Page 5249]]

November 2012). As discussed above, approximately 400 broker-dealers 
are members of at least one national securities exchange. The ten 
retail brokers analyzed in the Battalio Equity Market Study make up 
approximately 2.1% of the broker-dealers with exchange memberships, and 
less than 0.3% of broker-dealers overall. Although these are well-known 
retail brokers, due to the lack of representativeness of the sample 
(e.g., the majority of the broker-dealers represented in the Battalio 
Equity Market Study are online broker-dealers), these broker-dealers 
may be more (or less) likely than the average broker-dealer to route 
customer orders in ways that benefit themselves at the expense of their 
customers. The findings in the Battalio Equity Market Study, therefore, 
may not be representative of a broader sample of broker-dealers. 
Moreover, the Commission is unable to determine if the Battalio Equity 
Market Study's analyses of the Rule 606 disclosure data has statistical 
power because the authors did not provide any statistical analyses 
beyond the percentage of market or limit orders routed to a particular 
exchange.
    In sum, the absence of an exogenous shock to access fee caps or 
rebates outside the control of exchanges leaves the authors unable to 
definitively determine the causes of broker-dealers' order routing 
decisions. Consequently, the authors are unable to disentangle whether 
fees and rebates drive broker-dealer order routing decisions or order 
routing decisions determine fees and rebates chosen by exchanges.
ii. The Nasdaq Experiment
    Nasdaq independently conducted an experiment, whereby it lowered 
access fees and rebates for a sample of 14 stocks over a period of four 
months in 2015, providing an exogenous shock to the transaction-based 
pricing model on the exchange. The Nasdaq experiment lowered both the 
access fees charged and the liquidity rebates paid on the securities 
included in their study.\583\ Nasdaq produced two reports on the 
experiment \584\ and an academic study examining the experiment was 
submitted as a comment.\585\ Both Nasdaq's first study report and the 
Swan study indicate that when Nasdaq lowered fees and rebates they lost 
market share in the stocks with lower fees and rebates. According to 
analysis in the Swan study, the market share that Nasdaq lost appeared 
to migrate to other make-take venues with higher fees and rebates. 
Additionally, both Nasdaq's analysis as well as the Swan study find 
that the experiment led to a decrease in the fraction of time that 
Nasdaq quoted at the NBBO. The Swan study also estimated a variety of 
additional tests to measure the impact of the experiment on various 
aspects of market quality. The results of these tests are mixed. The 
Swan study found that the Nasdaq experiment improved market quality on 
Nasdaq in terms of improved fill rates and fill times as well as 
narrower cum-fee effective spreads and cum-fee realized spreads.\586\
---------------------------------------------------------------------------

    \583\ The Nasdaq study lowered access fees to $0.0005 and 
rebates to $0.0004 simultaneously for a set of 14 securities, half 
of which identified Nasdaq as the primary listing exchange, the 
other half which identified the NYSE as the primary listing 
exchange. Nasdaq released two reports see infra note 584 (examining 
the changes to a number of metrics related to market quality).
    \584\ The first report provided by Nasdaq can be found on their 
webpage http://qnasdaqomx.com/AccessFeeExperiment (``Nasdaq's first 
report'', or the ``first Nasdaq report''). The second report 
provided by Nasdaq can be found at http://people.stern.nyu.edu/jhasbrou/SternMicroMtg/SternMicroMtg2015/Supplemental/ (``Nasdaq's 
second report'', or the ``Second Nasdaq report'').
    \585\ See Swan Letter which submitted the paper: Yiping Lin, 
Peter Swan, & Frederick Harris, Why Maker-Taker Fees Improve 
Exchange Quality: Theory and Natural Experiment Evidence, Working 
Paper, (2018), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3034901 (hereinafter ``Swan study''); 
Nasdaq's Second Report, at 1.
    \586\ Cum fee indicates that the computation of spreads included 
the fee or rebate charged. It is a measure of the total cost of 
transacting.
---------------------------------------------------------------------------

    While cum-rebate effective spreads, fill rates and fill times 
improve on the Nasdaq during the experiment, the Swan study finds that 
the experiment diminished market quality in terms of quoted spreads and 
raw realized spreads which both increase during the experiment.\587\ 
Additionally, the Swan study shows that some measures of market quality 
were unchanged by the Nasdaq experiment, namely, the Swan study finds 
no change in raw effective spread.\588\ In Nasdaq's second report on 
the experiment they examine various market quality measures and find no 
impact on effective spread, relative effective spread, quoted spread, 
relative quoted spread, displayed dollar depth at the NBBO, time 
between quote updates on the consolidated tape, and time between price 
changes in the NBBO on the consolidated tape.
---------------------------------------------------------------------------

    \587\ The effective spread is the cost to transact and is 
defined as two times the absolute difference between the price of a 
trade and the prevailing midpoint at the time of trade. The 
effective spread can be decomposed into two components, the realized 
spread and price impact of the trade. The price impact is generally 
viewed as the portion of the effective spread that compensates 
market makers for adverse selection losses. The realized spread is 
the portion of the spread that market makers `realize' after adverse 
selection costs are taken into account. Raw realized spreads are 
realized spreads that do not take into account the all-in cost of 
trading, i.e., they exclude rebates from the calculations
    \588\ Raw effective spreads are effective spreads that do not 
take into account the all-in cost of trading, i.e., they exclude 
fees from the calculations.
---------------------------------------------------------------------------

    In examining the impact of the experiment on price efficiency, the 
Swan study finds mixed evidence that prices quoted on Nasdaq become 
less efficient during the experiment. First, the Swan study finds that 
global price impact declines during the experiment. Price impact is 
commonly employed as a measure of the informativeness of trades. The 
Swan study explains the decline in price impact with a theoretical 
model which suggests that rebates subsidize market makers for the 
adverse selection costs that they bear-thereby allowing them the 
ability to bear additional adverse selection which induces informed 
traders to trade more aggressively in the presence of rebates. 
Consequently, their model predicts that informed trades will congregate 
on exchanges with high rebates. Additionally, the Swan study finds 
using variance ratios that price efficiency declines on Nasdaq during 
the experiment. However when using autocorrelation of trades as a 
measure of price efficiency, the tests indicate a decrease in 
autocorrelation--suggesting more efficient stock prices on Nasdaq.\589\ 
Additional analysis on price efficiency comes from Nasdaq's second 
report which explores the impact of their experiment on market wide 
price efficiency and finds no change in price impact, autocorrelation 
of trades, or variance ratios.
---------------------------------------------------------------------------

    \589\ The interpretation of the price efficiency results is 
difficult because it is unclear what price efficiency on one 
exchange means in the absence of the other exchanges. Usually price 
efficiency is measured across all exchanges trading a given 
security.
---------------------------------------------------------------------------

    The Swan study also empirically examines how the Nasdaq experiment 
impacted the trading behavior of high frequency traders (``HFTs'') and 
non-HFTs and finds that as a result of the experiment HFTs added 
liquidity less often and took liquidity more often while non-HFTs did 
the opposite. Nasdaq also examined trading behavior and found that 
there was a shift in the composition of the top five liquidity 
providers for the securities that occurred as a result of the 
experiment. The top five liquidity providers prior to the start of the 
pilot significantly reduced their liquidity provision from 44.5% of the 
liquidity provided pre-pilot to 28.7% in the pilot period. However, the 
top five liquidity providers from the pilot period had a significant 
increase in their liquidity provision from 29.7% pre-pilot to 41.5% in 
the pilot period.

[[Page 5250]]

    While Nasdaq believes that the results from their study do not 
support the need for a pilot,\590\ the Commission disagrees because the 
Nasdaq experiment and the subsequent analysis suffers from the 
following limitations. First, the Nasdaq experiment may not be 
representative of the broader market. Nasdaq selected 14 stocks to be 
part of the analysis, which represent 0.3% of all NMS stocks. The 
sample is unlikely to be representative of the universe of NMS 
securities for two reasons: (1) The sample included a small number of 
stocks (and no ETPs),\591\ and (2) less than one-third of these stocks 
were small or mid-capitalization at the time of the analysis, although 
most had market capitalizations close to $3 billion immediately prior 
to the study.\592\ The small number of stocks makes interpretation of 
the results more difficult because a change to such a small number of 
stocks may not be significant enough for traders to alter their 
behavior.\593\
---------------------------------------------------------------------------

    \590\ See Nasdaq Letter I, at 10.
    \591\ Only common stocks were included in the Nasdaq study, 
while the proposed Pilot will include NMS stocks, which includes 
common stocks as well as ETPs.
    \592\ Market capitalizations are computed from CRSP shares 
outstanding and stock price, as of December 31, 2014. See also 
Themis Trading Letter I, at 2; NorthWestern Letter, at 1 and IEX 
Letter III, at 6.
    \593\ Nasdaq acknowledges this limitation in their second report 
analyzing the experiment. See supra note 584 See also Themis Trading 
Letter I, at 2 and IEX Letter III, at 6 for commenters expressing 
similar concerns about the representativeness of Nasdaq's sample.
---------------------------------------------------------------------------

    Additionally, the Commission is not able to make inference about 
the effect of a market wide change to fees and or rebates from the 
Nasdaq experiment because, as noted by multiple commenters, the effects 
of the experiment apply to a single exchange: Nasdaq.\594\ As the other 
equities exchanges did not have similar changes to transaction-based 
fees and rebates, any inferences drawn from the Nasdaq study may not be 
valid under different circumstances in which all equities exchanges 
were subject to consistent revisions to transaction-based fees. \595\
---------------------------------------------------------------------------

    \594\ See Swan Letter, at 3; Themis Trading Letter I, at 2; 
Credit Suisse Commentary, at 2, Larry Harris Letter, at 9, and IEX 
Letter III, at 6.
    \595\ This point was acknowledged in Nasdaq's second report. See 
supra note 584. This point was also brought up by multiple 
commenters. See Swan Letter, at 3; Credit Suisse Commentary, at 2; 
and Larry Harris Letter, at 9.
---------------------------------------------------------------------------

    Lastly, none of the analysis of the Nasdaq study analyzes the 
impact of potential conflicts of interest on order routing decisions. 
Further, even if the Nasdaq study had analyzed a causal relationship 
between transaction-based fees and rebates and potential conflicts of 
interest, the limited representativeness of the Nasdaq sample would 
limit the generality of the study.
iii. Options Market Studies
    Three studies have examined exogenous shifts between maker-taker 
and payment for order flow pricing models on U.S. options 
exchanges.\596\ These studies found that the movement from a payment 
for order flow model to a maker-taker model led to a decrease in 
execution costs for option classes affected by the shift, improved 
quoted spreads, and altered broker-dealer order routing behavior to 
account for the fees.\597\ However, the change to a payment for order 
flow model from a maker-taker model yielded better execution quality, 
but a reduction in the number of orders and order volume.\598\ With 
respect to the transition between forms of pricing models that occurred 
on the option exchanges, discussed above, the key limitation is the 
comparison of maker-taker pricing models with payment for order flow 
pricing models. For example, studies that explore these regime shifts 
between maker-taker to payment for order flow models are not comparing 
situations in which one regime could theoretically have lower conflicts 
of interest than the other. Each of these models is likely to create 
potential conflicts of interest that could affect how broker-dealers 
route their customer orders,\599\ although evidence does not suggest 
that one form of pricing model is more or less prone to conflicts than 
another. Moreover, the change from one form of pricing model to another 
could introduce new conflicts of interest or impacts on market and 
execution quality that did not previously exist. Therefore, the 
Commission believes that exchange-driven transitions between maker-
taker and payment for order flow pricing models are not likely to 
provide information about potential conflicts of interest and impacts 
on market and execution quality driven by the maker-taker and taker-
maker models or to inform the Commission about future regulatory 
decisions regarding transaction-based fee models. Additionally, these 
studies lack causality. Specifically the decision to invert an exchange 
from a taker/maker to a maker/taker exchange, which these studies are 
based on, is an endogenous decision, and therefore these studies lack 
the ability to make causal inference further hindering the Commission's 
ability to draw inference from these studies.
---------------------------------------------------------------------------

    \596\ See Amber Anand, Jian Hua, & Tim McCormick, Make-Take 
Structure and Market Quality: Evidence from the U.S. Options 
Markets, 62 Mgmt. Sci. 3085, 3217-90 (2016), https://pubsonline.informs.org/doi/abs/10.1287/mnsc.2015.2274 (hereinafter 
``Anand, Hua, & McCormick''); Robert Battalio, Todd Griffith, & 
Robert Van Ness, Make-Take Fees versus Order Flow Inducements: 
Evidence from the NASDAQ OMX PHLX Exchange, 12th Ann. Mid-Atlantic 
Res. Conf. in Fin. (2017), http://www1.villanova.edu/content/dam/villanova/VSB/assets/marc/marc2017/SSRN-id2870000.pdf (hereinafter 
``Battalio, Griffith, and Van Ness''); Robert Battalio, Andriy 
Shkilko, & Robert Van Ness, To Pay or Be Paid? The Impact of Taker 
Fees and Order Flow Inducements on Trading Costs in U.S. Options 
Markets, 51 J. Fin. & Quantitative Analysis (Oct. 2016) 1637, 1637-
62 https://www.cambridge.org/core/journals/journal-of-financial-and-quantitative-analysis/article/div-classtitleto-pay-or-be-paid-the-impact-of-taker-fees-and-order-flow-inducements-on-trading-costs-in-us-options-marketsdiv/0782CE3E9679C29BB910A66192D27201 (hereinafter 
``Battalio, Shkilko & Van Ness''). Anand, Hua, & McCormick explores 
the transition from a payment for order flow model to a maker-taker 
model on NYSE ARCA, while Battalio, Griffith, and Van Ness as well 
as Battalio, Shkilko, & Van Ness examine the shift on NASDAQ OMX 
PHLX (``PHLX'') from a maker-taker model to a payment for order flow 
model.
    \597\ Id.
    \598\ Id.
    \599\ See Battalio, Shkilko & Van Ness, supra note 596, at 1637-
62.
---------------------------------------------------------------------------

b. Limitations of Existing and Anticipated Data
    Some Commenters suggested that existing data sources could be 
employed in lieu of a Pilot to study the Commissions objectives.\600\ 
Another Commenter argued that enhancing existing data would be 
sufficient.\601\ To this end, the Commission considered whether a 
number of existing data sources could be used independently or in 
combination to relate transaction-based fees to order routing and 
execution quality. This section discusses these data sources. For 
instance, in the Battalio Equity Market Study and the Nasdaq study 
discussed above, the authors employed some combination of Rule 606 
data, proprietary broker-dealer data, the Trade and Quote (TAQ) 
database,\602\ and proprietary exchange data. In addition, while not 
employed in previous studies, CAT data, OATS data, Rule 605 data, Form 
ATS-N data, and exchanges' Form 19b-4 fee filings and fee schedules 
available from each exchange's website, could provide insights into the 
relation between transaction-based fees, order routing, and execution 
quality, and fees

[[Page 5251]]

and other arrangements. As noted above, several data sources provide 
information on order routing and execution quality. While researchers 
could use these data sources to produce some representative results 
regarding the relation between transaction-based fees, order routing, 
and execution quality, the Commission believes that available data has 
several limitations, which include: Granularity, completeness, 
periodicity, format, and availability.
---------------------------------------------------------------------------

    \600\ See STANY Letter, at 2; Nasdaq Letter I, at 11-12; NYSE 
Letter I, at 17; and Nasdaq Letter III, at 1-2.
    \601\ See Era Letter, at 1. But cf. IEX Letter II, at 9.
    \602\ Battalio Equity Market Study, supra note 530, relies on 
Rule 606 disclosures to identify order routing for a small sample of 
broker-dealers, proprietary broker-dealer data from a single smart-
order routing system to capture limit order execution quality for 
this broker-dealer's orders, and the TAQ data to measure execution 
quality as a function of each venue's taker fee or rebate.
---------------------------------------------------------------------------

i. Rule 606 Data
    Rule 606 requires broker-dealers to make publicly available 
quarterly reports that provide an overview of their routing practices 
on certain orders in NMS securities. As amended, broker-dealers must 
provide information for the ten venues to which the largest number of 
total non-directed orders were routed for execution and for any venue 
to which five percent or more of non-directed orders were routed for 
execution. Rule 606 disclosures also require broker-dealers to disclose 
in a standardized format material aspects of their relationships with 
trading venues to which they route orders, including a description of, 
among other things, the payment for order flow and any profit sharing 
relationships, which, like rebates, could influence the broker-dealer's 
order routing decision and potentially lead to potential conflicts of 
interest for broker-dealers when routing orders.\603\ Researchers and 
other analysts interested in order routing data can download these 
forms quarterly directly from broker-dealer websites.
---------------------------------------------------------------------------

    \603\ See Section III.B.3 of Amendments to Order Handling 
Disclosure, supra note 310.
---------------------------------------------------------------------------

    Some commenters believed that the amendments to the Rule 606 data 
would render the Pilot unnecessary.\604\ Indeed, a few commenters 
suggested that Rule 606 data, perhaps combined with other existing 
data, would be sufficient to study conflicts of interest among broker-
dealers.\605\ The Commission disagrees that this type of analysis would 
serve the purposes of the Pilot.\606\ Such an approach would not 
adequately advance the Pilot's broader purpose to study the effects 
that exchange transaction fee-and-rebate pricing models may have on 
order routing behavior, execution quality, and market quality, in 
addition to conflicts of interest between brokers and their customers 
that are presented when exchanges pay rebates.\607\ Further, disclosure 
alone would not provide an exogenous shock that generates measurable 
responses capable of providing insight into the effects of fees and 
rebates on the markets and market participant behavior.
---------------------------------------------------------------------------

    \604\ See Cboe letter I, at 26; FIA Letter, at 3; STANY Letter, 
at 2; Nasdaq Letter I, at 1-2, 4; NYSE Letter I, at 18.
    \605\ See STANY Letter, at 2; Nasdaq Letter I, at 11-12; ERA 
Letter, at 1.
    \606\ See also IEX Letter I, at 9.
    \607\ See, e.g., ICI Letter II at 3.
---------------------------------------------------------------------------

    In addition, the quarterly frequency of the public Rule 606 reports 
by broker-dealers is different from the frequency of changes in fee 
schedules by exchanges (e.g., as presented in Table 2, over a recent 
five-year measurement period, the average exchange updated its fees 
schedule approximately 6.7 times per year).\608\ Further, while the 
Rule 606 data provides order routing at the broker-dealer level, such 
information is not granular enough to thoroughly study potential 
conflicts of interest. Specifically, the 606 data is aggregated at the 
quarterly level. This frequency will not enable researchers to look at 
the full picture of how a broker-dealer responds to fees because 
exchanges on average revise their fee schedules 6.7 times per year. 
With 13 exchanges this amounts to 87 fee changes per year. 
Consequently, the fees that exchanges charge in a given quarter 
relative to the other exchanges will likely change multiple times 
within a quarter. Consequently, Rule 606 data is limited in how it can 
be employed to evaluate comprehensively the impact of order flow 
responding to fees and rebates.
---------------------------------------------------------------------------

    \608\ Not every fee schedule revision pertains to transaction 
fees or rebates. To focus only on these revisions, each Form 19b-4 
fee filing was evaluated to determine that revisions to fees or 
rebates were pertinent to this baseline.
---------------------------------------------------------------------------

    The value of Rule 606 disclosures for identifying possible 
conflicts of interest resulting from transaction-based fees would be 
limited for a number of additional reasons. First, each broker-dealer 
discloses data for only its top ten order routing venues. Second, 
because broker-dealers disclose data at a quarterly frequency, a five-
year sample of Rule 606 data for a single broker-dealer, would include 
only 20 observations, limiting statistical power.
    In sum, the Commission believes that the amended Rule 606 data will 
provide useful information to complement the Pilot; however it is 
insufficient by itself to determine the impact of exchange transaction 
fees and rebates on broker-dealer order routing decisions, or inform 
the Commission of the impact of exchange pricing on market and 
execution quality.\609\
---------------------------------------------------------------------------

    \609\ Multiple commenters expressed views similar to this and 
urged the Commission to adopt 606 amendments prior to the adoption 
of the Pilot. See, e.g., Citadel Letter, at 3; OMERS Letter, at 3; 
ICI Letter I, at 5-6; Fidelity Letter, at 2; IEX Letter II, at 9.
---------------------------------------------------------------------------

ii. CAT Data and OATS Data
    Once the CAT Phase 1 becomes operational,\610\ the Commission and 
SROs will have information on all exchange routing and exchange 
executions for all NMS securities. In CAT Phase 1, exchanges would 
record and report order events on every order they receive for NMS 
securities. Order events include order receipt, order routes, order 
modifications, order cancellations, and order executions. Likewise, the 
Order Audit Trail Systems (OATS) data could inform on order routing 
decisions.\611\ The OATS data tracks customer orders from the receipt 
of the order through execution or cancellation. Information in the OATS 
data reflects the terms of the order, including the security, price, 
shares, account type, handling instructions, and side of the market for 
which the order was placed; where the order was routed for execution; 
modifications to the order; and execution information, including the 
capacity in which the firm acted in the trade.
---------------------------------------------------------------------------

    \610\ See supra Section II.E.3.vi.
    \611\ See Nasdaq Letter I, at 4.
---------------------------------------------------------------------------

    Although the CAT and OATS data could feasibly be used to produce 
order routing data similar to that required by the Pilot, as indicated 
by one commenter, without the corresponding ``randomized trial,'' the 
use of OATS data alone would be insufficient to determine causality in 
the effect of fees and rebates on order routing decisions because it 
would not be possible to determine from the data whether fees respond 
to changes in order routing decisions or whether order routing 
decisions respond to changes in fees. Consequently, in the absence of 
an exogenous shock to fees, CAT and OATS data cannot provide the 
Commission with robust evidence about how access fees impact order 
routing decisions.\612\
---------------------------------------------------------------------------

    \612\ See Verret Letter I, at 4.
---------------------------------------------------------------------------

iii. Proprietary Broker-Dealer Data
    Proprietary data from broker-dealers or exchanges could also 
provide information about order routing decisions. Broker-dealer data 
include information on the orders received and routed by that broker-
dealer, including where the broker-dealer routed orders, whether the 
orders execute, and the price, size, and time of execution. Exchange 
data include information on the orders received by an exchange, 
including which members routed orders to the exchange, whether the 
orders execute, and the price, size, and time of

[[Page 5252]]

execution. Indeed, several commenters stated that if 606 data were not 
sufficient to answer the Commission's questions about broker dealer 
routing decisions, then the Commission could request routing tables and 
information directly from broker-dealers or request other Transaction 
Cost Analysis (TCA) data to supplement the 606 data.\613\
---------------------------------------------------------------------------

    \613\ See Nasdaq Letter I, at 11-12 and FIA Letter, at 3.
---------------------------------------------------------------------------

    While these data would provide potentially more granular data about 
order routing, as proprietary datasets, there is no standard format 
that exchanges or broker-dealers use to aggregate this data, which 
makes cross broker-dealer or cross exchange comparison difficult. Even 
if a dataset of proprietary data could be produced from data obtained 
directly from exchanges or broker-dealers, the data would still lack an 
exogenous shock to fees which is necessary to determine a causal link 
between order routing decisions and exchange fees.
iv. Rule 605 Data
    A few commenters suggested that Rule 605 data used in conjunction 
with other data such as Rule 606 data, could provide information about 
broker dealer conflicts of interest.\614\ Rule 605 data provides 
information about execution quality by market center, including 
exchanges, ATSs, and broker-dealers that execute orders, by requiring 
standardized reports of statistical information regarding order 
execution, and was designed to improve the public disclosure of order 
execution practices by exchanges.\615\ These data are available monthly 
from market center websites or data vendors, and provide information on 
execution quality statistics such as transaction costs, execution 
speed, and fill rates reported separately for marketable and non-
marketable orders.
---------------------------------------------------------------------------

    \614\ See STANY Letter, at 2 and Nasdaq Letter I, at 11-12.
    \615\ See Disclosure of Order Execution and Routing Practices, 
supra note 580, at 75417-25.
---------------------------------------------------------------------------

    While Rule 605 data is available to researchers and may provide 
information about execution quality, it too has a number of 
limitations. For example, Rule 605 data provides execution quality 
information for both marketable and non-marketable orders; however, the 
methodologies for estimating measures of the speed of execution of non-
marketable orders are outdated.\616\ For instance, Rule 605 measures 
realized spreads based on quotations five minutes after the time of 
order execution and recent research suggests using quotations that more 
closely follow a trade, because any temporary price impact of a trade 
goes away within seconds, not minutes, of the trade.\617\ Finally, Rule 
605 data is limited in that it covers only held orders and orders of 
less than 10,000 shares.
---------------------------------------------------------------------------

    \616\ See Securities Exchange Act Release No. 61358 (January 14, 
2010), 75 FR 3594 (January 21, 2010) (hereinafter ``Concept 
Release'').
    \617\ See, e.g., Jennifer Conrad & Sunil Wahal, The Term 
Structure of Liquidity Provision (August 8, 2018) (unpublished 
manuscript) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2837111.
---------------------------------------------------------------------------

v. TAQ Data
    Beyond Rule 605 data, researchers could also use the TAQ database 
as a means of measuring order execution quality or estimating market 
share to use as a measure for order routing decisions. The TAQ database 
is publicly available (for a fee) from NYSE and provides access to all 
trades and top of the book quotes for NMS securities, from which 
researchers and other analysts can estimate trade-based measures of 
execution quality such as effective spreads.
    While TAQ data are available to academic researchers, TAQ has a 
number of limitations in its precision in the measurement of order 
routing and execution quality. An exchange's market share can differ 
significantly from its share of orders received because exchanges 
reroute orders they cannot execute at the best prices and some 
exchanges reroute more orders than others. In addition, TAQ doesn't 
provide information on the brokers or dealers underlying the trades or 
quotes, so TAQ cannot tell us about the decisions of individual 
brokers. While TAQ facilitates the estimation of trade and quote-based 
measures of execution and market quality, it does not facilitate the 
estimation of order-based measures of execution quality, which are more 
precise than trade-based measures. In particular, order-based measures 
allow for the consideration of order size, which can be different and 
often larger than trade size. Order-based measures also consider the 
costs of latency whereas trade-based measures do not. Additionally, 
since TAQ only provides data on trades it does not provide a means of 
estimating execution quality for limit orders.
vi. Information From Exchange 19b-4 Filings
    Finally, researchers both in and outside of the Commission, who 
wish to link fees and rebates to various outcomes, can manually create 
datasets of exchange fees and rebates from the information that 
exchanges provide on their websites and release in their Notice of 
Filing of Proposed Rule Changes, which would capture information 
contained in exchanges' Form 19b-4 fee filings. The Form 19b-4 fee 
filings record changes to the existing exchange fee schedules with the 
Commission. At any point that an exchange chooses to make a change to 
any aspect of its fees and rebates, the exchange must provide notice to 
the Commission that it is filing a proposed rule change to amend its 
existing fee and rebate schedule. Exchanges may file their revisions to 
fees and rebates for immediate effectiveness upon submitting the Form 
19b-4 fee filings with the Commission.
    A key limitation to this data, particularly for researchers outside 
the Commission, is that exchanges use bespoke terminology to classify 
their fees and rebates. Consequently, identifying comparable fees 
across exchanges is difficult. For example, identifying the base or 
top-tier fees across exchanges could be difficult for researchers. As 
shown in Table 2 below, the average exchange has 24 different access 
fee categories and 21 different rebate categories. Further, exchanges 
do not disclose per share average or median fees charged and rebates 
earned on any report or filing, so such information is unavailable to 
the public. To add to the impediments to fee data aggregation and 
comparison, Form 19b-4 fee filings are available only as PDF files 
downloadable from the Commission's website, thereby increasing the 
costs of aggregation across exchanges over time by researchers.
    Lastly, even if a comprehensive dataset of fee changes were 
created, it would not be sufficient by itself to study the link between 
order routing decisions and fees because the dataset can only tell when 
and how an exchange revised fees, and not why the fee changed or if the 
fee change affected order routing behavior. In essence the data still 
lacks the ability to establish a causal connection between fee changes 
and order routing decisions.
vii. Form ATS-N
    Following implementation in January 2019, the public will have more 
information on ATS conflicts of interest and fees. In particular, in 
June 2018, the Commission adopted amendments to 17 CFR 242.300 through 
242.303 (Regulation ATS) and 17 CFR 240.3a1-1 (Rule 3a1-1 under the 
Exchange Act).\618\ As part of these amendments, NMS Stock ATSs will be 
required to

[[Page 5253]]

publicly report on new Form ATS-N information about the manner in which 
the ATS operates and activities of the broker-dealer operator and its 
affiliates, as well as potential conflicts of interest within the NMS 
Stock ATSs. While Form ATS-N will contain high level information on 
operations and affiliates of the ATS, it will not contain detailed 
information, such as ATS routing tables. Therefore, it would not 
contain detailed information on how fees and rebates affect the order 
routing decisions of the ATS.
---------------------------------------------------------------------------

    \618\ See Securities Exchange Act Release Nos. 83663 (July 18, 
2018), 83 FR 38768 (August 7, 2018).
---------------------------------------------------------------------------

    Form ATS-N also will require ATSs to provide public disclosures 
about the different types of fees they charge, along with the ranges of 
those fees and whether they are bundled with any other services. 
However this information would not be nearly as granular as the exact 
fee disclosures that would be required by the Pilot. Nor do they 
provide as much information as the fee disclosures that exchanges are 
currently required to disclose. These limitations make it difficult to 
use the ATS-N data to make causal inference about the impact of fees 
and rebates on order routing decisions.
c. The Potential To Study the Causal Link Between Fees, Rebates, and 
Conflicts of Interest Absent a Pilot
    Absent a Pilot, the Commission does not believe it would have 
comprehensive, empirical evidence to study the effects on the market 
that the Pilot is intended to study. In particular, as indicated above, 
the Commission does not believe the theoretical evidence on incentives 
and potential other effects are indicative of broker-dealers actually 
acting on those incentives. Further, even if the data sources above did 
not suffer from their limitations, researchers would struggle to 
identify the causality necessary to robustly link fee and rebate 
effects on order routing to order execution quality.
    Indeed, this link requires two steps: First establishing a causal 
link between fees and rebates and order routing and then between fee-
based order routing and order execution quality. Even with perfect 
data, any study linking fees and rebates to order routing would suffer 
from an inability to draw conclusions about causality. While such a 
study might find a correlation between fees/rebates and order routing 
decisions, the researchers would be unable to conclude which event was 
driving which. In particular, since exchanges compete for market share, 
it is reasonable to expect that exchanges change their fees and rebates 
in response to changes in order routing decisions by broker dealers. If 
this is the case it would be the order routing decisions that drive the 
exchange fees. The data alone do not allow researchers to distinguish 
whether order routing determines fees or whether fees determine order 
routing.
    Similarly, existing data, even if it didn't have the limitations 
above, would not enable researchers to infer the causal impact of fee-
based order routing on order execution quality. If fees and execution 
quality are linked, then exchanges may change their fees in response to 
changes in execution quality. For example, raising rebates might 
attract more liquidity providers and induce additional order flow to 
the exchange. An exchange that is experiencing low execution quality 
might raise rebates to address this problem. Under these circumstances, 
an empirical analysis that lacks an exogenous shock to fees/rebates 
might erroneously conclude that increased rebates cause a conflict of 
interest because they are correlated with low execution quality and 
increased order flow. Such a conclusion might lead the Commission to 
draw incorrect conclusions.
2. Current Market Environment
    This section provides an overview of the competitive landscape that 
could be affected as a result of revisions to the transaction-based fee 
structure required by the Pilot. Where information is currently 
available to the Commission, a description of the current practices of 
exchanges along dimensions that are relevant to the Pilot (e.g., 
summary information on their current fee schedule or the frequency of 
fee revisions) are included. The Commission requested that commenters 
provide additional information to inform the baseline as part of the 
proposal. Where available, the baseline has been supplemented to 
reflect additional baseline information that was received from 
commenters.
a. Market for Trading Services
    The market for trading services, which is served by exchanges, 
ATSs, and other liquidity providers (internalizers and others), relies 
on competition to supply investors with execution services at efficient 
prices. These trading venues, which compete to match traders with 
counterparties, provide platforms for price negotiation and the 
dissemination of trading information. The market for trading services 
in NMS stocks currently consists of 13 national equity market exchanges 
and 34 operational ATSs. Other off-exchange venues include broker-
dealer internalizers and wholesalers, which execute a substantial 
volume of retail order flow. The remainder of this section discusses 
the current competitive landscape for exchanges, ATSs, and others 
relevant to our economic analysis of the Pilot.
    Since the adoption of Regulation NMS in 2005, the market for 
trading services has become more fragmented and competitive. Of the 13 
exchanges, seven are maker-taker exchanges and four are taker-maker 
pricing exchanges, as shown in Table 1; the NYSE American and IEX 
operate as flat-fee exchanges.\619\ Since Regulation NMS was adopted in 
2005, the market for trading services has become significantly more 
competitive as measured by the decline in market share of individual 
exchanges, discussed in more detail below. The number of U.S. equities 
exchanges has increased by over 60%, as the number of exchanges 
increased from eight exchanges in 2005 to 13 exchanges operating 
today.\620\ Several studies have suggested that transaction-based fee 
pricing partially drove the increase in the number of U.S. equities 
exchanges since 2005.\621\
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    \619\ IEX charges a flat fee of $0.0009 for trades against non-
displayed liquidity on both sides of the market, and charges $0.0003 
for trade execution against displayed liquidity. See IEX, Investors 
Exchange Fee Schedule (August 1, 2018), https://iextrading.com/trading/fees (last visited September 18, 2018). As of March 2018, 
EDGA is no longer operating as a taker-maker market, but is also 
operating as a flat-fee venue. See Cboe, Cboe US Equities (2018) 
http://markets.cboe.com/us/equities/ (last visited September 18, 
2018).
    \620\ While the number of exchanges was eight, there were other 
non-exchange trading venues in 2005 (i.e., ECNs), which were 
displayed markets that utilized a standard price-time-priority 
market model similar to exchanges. Although 13 U.S. equities 
exchanges currently operate as of March 2018, the majority of these 
exchanges are part of exchange families. For instance, NYSE, NYSE 
Arca, NYSE American, and NYSE National, are all part of the NYSE 
Group, which is wholly owned by the Intercontinental Exchange (ICE), 
while Nasdaq, Phlx, and BX, are owned by Nasdaq. BATS, BATS-Y, EDGA, 
and EDGX, which all operated as ATSs in 2005, are all subsidiaries 
of Cboe Global Market, Inc. IEX became a registered exchange in 
2016. Further, NSX (NYSE National) existed as an exchange in 2005, 
but halted operations in 2016. It was acquired by NYSE/ICE in 
January 2017 and was re-opened for trading in May 2018. See 
Intercontinental Exchange, NYSE Finalizes Acquisition of National 
Stock Exchange, Bus. Wire: News (Jan. 31, 2017, 6:28 p.m.) https://www.businesswire.com/news/home/20170131006474/en/. Researchers can 
adequately control for exchanges that are subsidiaries of the same 
parent when conducting analyses of the effect of changes in 
transaction-based fees on order routes.
    \621\ See, e.g., Angel, Harris, & Spatt, supra note 530; Harris, 
supra note 530.
---------------------------------------------------------------------------

    Execution services are a lucrative business, which encourages new 
trading centers to enter the market in the hopes of capturing rents 
associated with order

[[Page 5254]]

execution.\622\ As discussed in the proposing release, liquidity 
externalities, where the more liquid venues attract more interest and 
therefore more liquidity, could result in a single venue (or very 
limited number of venues) being the preferred trading location for any 
given stock because all traders could optimally route orders to the 
venue with the highest liquidity for a given stock.\623\ But if rebates 
offered by exchanges are large enough, they provide incentives for 
market participants to route orders to those venues, in order to 
capture the rebates, and possibly despite the liquidity profile or 
execution quality of those venues. Rebates offered by exchanges, 
therefore, may ``break'' the liquidity externality.
---------------------------------------------------------------------------

    \622\ See, e.g., Angel, Harris, & Spatt, supra note 530; Harris, 
supra note 530.
    \623\ See Proposing Release, supra note 2, at 13042. See also 
ICI Letter II at 4.

                                    Table 1--U.S. National Equities Exchanges
----------------------------------------------------------------------------------------------------------------
                                                                                 Exchange in      Market share
                   Exchange                         Market fee type \624\           2005?           \625\ (%)
----------------------------------------------------------------------------------------------------------------
Cboe BZX: https://markets.cboe.com...........  Maker-Taker...................                               6.14
Cboe BYX: https://markets.cboe.com...........  Taker-Maker...................                               4.86
Cboe EDGA: https://markets.cboe.com..........  Taker-Maker...................                               1.26
Cboe EDGX: https://markets.cboe.com..........  Maker-Taker...................                               5.58
BX: www.nasdaqtrader.com.....................  Taker-Maker...................         [check]               3.00
Phlx (PSX): www.nasdaqtrader.com.............  Maker-Taker...................         [check]               0.70
Nasdaq: www.nasdaqtrader.com.................  Maker-Taker...................         [check]              15.76
NYSE Arca: https://www.nyse.com/markets......  Maker-Taker...................         [check]               8.87
NYSE American \626\: https://www.nyse.com/     Flat Fee......................         [check]               0.32
 markets.
NYSE: https://www.nyse.com/markets...........  Maker-Taker...................         [check]              12.16
NYSE National \627\: https://www.nyse.com/     Taker-Maker...................         [check]               0.64
 markets.
CHX: www.chx.com.............................  Maker-Taker...................         [check]               0.57
IEX: www.iextrading.com......................  Flat-fee......................                               6.14
                                              ------------------------------------------------------------------
    Total....................................  ..............................  ...............             66.00
----------------------------------------------------------------------------------------------------------------

    Table 1 highlights that the market share of trading volume among 
exchanges is not very concentrated. Although NYSE and Nasdaq have the 
largest market share of approximately 12% and 16%, respectively, among 
the exchanges, as of July 2018, these two exchanges collectively 
account for less than 30% of the total market share of trading volume 
for NMS stocks, indicating that the market for trading services has 
become decentralized, and has become more so over time. For instance, 
between 2004 and 2013, the NYSE's market share of NYSE-listed stocks 
declined from approximately 80% to 20%, while market share of other 
exchanges and off-exchange trading centers has increased.\628\ This 
decentralization provides market participants with a choice among 
venues when they route orders, and may also encourage exchanges to 
compete to attract order flow.
---------------------------------------------------------------------------

    \624\ See supra notes 3 and 4.
    \625\ Shares are computed based on trading volume in August 
2018. Market shares for the exchanges reported do not add up to 
100%, because approximately 34% of trading volume is executed off-
exchange on over-the-counter venues. These market share figures 
differ slightly from the ones in footnote 9 of Cboe Letter I, which 
provided market share for May 2018. While these differences could 
result from the focus on more recent data, the Commission is not 
sure if the differences could also be driven by differing 
methodologies. Nonetheless, the figures in Cboe Letter I are 
consistent with the conclusions in this release. Also, the off-
exchange share differs slightly from the 39% share in Nasdaq Letter 
I, at 2. Note that the off-exchange share in the Proposing Release 
was 40%.
    \626\ Since July 2017, NYSE American has not been a purely 
maker-taker market as only certain types of market participants 
(electronic Designated Market Makers) are eligible for rebates. See 
NYSE American Equities Price List (July 26, 2018), https://www.nyse.com/publicdocs/nyse/markets/nyse-american/NYSE_America_Equities_Price_List.pdf.
    \627\ NYSE acquired NSX in January 2017, and the exchange is now 
known as NYSE National. The exchange was re-opened for trading in 
May 2018 as taker-maker exchange.
    \628\ See Angel, Harris, & Spatt, supra note 5307, Figures 2.17 
and 2.18. Although less evident than for NYSE-listed securities, the 
effect is similar for the Nasdaq market.
---------------------------------------------------------------------------

    A number of commenters suggested that exchanges compete intensely 
with each other to attract order flow.\629\ Transaction-based fees 
represent one means by which national securities exchanges may compete 
for order flow, and exchanges may adopt business models that focus on 
attracting order flow by offering large rebates or charging competitive 
fees. Exchanges may also develop different business models to attract 
different types of order flow.\630\ For example, maker-taker venues may 
offer large rebates to attract liquidity supplying orders.\631\ They 
may then rely on this liquidity to attract marketable orders, to which 
they charge a high transaction fee in order to both offset the cost of 
the large rebates and to ensure a profitable transaction pricing model. 
Alternatively, inverted exchanges offer higher rebates to compete to 
attract marketable orders. Exchanges may also compete for order flow on 
other dimensions as well, by offering better execution quality, better 
technology, and innovations in order types and other trading 
mechanisms.\632\
---------------------------------------------------------------------------

    \629\ See, e.g., CBOE Letter I, at 2; NASDAQ Letter I, at 11-13. 
One commenter suggested that in the Proposal, the Commission made 
the assumption that exchange groups had market power without 
providing evidence to support the assumption. This commenter also 
argued that no exchange group controls even 25 percent of market 
share and that competition is robust between and among equities 
exchanges. See NASDAQ Letter I, at 12-13.
    \630\ One commenter suggested that in the Proposal, the 
Commission failed to account for the two-sided nature of exchange 
platforms when assessing the competitive impact of the Proposal. See 
NASDAQ Letter II, at 4-5. In the Proposal, the Commission separately 
discussed the potential impact of the Pilot on the competition for 
trading volume, see the Proposal, supra note 2, at 13068. The 
Commission also discussed some ways the Pilot could potentially 
impact marketable and nonmarketable order flow, see the Proposal, 
supra note 2, at 13057. Additionally, in Section IV.D.2.a, the 
Commission separately discusses the potential effects of the Pilot 
on marketable and non-marketable order flow.
    \631\ A number of commenters said exchanges use rebates to 
compete to attract limit orders to supply liquidity. See, e.g. 
NASDAQ Letter I, at 12; Virtu Letter, at 3; State Street Letter, at 
2.
    \632\ One commenter also suggested that exchanges also compete 
to attract to liquidity using many costly features, including 
rebates, incentive programs, superior execution systems, regulatory 
quality, and customer service. See NASDAQ Letter I, at 12.
---------------------------------------------------------------------------

    In addition to competing with other U.S. equities exchanges, 
exchanges also compete for order flow with off-exchange trading 
centers, including ATSs, internalizers, and others. One way exchanges 
compete with off-exchange trading venues is through the use of rebates. 
For example, a number

[[Page 5255]]

of commenters argued that one way exchanges compete with off-exchange 
trading venues is by using liquidity rebates to attract liquidity and 
narrow the displayed spread, which makes it more expensive for off-
exchange trading venues to either match or improve upon the NBBO.\633\ 
Exchange transaction fees may also affect competition between exchanges 
and off-exchange trading venues. For example, commenters suggested that 
broker-dealers may opt to route order flow off-exchange in order to 
avoid higher transaction fees charged by exchanges.\634\ Off-exchange 
trading venues may also compete with exchanges to attract order flow by 
offering more flexibility in how they execute orders. One commenter 
noted that ``market participants choose to send orders to off-exchange 
venues for reasons other than avoiding fees,'' including ``investors 
anonymity, the ability to trade in more granular tick sizes, the 
flexibility to segment the treatment of different types of clients, the 
ability to choose trading counterparties, and the ability to 
accommodate customer errors.'' \635\
---------------------------------------------------------------------------

    \633\ See e.g., FIA Letter, at 3-4; NYSE Letter I, at 6; Grasso 
Letter, at 4.
    \634\ See e.g., IEX Letter I, at 3; Credit Suisse Commentary, at 
2.
    \635\ See NYSE Letter I, at 6.
---------------------------------------------------------------------------

    Off-exchange trading makes up a substantial fraction of total 
volume, as approximately 34% of all transaction reports are routed 
using the NYSE and Nasdaq Trade Reporting Facilities as of August 
2018.\636\ Of that off-exchange NMS share volume, approximately 14% was 
attributable to ATSs, of which 34 traded NMS securities as of August 
2018.\637\ The remaining 21% of off-exchange share volume is routed to 
other off-exchange trading centers, such as internalizers.\638\
---------------------------------------------------------------------------

    \636\ Data on off-exchange market share are available from Cboe 
http://markets.cboe.com/us/equities/market_share/ (last visited 
November 8, 2018).
    \637\ The estimates of ATSs that trade NMS stocks and ATS trade 
volume share was developed using weekly summaries of trade volume 
collected from ATSs pursuant to FINRA Rule 4552. See also Securities 
Exchange Act Release No. 76474 (November 18, 2015), 80 FR 80998, 
81109 (December 28, 2015) (hereinafter ``Regulation of NMS Stock 
Alternative Trading Systems''). The estimates in this release were 
calculated in the same manner as in the cited release. See also OTC 
(ATS & Non-ATS) Transparency, FINRA: Reg. Filing & Reporting (2018), 
http://www.finra.org/Industry/Compliance/MarketTransparency/ATS/.
    \638\ Total market share is collected from Cboe http://markets.cboe.com/us/equities/market_share/ (last visited November 8, 
2018). ATS weekly market share is collected from FINRA, https://otctransparency.finra.org (last visited November 8, 2018).
---------------------------------------------------------------------------

    In aggregate, broker-dealers and other market participants have a 
large and varied set of options as to where they route orders, whether 
to exchanges or to off-exchange trading centers. Moreover, empirical 
evidence suggests that traditional exchanges, such as NYSE and Nasdaq, 
are losing market share to off-exchange trading centers and newer 
exchanges,\639\ which may provide different incentives to broker-
dealers in order to attract this order flow, including transaction fees 
and rebates. We discuss the current levels of transaction-based fees in 
Section IV.B.2.e below.
---------------------------------------------------------------------------

    \639\ See Angel, Harris, & Spatt, supra note 530.
---------------------------------------------------------------------------

b. Market for Liquidity Provision
    Several commenters discussed the importance of liquidity providers 
to an exchange's ability to compete in the market for trading 
services.\640\ Within the exchange framework, liquidity providers, such 
as market makers, other proprietary traders, and investors, compete to 
supply liquidity to liquidity demanders. They compete by posting 
displayed limit orders on exchanges, or by posting undisplayed limit 
orders on exchanges or ATSs. Liquidity providers profit by buying at a 
price lower than the price at which they sell and/or by collecting 
rebates that are greater than the fees they pay. Hence, an execution is 
a necessary means of profiting from liquidity provision, whether the 
liquidity provider seeks to profit from price changes or rebates.
---------------------------------------------------------------------------

    \640\ See, e.g., Cboe Letter I; NYSE Letter I.
---------------------------------------------------------------------------

    Liquidity providers, and traders more generally, seek to manage 
their trading profits by managing the tradeoff between the price they 
get in an execution, the certainty of execution, and any adverse 
selection resulting from the execution.\641\ When a liquidity supplier 
more aggressively prices their limit order, they increase the chance 
that their order will execute, but they trade this off against their 
order executing at a worse price and increased chance of their order 
being adversely selected if it does execute.
---------------------------------------------------------------------------

    \641\ See NYSE Letter II at 8 for more concrete factors 
considered by liquidity providers.
---------------------------------------------------------------------------

    To get an execution, the limit orders need to be at the top of a 
queue at a given price and venue and placed on a venue able to attract 
liquidity demanders. Displaying a limit order attracts liquidity 
demanders to the venue displaying the limit order, and thus improves 
the probability of execution, but could also increase the risk of being 
adversely selected, which reduces profits. For example, an algorithm 
that is skilled at identifying short-term price movements may be 
programmed to hit displayed limit buy orders at a price following a 
signal that the price is about to go down. In such a situation, the 
liquidity provider is unlikely to quickly sell at a price higher than 
the recent purchase, and therefore, these situations are costly for the 
liquidity provider. One way to attempt to reduce adverse selection 
costs is to not display the limit order. When the order is not 
displayed, the traders with the price signals may not see it and, as a 
result, would be less likely to pick it off. On the other hand, an 
undisplayed limit order also risks not getting executed when an 
execution would be profitable. For example, an undisplayed limit buy 
order is less likely to execute than a displayed limit buy order just 
prior to an increase in the price because marketable sell orders that 
do not anticipate the price increase are likely to route to venues with 
competitively priced limit buy orders and would not be able to identify 
which venues have undisplayed limit buy orders.
    Rebates and fees can also affect where liquidity providers choose 
to supply liquidity. Maker-taker exchanges, which pay rebates to 
liquidity suppliers, provide them with extra revenue when trades are 
executed. This could encourage liquidity suppliers to post at more 
aggressive prices for some securities, subject to the fact that 
displayed quotes on stock exchanges must be priced in one-cent 
increments. However, competition among liquidity suppliers to earn 
rebates could lead to longer queues in an order book, which could 
decrease the chance that a liquidity supplier's order executes unless 
they are at or near the front of the queue. In contrast, inverted 
exchanges, which charge liquidity suppliers a fee when they supply 
liquidity and offer a rebate to takers of liquidity, usually have 
shorter queue lengths and an economic incentive to take liquidity, 
which increases the chance that a liquidity supplier's order executes.
c. Market for Broker-Dealer Services
    The Commission considered the potential for the Pilot to affect 
competition among broker-dealers that route institutional and retail 
orders. These broker-dealers compete in a segment of the market for 
broker-dealer services. The market for broker-dealer services is highly 
competitive, with most business concentrated among a small set of large 
broker-dealers and thousands of small broker-dealers competing in niche 
or regional segments of the market.\642\ Large broker-dealers

[[Page 5256]]

typically enjoy economies of scale over small broker-dealers and 
compete with each other to service the smaller broker-dealers, who are 
both their competitors and their customers.\643\ As of December 31, 
2017, approximately 3,860 broker-dealers filed Form X-17a-5. These 
firms vary in size, with median assets of approximately $800,000, 
average assets of nearly $1 billion, and total assets across all 
broker-dealers of approximately $4 trillion. The twenty largest broker-
dealers held approximately 72% of the assets of broker-dealers overall, 
with total assets of $2.89 trillion, indicating the high degree of 
concentration in the industry. Of the 3,860 broker-dealers that filed 
Form X-17a-5, 397 are members of U.S. equities exchanges. Broker-
dealers that are members of equities exchanges had, on average, higher 
total assets than other broker-dealers, with median assets of $25.5 
million, average assets of $9.2 billion, and total assets across all 
broker-dealers that are members of exchanges of $3.65 trillion.
---------------------------------------------------------------------------

    \642\ See Securities Exchange Act Release No. 63241 (November 3, 
2010), 75 FR 69791, 69822 (November 15, 2010) (hereinafter ``Risk 
Management Controls for Brokers or Dealers with Market Access'').
    \643\ See id. Larger brokers, or those with more order flow, 
also benefit from the economies of scale that accompany the tiering 
structure typically provided by exchanges. Accordingly, the brokers 
with the most liquidity-providing orders may benefit 
disproportionately from rebates because they generally receive 
higher rebates within the various tiered pricing models of 
exchanges.
---------------------------------------------------------------------------

d. Market for Assets Under Management
    Many commenters expressed concern about the impact of the Pilot on 
the market for assets under management, particularly on exchange-traded 
products (``ETPs''). Asset management firms compete with each other in 
a segment of the market for assets under management. They offer 
different types of investment vehicles, such as mutual funds, close-end 
funds, and ETPs,\644\ which compete with each other to attract investor 
funds. Investor funds in an investment vehicle are pooled together and 
invested in financial assets, with investors sharing any profits or 
losses incurred by the investment vehicle according to each investor's 
interest in the vehicle. Asset management firms generally earn revenue 
by charging fees based on the value of the assets they manage on behalf 
of investors in their investment vehicles.\645\
---------------------------------------------------------------------------

    \644\ Not all ETPs are pooled investment vehicles. For example, 
exchange traded notes (``ETNs''), which are a subset of ETPs, are 
unsecured, unsubordinated debt securities that trade in the 
secondary market on exchanges.
    \645\ Investment companies can also earn revenue from other 
activities such as lending securities.
---------------------------------------------------------------------------

    Investment vehicles compete with other investment vehicles that 
follow similar investment strategies to attract investor funds. They 
often rely on differences in expense ratios, tracking error, and 
redemption and trading characteristics when competing to attract 
investor funds.\646\
---------------------------------------------------------------------------

    \646\ Actively managed investment vehicles also rely on their 
historical performance when competing to attract investor funds.
---------------------------------------------------------------------------

    One subset of investment vehicles are ETPs. ETPs differ from other 
investment vehicles in their trading and redemption characteristics. 
ETPs are investment vehicles that issue shares that can be bought or 
sold throughout the day on securities exchanges in the secondary market 
at a market-determined price.
    ETPs provide investors with a diverse set of investment options. 
While the first ETPs held portfolios of securities that replicated the 
component securities of broad-based domestic stock market indexes, some 
ETPs now track more specialized indexes, including international equity 
indexes, fixed-income indexes, or indexes focused on particular 
industry sectors such as telecommunications or healthcare. Some ETPs 
seek to track highly customized or bespoke indexes, while others seek 
to provide a level of leveraged or inverse exposure to an index over a 
fixed period of time. Investors also have the ability to invest in ETPs 
that do not track a particular index and are actively managed.
    A number of commenters noted that ETP issuers face strong 
competition within similar investment strategies and that small 
differences in fees and trading characteristics, such as spreads, daily 
volume, and intraday volatility, may be meaningful to market 
participants when deciding which ETPs to trade or invest in.\647\
---------------------------------------------------------------------------

    \647\ See, e.g. JPMorgan Letter, at 4; STANY Letter, at 4; 
Healthy Markets Letter II, at 8; Morgan Stanley Letter, at 3-4.
---------------------------------------------------------------------------

    As of September 2018,\648\ there were 2,003 ETPs categorized as 
exchange traded funds (``ETFs''), 223 ETPs categorized as non-ETF ETPs, 
and 18 ETPs categorized as ETMFs.\649\ As of this date, ETPs had total 
net assets of $3.74 trillion. The ten largest ETPs accounted for 28.0% 
of total ETP net assets and 27.8% of the average dollar trading volume 
on secondary markets.
---------------------------------------------------------------------------

    \648\ The results are based on data collected from Bloomberg and 
Morningstar as of September 30, 2018 for US-domiciled ETPs.
    \649\ ETFs operate under exemptive orders that allow them to 
register as investment companies under the Investment Company Act. 
See 15 U.S.C. 80a-3(a)(1). Non-ETF ETPs are other ETPs that are not 
registered under the Investment Company Act. Some are pooled 
investment vehicles with shares that trade on a securities exchange, 
but they are not ``investment companies'' under Investment Company 
Act because they do not invest primarily in securities. Such ETPs 
may invest primarily in assets other than securities, such as 
futures, currencies, or physical commodities (e.g., precious 
metals). Others are not pooled investment vehicles. For example, 
ETNs are senior, unsecured, unsubordinated debt securities that are 
linked to the performance of a market index and trade on securities 
exchanges. See fn. 10 and accompanying text in the ETF Proposal, 
infra note 651, at 37333. ETMFs are exchange traded managed funds. 
ETMFs also operate under exemptive orders that allow them to 
register as investment companies under the Investment Company Act, 
but they have different disclosure requirements than ETFs. See, e.g. 
Eaton Vance Management, et al., Investment Company Act Rel. Nos. 
31333 (Nov. 6, 2014) (notice) and 31361 (Dec. 2, 2014) (order).
---------------------------------------------------------------------------

    As the statistics above indicate, ETFs represent the majority of 
ETPs, they possess characteristics of both mutual funds, which issue 
redeemable securities, and closed-end funds, which generally issue 
shares that trade at market-determined prices on a national securities 
exchange and are not redeemable.\650\ Similar to mutual funds, ETFs 
continuously offer their shares for sale. Unlike mutual funds, however, 
ETFs do not sell or redeem individual shares. Instead, ``authorized 
participants'' that have contractual arrangements with the ETF (or its 
distributor) purchase and redeem ETF shares directly from the ETF in 
blocks called ``creation units.'' \651\
---------------------------------------------------------------------------

    \650\ The Investment Company Act defines ``redeemable security'' 
as any security that allows the holder to receive his or her 
proportionate share of the issuer's current net assets upon 
presentation to the issuer. See 15 U.S.C. 80a-2(a)(32). While 
closed-end fund shares are not redeemable, certain closed-end funds 
may elect to repurchase their shares at periodic intervals pursuant 
to rule 23c-3 under the Investment Company Act (``interval funds''). 
Other closed-end funds may repurchase their shares in tender offers 
pursuant to rule 13e-4 under the Exchange Act.
    \651\ The Commission's exemptive orders typically contain a 
representation by the applicant that an authorized participant will 
be either: (a) A broker or other participant in the continuous net 
settlement system of the National Securities Clearing Corporation, a 
clearing agency registered with the Commission and affiliated with 
the Depository Trust Company (``DTC''), or (b) a DTC participant, 
which has executed a participant agreement with the ETF's 
distributor and transfer agent with respect to the creation and 
redemption of creation units. See, e.g., Emerging Global Advisors, 
LLC, et al., Investment Company Act Release Nos. 30382 (February 13, 
2013), 78 FR 11909 (February 20, 2013) (notice) and 30423 (March 12, 
2013) (order) and related application. In June 2018, the Commission 
proposed a new rule under the Investment Company Act of 1940 that 
would permit ETFs that satisfy certain conditions to operate without 
obtaining an exemptive order. In connection with the proposed 
exemptive rule, the Commission proposed to rescind certain exemptive 
orders that have been granted to ETFs and their sponsors. See 
Securities Exchange Act Release No. 10515 (June 28, 2018), 83 FR 
37332 (July 31, 2018) (``ETF Proposal'').
---------------------------------------------------------------------------

    An authorized participant that purchases a creation unit of ETF 
shares directly from the ETF deposits with the ETF a ``basket'' of 
securities and other assets identified by the ETF that day, and then 
receives the creation unit of

[[Page 5257]]

ETF shares in return for those assets.\652\ The basket is generally 
representative of the ETF's portfolio \653\ and, together with a cash 
balancing amount, equal in value to the aggregate NAV of the ETF shares 
in the creation unit.\654\ After purchasing a creation unit, the 
authorized participant may hold the individual ETF shares, or sell some 
or all of them in secondary market transactions. The redemption process 
is the reverse of the purchase process: The authorized participant 
redeems a creation unit of ETF shares for a basket of securities and 
other assets.\655\ While the Commission currently lacks data on 
authorized participants, a 2015 survey-based study of fifteen fund 
sponsors, which together offer two-thirds of all existing ETFs 
(covering 90% of all ETF assets), finds that the average ETF has 34 
authorized participant agreements.\656\ The study further reports that 
creation and redemption transactions occurred only on between 10% to 
20% of trading days and that only 10% of the daily activity in all ETF 
shares (by volume) are creations or redemptions.\657\
---------------------------------------------------------------------------

    \652\ An ETF may impose fees in connection with the purchase or 
redemption of creation units that are intended to defray operational 
processing and brokerage costs to prevent possible shareholder 
dilution (``transaction fees'').
    \653\ The basket might not reflect a pro rata slice of an ETF's 
portfolio holdings. Subject to the terms of the applicable exemptive 
relief, an ETF may substitute other securities or cash in the basket 
for some (or all) of the ETF's portfolio holdings. Restrictions 
related to flexibility in baskets have varied over time. See the ETF 
Proposal, supra note 651, at 37354-58.
    \654\ Non-ETF ETPs also offer creation and redemption processes. 
Some Non-ETF ETPs that are organized as pooled investment vehicles 
may offer creation and redemption processes similar to ETFs. Other 
Non-ETF ETPs may offer creations or redemptions on a less frequent 
basis. For example, some ETNs may only be redeemed weekly.
    \655\ An authorized participant may act as a principal for its 
own account when purchasing or redeeming creation units from the 
ETF. Authorized participants also may act as agent for others, such 
as market makers, proprietary trading firms, hedge funds or other 
institutional investors, and receive fees for processing creation 
units on their behalf. See Abner, D.J. The ETF Handbook: How to 
Value and Trade Exchange Traded Funds, 2nd ed., Wiley Finance (2016) 
(``ETF Handbook'').
    \656\ See, e.g., Antoniewicz, R. & Heinrichs, J. (2014). 
``Understanding Exchange-Traded Funds: How ETFs Work.'' ICI Research 
Perspective, Vol. 20(5) (available at: https://www.ici.org/pdf/per20-05.pdf) (``Antoniewicz'').
    \657\ NSCC is the sole provider of clearing services for ETF 
primary market transactions. Whether a creation or redemption order 
is eligible to be processed through NSCC depends on the eligibility 
for NSCC processing of the securities in the ETF's basket. See id.
---------------------------------------------------------------------------

    Investors can purchase individual ETF shares in the secondary 
market at prices that may deviate from the ETF's NAV. As a result, ETF 
investors may trade shares at prices that do not necessarily reflect 
the intrinsic value of the underlying ETF assets.\658\
---------------------------------------------------------------------------

    \658\ It is possible for both the ETF's NAV per share and its 
market price to deviate from the intrinsic value of the ETF's 
underlying portfolio. In addition, there may be cases in which the 
ETF's market price is closer to the intrinsic value of the ETF's 
portfolio than its NAV per share. See, e.g., Madhavan, A. & Sobczyk, 
A. (2016) ``Price Discovery and Liquidity of Exchange-Traded 
Funds.'' Journal of Investment Management, Vol 14(2) (available at: 
https://www.joim.com/price-dynamics-and-liquidity-of-exchange-traded-funds-2/).
---------------------------------------------------------------------------

    As discussed in the ETF Proposal,\659\ the combination of the 
creation and redemption process with secondary market trading in ETF 
shares provides arbitrage opportunities that are designed to help keep 
the market price of ETF shares at or close to the NAV per share of the 
ETF.\660\ For example, if ETF shares are trading on national securities 
exchanges at a ``discount'' (a price below the NAV per share of the 
ETF), an authorized participant can purchase ETF shares in secondary 
market transactions and, after accumulating enough shares to compose a 
creation unit, redeem them from the ETF in exchange for the more 
valuable securities in the ETF's redemption basket.\661\ The authorized 
participant's purchase of an ETF's shares on the secondary market, 
combined with the sale of the ETF's basket assets, may create upward 
pressure on the price of the ETF shares, downward pressure on the price 
of the basket assets, or both, bringing the market price of ETF shares 
and the value of the ETF's portfolio holdings closer together.\662\ 
Alternatively, if ETF shares are trading at a ``premium'' (i.e., a 
price above the NAV per share of the ETF), the transactions in the 
arbitrage process are reversed and, when arbitrage is working 
effectively, keep the market price of the ETF's shares close to its 
NAV.\663\
---------------------------------------------------------------------------

    \659\ See the ETF Proposal, supra note 651, at 37384.
    \660\ ETFs also operate under several conditions designed to 
facilitate an efficient arbitrage mechanism. For example, ETFs are 
required to provide some degree of transparency regarding their 
portfolio holdings by disclosing their holdings prior to the 
commencement of trading each business day (i.e., portfolio 
transparency).
    \661\ This redemption would also cause the ETF's assets under 
management to decline.
    \662\ As part of this arbitrage process, authorized participants 
are likely to hedge their intraday risk. For example, when ETF 
shares are trading at a discount to an estimated intraday NAV per 
share of the ETF, an authorized participant may short the securities 
composing the ETF's redemption basket. After the authorized 
participant returns a creation unit of ETF shares to the ETF in 
exchange for the ETF's baskets, the authorized participant can then 
use the basket assets to cover its short positions.
    \663\ Market participants also can engage in arbitrage activity 
without using the creation or redemption processes by buying/
shorting shares in the ETF while simultaneously shorting/buying the 
ETF's underlying assets.
---------------------------------------------------------------------------

    However, authorized participants, other market participants, and 
arbitrageurs acting in secondary markets may incur costs and be exposed 
to risk when engaging in arbitrage. The costs include bid-ask spreads 
and transaction fees associated with the arbitrage trades. In addition, 
during the time it takes arbitrageurs to execute these trades, they are 
exposed to the risk that the prices of the basket assets and the ETF 
shares change. As a consequence, arbitrageurs may decide to wait for 
any mispricing between the market price of ETF shares and NAV per share 
to widen until the expected profit from arbitrage is large enough to 
compensate for any additional costs and risks associated with engaging 
in the transaction.\664\
---------------------------------------------------------------------------

    \664\ As discussed above, authorized participants can also hedge 
the intraday risk associated with the arbitrage process. See supra 
note 662.
---------------------------------------------------------------------------

    A number of commenters noted that, in order to promote liquidity in 
thinly-traded ETPs, exchanges offer market makers who meet certain 
quoting requirements enhanced rebates when supplying liquidity in 
certain less actively traded ETPs.\665\
---------------------------------------------------------------------------

    \665\ See, e.g., Virtu Letter, at 7; Cboe Letter I, at 17-18.
---------------------------------------------------------------------------

e. Transaction-Based Fees and Rebates
    Exchanges are required to disclose their current fee schedules, 
which include transaction-based fees and rebates, connectivity fees, 
membership fees, among others.\666\ When exchanges update their fees, 
they are required to file Form 19b-4 with the Commission; fee changes 
are permitted to take effect upon filing under Section 19(b)(3)(A) of 
the Exchange Act.\667\ Although these fee schedules and Form 19b-4 fee 
filings contain information about fees beyond transaction-based fees 
and rebates, in this baseline, the discussion is limited to only 
transaction-based fees and rebates and any changes thereto.
---------------------------------------------------------------------------

    \666\ See 17 CFR 240.19b-4(m)(1), which requires each SRO to 
post and maintain a current and complete version of its rules, 
including those related to transaction-based fees and rebates, on 
its website.
    \667\ As discussed supra Section IV.B.1.b.vi, fee information, 
such as that included in exchange fee schedules or Form 19b-4 fee 
filings, does not have standardization or formatting requirements.
---------------------------------------------------------------------------

    Table 2 reports the range of minimum and maximum transaction fees 
and rebates, as well as the number of categories for each (in 
parentheses below the fee ranges), by exchange, as reported by each 
exchange on their recent fee schedules.\668\ On average,

[[Page 5258]]

U.S. exchanges have 18 access fee categories and 21 rebate categories 
associated with these fee schedules.\669\ For the maker-taker 
exchanges, access fees do not exceed the Rule 610(c) cap at $0.0030, 
but are as little as zero in some fee categories for some exchanges; 
taker-maker exchanges, because they are not restricted in the amount 
they can charge to non-marketable limit orders, have fees that range as 
high as $0.0033. Seven exchanges have some categories of rebates that 
exceed the maximum access fees charged by exchanges.\670\
---------------------------------------------------------------------------

    \668\ The transaction fee and rebate ranges in Table 2 are 
collected from recent fee schedules (as of July 31, 2018) available 
from each individual exchange's website (listed in Table 1). Table 2 
provides the date from which these fee schedules were reported. The 
ranges in fees are the minimum and maximum fees and rebates reported 
by each exchange.
    \669\ This average does not include the IEX exchange as the fee 
structure is a flat one. See also, e.g., RBC Letter II (attaching a 
report titled ``Complexity of Exchange Pricing and Corresponding 
Challenges to Transparency and Routing'' in which they identify 
``1,023 separate pricing `paths'--i.e., separate fees or rebates--
across these exchanges.'').
    \670\ See, e.g., CFA Letter, at 6.
---------------------------------------------------------------------------

    Table 2 also provides the number of fee revisions for the exchanges 
as reported in their Form 19b-4 fee filings to the Commission in the 
last five years (August 1, 2013-July 31, 2018). Exchanges, on average, 
have changed their fee schedules 34 times in the last five years,\671\ 
indicating that the average exchange revises its transaction-based fee 
schedules about seven times per year (approximately every 7.4 weeks).
---------------------------------------------------------------------------

    \671\ The median number of revisions to fee and rebate schedules 
by exchanges is 41 over the five-year period.

    Table 2--Summary of Transaction-Based Fee Schedules for U.S. National Equities Exchanges as of July 2018
----------------------------------------------------------------------------------------------------------------
                                                   Number of
           Exchange               Fee model      revisions (5     Date of fee      Fees (# of     Rebates (# of
                                                    years)         schedule       categories)      categories)
----------------------------------------------------------------------------------------------------------------
Cboe BZX.....................  Maker-Taker....              54       8/16/2018  $0.0000-$0.0033  ($0.0010)-($0.0
                                                                                (29)...........   032)
                                                                                                 (18)
Cboe BYX.....................  Taker-Maker....              51        8/9/2018  $0.0000-$0.0033  ($0.0005)-($0.0
                                                                                (40)...........   022)
                                                                                                 (12)
Cboe EDGA....................  Taker-Maker....              41        8/1/2018  $0.0000-$0.0032  ($0.0004)-($0.0
                                                                                (48)...........   027)
                                                                                                 (14)
Cboe EDGX....................  Maker-Taker....              53       8/16/2018  $0.0000-$0.0032  $0.000-($0.0032
                                                                                (37)...........   )
                                                                                                 (20)
BX...........................  Taker-Maker....              29       7/20/2018  $0.0005-$0.0030  $0.0000-($0.002
                                                                                (13)...........   1)
                                                                                                 (12)
Phlx (PSX)...................  Maker-Taker....              24       5/21/2018  $0.0028-$0.0030  $0.00-($0.0030)
                                                                                (3)............  (8)
Nasdaq.......................  Maker-Taker....              54       7/25/2018  $0.0000-$0.0030  $0.0000-($0.003
                                                                                (4)............   25)
                                                                                                 (36)
NYSE Arca....................  Maker-Taker....              51        8/1/2018  $0.0005-$0.0035  ($0.0002)-($0.0
                                                                                (68)...........   035)
                                                                                                 (65)
NYSE American................  Flat...........               9       7/26/2018  $0.0002-$0.0030  $0.0000-($0.004
                                                                                (12)...........   5)
                                                                                                 (4)
NYSE.........................  Maker-Taker....              42       8/10/2018  $0.0003-$0.0030  $0.0000-($0.004
                                                                                (20)...........   5)
                                                                                                 (41)
NYSE National \672\..........  Taker-Maker....              11       7/26/2018  $0.0003-$0.0025  ($0.0002)-($0.0
                                                                                (16)...........   020)
                                                                                                 (2)
CHX..........................  Maker-Taker....               8       4/26/2018  $0.0007-$0.0040  ($0.0009)-($0.0
                                                                                (5)............   020)
                                                                                                 (2)
IEX..........................  Flat...........              10        8/1/2018  $0.0009........  $0.0009
----------------------------------------------------------------------------------------------------------------

    For several of the exchange families, information about revenues 
and costs attributed to transaction-based fees and rebates is available 
in aggregate from Form 10-K filings. Using the statements of income 
from Form 10-K filings for 2017 capturing the net (of rebates) 
transactions-based fee revenues, the Nasdaq exchanges (Nasdaq, BX, and 
PSX) earned $253 million.\673\ Based on the same measure the NYSE-
affiliated exchanges (NYSE, NYSE Arca, NYSE American, and NYSE 
National) earned $196 million in transaction-based fees net of 
rebates,\674\ while the BATS Global Markets (now, Cboe BZX, Cboe BYX, 
Cboe EDGA, and Cboe EGDX), for the year ended December 31, 2017, earned 
$153 million in transaction-based fees net of rebates.\675\ Neither CHX 
(which became a NYSE-affiliated exchange in 2018) nor IEX or their 
affiliates are publicly traded, meaning that these exchanges do not 
file an annual Form 10-K with the Commission. As a result, public 
information regarding the revenues or profits associated with 
transaction-based fees does not exist for these exchanges.
---------------------------------------------------------------------------

    \672\ NYSE acquired NSX in January 2017, and the exchange is now 
known as NYSE National. As of May 2018, the exchange re-opened for 
trading and began submitting new fee schedules periodically.
    \673\ See Nasdaq Form 10-K filings (2017), available at https://www.sec.gov/Archives/edgar/data/1120193/000112019318000003/ndaq1231201710-k.htm. Transaction-based revenues for equity 
securities accounted for approximately 59% of total operating income 
net of rebates and 25% net of rebates and brokerage, clearing, and 
exchange fees. The Commission has revised the revenue number for 
Nasdaq for 2017 revenue per the correction provided in the Nasdaq 
Letter II.
    \674\ See Intercontinental Exchange Form 10-K filings (2017), 
available at https://www.sec.gov/Archives/edgar/data/1571949/000157194918000003/ice2017123110k.htm. For the Intercontinental 
Exchange, net cash equity transaction-based revenues were 
approximately 8.2% of operating income for 2016.
    \675\ See Cboe Form 10-K filings (2017), available at https://www.sec.gov/Archives/edgar/data/1374310/000155837018000953/cboe-20171231x10k.htm. Cboe's acquisition of BATS Global Markets became 
effective on March 1, 2017. For the year ending December 31, 2017, 
the net transaction-based revenues were 41% of Cboe operating 
profits.
---------------------------------------------------------------------------

    Information on the net transactions-based revenues for each 
individual exchange, as opposed to the amounts reported for exchange 
groups in Form 10-K filings, is not currently publicly available, 
making it difficult to analyze the fees and rebates for an individual 
exchange. To estimate the net transactions-based revenues for each 
individual exchange, Table 3 reports the maximum and median net 
transaction-based fees based on each exchange's

[[Page 5259]]

most recently reported fee schedule and the share volume of each 
exchange for July 25, 2018 through August 24, 2018.\676\ As evidenced 
by the significant differences between the sum of net of rebate 
revenues for entities reporting to the same exchange group obtained 
from Table 3 and the total net of rebate revenues for each exchange 
family reported on the Form 10-K or 10-Q filings, this approach does 
not yield reliable results, highlighting the limitations on the data 
currently available to researchers.
---------------------------------------------------------------------------

    \676\ The share volume is obtained from Cboe, available at 
http://markets.cboe.com/us/equities/market_share/ (last visited 
September 18, 2018). To compute the maximum profit attainable, staff 
took the difference between the highest possible transaction fee and 
the lowest possible rebate and multiplied it by the monthly share 
volume. For a midpoint profit, the median of the transaction fees 
less the median of the rebates is computed and multiplied it by 
share volume. In order to make the results comparable to those 
reported above from Form 10-K filings, the monthly profits are 
annualized by multiplying each monthly profit amount by 12.

Table 3--Estimates of Annualized Per-Exchange Net Transaction-Based Fee Revenues From Transaction-Based Fees and
                                          Monthly Exchange Share Volume
                                       [For July 25, 2018-August 24, 2018]
                                                  [In millions]
----------------------------------------------------------------------------------------------------------------
                                   Share volume     Annualized       Per share      Annualized       Per share
            Exchanges               (millions)       midpoint         profit          maximum         profit
                                       \677\        difference       (median)       difference       (maximum)
----------------------------------------------------------------------------------------------------------------
Cboe BZX........................           9,014       ($486.75)      ($0.00450)         $248.78         $0.0023
Cboe BYX........................           7,136           25.69         0.00030          239.76          0.0028
Cboe EDGA.......................           1,853            1.11         0.00005           62.26          0.0028
Cboe EDGX.......................           8,165          (4.90)       (0.00005)          205.77          0.0021
BX..............................           4,389           36.87         0.00070          158.02          0.0030
Phlx (PSX)......................           1,035           16.15         0.00130           37.27          0.0030
Nasdaq..........................          23,087         (34.63)       (0.00013)          831.14          0.0030
NYSE Arca.......................          13,024           23.44         0.00015          515.75          0.0033
NYSE American...................             473          (3.69)       (0.00065)           17.03          0.0030
NYSE............................          17,823        (128.33)       (0.00060)          641.63          0.0030
NYSE National...................             920            3.31         0.00030           25.40          0.0023
CHX.............................             830            8.96         0.00090           30.87          0.0031
IEX.............................           3,757             N/A         0.00000             N/A          0.0000
----------------------------------------------------------------------------------------------------------------

C. Analysis of Benefits and Costs of Transaction Fee Pilot

1. Benefits of Transaction Fee Pilot
    The Commission expects that the benefits of the Pilot will fall 
into two categories: (1) More informed policy decisions, including more 
information about the economic impact of transaction-based fees and 
rebates, and (2) other benefits that may accrue to market participants 
for the duration of the Pilot. In this section we discuss each of the 
categories of benefits as well as potential limitations to the 
applicability of information to be drawn from the Pilot.
---------------------------------------------------------------------------

    \677\ Monthly share volume obtained from Cboe for July 25, 2017 
through August 24, 2017, Cboe, U.S. Equities Market Volume Summary, 
available at http://markets.cboe.com/us/equities/market_share/ (last 
visited September 18, 2018).
---------------------------------------------------------------------------

a. Benefits of More Informed Policy Decisions
    The Commission expects that the primary benefit of the Pilot will 
be to inform the Commission and public of the economic impact of 
exchange transaction-based fees and rebates.\678\ As a result, the 
Commission will have data to better inform its regulatory consideration 
of exchange transaction-based fee-and-rebate pricing models and fee 
changes, and the potential effects of changes to its regulatory 
approach concerning the same. In general, more informed regulatory 
decisions are more likely to result in regulatory approaches that 
better balance costs and benefits relative to regulatory decisions 
based on less precise information. In other words, many of the economic 
benefits derive from subsequent decisions that the Commission can 
neither predict nor commit to at this time. Indeed, the Commission 
cannot predict at this time whether the results of the Pilot will 
suggest any particular policy direction and recognizes that the results 
could suggest that existing exchange transaction-based fee caps and 
related rebates may be more beneficial to investors than the policy 
alternatives examined in the Pilot.
---------------------------------------------------------------------------

    \678\ In contrast, one commenter opined that the primary benefit 
of the Pilot would be ``the `better fills' that institutional 
investors will get after the pilot is introduced.'' Nasdaq Letter 
III, at 9. This commenter asserted that the Commission had not done 
a proper cost benefit analysis because its analysis of benefits did 
not account for the ``opportunity costs'' inherent in order routing 
decisions, or other factors which would impact institutional orders. 
See id. Consequently, the commenter asserted that the Commission 
overstated the benefit of the Pilot. See id. However, the Commission 
does not agree that ``better fills'' will be a certain result of the 
Pilot. Furthermore, the Commission disagrees that it has not 
adequately analyzed the costs of the Pilot. As noted above, the 
Commission has quantified the likely economic effects of the Pilot 
where possible; however, the Commission is unable to quantify all of 
the economic effects because it lacks the information necessary to 
provide reasonable estimates. The Commission agrees with the 
commenter that quantifying benefits using existing data is 
difficult, thus underscoring the need for a Pilot. A more detailed 
analysis of the Pilot's impact on trading costs can be found in 
Section IV.C.2.b.
---------------------------------------------------------------------------

i. Expected Analysis From the Pilot
    The Proposing Release discussed the theoretical impact of exchange 
transaction-based fees and rebates on several potential effects such as 
conflicts of interest, fragmentation, complexity, liquidity, and off-
exchange competition and explained that certain components of the 
Proposed Pilot would facilitate the study of these effects.\679\ As 
noted above, the Commission believes that little empirical evidence 
currently exists regarding these effects.
---------------------------------------------------------------------------

    \679\ See Proposing Release, supra note 2, at Section V.
---------------------------------------------------------------------------

    More specifically, the Pilot will provide information on the direct 
effects of exchange transaction fee and rebate levels on execution 
quality and market quality and will facilitate studies of the impact of 
fees and rebate levels on market participant behavior and competition, 
including potential conflicts of interest. Sections IV.C.2 and IV.D. 
discuss many potential economic effects for which this economic 
analysis

[[Page 5260]]

is unable to draw unambiguous conclusions. For example, many commenters 
disagreed on how reducing exchange fees and rebates affects the 
competitive landscape between exchanges and off-exchange venues in the 
market for trading services,\680\ and the analysis here recognizes that 
many competitive forces can drive order flow in either direction. The 
Pilot will provide insight into the impact of transaction fees and 
rebates on this competitive landscape and can perhaps even shed light 
into the mechanism behind any observed changes. Further, one commenter 
argued that this economic analysis ``does not accurately account for 
the actual level of orders impacted by conflicted broker routing.'' 
\681\ The Commission believes that it cannot establish the actual level 
of orders impacted by potentially conflicted broker routing with 
current data and has designed the Pilot in part to gather more data on 
the extent to which rebates impact order routing decisions, as 
explained in the section that follows. The Commission also notes that 
the Pilot seeks to study the effects of exchange pricing models on 
market quality and execution quality, which could affect all orders. 
The Pilot will facilitate the study of order flow among different 
venues, which could provide insights into whether changes in exchange 
transaction-based fees and rebates affect, for example, the level of 
fragmentation. Existing literature suggests that transaction-based 
pricing has contributed to an increase in the number of venues 
competing for order flow over time.\682\ By offering rebates or Linked 
Pricing, start-up maker-taker and taker-maker exchanges have been able 
to attract order flow from exchanges such as NYSE and Nasdaq, thereby 
reducing liquidity externalities, or concentration of order flow to a 
preferred venue, and leading to increased fragmentation of the market 
for trading services.\683\ By altering the access fee and rebate 
structures for exchanges, researchers may be able to identify whether 
these changes lead to more (or less) concentration of liquidity and how 
they affect competition for order flow among exchanges, which could 
lead to less (or more) market fragmentation.\684\
---------------------------------------------------------------------------

    \680\ See e.g., Cboe Letter I, at 12; NYSE Letter I, at 9; 
Nasdaq Letter I, at 2, 5 (suggesting that the Pilot may impact 
competitive dynamics between exchanges and ATSs).
    \681\ See, e.g., Nasdaq Letter III at 1.
    \682\ As discussed in the baseline, the number of exchanges has 
increased since 2005, and market share has become less concentrated 
over the same time period. The majority of the U.S. equities 
exchanges belong to three exchange groups. The Commission believes 
that any analyses of the effects of transaction-based fees on order 
routing decisions can appropriately control for exchange groups.
    \683\ See, e.g., ICI Letter II at 2.
    \684\ See, e.g., Fidelity Letter, at 9.
---------------------------------------------------------------------------

    Test Group 2 will provide insight into the natural equilibrium 
level of access fees, within the current regulatory structure, in the 
absence of rebates and Linked Pricing.\685\ As discussed above, 
prohibiting exchanges from offering Linked Pricing in Test Group 2 is 
intended to complement and reinforce the prohibition on rebates.\686\ 
Although Rule 610(c) caps the maximum access fee for exchanges at 
$0.0030, in the absence of rebates and Linked Pricing, competition 
among exchanges could drive the average access fee to an amount 
substantially below $0.0030.\687\ As noted in Section IV.A.2, exchanges 
have a reduced competitive incentive to reduce fees because doing so 
would require reducing the rebates that attract order flow to the 
exchange. Test Group 2 will allow competition among exchanges, in the 
absence of pressure to offer high rebates or Linked Pricing, to 
determine the level of access fees, which the Commission and others can 
observe during the Pilot. Like the other examinations the Pilot can 
facilitate, the results of an analysis of the equilibrium access fees 
are not currently predictable with much certainty.
---------------------------------------------------------------------------

    \685\ Equilibrium refers to conditions of a system in which all 
competing influences are balanced. For instance, with respect to the 
Test Group 2, this could be the level of transaction fees charged by 
exchanges from which no exchange has any incentive to increase or 
decrease that fee outside of a constrained competitive margin. This 
will be the equilibrium transaction fee. See also, discussion in 
Section II.C.7.e. An important potential benefit of the Pilot could 
result if the no rebate Test Group were able to demonstrate a set of 
conditions wherein regulatory fee caps might not be necessitated in 
an environment in which natural competitive forces could effectively 
cap access fees. This would occur if in the no-rebate Test Group the 
equilibrium fee charged during the Pilot was lower than the fee 
cap--implying that the fee cap was not binding in this situation.
    \686\ If Linked Pricing were not prohibited, market participants 
could potentially circumvent the prohibition on rebates through 
Linked Pricing mechanisms. Therefore, including prohibitions on 
rebates or Linked Pricing could provide information to the 
Commission and the public about potential conflicts of interest 
associated with rebates or substitutes for rebates, such as Linked 
Pricing, as well as the equilibrium fee that emerges in the absence 
of rebates or Linked Pricing.
    \687\ See, e.g., Fidelity Letter, at 9; Citadel Letter, at 5. In 
addition to removing rebates or Linked Pricing in Test Group 2, the 
Commission could also temporarily suspend limitations on access fee 
caps imposed by Rule 610(c). Implementing multiple changes within a 
single test group, however, could prevent researchers and others 
from clearly determining the effect of the prohibition of rebates on 
order routing decisions of broker-dealers from the effect resulting 
from the removal of access fee caps if Rule 610(c) restricted access 
fees during the Pilot.
---------------------------------------------------------------------------

    The Pilot will facilitate studies of the impact of exchange 
transaction-based fees and rebates on liquidity by studying metrics 
such as the quoted spreads.\688\ The width of the quoted spread is 
considered to be an indicator of a stock's liquidity, with narrower 
spreads generally indicating more liquid securities. The analysis below 
is Section IV.C.2.b.iv identifies several reasons that reducing fees 
and rebates could increase or decrease quoted spreads. The Pilot could 
provide information on whether exchange fees and rebates affect the 
liquidity of securities, as measured by the quoted spreads, across 
different test groups.\689\
---------------------------------------------------------------------------

    \688\ See, e.g., ICI Letter II at 3 (noting that the Pilot could 
facilitate the study of how access fees and rebates affect 
liquidity, including quoted spreads).
    \689\ See. Academic studies suggest that the majority of retail 
orders are executed off-exchange at prices based on the NBBO, 
thereby providing retail investors with better prices in the 
presence of rebates. If, however, large rebates provide incentives 
for broker-dealers to route retail orders to these exchanges instead 
of to off-exchange venues, retail customers may not be fully aware 
of the total cost associated with their orders. See, e.g., Angel, 
Harris, & Spatt, supra note 530.
---------------------------------------------------------------------------

    The Commission disagrees with commenters who said that the Pilot 
was inappropriate because of a one-size-fits-all approach.\690\ In 
selecting the number of securities for each Test Group, the Commission 
staff divided NMS securities into three common stock strata and three 
ETP strata by liquidity to determine how many stocks each stratum 
requires to achieve statistical power.\691\ The staff also separately 
examined ETPs to determine how many ETPs would be required to achieve 
statistical power. Having statistical power within each Test Group, and 
within each Test Group by liquidity strata, helps to ensure that 
researchers will be able to use Pilot data to inform the Commission 
regarding the issue of whether different securities should have the 
same regulatory treatment.
---------------------------------------------------------------------------

    \690\ See, e.g., Nasdaq Letter I at 9.
    \691\ See supra Section II.C.5 (discussing statistical power) 
and infra note 695.
---------------------------------------------------------------------------

ii. How the Pilot Facilitates Study
    The Pilot will simultaneously create different fee environments, 
each of which restricts transaction-based fees differently to allow for 
the comparison of securities that are simultaneously in different 
regulatory regimes. The study of these comparisons will inform the 
Commission about economic distortions that may arise as a result of 
transaction-based fees. Because of the size and length of the Pilot, 
the Commission believes that the different fee environments over 
representative subsamples of NMS securities, even though implemented 
temporarily, will produce effects on market participant behavior that 
are identical or similar to

[[Page 5261]]

those that would arise under a similar permanent change.
    As explained below, three distinct features of the Pilot's design 
will facilitate analyses of the relationship, if any, between fees and 
potential economic distortions. Specifically, the Pilot is designed to 
provide (1) representative results; (2) more direct access to data that 
is currently unavailable or requires lengthy and labor-intensive effort 
to compile and process; and (3) sufficient information to determine 
causality. The following sections discuss in detail how each of these 
aspects of the Pilot could facilitate studies of the issues described 
above.
(1) Representative Results
    In the context of the Pilot, representative results mean that the 
impact of the Pilot's terms on a Test Group during the Pilot Period is 
likely to be consistent with the impact of the results on the Test 
Group if the Pilot's terms were permanent (as opposed to temporary). 
Representative results are desirable for researchers and policy makers 
because it ensures that inferences drawn from the results of analysis 
of Pilot data are likely to be similar to those that would emerge if 
the terms were permanent. As discussed in the baseline, current 
analyses are limited by some combination of the following: Data from a 
single broker-dealer, a small sample of securities, a single exchange, 
or a short sample period. By contrast, the Commission believes that the 
Pilot, as designed, will produce more representative results. 
Specifically, as discussed in detail below, the Pilot will cover a 
large stratified sample of NMS stocks (including ETPs), both maker-
taker and taker-maker exchanges, and transaction fee caps as well as a 
prohibition on rebates and Linked Pricing, and will have a two-year 
duration with an automatic sunset at the end of the first year unless 
the Commission determines, at its discretion, that the Pilot shall 
continue for up to one additional year.\692\
---------------------------------------------------------------------------

    \692\ As designed, the Pilot will exclude NMS securities that 
have prices below $2.00 per share as of the date of pilot selection 
and NMS securities with average daily volume of less than 30,000 
shares. As detailed above, the data will also be produced for a six-
month pre-Pilot Period and a six-month post-Pilot Period.
---------------------------------------------------------------------------

    The Commission believes that the Pilot will produce representative 
results, presenting a significant improvement on existing studies, 
because the Pilot applies to a large stratified sample of NMS stocks 
(including ETPs) with prices of at least $2.00 per share at the date of 
the Pilot Securities selection, with average daily volume of 30,000 
shares or more, and with no restrictions on market capitalization.\693\ 
In particular, the Commission recognizes that any possible conflicts of 
interest related to transaction-based fees could vary across securities 
such that the results of a pilot focused only on large capitalization 
stocks may not provide information relevant to small capitalization 
stocks or ETPs.\694\ Including a broad sample of NMS stocks allows the 
results to inform policy choices across subsets of these securities. 
The stratification of the stocks selected for each Test Group is 
designed to ensure that each Test Group and the control group have a 
similar composition within a given stratum, facilitating a comparison 
of Test Groups and the Control Group, which further supports the 
representativeness of results. If, for instance, the Test Groups and 
Control Group had a different composition within strata, researchers 
outside the Commission might not be able to distinguish whether 
differences across Test Groups and the Control Group stem from 
different fee environments or different sample composition, rendering 
the results less representative. In addition, the Commission believes 
that the sample sizes in the Test Groups are sufficient to provide the 
statistical power necessary to identify differences across the samples, 
even within strata.
---------------------------------------------------------------------------

    \693\ See, e.g., Brandes Letter, at 2 (supporting applying the 
Pilot to the ``widest range of stocks possible''); Spatt Letter, at 
1-2.
    \694\ See, e.g., Battalio Equity Market Study, supra note 5307.
---------------------------------------------------------------------------

    The Commission notes that while the adopted Pilot will be able to 
provide representativeness within strata, changes since the Proposal 
affect the representativeness of the Test Groups as a whole. In 
particular, in response to commenters who called for fewer stocks to be 
included in the Pilot, Commission staff conducted a supplemental 
analysis of Test Group sizes needed to achieve statistical power.\695\ 
In contrast to its analysis in the Proposal,\696\ the Commission 
analyzed the sample sizes in each stratum rather than using the lowest 
power stratum to determine the ratio of test group stocks to control 
stocks. As a result, the ratio of test group stocks to control group 
stocks is lower for some strata. In other words, the Commission was 
able to reduce the number of securities in test groups by weighting the 
composition of the test groups relative to the control group more 
heavily toward securities in certain strata in which more data would be 
needed to achieve statistical power. While analyses of the Pilot that 
do not consider the strata may fail to provide representative results, 
the addition of the stratum identifier to the Exchange Lists will allow 
researchers in and outside the Commission to consider the strata in 
their analyses.
---------------------------------------------------------------------------

    \695\ The supplemental analysis made several improvements over 
the analysis used to identify the proposed test group sizes in an 
attempt to refine the analysis to respond to commenters' desire for 
smaller test groups while preserving statistical power. First, the 
supplemental analysis used more refined methodology that more 
directly controlled for time series and cross-sectional 
dependencies. Second, the supplemental analysis considered three 
quoted spread strata instead of two market capitalization stratum. 
The market capitalization strata was originally necessary to control 
for any overlap with the Tick Size Pilot, but quoted spread strata 
more directly align with the potential economic significance of fees 
and rebates relative to anticipated transaction costs and the Tick 
Size Pilot has ended. Third, the supplemental analysis eliminated 
stocks that trade below 30,000 shares per day. See also supra 
Section II.C.6. See supra note 175 (citing commenters that favored 
smaller test groups).
    \696\ See Proposing Release, supra note 2, at 13019.
---------------------------------------------------------------------------

    The Commission believes that the inclusion of a broad sample of NMS 
stocks, including small and mid-capitalization stocks, ensures 
representative results from the Pilot. Although previous studies, as 
discussed above, suggest that any possible conflicts of interest are 
likely to be the greatest for small-capitalization securities,\697\ the 
Commission believes that it is important to the design of the Pilot to 
include these small and mid-capitalization stocks (including ETPs). In 
particular, including these securities in the Pilot will allow the 
results of the Pilot to inform policy choices across any subset of 
these securities.
---------------------------------------------------------------------------

    \697\ See, e.g., Battalio Equity Market Study, supra note 5307; 
Harris, supra note 5307; RBC Letter I, at 5-6.
---------------------------------------------------------------------------

    Representativeness of results of the Pilot will also be promoted by 
the choice of the Pilot Security selection date. Rule 610T(b) and (c) 
contemplate that the Commission will select and announce the Pilot 
Securities prior to the Pilot start date. As noted in the Proposal, the 
Commission anticipates that it will assign and designate by notice each 
Pilot Security to one Test Group or the Control Group approximately one 
month prior to the start of the Pilot. By assigning securities close to 
the start of the Pilot, each Test Group and the Control Group are 
likely to be more comparable during the Pilot. Because stratification 
criteria (e.g., market capitalization and liquidity) vary naturally 
over time, the closer the assignments occurs to the Pilot start date, 
the more comparable the Test Groups will be during the Pilot. Selection 
of securities close to the start of the Pilot also will be more likely 
to

[[Page 5262]]

include the intended universe of securities, by avoiding securities 
that exit between the adoption of the Rule and the start of the Pilot, 
while also capturing new securities that enter the market during this 
period. Further, to the extent that market participants would change 
their behavior in anticipation of the Pilot, setting the selection 
period close to the Pilot effective date could reduce the effect of 
such behavior on pre-Pilot data.
    The results of the Pilot will be further representative because the 
Pilot applies to all U.S. equities exchanges regardless of fee 
structure. Broker-dealers potentially face transaction-fee related 
conflicts of interest regardless of whether those fees are on maker-
taker exchanges or taker-maker exchanges, and rebates on either the 
make or take side can both impact market quality and execution quality. 
Further, a pilot that addresses only a single fee structure would not 
produce results relevant for policy choices that also would apply to 
another fee structure.
    Applying the Pilot to all exchanges also improves upon the existing 
analysis of the limited fee experiment conducted by Nasdaq,\698\ which 
only covered a single exchange, as explained in Section IV.B.1.a.ii. 
While the results from that study are suggestive that broker-dealers 
routed customer orders to other exchanges that did not change their 
transaction-based fees and rebates, reasons other than potential 
conflicts of interest could have impacted the changes in order routing 
decisions. The Commission believes that the Pilot will achieve 
representativeness by requiring transaction-fee changes for all U.S. 
equities exchanges, which will allow researchers in and outside the 
Commission to identify how these revisions affect order routing 
decisions across exchanges. As discussed above, excluding non-exchange 
trading centers does not forfeit the representativeness of the results 
to be obtained from the Pilot, as including them would expand the Pilot 
to dissimilarly situated trading centers whose fee models and 
regulatory treatment are incomparable to exchanges. Further, the Pilot 
will require that changes to fees or rebates are applied at the 
security level, which means that for any given security, the limitation 
on access fees or rebates is ubiquitous across all exchanges.
---------------------------------------------------------------------------

    \698\ See, e.g., Larry Harris Letter, at 9.
---------------------------------------------------------------------------

    In addition, the Pilot achieves representativeness by imposing a 
fee cap and a prohibition on rebates and Linked Pricing. The existing 
literature suggests that the potential distortive effects arising from 
access fees could induce behavior that would be different from the 
distortions arising from rebates or Linked Pricing. Therefore, the 
inclusion of caps on both fees and rebates or Linked Pricing allows for 
a more comprehensive analysis of any possible conflicts of interest 
than could be achieved by focusing solely on fees or rebates.
    The Commission further believes that the duration of the Pilot will 
produce sufficiently representative results. If broker-dealers 
incorporate transaction fees and rebates into their order routing 
decisions, a two-year duration for the Pilot, with an automatic sunset 
at the end of the first year, unless the Commission publishes a notice 
determining that the Pilot shall continue for up to a second year, 
would likely make it economically worthwhile for broker-dealers to 
change their routing behavior during the Pilot by making it costly to 
avoid the Pilot.\699\ Specifically, as discussed below, the Commission 
recognizes that broker-dealers will incur costs to incorporate new fee 
schedules that are consistent with the Pilot's requirements into their 
order routing decisions.\700\ Broker-dealers could ignore the Pilot to 
avoid these costs. If enough broker-dealers ignore the Pilot, the Pilot 
might not produce results that provide the Commission a sense of the 
likely impact of permanent changes to fee caps or rebates. However, to 
the extent that broker-dealers incorporate transaction-based fees and 
rebates into their order routing decisions, ignoring the Pilot will 
also impose costs on broker-dealers, and these costs increase with the 
duration of the Pilot. The Commission believes that the Pilot duration, 
even with a one-year sunset, is long enough to produce representative 
results because, as discussed below in Section IV.C.2.b.ii, broker-
dealers that incorporate transaction-based fees and rebates into their 
routing decisions will find it economically worthwhile to adapt their 
behavior in response to the Pilot. Further, the provision to suspend 
the automatic sunset facilitates representative results because it 
provides the Commission with flexibility as the data from the Pilot 
develops. For example, the Commission could suspend the sunset if, for 
example, it believed that additional time would help ensure that market 
developments are fully reflected in the data with sufficient 
statistical power for analysis, recognizing that such market 
developments are uncertain. Therefore, the sunset provides flexibility 
to the Commission to observe developments during the Pilot to determine 
whether to allow the sunset to occur.
---------------------------------------------------------------------------

    \699\ See, e.g., Joint Asset Managers Letter, at 2. Other 
commenters agreed that the Pilot duration will be sufficient but for 
other reasons. See, e.g., Fidelity Letter at 9 and CFA Letter at 6.
    \700\ See, e.g., Citi Letter, at 5 and Larry Harris Letter, at 
11. Also, see infra Section IV.C.2.b.ii for a discussion of the 
costs broker-dealers could incur during the Pilot.
---------------------------------------------------------------------------

    Some commenters disagreed that one year will be sufficient to 
achieve a representative sample.\701\ One commenter said that ``robust 
data . . . should take two years'' and that ``technological changes . . 
. to routing and algorithmic logic for some firms are a hurdle that 
could require significant time to implement.'' \702\ Another commenter 
noted the ``complexities of the pilot and the opportunities for 
significant market evolutions.'' \703\ The Commission notes that it 
will consider these and other concerns, as noted above, in deciding 
whether or not to suspend the automatic sunset.
---------------------------------------------------------------------------

    \701\ See, e.g., Babelfish Letter at 3 and Healthy Markets 
Letter at 19.
    \702\ See Babelfish Letter at 3.
    \703\ See Healthy Markets Letter I at 19.
---------------------------------------------------------------------------

    The Commission believes that the Pilot will produce representative 
results despite the Pilot's treatment of stocks cross-listed on 
Canadian exchanges during the Pilot and the exclusion of stocks with 
average daily volume of less than 30,000 shares. A supplemental staff 
analysis found that the exclusion of the interlisted Canadian stocks 
from the selection of securities for test group inclusion would not 
materially impact the representativeness of the remaining sample.\704\ 
Second, the exclusion of securities with average trading volume of less 
than 30,000 shares per day should not materially affect the 
representativeness of the results because the trading in these stocks 
generates less than $100 per day in fees or rebates. Additionally, low 
trading volume stocks tend to have wider spreads rendering a rebate of 
$.0030 a significantly smaller incentive relative to the size of the 
spread than it would be for higher volume tighter spread securities. 
Because of these two factors, the Commission believes fees and rebates 
are economically much less meaningful inducements to provide liquidity 
for these stocks. Because of the diminished economic significance of 
rebates in

[[Page 5263]]

these extremely low volume stocks, the Commission believes that there 
is a lower risk of applying a suboptimal transaction-based fee 
regulatory regime in these stocks. In other words, because rebates are 
economically less meaningful for these securities the benefits of the 
Pilot in informing policy decisions regarding transaction-based fees in 
these securities are likely low. In addition, the supplemental staff 
analysis found that excluding these securities increased the potential 
statistical power of the Pilot.
---------------------------------------------------------------------------

    \704\ Specifically, the supplemental analysis compared the 
distributional characteristics of all US listed stocks (including 
Canadian interlisted stocks) to the distributional characteristics 
of the subset of US listed stocks that excludes Canadian interlisted 
stocks to determine whether distributional characteristics of the 
subset differs statistically significantly from the distributional 
characteristics of all US listed stocks. The analysis finds that the 
distribution of the subset that excludes Canadian interlisted 
securities is statistically similar to the distribution of all US 
listed stocks.
---------------------------------------------------------------------------

    Some commenters suggested that the exclusion of ATSs from the data 
gathering hinders the representativeness of the data obtained from the 
Pilot.\705\ The Commission understands that ATSs often negotiate 
bespoke agreements with individual subscribers for a bundle of services 
for which rebates may or may not play a significant role. Even if the 
Commission obtained detailed information on all of these agreements, it 
may not be possible to identify the fees or rebates they pay for order 
flow from the fees for the other bundled services the ATS offers the 
subscriber in a manner sufficient for inclusion in the Exchange 
Transaction Fee Data. Also, as discussed in section IV.D.2.a it is 
uncertain whether the Pilot will lead to exchanges to be in an improved 
or diminished competitive position with ATSs. Further, without 
including ATSs in the Pilot, ample public data exists to assess the 
market share of ATSs relative to exchange market share to observe and 
measure off-exchange order flow changes.
---------------------------------------------------------------------------

    \705\ See, e.g., Nasdaq Letter I, at 2, 5 and RBC Letter I, at 
4.
---------------------------------------------------------------------------

(2) Expansion of Readily Available Data
    The Commission also expects the Pilot to provide data that would 
otherwise require lengthy and labor-intensive collection. Having a 
representative source of data is critical for the production of 
research and analyses about the impact of transaction-based fees on 
potential distortions. If more data becomes available, that data will 
assist the Commission in analyzing potential conflicts of interest.
    The Commission believes that the data produced by the Pilot will 
improve upon existing data,\706\ as is discussed in more detail below. 
The ready availability of the Exchange Transaction Fee Summaries will 
facilitate the study of distortions and the equilibrium level of fees 
and rebates by reducing the cumbersome nature of collecting fee data. 
Further, the Pilot will make information on order routing decisions 
available to the Commission on a more granular level than current 
readily available data and will improve the feasibility of Commission 
staff analysis of order routing data during the Pilot.\707\
---------------------------------------------------------------------------

    \706\ See Section IV.C.1.a. For commenter statements supporting 
the usefulness of the data to be obtained from the Pilot See, e.g., 
Clark-Joseph Letter, at 1, AJO Letter, at 1, CII Letter, at 3, 
NYSTRS Letter, at 1, Barnard Letter, at 1; ICI Letter I, at 1-2; MFS 
Letter, at 1; Nuveen Letter, at 2; Better Markets Letter, at 2; RBC 
Letter I, at 2; Invesco Letter, at 2; CFA Letter, at 1; State Street 
Letter, at 2; Wellington Letter, at 1; Joint Pension Plan Letter, at 
2; Oppenheimer Letter, at 2; Angel Letter I, at 1. Some commenters 
suggest that the data will not be useful because it excludes data 
from ATSs and doesn't account for other forms of remuneration that 
broker dealers receive which may also impact order routing 
decisions. See NYSE Letter 1 at 1,8-10; ProAssurance Letter, at 2; 
Cboe Letter I, at 15; Nasdaq Letter I, at 2.
    \707\ The aggregation and availability of the data gathered by 
the Pilot is one of the primary benefits of the Pilot and provides 
much of the value of the data collected. See, e.g., NYSE Letter II, 
at 13; Cboe Letter I, at 3.
---------------------------------------------------------------------------

    The Pilot will enable Commission staff to gain improved access to 
order routing data and will provide access to fee data in a simplified 
and standardized form, which will improve the quality of the analyses 
produced as a result of the Pilot. Although certain order routing data 
and exchange fee schedules are publicly available through a combination 
of Rule 606 disclosures and exchange websites, respectively, the Pilot 
will resolve a number of limitations associated with using currently 
available data to study the effect of transaction-based fees on 
potential conflicts of interest and their impact on market quality and 
execution quality.
    The order routing data that Commission staff will obtain as a 
result of the Pilot will provide superior information to that readily 
available today. Data will be available for a representative sample of 
NMS stocks, across all broker-dealers, and exchanges, at the daily 
frequency, which will provide sufficient data for analyses, while 
providing more statistical power than the Rule 606(a) public reports 
can provide. Relative to the data that some studies have acquired from 
broker-dealers and exchanges,\708\ the order routing data will also 
allow Commission staff to observe a time series of order routing data 
across broker-dealers and exchanges. Further, more granular order 
routing data (e.g., daily order routing statistics that separate 
principal and agency trading as well as auction, post only, and other 
orders) than that available publicly will facilitate more targeted 
analysis. Together, these characteristics of the data will facilitate 
Commission staff research on issues such as potential conflicts of 
interest, which will improve the quality of the information available 
to the Commission for policy decisions.
---------------------------------------------------------------------------

    \708\ See, e.g., Battalio Equity Market Study, supra note 530.
---------------------------------------------------------------------------

    The following discussion illustrates how the data obtained from the 
Pilot could be used to study the Commission's objectives.\709\ The key 
components in the order routing data that facilitate studies of the 
impact of transaction-based fees and rebates on order routing and 
execution quality are daily volume information at the exchange, stock, 
and broker-dealer level, the separation of liquidity taking and 
liquidity making orders, the Order Capacity, the Order Designation, the 
time to execution for liquidity-providing orders, and the ability to 
estimate fill rates. The routing volume allows Commission researchers 
to measure how much volume each broker-dealer sends to each exchange 
each day in individual securities, which can be combined with the Pilot 
Securities Exchange List and the Exchange Transaction Fee Summary to 
observe patterns in routing and correlate those patterns with fees and 
Test or Control Group membership. The exchange level is required to 
match the order routing data with the fee data; the broker level is 
required to allow for different routing strategies across broker-
dealers; and the daily level in the data facilitates statistical power. 
The separation of liquidity taking and liquidity making orders allows 
researchers to match the order routing volume to the potential fee or 
rebates in the Exchange Transaction Fee Summary. Order Capacity allows 
Commission researchers to compare order routing and execution quality 
statistics for Agency Orders to Principal Orders, which are less 
subject to conflicts of interest concerns than Agency Orders and, thus, 
provides an added means of obtaining causal identification. Order 
Designation allows researchers to exclude auction orders and to 
separately analyze Post Only orders because these orders types are 
subject to different fee structures (auction orders do not get rebates) 
or exist for the purpose of capturing rebates (Post Only). Excluding or 
separately analyzing these orders types provides for cleaner tests that 
are better able to measure the impacts consistent with the objectives 
of the Pilot. Finally, the time to execution and ability to estimate 
fill rates (using orders received, executed, canceled or rerouted)

[[Page 5264]]

provides Commission researchers with execution quality information not 
readily available for liquidity providing or liquidity taking 
orders.\710\
---------------------------------------------------------------------------

    \709\ See NYSE Letter II, at 13 suggesting that the proposing 
release did not provide an illustration for how the data could be 
used to study the Commission's objectives.
    \710\ The Commission recognizes that many trade-based execution 
quality statistics are readily estimated from publicly available 
data. See Section IV.E.5.g infra for a discussion of an alternative 
to require order-based execution quality statistics during the 
Pilot.
---------------------------------------------------------------------------

    An additional requirement of the Pilot is that the exchanges will 
be required to provide a standardized dataset of fees, the Exchange 
Transaction Fee Summary, to the public. In particular, this information 
will allow researchers in and outside the Commission to create proxies 
for which exchanges are likely to be more or less expensive and which 
offer the highest rebates. For instance, within Test Group 1, the 
maximum allowable access fee is $0.0010; however, each exchange may 
have different base and top-tier fees. Thus, only knowing that a 
security is in Test Group 1 will be incomplete information about the 
impact of transaction-based fees and rebates. Moreover, the Exchange 
Transaction Fee Summary will provide researchers in and outside the 
Commission with historical (realized) average and median per share fees 
and rebates to enable an ex post analysis of how actual fees affected 
past order routing decisions, which is not available from any data 
source today.
    Exchanges will construct Exchange Transaction Fee Summaries 
according to an XML schema to be published on the Commission's website, 
and exchanges will update this information monthly.\711\ These data 
will be standardized and consistently formatted, which will ease the 
use of these data for researchers in and outside the Commission, as 
each exchange will have to report the Base, Top Tier, average and 
median fees, as detailed above in Section III.E. Each month, exchanges 
will be required to report realized average and median per share fees, 
as well as any ``spot'' revisions to fees associated with Form 19b-4 
fee filings to the Commission. These fee data will be publicly posted 
on each exchange's website.\712\
---------------------------------------------------------------------------

    \711\ The standardized fee data, as would be required by the 
proposed Pilot, is discussed supra Section III.E.2.
    \712\ Rule 610(T) requires each exchange to publicly post on its 
website downloadable files containing the Exchange Transaction Fee 
Summary and update them on a monthly basis. Similarly, each exchange 
will be required to publicly post on its website downloadable files 
containing daily aggregated and anonymized order routing statistics, 
updated monthly. Each exchange will also be required to provide 
daily on its website downloadable files containing the List of Pilot 
Securities and the Pilot Securities Change List.
---------------------------------------------------------------------------

    The Exchange Transaction Fee Summary released during the Pilot 
will: (1) Ease aggregation across exchanges, which affords researchers 
in and outside the Commission an opportunity to obtain representative 
results; (2) replicate across studies, which will provide validation of 
findings; and (3) reduce burdens associated with fee data collection, 
which could encourage more research on the impact of fees and rebates 
on routing behavior. Thus, the Commission believes that a standardized 
reporting of summary data on fees by the exchanges will facilitate 
analysis of the effect of transaction-based fees.
    The rule will require that the Exchange Transaction Fee Summary be 
structured using an XML schema to be published on the Commission's 
website.\713\ Data that are structured in a standard format can result 
in lower costs to analysts and higher quality data. An additional key 
benefit of structured data is increased usability. If, for instance, 
the Exchange Transaction Fee Summary were not standardized across the 
exchanges, researchers would have to manually rekey the data, a time-
consuming process which has the potential to introduce a variety of 
errors, such as inadvertently keying in the wrong data or interpreting 
the filings inconsistently, thereby reducing comparability. With the 
data in the reports structured in XML, researchers in and outside the 
Commission could immediately download the information directly into 
databases and use various software packages for viewing, manipulation, 
aggregation, comparison, and analysis. This will enhance their ability 
to conduct large-scale analysis and immediate comparison of the fee 
structures of exchanges. The Commission believes that requiring these 
reports to be made available in an XML format will provide flexibility 
to researchers in and outside the Commission and will facilitate 
statistical and comparative analyses across exchanges, test groups, and 
date ranges.
---------------------------------------------------------------------------

    \713\ As an open standard, XML is widely available to the public 
at no cost. As an open standard, XML is maintained by an industry 
consensus-based organization, rather than the Commission, and 
undergoes constant review. As updates to XML or industry practice 
develop, the Commission's XML schema may also have to be updated to 
reflect the updates in technology. In those cases, the supported 
version of the XML schema will be published on the Commission's 
website and the outdated version of the schema will be removed in 
order to maintain data quality and consistency with the XML 
standard. The Commission's XML schema will also incorporate certain 
validations to help ensure data quality.
---------------------------------------------------------------------------

(3) Causality
    In addition to providing representative results, the Commission 
expects the Pilot to achieve the benefits identified above because it 
will, among other things, provide insight into the degree to which 
exchange transaction-based fees and rebates cause economic distortions 
that either harm or benefit investors. Such causal information is 
especially useful when considering policy choices aimed at reducing any 
possible harmful distortions. As detailed in the baseline, exogenous 
shocks are a means by which researchers may analyze a causal 
relationship between changes to transaction-based fees and rebates and 
changes to order routing decisions of broker-dealers.\714\ This Pilot 
facilitates the analysis of causality through an exogenous shock that 
simultaneously creates several distinct fee environments, each of which 
restricts transaction-based fees or rebates differently, enabling 
synchronized comparisons to the current environment.
---------------------------------------------------------------------------

    \714\ As discussed in the baseline, analysis of causality can be 
accomplished through either exogenous shocks or econometric methods, 
such as instrumental variable analysis.
---------------------------------------------------------------------------

    The Commission believes that the Pilot is able to facilitate the 
examination of causality because the Pilot will produce a single 
exogenous shock that differentially impacts either fees or rebates on 
both maker-taker and taker-maker exchanges. Exogenous shocks, such as 
those in the Pilot provide researchers with data to analyze the 
direction of causality.\715\ For example, a researcher seeking to study 
the impact of the rebates on transaction costs could estimate a 
difference-in-differences test that compares transaction costs during 
the Pilot to the transaction costs before the Pilot and then compare 
the changes in Test Group securities to the changes in Control Group 
securities. It also will allow investors who receive 606(b)(3) data 
from their broker-dealers to directly test with their own 606(b)(3) 
data whether, in the absence of rebates in the most actively traded 
stocks, they are better able to compete for queue priority and thereby 
capture the quoted spread when posting liquidity. More generally, the 
Pilot will allow researchers, including Commission staff and others, to 
run difference-in-difference tests on many measures of execution 
quality and market quality based on publicly available data to examine 
the causal impact of transaction-based fees and rebates on execution 
and market quality.
---------------------------------------------------------------------------

    \715\ Other econometric techniques, such as instrumental 
variables methodology, are used when an exogenous shock (or other 
controlled experiment) cannot be established.
---------------------------------------------------------------------------

    As discussed above, the Pilot will produce a single exogenous shock 
that

[[Page 5265]]

differentially affects multiple Test Groups at the same time. The 
simultaneity of the exogenous shock across Test Groups facilitates 
examinations of causality, particularly in the presence of any 
confounding effects. For instance, if some market-wide event were to 
result in deviations in order routing behavior during the Pilot, the 
event would likely affect stocks in each Test Group as well as the 
Control Group. The simultaneity allows researchers in and outside the 
Commission to control for the impact of the market-wide event, because 
the impact would likely affect the Test Groups and the Control Group 
similarly. For example, in the difference-in-differences test of 
transaction costs mentioned above, any market-wide effect would result 
in changes to fill rates in both the Control Group and Test Group 2. 
Therefore, the comparison of the changes in Test Group 2 to the changes 
in the Control Group subtracts the market-wide effect from the total 
effect, thus isolating the effect of the Pilot.
    In addition, to facilitate causal analysis of data during the Pilot 
Period, the Commission believes that it is important to collect 
sufficient data during a pre-Pilot Period.\716\ The pre-Pilot data can 
then be compared with the data that will be produced during the Pilot 
Period, which will permit analysis of any changes to order routing 
behavior, execution quality, and market quality between the two for the 
Pilot Securities in each of the Test Groups. To make this comparison 
informative, the length of the pre-Pilot Period needs to be long enough 
to obtain sufficient statistical power to permit analysis of the stocks 
and ETP Pilot Securities. In turn, sufficient statistical power in 
tests that compare the pre-Pilot data to the Pilot data would allow all 
researchers to more easily use the information obtained from the Pilot 
to inform future regulatory consideration of exchange transaction fees 
and rebates and their impact on the markets. The Commission believes 
that at least six months of pre-Pilot data may be required to obtain 
the necessary statistical power to permit analysis of the Pilot 
Securities during the Pilot, particularly ETPs.\717\
---------------------------------------------------------------------------

    \716\ See Healthy Markets Letter I, at 19.
    \717\ See supra. Section II.D.3.
---------------------------------------------------------------------------

    The Commission further believes that the combination of the 
representative sample, data from the Pilot, and the exogenous shock 
will facilitate analysis by Commission staff (or institutions who 
receive 606(b)(3) reports from their broker-dealers) of the degree to 
which transaction-based fee- and rebate-motivated order routing harms 
order execution quality. In particular, with the exogenous shock, the 
Order Routing Data, the Exchange Transaction Fee Summaries, and 
publicly available data, researchers at the Commission can identify 
both the degree to which transaction fees and rebates impact order 
routing and, the impact of transaction fee- and rebate-motivated order 
routing impacts execution quality.
    Several commenters seemed to state that the Pilot would produce 
flawed causal results because the Pilot does not include all forms of 
remuneration.\718\ While the Commission acknowledges that other forms 
of remuneration may impact routing decisions, the results will still be 
informative. Even if some order flow migrates between exchanges and 
off-exchange venues, Commission staff should still be able to identify 
the impact of exchange fees and rebates on exchange routing.
---------------------------------------------------------------------------

    \718\ See, e.g., Cboe 15-16; NYSE at 9-10; Nasdaq I at 7; RBC 
Letter I, at 4; ProAssurance at 2.
---------------------------------------------------------------------------

    The Pilot Securities Exchange List and the Pilot Securities Change 
List further enhance the ability for researchers both inside and 
outside of the Commission to analyze the effects of transaction-based 
fees on order routing decisions. By requiring daily updates to the 
Pilot Securities Change List, the Pilot will provide broker-dealers 
with the information they need to track the exact securities in each 
Test Group in real-time and when securities exit the Pilot. This 
information will be crucial for broker-dealers that choose to adjust 
their routing behavior during the Pilot. If broker-dealers are unable 
to track which securities are in which Test Groups, the Pilot results 
could provide misleading causal information.
iii. Potential Limitations on the Benefits
    The Commission recognizes that pilots are unpredictable and as such 
considered whether possible limitations associated with pilots 
generally, as well as certain issues presented by the design of this 
Pilot in particular, would limit the benefits of the Pilot. This 
section discusses, in greater detail below, issues associated with 
pilots in general and the potential concerns with resultant research 
and analyses.
    Pilots may face limitations related to the unpredictable nature of 
market conditions and confounding events. Even if a pilot lasted 
several years, not all of the market conditions of interest could be 
experienced. Depending on the requirements of pilots, such limitations 
might reduce the usefulness of the information obtained.\719\ The 
Commission believes, however, that the value of the information 
obtained from the Pilot is not dependent upon having variation in 
market conditions over time, and that the duration of the Pilot will 
provide sufficient information to inform policy decisions.
---------------------------------------------------------------------------

    \719\ For instance, a pilot could be designed where the 
information obtained from the Pilot would only be valuable if 
certain market conditions, such as high market volatility or a 
recessionary period occurred. If, however, markets experience low 
volatility or are in an expansionary period, the Pilot may either 
not be sufficiently long enough to capture the events that it 
requires to be useful or would have to be extended to ensure that 
those market conditions could occur.
---------------------------------------------------------------------------

    In addition, pilots also face the limitation that market 
participants, knowing that a pilot is underway, may not act as they 
would in a permanent regime.\720\ In the context of this pilot, broker-
dealers could choose to retain their current order-routing decisions 
for the duration of the Pilot, which could be costly to such broker-
dealers.\721\ Broker-dealers, when deciding whether to adjust any order 
routing behavior that currently depends on fees and rebates, would 
likely trade off the costs of retaining strategies that are no longer 
profitable because of the restrictions imposed by the Pilot against the 
costs of adjusting the algorithms for their smart order routing 
systems. Alternatively, broker-dealers could substantially change their 
business model in order to

[[Page 5266]]

avoid the Pilot.\722\ In addition, the Commission recognizes that the 
anticipated analysis of order routing data from the Pilot could cause 
broker-dealers to improve execution quality. This could reflect the 
``Hawthorne effect,'' which refers to the idea that people will often 
improve their behavior if they believe that they are observed. These 
outcomes could lead to results that would not represent the effects of 
a permanent rule change. If that were to occur, a few commenters 
suggested that this could lead the potential benefits of the Pilot to 
not justify the costs or risks that the pilot imposes.\723\
---------------------------------------------------------------------------

    \720\ For example, one study provided evidence suggesting that 
trading behavior may not have completely adjusted to the Regulation 
SHO pilot. See Ekkehart Boehmer, Charles Jones, & Xiaoyun Zhang, 
Unshackling Short Sellers: The Repeal of the Uptick Rule, Colum. U. 
(2008), https://www0.gsb.columbia.edu/mygsb/faculty/research/pubfiles/3231/UptickRepealDec11.pdf. Despite this effect, the study 
found evidence consistent with the evidence gathered from the 
Regulation SHO pilot. See Securities Exchange Act Release No. 50103 
(July 28, 2004), 69 FR 48008 (Aug. 6, 2004) (hereinafter 
``Regulation SHO'').
    \721\ If broker-dealers have smart order routing systems that 
use algorithms that maximize rebate capture, as suggested in the 
Battalio Equity Market Study, supra note 530, then for at least some 
subset of securities, broker-dealers would not be able to pursue 
rebates from those exchanges, so it would be suboptimal for broker-
dealers to not reconsider their order routing choices. If broker-
dealers, however, already have order routing decisions that are 
optimal from a customer's perspective (e.g., based on execution 
quality) and are not driven by potential conflicts of interest 
(e.g., maximizing rebates), then for at least some broker-dealers, 
their order routing decision process may be unchanged. It is also 
possible that for broker-dealers with algorithms that dynamically 
route based upon real-time market metrics, including liquidity 
metrics, expected fill rates, and current queue length, routing 
logic may not change, however, routing choices may dynamically 
adjust based upon changes in those variables that result from 
altered fee schedules that broker-dealers may implement in 
conjunction with the Pilot.
    \722\ It could be costly for broker-dealers to completely alter 
their business models because they may not find it worthwhile to do 
so for a temporary pilot.
    \723\ See, e.g., FIA Letter, at 3; Citadel Letter, at 4.
---------------------------------------------------------------------------

    The Commission believes that the Pilot is designed to obtain 
empirical information about how fees and rebates affect order routing 
decisions because the size and length of the Pilot render it unlikely 
that broker-dealers that currently focus their routing on rebates would 
maintain existing order routing decisions or alter their business 
models to avoid the Pilot as suggested by some commenters. In 
particular, the Commission believes that the Pilot duration is likely 
to make it economically worthwhile for broker-dealers to adjust their 
order routing behavior. The costs of ``waiting out'' the Pilot increase 
with the duration of the pilot, whereas the costs of adjusting the 
algorithms of the smart order routers, discussed below in Section 
IV.C.2.b.ii do not.
    In addition, the potential compromise of the data due to the 
Hawthorne effect is limited by at least two factors. First, this is not 
the Commission's first pilot study. Market participants are relatively 
accustomed to the Commission collecting data for analysis. Second, the 
analysis of pre-Pilot data will allow for a baseline observation of 
unaffected broker-dealer order routing activity. If broker-dealers do 
not act on conflicts of interest during the baseline period, the 
Hawthorne effect is irrelevant unless it causes that good baseline 
behavior.\724\ If, on the other hand, broker-dealers do act on 
conflicts of interest during the baseline and the Hawthorne effect 
results in good behavior during the Pilot, the Pilot should facilitate 
the measurement of the conflicts. As a result, the Commission believes 
that the Pilot will produce useful data despite the possible influence 
of the Hawthorne effect.
---------------------------------------------------------------------------

    \724\ The Commission does not believe that the Hawthorne effect 
will cause ``good'' behavior in the baseline because broker-dealers 
would need to implement system changes similar to those described in 
Section IV.B.2.c prior to the pre-Pilot.
---------------------------------------------------------------------------

    The Commission recognizes that not all objectives of the Pilot 
would be straightforward to study. For example, the changes in fees or 
rebates imposed by the Pilot may change transaction costs in a way that 
results in changes to order routing decisions by broker-dealers, even 
absent potential conflicts of interest. Studying how order routing 
changes during the Pilot, without jointly studying why it changes, 
would not be sufficient to understand any possible conflicts of 
interest. Researchers can carefully study the data to distinguish the 
proportion of changes in order routing decisions resulting from 
execution quality considerations from those resulting from potential 
conflicts of interest. Nonetheless, this complication could reduce the 
number and/or quality of studies of the Pilot.
    Another limitation on the benefits from the Pilot is that the Pilot 
will not require that the order routing data be released to the public. 
As a result, fewer independent analyses of the Pilot's order routing 
datasets are likely to be performed, compared to the analysis that 
might have been obtained if the data were publicly released. However, 
the Commission believes that sufficient analysis will be produced to 
yield credible and reliable results without public dissemination of the 
order routing data. In addition, institutions, including broker 
dealers, asset managers, and transaction cost analysis (TCA) providers, 
may produce their own analyses using proprietary data and information. 
To the extent that interested parties prepare their own analyses, they 
may submit them to [email protected] with the words 
``Transaction Fee Pilot Analysis'' in the subject line, and the 
Commission will post those reports on its public website.\725\
---------------------------------------------------------------------------

    \725\ As noted above, the Commission encourages market 
participants to disclose what sources of data they used for their 
analyses and describe the methodology they used, and to make those 
reports publicly and freely available.
---------------------------------------------------------------------------

    Additionally, only NMS stocks with prices of at least $2 prior to 
the start of the Pilot are eligible for inclusion in the Pilot. One 
commenter suggested that NMS stocks with prices between $1 and $2 also 
be included in the Pilot, as the commenter believed that the impact of 
fees and rebates are likely to be greatest for these securities.\726\ 
The Commission agrees with the commenter who stated that the initial 
Test and Control Groups in the Pilot would be more representative if 
they contained securities with prices below $2. However, excluding 
securities with prices below $2 helps to keep the sample of stocks more 
stable across the Pilot. This occurs because if a stock's price falls 
below $1 it is subject to different regulations, such as a different 
tick size, and thus would be excluded from the Pilot. By excluding 
stocks below $2 the Pilot mitigates the risk that the 
representativeness of the sample may diminish over time as Pilot stocks 
are removed due to their stock prices falling below $1. The Commission 
believes that the data obtained from the Pilot will be sufficient to 
obtain data on the effects to changes in fees and rebates on small, 
low-priced securities (those with prices close to $2, or any Pilot 
security that drops below $2 per share, but exceeds $1 per share, after 
the start of the Pilot).
---------------------------------------------------------------------------

    \726\ See James Angel Letter I, at 2.
---------------------------------------------------------------------------

b. Other Benefits of the Transaction Fee Pilot
    Other benefits may emerge that could affect markets and market 
participants for the duration of the Pilot, such as potentially reduced 
conflicts of interest for some Test Groups, lower all-in costs of 
trading, or improved market quality. The Commission believes that many 
of the benefits discussed below will be temporary in nature and affect 
markets and market participants only for the duration of the Pilot. 
Because the Commission lacks information on the extent to which the 
impact of exchange fee-and-rebate pricing models affect investors,\727\ 
the Commission is unable to quantify many of the temporary benefits of 
the Pilot discussed below.
---------------------------------------------------------------------------

    \727\ See supra Section IV.A.1 (Market Failure at the Broker 
Dealer Level) and Section IV.A.2 (Market Failure at the Exchange 
Level).
---------------------------------------------------------------------------

    Some commenters stated their belief that the Pilot would not help 
investors and issuers.\728\ As discussed in Sections IV.C.2.b and 
IV.D.1 the Commission acknowledges that the Pilot could harm execution 
quality and/or market quality, but the impacts of the Pilot are 
uncertain. The Pilot could also improve execution quality and/or market 
quality for the reasons explained in those same sections. For example, 
as discussed in detail below,\729\ the Commission is uncertain about 
whether, or among which securities, the Pilot will result in increases 
or decreases in quoted spreads and investor transaction costs. A 
decrease in quoted spreads and/or investor transaction costs during the 
Pilot in some or all stocks in test groups would benefit investors. 
Likewise, the Commission is uncertain about how the Pilot will affect 
price efficiency--the

[[Page 5267]]

Pilot could plausibly improve or degrade price efficiency in certain 
test group stocks.\730\ Any improvements would benefit issuers and 
investors.
---------------------------------------------------------------------------

    \728\ See, e.g., Nasdaq I, at 1.
    \729\ See infra Section IV.C.2.b.iv
    \730\ See infra Section IV.D.1.
---------------------------------------------------------------------------

    The Commission believes that another temporary benefit of the rule 
will be that the Pilot could prevent some traders from indirectly 
quoting in sub-pennies.\731\ Rebates have the practical effect of 
reducing the minimum tick size by the size of the rebate, and in effect 
allow trading centers to offer quotations superior to the existing 
quote. Several studies suggested that the use of exchange fees and 
rebates to effectively undercut quotations by sub-pennies is 
particularly severe in taker-maker markets.\732\ The Pilot would, in 
some test groups, reduce or eliminate rebates, which could stem this 
indirect reduction of tick sizes, and could provide the Commission and 
the public with information currently unavailable about this issue.
---------------------------------------------------------------------------

    \731\ 17 CFR 242.612 (Rule 612 of Regulation NMS) prohibits 
traders from submitting sub-penny quotations on securities trading 
at prices over $1.00. The purpose of the sub-penny quotation 
prohibition was two-fold: (1) To prevent high frequency traders from 
front-running standing non-marketable limit orders and (2) to reduce 
the complexity of trading systems. See NMS Adopting Release, supra 
note 10, at 37550-57.
    \732\ See, e.g., Angel, Harris, & Spatt, supra note 530; Harris, 
supra note 530. One study noted that as a result of the Tick Size 
Pilot test group with the trade-at provision, taker-maker markets 
have seen a significant increase in market share, in part due to 
this quotation issue. See Carole Comerton-Forde, Vincent Gregoire, & 
Zhuo Zhong, Inverted Fee Venues and Market Quality 1 (August 10, 
2018) (unpublished manuscript) (forthcoming J. Fin. Econ.) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2939012&download=yes.
---------------------------------------------------------------------------

2. Costs of the Pilot
    This section describes the compliance costs associated with the 
Pilot, followed by the additional costs, some of which are temporary, 
that could affect issuers, investors, broker-dealers, exchanges, and 
other market participants resulting from the Pilot.
a. Exchange Compliance Costs of the Pilot
    The Pilot will impose costs on exchanges to comply with the Pilot's 
requirements to collect, calculate, and publicly post data certain 
required by the Pilot on their websites, transmit the order routing 
datasets to the Commission, as well as to implement fee changes, if 
required in order to comply with the Pilot's restrictions. Table 4 
provides a summary of the costs discussed in this section.

                                                   Table 4--Summary of Compliance Costs for Exchanges
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               Pilot         Exchange      Order routing    Fee filings                Total
---------------------------------------------------------   securities      transaction     data \735\         \736\     -------------------------------
                                                           exchange list    fee summary  --------------------------------
                                                               \733\           \734\
                      Exchange type                      --------------------------------       All             All           Listing       Non-listing
                                                              Listing           All
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      Per exchange
--------------------------------------------------------------------------------------------------------------------------------------------------------
Implementation..........................................          15,400          26,100          24,000          96,800         162,000         147,000
Periodic:
    --2-yr Pilot........................................          83,500          55,000         103,800         148,400         391,000         307,000
    --1-yr Pilot........................................          50,100          36,600          69,200          74,200         230,000         180,000
Total (implementation + periodic):
    --2-yr Pilot........................................          98,900          81,000         127,800         245,200         553,000         454,000
    --1-yr Pilot........................................          65,500          62,700          93,200         171,000         392,000         327,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Total across exchanges
--------------------------------------------------------------------------------------------------------------------------------------------------------
Implementation..........................................          92,000         339,000         311,000       1,258,000       2,001,000
Periodic:
    --2-yr Pilot........................................         501,000         714,000       1,350,000       1,929,000       4,494,000
    --1-yr Pilot........................................         301,000         476,000         900,000         964,000       2,641,000
Total (implementation + periodic):
    --2-yr Pilot........................................         593,000       1,054,000       1,661,000       3,187,000       6,495,000
    --1-yr Pilot........................................         393,000         815,000       1,211,000       2,223,000       4,642,000
--------------------------------------------------------------------------------------------------------------------------------------------------------

i. Updating the Pilot Securities Exchange List and Pilot Securities 
Change List
---------------------------------------------------------------------------

    \733\ See infra Section IV.C.2.a i.
    \734\ See infra Section IV.C.2.a ii.
    \735\ See infra Section IV.C.2.a iii.
    \736\ See infra Section IV.C.2.a iv.
---------------------------------------------------------------------------

    During the Pilot, the primary listing exchanges will maintain and 
make public prior to the start of each trading day the Pilot Securities 
Exchange List of the securities included in each test or control group 
on its website. Further, each primary listing exchange will publicly 
post on its website the updated Pilot Securities Change List prior to 
the start of each trading day, which will list, separately, changes to 
applicable Pilot Securities. Additional details of what will be 
included in each list are provided in Section II.E.1.
    Upon the initial publication of the List of Pilot Securities by 
notice by the Commission, the primary listing exchanges \737\ will need 
to determine which of those securities are listed on their market, and 
then compile a list of those securities and publicly post on their 
websites that list as a downloadable file in pipe-delimited ASCII 
format. The Commission initially estimated that the costs associated 
with the initial compilation of the Pilot Securities Exchange List 
would cost $2,060 per exchange based on an estimated burden of 8 hours. 
However, one commenter stated that it ``anticipates it could take as 
many as 44 hours'' to compile the initial Pilot Securities Exchange 
List.\738\ The commenter stated that its estimates of the costs 
associated with the Pilot are based on its ``prior experience 
implementing the Tick Size Pilot.'' \739\ In light of this comment, the 
Commission is increasing its estimate.\740\ Accordingly, the Commission 
estimates that each primary listing exchange would incur, on average, a 
one-time

[[Page 5268]]

burden of approximately 44 burden hours per primary listing exchange to 
compile and publicly post their initial Pilot Securities Exchange List. 
Consequently, the Commission now estimates a cost of approximately 
$11,700 per listing exchange to compile the initial list of 
securities.\741\ The Commission understands that each primary listing 
exchange has existing systems to monitor and maintain the Pilot 
Securities Exchange List and the Pilot Securities Change List as a 
result of certain corporate actions.\742\ While these systems can be 
used to collect the data required to be made public for the Pilot 
Securities Exchange List and the Pilot Securities Change List, these 
systems would have to be adapted to conform to the requirements of the 
Pilot. The Commission estimates that it would cost each primary listing 
exchange approximately $3,720 to develop appropriate systems for the 
Pilot, or about $22,300 in aggregate across the six U.S. primary 
listing exchanges.\743\ Once these systems are established, the 
Commission estimates that it would cost each listing exchange 
approximately $83,500 for the entire duration of the Pilot, or 
approximately $501,000 across the six primarily listing exchanges,\744\ 
to publicly post on each exchange's website the Pilot Securities 
Exchange List and Pilot Securities Change List prior to the start of 
each trading day in pipe-delimited ASCII format. If the Commission 
determined that the Pilot shall automatically sunset at the end of the 
first year, the Commission estimates that the costs to each exchange 
would be $50,100 for a one-year Pilot duration and the six-month post-
Pilot Period, or approximately $301,000 across the six primarily 
listing exchanges.\745\
---------------------------------------------------------------------------

    \737\ The primary listing exchanges are NYSE, Nasdaq, NYSE 
American, NYSE ARCA, BATS and IEX.
    \738\ See NYSE Letter I, at 15.
    \739\ See id.
    \740\ The Commission notes that the Tick Size Pilot required the 
exchanges and FINRA to also select the Pilot securities whereas the 
Transaction Fee Pilot does not. Therefore, the Transaction Fee Pilot 
could result in lower costs than the Tick Size Pilot. Nonetheless, 
the Commission believes it is reasonable to rely on this commenter's 
estimate because this commenter has expertise on these costs likely 
to result in incorporating relatively precise information into the 
cost estimates.
    \741\ This estimate is based on the following: [(Compliance 
Manager (22 hours) x $298) + (Programmer Analyst (22 hours) x $232)] 
= $11,660 [ap]11,700 per exchange, or $11,660 x 6 primary listing 
exchanges = $69,960 [ap] 70,000 in aggregate. The burden hours are 
obtained from supra Section III.D.1. The Commission estimates the 
wage rate associated with these burden hours based on salary 
information for the securities industry compiled by the Securities 
Industry and Financial Markets Association (SIFMA). The estimated 
wage figure for attorneys, for example, is based on published rates 
for attorneys, modified to account for a 1,800- hour work-year and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits, and overhead, yielding an effective hourly rate for 2013 
of $380 for attorneys. See Securities Industry and Financial Markets 
Association [SIFMA], Management & Professional Earnings in the 
Securities Industry--2013 (October 7, 2013), available at https://www.sifma.org/resources/research/management-and-professional-earnings-in-the-securities-industry-2013/. These estimates are 
adjusted for inflation based on Bureau of Labor Statistics data on 
CPI-U between January 2013 (230.280) and January 2017 (242.839). 
Therefore, the 2017 inflation-adjusted effective hourly wage rates 
for attorneys are estimated at $401 ($380 x 242.839/230.280). The 
Commission discusses other costs of compliance with the rule below.
    \742\ The Commission notes that the primary listing exchanges 
maintained public web pages containing similar lists with respect to 
the recently concluded Tick Size Pilot. The systems to produce lists 
for the Tick Size pilot should be adaptable to meet the requirements 
of the Transaction Fee Pilot.
    \743\ This estimate is based on the following: [(Attorney (4 
hours) x $401) + (Compliance Manager (4 hours) x $298) + (Programmer 
Analyst (4 hours) x $232)] = $3,724 per exchange, or $3,724 x 6 
exchanges = $22,344 [ap] 22,300 in aggregate. The burden hours are 
obtained from supra Section III.D.1.
    \744\ If the Pilot were to automatically sunset at the end of 
the first year, the total number of days that the exchanges would 
need to provide the Pilot Securities Exchange List and the Pilot 
Securities Change Lists would be up to 630 business days (504 
business days for the two-year Pilot horizon (252 business days per 
year x 2 years), and up to 126 business days for the six-month post-
Pilot Period). The cost estimate for providing these lists for the 
entire period is based on the following: [(Compliance Manager (0.25 
hour x 630 trading days) x $298) + (Programmer Analyst (0.25 hour x 
630 trading days) x $232)] = $83,475 [ap] 83,500, or $83,475 x 6 
exchanges = $500,850 [ap] 501,000, in aggregate. The burden hours 
are obtained from supra Section III.D.1. One commenter provided an 
estimate of 300.5 burden hours for providing these lists, but the 
Commission continues to believe its own higher burden estimates are 
reasonable. See Section III.D.6, supra.
    \745\ If the Pilot were to automatically sunset at the end of 
the first year, the total number of days that the exchanges would 
need to provide the Pilot Securities Exchange List and the Pilot 
Securities Change Lists would be up to 378 business days (252 
business days for the one-year Pilot horizon, and 126 business days 
for the six-month post-Pilot Period). The cost estimate for 
providing these Lists for the entire period is based on the 
following: [(Compliance Manager (0.25 hour x 378 trading days) x 
$298) + (Programmer Analyst (0.25 hour x 378 trading days) x $232)] 
= $50,085 [ap] $50,100, or $50,085 x 6 exchanges = $300,510 [ap] 
$301,000, in aggregate. The burden hours are obtained from supra 
Section III.D.1.
---------------------------------------------------------------------------

    In sum, the Commission estimates a total cost for each listing 
exchange of approximately $98,900, or $593,000 in aggregate across 
exchanges, to comply with the requirement to update and post on its 
website at the beginning of each trading day the list of its listed 
securities in each of the Test Groups. This includes an estimated 
$15,400 in one-time implementation costs and $83,500 in ongoing costs. 
This estimate is based on one provided by a commenter who, based on 
their experience with the Tick Size Pilot, estimated that it would take 
up to 44 hours to compile. \746\ Accordingly, the Commission continues 
to believe its burden estimates are reasonable.
---------------------------------------------------------------------------

    \746\ See, e.g., NYSE Letter I, at 15.
---------------------------------------------------------------------------

iii. Producing the Exchange Transaction Fee Summary in XML Format
    In addition to the Pilot Securities Exchange List provided by the 
primarily listing exchanges, all U.S. equities exchanges would also 
need to publicly post on their websites the Exchange Transaction Fee 
Summary, which are downloadable files containing the initial set of 
fees at the outset of the Transaction Fee Pilot as well as monthly 
updates to include both changes to fees and rebates reported in Form 
19b-4 fee filings and realized average and median per share fees and 
rebates, as discussed in Section II.E.2. The Exchange Transaction Fee 
Summary would need to be updated in response to any changes to its fee 
schedule following the beginning of each calendar month from the pre-
Pilot Period through the post-Pilot Period. The exchanges would be 
required to provide information on any transaction-based fee and rebate 
changes, according to Rule 610T(e), that they make during the Pilot, 
including the effective dates of fee revisions. The rule also requires 
that each exchange calculate numerous statistics relating to their fees 
as discussed in more detail in Section II.E.2.
    A requirement at the outset of the Pilot is that exchanges would 
need to report their base and top-tier fees and rebates, which the 
Commission estimates would cost each exchange $1,130, or about $14,700, 
in aggregate across the 13 U.S. equities exchanges.\747\ The reported 
base and top-tier fees and rebates would be mandatory elements of the 
Exchange Transaction Fee Summary. Concurrent with the submission of the 
Form 19b-4 fee filings to the Commission at the outset of the 
Transaction Fee Pilot, the exchanges also would be required to publicly 
post on their websites downloadable files containing the initial 
Exchange Transaction Fee Summary, using an XML schema to be published 
on the Commission's website. The Commission estimates that it will cost 
exchanges $530 each to post this summary dataset to their 
websites.\748\
---------------------------------------------------------------------------

    \747\ The estimate is based on the following: (Compliance 
Manager (2 hours) x $298) + (Senior Business Analyst (2 hours) x 
$265) = 1,126 [ap] $1,130, or $1,126 x 13 equities exchanges = 
$14,638 [ap] 14,600 in aggregate. The burden hours are obtained from 
Section III.D.2, supra.
    \748\ This estimate is based on the following: (Compliance 
Manager (1 hours) x $298) + (Programmer Analyst (1 hours) x $232) = 
$530 per exchange, or $530 x 13 U.S. equities exchanges = $6,890 
[ap] 7,000 in aggregate. The burden hours are obtained from supra 
Section III.D.2.
---------------------------------------------------------------------------

    The rule would also require that exchanges compute the monthly 
average and median realized per share fees and rebates, as detailed in 
Section II.E.2. These data will provide the Commission and the public 
with aggregated data on the actual per share levels of fees and rebates 
assessed in the prior month, which the Commission believes is critical 
for estimating the effects of fees and rebates on order routing 
decisions. The Commission believes that the costs

[[Page 5269]]

associated with computing these summary data on fees and rebates are 
likely to be larger than the costs associated with updating the 
Exchange Transaction Fee Summary, discussed in detail below, and would 
likely require new systems by the exchanges to track the average and 
median fees.
    The Commission estimates that each exchange would have a one-time 
cost of about $24,000, or approximately $311,000 in aggregate across 
the 13 U.S. equities exchanges, associated with the development and 
implementation of systems tracking realized monthly average and median 
share fees pursuant to the rule.\749\ The Commission further 
anticipates that it would cost an additional $12,000 annually, or 
$155,000, in aggregate, per year, to ensure that the system technology 
is up to date and remains in compliance with the rule.\750\
---------------------------------------------------------------------------

    \749\ This estimate is based on the following, which reflects 
the Commission's experience with and burden estimates for SRO 
systems changes: [(Attorney (20 hours) x $401) + (Compliance Manager 
(20 hours) x $298) + (Programmer Analyst (20 hours) x $232) + 
(Senior Business Analyst (20 hours) x $265] = 23,920 [ap] $24,000 
per exchange, or $23,920 x 13 exchanges = $310,960 [ap] 311,000 in 
aggregate. The burden hours are obtained from supra Section III. 
D.2.
    \750\ This estimate is based on the following, which reflects 
the Commission's experience with and burden estimates for SRO 
systems changes: [(Attorney (10 hours) x $401) + (Compliance Manager 
(10 hours) x $298) + (Programmer Analyst (10 hours) x $232) + 
(Senior Business Analyst (10 hours) x $265] = $11,960 [ap] $12,000 
per exchange, or $11,960 x 13 exchanges = $155,480 [ap] $155,000 in 
aggregate. The burden hours are obtained from supra Section III.D.2.
---------------------------------------------------------------------------

    Moreover, as discussed above, exchanges would be required to 
produce monthly updates to the Exchange Transaction Fee Summary to 
capture realized average and median per share fees as well as any 
revisions to fee schedules made by the exchanges, which would be 
reflected in changes to Base or Top-Tier fees and rebates, detailed in 
Section II.E.2. The Commission estimates that each month it would cost 
each exchange $530 to update the dataset of summary fees to reflect the 
updates to historical realized average and median per share fees and 
changes to the Base and Top-Tier fees. This would require each exchange 
to make a total of 36 updates to the Exchange Transaction Fee Summary 
from the pre-Pilot Period through the post-Pilot Period, if the 
Commission determined that the Pilot should continue for up to a second 
year and not automatically sunset at the end of the first year.\751\ 
Each exchange would have total costs of updates to the Exchange 
Transaction Fee Summary of approximately $19,000 per exchange, or 
$248,000 among the 13 exchanges over the pilot duration, including pre- 
and post-periods.\752\ If the Pilot were to automatically sunset at the 
end of the first year, without the Commission determining that an 
extension for up to an additional year was needed, this would decrease 
the total number of updates to the Exchange Transaction Fee Summary to 
24.\753\ Under an automatic sunset at the end of the first year, each 
exchange would have total costs of updates to the Exchange Transaction 
Fee Summary of approximately $12,700 per exchange, or $169,000 among 
the 13 exchanges over the pilot duration, including pre- and post-
periods.\754\ As detailed above, the Commission estimates that the 
costs associated with the monthly updates to the Exchange Transaction 
Fee Summary would be a small fraction of the costs associated with the 
initial allocation of fees required at the outset of the Pilot.
---------------------------------------------------------------------------

    \751\ This estimate of updates to the Exchange Transaction Fee 
Summary is the aggregation of updates from the pre-Pilot Period (6), 
the two-year pilot period if the Commission determines that an 
extension of up to an additional year was needed (24), and the post-
pilot period (6), for a total number of 36 updates.
    \752\ This estimate is based on the following: [(Compliance 
Manager (1 hours) x $298) + (Programmer Analyst (1 hours) x $232)] = 
$530 per exchange, or $530 x 36 fee changes per exchange = $19,080 
[ap] $19,000. The 36 fee changes for the exchange encompass six 
updates during the six-month pre-Pilot Period, 24 updates during the 
two-year Pilot Period, assuming that the Commission determines that 
the additional year is required, and six updates during the six-
month post-Pilot Period. In aggregate, updates to the Exchange 
Transaction Fee Summary are estimated to cost $19,080 x 13 U.S. 
equities exchanges = $248,040 [ap] $247,000. The burden hours are 
obtained from supra Section III. D.2.
    \753\ This estimate of updates to the Exchange Transaction Fee 
Summary is the aggregation of updates from the pre-Pilot Period (6), 
the one-year pilot period with an automatic sunset at the end of the 
first year (12), and the post-pilot period (6), for a total number 
of 24 updates.
    \754\ This estimate is based on the following: [(Compliance 
Manager (1 hours) x $298) + (Programmer Analyst (1 hours) x $232)] = 
$530 per exchange, or $530 x 24 fee changes per exchange = $12,720 
[ap] $12,700. The 24 fee changes for the exchange encompass six 
updates during the six-month pre-Pilot Period, 12 updates during the 
one-year Pilot Period, assuming that the Commission determines that 
the additional year is not required and the Pilot is automatically 
sunset at the end of the first year, and six updates during the six-
month post-Pilot Period. In aggregate, updates to the Exchange 
Transaction Fee Summary are estimated to cost $12,720 x 13 U.S. 
equities exchanges = $165,360 [ap] $165,000. The burden hours are 
obtained from supra Section III.D.2.
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    As discussed in Section II, the rule will require that the Exchange 
Transaction Fee Summary be published on the exchanges' websites using 
an XML schema to be published on the Commission's website. The 
Commission understands that there are varying costs associated with 
varying degrees of structuring. The Commission believes that most of 
the exchanges already have experience applying the XML format to market 
data. For example, the exchanges and market participants regularly use 
the FIX protocol \755\ and FpML \756\ to exchange information on highly 
structured financial instruments and related market data.\757\
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    \755\ The Financial Information eXchange (FIX) protocol is an 
electronic communications protocol that provides a non-proprietary, 
free and open XML standard for international real-time exchange of 
information related to the securities transactions and markets. See 
Fix Trading Community, available at https://www.fixtrading.org/.
    \756\ FpML (Financial products Markup Language) is an open 
source XML standard for electronic dealing and processing of OTC 
derivatives. It establishes the industry protocol for sharing 
information on, and dealing in, financial derivatives and structured 
products. See Financial products Markup Language [FpML], available 
at http://www.fpml.org/.
    \757\ Most of the exchanges have at least some portion of their 
data available through XML formats. For instance, the NYSE Group of 
exchanges provides daily closing prices, among other data, in XML, 
Excel, and pipe-delimited ASCII, while the Nasdaq exchanges (Nasdaq, 
BX, and PHLX) and Cboe exchanges (Cboe BZX, Cboe BYX, Cboe EDGA, and 
Cboe EDGX), provide daily share volume data, among other data, in 
XML. Information on the use of XML by exchanges is available for the 
NYSE, www.nyse.com, Nasdaq, www.nasdaqomx.com, and Cboe, 
www.cboe.com, exchange groups, respectively, and was obtained from a 
staff review of information on publicly available exchange websites. 
The Commission was unable to obtain information from CHX or IEX on 
their use of XML from information available on their publicly 
available websites.
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    The Commission anticipates that implementation of the Pilot's XML 
schema would draw upon exchange resources and experiences previously 
used to implement other supply chain information standards, like those 
discussed above, that were developed by industry consensus-based 
organizations. Costs generally associated with the implementation may 
include those for: Identifying the data required by the Pilot within 
the exchange source systems; mapping the relevant fields in the 
exchanges' data source systems to the Commission's XML schema; 
implementing, testing and executing the validation rules; and 
developing the website posting processes as required by the rule. The 
initial costs to exchanges of complying with the Commission's XML 
schema in order to publicly post the Exchange Transaction Fee Summary 
in this format would be $500 per exchange, or $6,500 in aggregate 
across the 13 exchanges.\758\ For all updates to

[[Page 5270]]

the Exchange Transaction Fee Summary, the Commission estimates that any 
burden associated with making those available using the XML schema is 
included in the costs of the updates discussed above.
---------------------------------------------------------------------------

    \758\ This estimate is based on the following, which reflects 
the Commission's experience with and burden estimates for systems 
changes to map to an XML schema: [(Programmer Analyst (1 hours) x 
$232) + (Senior Business Analyst (1 hours) x $265] = $497 [ap] $500 
per exchange, or $500 x 13 exchanges = $6,461 [ap] $6,500 in 
aggregate. See Securities Exchange Act Release No. 78309 (July 13, 
2016), 81 FR 49431, 49475 (July 27, 2016) (``Disclosure of Order 
Handling Information''). The estimate is lower than that for 
proposed Rule 606 disclosures because the costs for those 
disclosures encompassed many additional requirements beyond the 
mapping to an XML schema.
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    In sum, the Commission estimates the total cost of the pilot 
associated with producing the exchange transaction fee summary in XML 
format to be approximately $81,000 per exchange if the Pilot runs for 2 
years and $62,700 per exchange if the Pilot sunsets at the end of the 
first year. These costs comprise of approximately $26,100 in one time 
implementation costs and $55,000 in ongoing costs if the Pilot runs for 
two years, or $36,600 if the Pilot sunsets at the end of the first 
year. These costs aggregate to approximately $1,054,000 in total costs 
across all exchanges if the Pilot runs for the entire two years, and 
$815,000 if the Pilot sunsets at the conclusion of the first year.
iv. Producing the Order Routing Data
    The rule also will require as part of the Pilot that exchanges 
prepare, in pipe-delimited ASCII format, and transmit to the 
Commission, order routing data, updated monthly, containing aggregated 
broker-dealer order routing information. As discussed in Rule 610T(d) 
and in Section II.E.3, the datasets would contain separate order 
routing data for liquidity-providing and liquidity-taking orders 
aggregated by day, by security, by broker-dealer, and by exchange.
    The Commission believes that as long as the CAT Phase 1 data are 
available at the implementation of the Pilot, the exchanges would be 
able to use that data to construct the order routing data required by 
the rule. In particular, the CAT data will include records for every 
order received by an exchange that indicate the member routing the 
order to the exchange and details regarding the type of security. The 
CAT data will also include other information necessary to create the 
order routing data such as order type information, special handling 
instructions, and execution information. In the event that the CAT 
Phase 1 data were not available, the exchanges would have to use 
existing systems to collect the required order routing data. Regardless 
of which system exchanges use for the order routing data, the 
Commission anticipates they would incur costs in producing the 
downloadable files containing aggregated monthly order routing data to 
be transmitted to the Commission.
    The Commission estimates that each exchange would have a one-time 
cost of approximately $23,900, or approximately $311,000 in aggregate 
across the 13 exchanges, associated with the development and 
implementation of systems needed to aggregate the order routing 
information, as well as store the data, in the pipe-delimited ASCII 
format specified by the rule and as detailed in Rule 610T(d).\759\ The 
Commission anticipates that it will cost each exchange an additional 
$12,000 per year, or approximately $156,000 in aggregate per year, to 
ensure that the system and storage technology is up to date and remains 
in compliance with the rule.\760\
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    \759\ This estimate is based on the following, which reflects 
the Commission's experience with and burden estimates for SRO 
systems changes: [(Attorney (20 hours) x $401) + (Compliance Manager 
(20 hours) x $298) + (Programmer Analyst (20 hours) x $232) + 
(Senior Business Analyst (20 hours) x $265] = $23,920 [ap] $23,900 
per exchange, or $23,920 x 13 exchanges = $310,960 [ap] $311,000 in 
aggregate. The burden hours are obtained from supra Section III.D.3.
    \760\ This estimate is based on the following, which reflects 
the Commission's experience with and burden estimates for SRO 
systems changes: [(Attorney (10 hours) x $401) + (Compliance Manager 
(10 hours) x $298) + (Programmer Analyst (10 hours) x $232) + 
(Senior Business Analyst (10 hours) x $265] = $11,960 [ap] $12,000 
per exchange, or $11,960 x 13 exchanges = $155,480 [ap] $156,000 in 
aggregate. The burden hours are obtained from supra Section III.D.3.
---------------------------------------------------------------------------

    The rule will require that exchanges produce monthly updates of the 
order routing data, and transmit them to the Commission in pipe-
delimited ASCII format by the end of the month, as detailed in Section 
II.E.3 and Rule 610T(d). The Commission estimates that the transmittal 
and updates of the order routing datasets would cost $1,888 each month. 
This will require each exchange to make a total of 36 updates to the 
order routing data from the pre-Pilot Period through the post-Pilot 
Period (if the core Pilot lasts for a full two years). Each exchange 
would have recurring costs of updates to the order routing data of 
approximately $68,000 per exchange, or $884,000 among the 13 exchanges 
over the entire duration of the Pilot, and the pre-Pilot and post-Pilot 
periods.\761\ If the Commission were to allow the Pilot to 
automatically sunset at the end of the first year, this would decrease 
the total number of monthly updates to the order routing data by 12 to 
24.\762\ Under the automatic sunset, each exchange would have recurring 
costs of updates to the order routing data of approximately $45,300 per 
exchange, or $589,000 among the 13 exchanges over a one-year Pilot, and 
the pre-Pilot and post-Pilot periods.\763\
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    \761\ This estimate is based on the following: [(Compliance 
Manager (4 hours) x $298) + (Programmer Analyst (3 hours) x $232)] = 
$1,888 per exchange, or $1,888 x 36 fee changes per exchange = 
$67,968 [ap] $68,000. The burden hours are obtained from supra 
Section III.D.3. The 36 updates to the order routing data for each 
exchange encompass six updates during the six-month pre-Pilot 
Period, 24 updates during the two-year Pilot Period, assuming that 
the Commission determines at the end of the first year that it shall 
continue the proposed Pilot for up to an additional year, and six 
updates during the six-month post-pilot period. In aggregate, 
updates to the order routing data are estimated to cost $67,968 x 13 
U.S. equities exchanges = $883,584 [ap] $884,000.
    \762\ This estimate of updates to the order routing data is the 
aggregation of updates from the pre-Pilot Period (6), the one-year 
Pilot Period assuming that the Commission allows the Pilot to 
automatically sunset at the end of the first year (12), and the 
post-Pilot Period (6), for a total number of 24 updates.
    \763\ This estimate is based on the following: [(Compliance 
Manager (4 hours) x $298) + (Programmer Analyst (3 hours) x $232)] 
[ap] $1,888 per exchange, or $1,888 x 24 fee changes per exchange = 
$45,312 [ap] $45,300. The burden hours are obtained from supra 
Section III.D.3. The 24 updates to the order routing data for each 
exchange encompass six updates during the six-month pre-Pilot 
Period, 12 updates during the first year of the Pilot Period, 
assuming that the Commission determines at the end of the first year 
that it shall automatically sunset the proposed Pilot, and six 
updates during the six-month post-pilot period. In aggregate, 
updates to the order routing data are estimated to cost $45,312 x 13 
U.S. equities exchanges = $589,056 [ap] $589,000.
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    One commenter stated that the Commission underestimated the number 
of burden hours required to produce the order routing data required by 
the Pilot.\764\ This commenter indicated that the Commission allocated 
160 burden hours to compile and produce the order routing data, while 
the commenter estimates that it would take approximately 400 burden 
hours.\765\ Over the entire Pilot duration, including the six-month pre 
and post-Pilot periods, the Commission estimates that exchanges would 
have initial systems burden hours of 80 hours, an additional annual 
burden of 40 hours to update and maintain those systems, plus 84 burden 
hours per year to produce and publicly post order routing data 
monthly.\766\
---------------------------------------------------------------------------

    \764\ See NYSE Letter I, at 15.
    \765\ However, it is unclear exactly how the commenter 
aggregated the data in the Proposing Release to arrive at 160 hours 
because they did not provide details of their calculation.
    \766\ See Proposing Release, supra note 2, at 13061. Discussion 
of comments on these estimates is presented in Section III.D.3 
supra.
---------------------------------------------------------------------------

    In sum the Commission estimates the costs of producing the order 
routing data to include a one-time cost of approximately $23,900 per 
exchange to set up the data gathering process, $12,000 per year to 
maintain the data gathering systems, and $1,888 per

[[Page 5271]]

month to publish the data. Specifically, the Commission estimates 
initial one-time implementation costs of approximately $23,900 and 
ongoing costs of approximately $103,800 per exchange if the Pilot lasts 
two years or $69,200 if the Pilot lasts one year. These costs total 
approximately $127,800 per exchange if the Pilot lasts two years--or 
approximately $1,661,000 in aggregate. These costs decline to 
approximately $93,200 per exchange--or $1,211,000 in aggregate--if the 
Pilot sunsets after one year.
v. Fee-Related Costs to Exchanges
    When exchanges alter their fees they are required to submit a Form 
19b-4 filing with the Commission. Consequently, the Commission expects 
most exchanges to file two 19b-4 Forms that they would not have 
otherwise done. Additionally, the Commission expects that the pilot may 
increase the complexity of these filings. This section provides 
estimates for the costs associated with the submission of 19b-4 Forms 
by the exchanges during the Pilot.
    At the outset of the Pilot, each equities exchange if their fees do 
not at that time comply with the Pilot's pricing restrictions, would 
need to file with the Commission a comprehensive Form 19b-4 fee filing 
reflecting all of the applicable fees and rebates applicable to each of 
the Pilot Groups, as well as the Control Group--to reflect the 
temporary changes to transaction-based fees and rebates as a result of 
the Pilot. The Commission anticipates that exchanges will incur costs 
associated with and devote time to optimally assign fees and rebates 
across Test Groups, within the parameters allowed by the Pilot, 
including any incentives, tiers, caps, and discounts available. The 
Commission estimates that it would cost $48,400 per-exchange for the 
initial Form 19b-4 fee filing or $629,100 in aggregate.\767\ The 
Commission further anticipates that exchanges would bear similar costs 
upon the completion of the Pilot to prepare Form 19b-4 fee filings for 
filing with the Commission to reflect changes in fees at the conclusion 
of the Pilot, should they wish to change their fees or revert to their 
former pricing models after the Pilot concludes.
---------------------------------------------------------------------------

    \767\ The estimate is based on the following: [(Attorney (40 
hours) x $401) + (Compliance Attorney (40 hours) x $352) + 
(Assistant General Counsel (25 hours) x $449) + (Director of 
Compliance (15 hours) x $470)] = $48,395 [ap] $48,400, or $48,395 x 
13 equities exchanges = $629,135 [ap] $629,100 in aggregate. See OMB 
Control No. 3235-0045 (August 19, 2016), 81 FR 57946 (August 24, 
2016) (Request to OMB for Extension of Rule 19b-4 and Form 19b-4 
Filings).
---------------------------------------------------------------------------

    In addition to the initial production of the Form 19b-4 fee filing 
at the outset of the Pilot, exchanges may also choose to make periodic 
updates to their fee and rebate schedules, and file Form 19b-4 fee 
filings to effectuate those changes and thereby notify the Commission 
and the public of those updates. As noted in the baseline, the average 
exchange makes approximately seven changes to its fee schedules per 
year. While recognizing the possibility that as a result of the Pilot, 
exchanges may revise their fee schedules more or less often during the 
Pilot, the Commission has no basis to expect an increase in the number 
of Form 19b-4 fee filings other than at the beginning or end of the 
Pilot and has no basis to expect a decrease.
    The Commission also recognizes that as an outcome of the Pilot, the 
complexity of the Form 19b-4 fee filings could increase if exchanges 
seek to impose different fees within Test Groups 1, Test Group 2, and 
the Control Group, thereby increasing the overall costs for exchanges 
to revise their fee and rebate schedules.\768\ As discussed above, the 
Pilot may require exchanges to design new fee structures to comply with 
the Pilot's Test Groups, which would then translate into additional 
information in each Form 19b-4 fee filing submitted during the Pilot. 
These costs are likely to increase because the exchanges could take 
more time to design and describe fee structures in each filing than 
they do designing fee structures today. As discussed above in the 
baseline, the average fee schedules of exchanges are complex, with many 
different categories of fees or rebates assessed to NMS stocks. 
Assuming the frequency remains constant, then the Pilot could increase 
the incremental costs incurred by exchanges to file the expected Form 
19b-4 fee filings during the Pilot.\769\ The additional costs would 
only be relevant for Form 19b-4 fee filings that occur during the Pilot 
Period, and would not apply to Form 19b-4 fee filings in the pre-Pilot 
or post-Pilot Periods, as the Commission does not believe that there 
will be any incremental costs associated with increased complexity of 
these filings during these periods. The Commission estimates that each 
exchange would bear an incremental cost of $10,600 per Form 19b-4 fee 
filing to account for the increased complexity associated with the 
requirements of the Pilot, or approximately $1,929,000 for the 
anticipated 182 Form 19b-4 fee filings for fee and rebate revisions 
across the 13 U.S. equities exchanges during the two-year pilot 
duration.\770\ If the Pilot were to automatically sunset at the end of 
the first year, the Commission estimates that exchanges would bear 
costs of approximately $964,000 for the anticipated 91 Form 19b-4 
filings for fee and rebate revisions across the 13 U.S. equities 
exchanges during the first year of the Pilot duration.
---------------------------------------------------------------------------

    \768\ The Commission believes that the inclusion of Linked 
Pricing prohibitions for Test Group 2 should not increase the 
complexity of Form 19b-4 filings for exchanges because many 
exchanges already report non-cash incentives, such as tiered pricing 
or volume discounts, as part of their standard filings. Further, the 
Commission does not believe that many exchanges currently use Linked 
Pricing mechanisms and instead most rely on rebates.
    \769\ Maintaining the current average frequency of 7 19b-4 
filings per year would mean that the average exchange would file a 
total of 14 19b-4 filings during the two-year pilot (7 filings x 2 
year duration). If the Commission were to allow the Pilot to 
automatically sunset at the end of the first year, then the total 
number of 19b-4 filings could decrease by 7 filings. Annually, 
across all 13 exchanges, the Commission estimates that there will be 
91 19b-4 filings (7 filings x 13 exchanges). If the Commission 
determines that the Pilot shall continue for a second year, in 
aggregate, the 13 exchanges could file a total of 182 19b-4 filings 
(91 x two-year Pilot duration).
    \770\ The estimate is based on the following: [(Attorney (8 
hours) x $401) + (Compliance Attorney (8 hours) x $352) + (Assistant 
General Counsel (6 hours) x $449) + (Director of Compliance (4 
hours) x $470)] =$10,598 [ap] $10,600, or $10,598 x 182 fee changes 
in aggregate across 13 exchanges over the two-year pilot duration = 
$1,928,836 [ap] $1,929,000 in aggregate, assuming that the 
Commission determines that the Pilot shall continue for up to an 
additional year. If the Pilot were to automatically sunset after the 
first year, the Commission believes that the costs associated with 
91 19b-4 filings (13 exchanges x 7 filings) would be approximately 
$964,000 ( ~$10,598 x 91 filings). See Request to OMB for Extension 
of Rule 19b-4 and Form 19b-4 Filings, supra note 767.
---------------------------------------------------------------------------

    In sum, the Commission expects the pilot to impose on each exchange 
a one-time cost of $48,400 at the beginning and end of the pilot for 
the additional 19b-4 filings required by the pilot, as well as an 
ongoing cost of approximately $10,600 per additional 19b-4 filing to 
account for increased complexity in 19b-4 filings caused by the Pilot. 
If we assume that exchanges continue to file 19b-4 filings at an 
average rate of 7 per year and if the pilot lasts for 2 years, these 
incremental costs sum to approximately $148,400 per exchange--which 
declines to $74,200 if the pilot ends after the first year. Combining 
the cost of the two additional 19b-4 filings with the cost of potential 
increased complexity provides an estimated cost of the pilot associated 
with 19b-4 filings of approximately $245,200 per exchange--or 
$3,187,000 in aggregate--if the pilot lasts two years, or $171,000 per 
exchange--or $2,223,000 in aggregate--if the pilot expires after the 
first year.

[[Page 5272]]

vi. Other Costs to Exchanges
    The Pilot may result in more complicated fee structures that could 
also increase an exchange's processing costs of tracking and 
calculating monthly invoices for its members during the Pilot; however, 
the Commission does not have any information on the costs to exchanges 
for tracking and calculating monthly member invoices and therefore 
cannot provide estimates of quantified costs and no commenters provided 
such information.
b. Other Costs Associated With the Pilot
    This section considers additional costs that may occur as a result 
of the Pilot. Specifically, this section discusses how the Pilot may 
impact exchanges' fee revenue, broker-dealer compliance costs, 
brokerage commissions, liquidity, and issuers.
i. Loss of Exchanges' Fee Revenue
    The Commission analyzed whether exchanges could experience a change 
to their fee revenues associated with transaction-based fees and 
rebates for either of two reasons: A decline in the margin between fees 
and rebates,\771\ or a decline in overall trading volume on an exchange 
as a result of the Pilot.\772\ In the Proposing Release the Commission 
stated its belief that only stocks in the test group with a cap of 
$0.0005 (former Test Group 2) would experience narrower margins and 
estimated that these narrower margins could result in exchanges 
incurring revenue losses of up to $7,650,000 per month.\773\ With the 
removal of the former Test Group 2 the Commission now believes that the 
Pilot may not have a significant effect on Exchange revenue, at least 
not because of narrower margins between fees and rebates.
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    \771\ On a given trade, an exchange earns the margin between 
fees and rebates. For example, if an exchange charges a take fee of 
$.0030 per share and offers a make rebate of $.0025 per share then 
the margin captured by the exchange is $.0005 per share traded.
    \772\ A number of commenters expressed concern that the Pilot 
would lead to decreased exchange revenue largely through decreased 
trading volume. See, e.g., Cboe Letter I, at 7; NYSE Letter I, at 3 
and 15-16.
    \773\ See Proposing Release, supra note 2, at 13063.
---------------------------------------------------------------------------

    For stocks in Test Group 1 (the Test Group with a fee cap of 
$0.0010) the Commission does not believe that the Pilot will result in 
narrower margins earned by the exchanges because the fee cap in this 
group is double the current typical average net capture (i.e., margin) 
that exchanges earn which is approximately $0.0005.\774\ Consequently, 
the exchanges can maintain current margins by reducing the rebate 
offered at the same level as fees charged are reduced.\775\ For stocks 
in Test Group 2, the Commission also does not believe that the Pilot is 
likely to shrink margins. For these stocks the fee cap remains at 
$0.0030, while exchanges are prohibited from paying rebates and 
offering Linked Pricing. Consequently, the prohibition of rebates for 
securities in this Test Group would conceivably allow the exchanges to 
reduce fees to as low as $0.00025--if charged to both parties in a 
transaction--without reducing the exchange's average net capture per 
trade. While less likely given competitive dynamics, if the exchanges 
wanted to increase their net capture, it is possible under the pilot 
terms for total net capture in group one to be as high as $0.002 (if 
both side were charged the maximum of $0.001), and in group two to be 
$0.003, both of which are far in excess of the average net capture that 
exchanges receive today. For these reasons, the Commission now expects 
the effects of the Pilot on exchange revenue through impacting per-
trade margins to be minimal.
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    \774\ See Proposing Release supra 1 at 13067.
    \775\ This was the case in Canada when in January 2017 the 
Canadian Securities Administrators (CSA) approved the lowering of 
the fee cap for non-interlisted Canadian stocks from $0.0030 to 
$0.0017. In response to this regulation, the Toronto Stock Exchange 
retained its $0.0004 margin per trade for continuous trading--high 
priced securities ($1.00 and over) by lowering both fees and rebates 
by $0.0008. Fees for taking liquidity on non-interlisted securities 
reduced from $0.0023 to $0.0015 whereas rebates provided to 
liquidity providers declined from $0.0019 to $0.0011. Fees and 
rebates for inter-listed securities remained unchanged. See https://www.tsx.com/resource/en/1501.
---------------------------------------------------------------------------

    In addition, the Commission believes that the impact of the Pilot 
on exchange revenues through changes in trading volume are difficult to 
determine in advance, but recognizes that the magnitude of such changes 
could be significant and some potential lost revenue could be in a 
transfer to investors or among exchanges. The Commission considered 
whether individual exchanges could experience a decline in trading 
volume for four reasons, as multiple commenters suggested: If exchanges 
lose volume to off-exchange venues, if volume declines because of 
increased transaction costs, if the Pilot reduces excessive 
intermediation, or if volume shifts among exchanges. The Commission 
recognizes that the Pilot presents a risk that the Pilot could result 
in less fee revenue for exchanges due to lower trading volumes. 
However, the Commission believes that decreased trading volume, while 
one possible outcome of the Pilot, is not the only reasonable outcome, 
and that the ex ante effect of the Pilot on trading volume is difficult 
to determine.
    First, several commenters stated that reducing or eliminating the 
ability for exchanges to pay rebates may cause exchanges to become less 
competitive relative to off-exchange venues like ATSs, which would not 
be so constrained. The analysis in Section IV.D.2.a identifies 
significant uncertainty in the potential for exchanges to be less 
competitive relative to off-exchange venues such as ATSs, and 
identifies conditions in which they could actually be more 
competitive.\776\ Consequently, the Commission cannot determine in 
advance of the Pilot whether exchanges will lose volume to off-exchange 
venues.
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    \776\ See Section IV.D.2.a. See also Section IV.C.2.b.iv
---------------------------------------------------------------------------

    Second, total trading volume, and consequently exchange revenue, 
could decline if the Pilot increases transaction costs. A number of 
issuers expressed the concern via comment letters that the Pilot would 
lead to lower levels of trading volume because of their experience with 
the Tick Size Pilot.\777\ However, not all issuers felt that the Pilot 
would result in lower trading volumes. One issuer ``welcome[d] the 
opportunity for [its] stock to be included in the Pilot'' and did not 
``expect that a reduction or outright removal of rebates will have any 
significant or harmful effects on . . . [its] stock's trading volume.'' 
\778\ On the other hand, if the Pilot decreases the cost of trading on 
the exchanges, then the Pilot could increase trading volumes on the 
exchanges. This view was expressed by one commenter who stated their 
belief ``the Pilot will reduce the costs of trading on exchanges, which 
may increase trading volumes on the exchanges.'' \779\ Lower costs of 
trading, caused by the reduction in fees, might increase trading volume 
on exchanges for at least two reasons. First, lower trading costs may 
induce trades that would otherwise not have occurred by allowing 
investors the ability to trade on smaller increments of information. 
Lower trading costs may also induce the participation of new traders, 
such as short-term traders for whom transaction costs are of greatest 
concern, to transact in a given stock

[[Page 5273]]

who would not otherwise participate. Consequently, if the Pilot leads 
to decreased trading costs, then trading volumes in those stocks may 
increase--increasing exchange revenue. In Section IV.C.2.b.iv below, 
the Commission discusses its belief that the effect of the Pilot on 
liquidity and transaction costs is not clear and could either increase 
or decrease. Given this uncertainty in the impact on liquidity, the 
Commission cannot determine in advance whether the Pilot will result in 
a reduction in liquidity that would reduce trading volume.
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    \777\ See, e.g., Leaf Letter, at 1-2; Ennis Letter, at 2.
    \778\ T. Rowe Price Letter, at 4-5.
    \779\ See, e.g., TD Ameritrade Letter, at 7. Other commenters 
also either expressed their belief that the Pilot would not reduce 
trading volumes (see, e.g., IEX Letter II, at 8; T. Rowe Price 
Letter, at 5) or expressed uncertainty about the outcome of the 
Pilot on trading volume (see, e.g. Credit Suisse Commentary, at 5).
---------------------------------------------------------------------------

    Third, the Pilot may decrease trading volume, and thus exchange 
revenues, if it results in a reduction in intermediation by market 
makers for two reasons, but this would be a transfer to investors. The 
first reason is that market makers from time to time will use 
marketable orders to balance inventory. If these market makers decline 
to participate due to reduced rebate incentives, then their marketable 
orders will not arrive--diminishing trading volume. The second reason 
decreased intermediation may lead to lower volumes is that non-market 
makers might begin to execute their trades via non-marketable orders. 
Non-market makers may submit marketable orders because of an inability 
to achieve high fill rates with non-marketable limit orders due to 
significant competition from market makers. The reduction in 
intermediation may result in situations where two traders with 
offsetting trades, who would have generated two separate trades with 
market makers as the counterparty instead execute their trade with each 
other resulting in one trade. This could occur, for example, if the 
Pilot reduces queue lengths for investors as discussed in Section 
IV.C.2.b.iv.(2) below. While this effect would result in a loss in 
revenue to exchanges that would collect margin on a smaller number of 
trades, it would be a net gain for investors because executions on a 
smaller proportion of marketable orders would mean that the investors 
pay less in transaction fees and would more often capture, or earn, the 
spread where previously they would have paid the spread to transact.
    Fourth, even if overall trading volume does not decline or shift to 
off-exchange venues during the Pilot, individual exchanges may 
experience a decline in trading volume if the Pilot leads to a change 
in market share among the lit exchanges. This mechanism is discussed in 
Section IV.D.2.a. This section also highlights the difficulties in 
determining the expected redistribution of market share among the 
existing exchanges due to potentially countervailing economic effects. 
To this point, one commenter noted that the loss in revenue estimated 
above relied on ``exchanges' existing market share percentages'' which 
``assumes that exchanges would remain equally competitive for order 
flow.'' \780\ The Commission agrees that the Pilot may impact the level 
and distribution of trading volume on lit exchanges but notes that such 
a redistribution would be a transfer among exchanges rather than an 
economic cost.
---------------------------------------------------------------------------

    \780\ NYSE Letter I, at 17.
---------------------------------------------------------------------------

    The Commission acknowledges that the reduction or elimination of 
rebates may particularly affect smaller exchanges due to the liquidity 
externality, especially if their primary competitive differentiation is 
based upon a modified fee model. As discussed in the Proposing Release 
liquidity tends to consolidate.\781\ Thus, the restrictions on rebates 
resulting from the Pilot could harm smaller exchanges that may be 
competing by paying large rebates rather than by producing better 
prices or execution quality. In the short run, this could lead to lost 
revenue for these exchanges. It could also have longer-term effects if 
smaller exchanges consolidate or exit as a result of the Pilot. 
However, the Commission does not believe that consolidation or exit is 
likely during the pilot because only about a quarter of NMS stocks will 
be included in test groups.
---------------------------------------------------------------------------

    \781\ See Proposing Release, supra note 2, at 13042.
---------------------------------------------------------------------------

    The Pilot could also impact exchanges' fee revenue after the 
conclusion of the Pilot if as a result of the Pilot broker-dealers 
permanently alter their order routing decisions after the Pilot is 
completed. One commenter argued that this may be the case and suggested 
that the Commission's claim that the Pilot's effect on broker-dealers' 
routing decisions would be temporary ``[was] contradicted by the 
Commission's own finding that broker-dealers would not change their 
behavior unless the Transaction Fee Pilot lasts for at least one 
year.'' \782\ To this point, given the competitive nature of financial 
markets, the Commission does not expect that it would take most broker-
dealers up to one year to alter their behavior. Indeed, this commenter 
supports this belief by stating that exchange and non-exchange trading 
centers vigorously compete for trading volume, and that market 
participants are sensitive to revisions in transaction-based pricing 
models.\783\ Given this competition, the Commission believes market 
participants will likely adjust their behavior quickly both upon the 
implementation and conclusion of the Pilot, and that the Pilot duration 
will incentivize broker-dealers not to ``wait out'' the Pilot who could 
be otherwise inclined to do so if the duration were not sufficiently 
long.\784\
---------------------------------------------------------------------------

    \782\ See NYSE Letter I, at 15-16.
    \783\ See State Street Letter, at 2.
    \784\ See Section IV.C.1.a.iii, supra.
---------------------------------------------------------------------------

    If the Pilot results in a decline in fee revenue for exchanges, 
then this could lead to other costs borne by investors as a result. 
Exchanges could promote additional order types and may even initiate 
new types of markets as a result of the Pilot, which would only serve 
to further fragment markets and add to their complexity, the costs of 
which could be borne by investors.\785\ In particular, the Commission 
recognizes the remote possibility that an exchange holding company 
could attempt to optimize its overall performance during the Pilot by 
further diversifying with other exchange models. The Commission 
believes, however, that a new equity exchange registered in direct 
response to the Pilot would be unlikely to become operational before 
the conclusion of the Pilot. In addition, the Commission believes that 
it is unlikely that exchanges will promote additional order types as a 
result of the Pilot.
---------------------------------------------------------------------------

    \785\ See Section III.A. See also, e.g., Fidelity Letter, at 8.
---------------------------------------------------------------------------

    In sum, the Commission believes that the costs to the exchanges due 
to narrower margins earned per trade are likely to be minimal--if any--
due to the removal of the proposed Test Group with the fee cap of 
$0.0005. However, the Commission does expect that there could be a 
change in trading volume or a redistribution of market share among 
exchanges as market participants re-optimize their order routing 
systems as a result of the Pilot. However, due to the reasons discussed 
in this section, the Commission cannot determine in advance of the 
Pilot whether these market share/trading volume changes will increase 
or decrease exchange revenue. Consequently, the Commission acknowledges 
that the Pilot may lead to lower trading volume/market share for 
exchanges, which would impose a cost in terms of lost transaction fee 
revenue, but is unable to quantify the expected magnitude of this 
potential cost and no commenter provided an estimate of the amount of 
the lost transaction fee revenue.
    While the Commission cannot determine in advance of the Pilot its 
impact both in terms of direction and magnitude, the Commission has 
attempted to estimate the costs should volume decline. Using data from 
Table 3 in section IV.B.2.e the Commission

[[Page 5274]]

estimates an annualized upper bound on the profit earned from 
transaction fees for each exchange. Aggregated across all exchanges 
this number equals approximately $3 billion per year. However, only 
about 1/4th of NMS securities will be in a test group subject to the 
Pilot, so the Commission estimates the Pilot could affect the 
approximately $750 million per year across all exchanges, depending on 
how much volume changes. Consequently, if the Pilot were to cause a 10% 
reduction in trading volume on exchanges then this change could reduce 
fee revenue on the exchanges by approximately $150 million over two 
years or $75 million if the Commission were to allow the Pilot to 
automatically sunset at the end of the first year. However, the 
Commission does not believe that the 10% reduction in trading volume is 
a reasonable assumption. While the Swan Study shows that Nasdaq lost 
10% of its volume using one volume measure, it lost only 200,000 shares 
in another. In addition, the Swan Study finds no change in overall 
volume or in off-exchange volume, just a migration from Nasdaq to other 
exchanges. Therefore, the Commission does not believe that either the 
10% volume reduction or, consequently, the estimate of $150 million 
revenue reduction is reasonable.
ii. Broker-Dealer Systems Costs
    Although the costs of compliance with the Pilot will primarily 
affect the exchanges, broker-dealers and other market participants are 
also likely to incur costs as a result of the Pilot. Commenters 
provided mixed information on the magnitude of these costs. While some 
commenters stated that the costs to broker-dealers of the Pilot would 
be substantial,\786\ other commenters stated that the costs for broker-
dealers associated with the Pilot would not be significant or expensive 
because exchange fee schedules change regularly and broker-dealers are 
used to adapting their order routing algorithms to new and changed fee 
schedules.\787\ This section provides the Commission's estimates for 
broker-dealer compliance costs associated with the Pilot.\788\
---------------------------------------------------------------------------

    \786\ See, e.g., Larry Harris Letter, at 10-11; STANY Letter, at 
2; FIA Letter, at 3; Nasdaq Letter I, at 10; Nasdaq Letter III, at 
9.
    \787\ See, e.g., Vanguard Letter, at 3; Healthy Markets Letter 
I, at 34.
    \788\ One commenter stated that the Commission did not consider 
implementation and coding costs. See STANY Letter at 2. However, the 
commenter does not elaborate on why the Proposing Release estimates 
of $3,741,000 implementation costs for broker-dealers to adjust 
their order routing systems at the beginning and end of the Pilot 
and the $20,726,000 costs for broker-dealers to update their order 
routing systems for fee changes during the Pilot failed to consider 
implementation and coding. See Proposing Release, supra note 2, at 
13063-13064.
---------------------------------------------------------------------------

    In response to the Pilot, market participants might have a one-time 
cost at the onset and the conclusion of the Pilot to adjust their 
systems to reflect the shocks and potential additional complexity of 
transaction-based fees. In addition, there may be additional 
modifications to routing strategies that are made in subsequent months 
to adjust to changing liquidity dynamics as behavior changes associated 
with the pilot settle in. Many broker-dealers have smart-order routing 
systems that use algorithms to route orders based on certain criteria, 
such as fill rates, time to execution, lowest fees, or highest 
rebates.\789\ One commenter agreed, stating that such systems changes 
``should primarily consist of modifications to the routing tables and 
other associated operational activities.'' \790\ The Commission 
understands that some of the associated changes and modifications may 
already be coded into the smart order router (SOR) algorithms such that 
changes to associated liquidity shifts may be dynamic and automated, 
i.e., in need of little additional modification.
---------------------------------------------------------------------------

    \789\ See Bacidore, Jeff, Hernan Otero, and Alak Vasa, 2011, 
Does smart routing matter ?, Journal of Trading 6, 32- 37. 
(available at http://jot.iijournals.com/content/6/1/32), which found 
that smart-order routers designed to maximize rebates delivered 
worse execution quality to their clients.
    \790\ See FIF Letter at 8. See also FIA Letter at 3; Nasdaq 
Letter I at 10.
---------------------------------------------------------------------------

    To estimate these costs, the Commission assumes (1) that all 
broker-dealer members of exchanges will adjust their systems for the 
pilot and (2) that all broker-dealer members of exchanges have 
automated order routing systems.\791\ While the Pilot does not directly 
require broker-dealers to adjust their systems, the Commission expects 
broker-dealers who do not update their systems may incur significant 
costs relative to those who do in terms of potential impacts on 
execution quality and in their ability to manage fees and rebates. 
Broker-dealers might choose to adjust their systems for the Pilot for 
many reasons, including to recognize that the Pilot could affect 
execution quality for investors and/or to better manage fees and 
rebates.\792\ Therefore, the cost estimates assume that broker-dealers 
will adjust to their existing systems to capture changes in fees and 
rebates associated with each Test Group of securities, rather than 
bearing start-up costs associated with implementing new order routing 
systems.
---------------------------------------------------------------------------

    \791\ Even in the absence of smart-order routers, broker-dealers 
could still adjust their execution determinations to take advantage 
of the changes implemented during the Pilot and these adjustments 
would incur costs. While the Commission does not estimate these 
particular costs, the assumption that all broker-dealers have 
automated order routing systems is reasonable and is necessary to 
enable the estimation of cost estimates. The Commission believes, 
however, that the costs to adjusting manual systems could be lower 
than the costs to adjust automated routing systems. If any broker-
dealers still route orders manually, they likely do so because 
setting up and maintaining manual systems is not economical for 
them. It is likely that such firms utilize exchange routing 
services.
    \792\ See sections IV.C.1.a.iii and IV.E.5.a for additional 
discussion.
---------------------------------------------------------------------------

    In its estimates, the Commission recognizes that the costs 
associated with adjusting the execution algorithms by broker-dealers 
for the Pilot are likely to be more costly than the periodic updates 
that broker-dealers may make to incorporate changes to fee schedules 
implemented by exchanges or to fine tune their strategies. The 
additional expected costs may occur because changes for the Pilot are 
likely to require more complex programming that segments stocks into 
different fee regimes (assuming exchanges implement fees customized to 
each Test Group), rather than just altering codes or inputs. As of July 
2017, exchanges have 18 fee categories and 21 rebate categories, on 
average.\793\ If exchanges maintain the same level of complexity in 
their fee schedules during the Pilot, up to a two-fold increase in the 
number of fee and rebate categories could occur, which would increase 
complexity for broker-dealers who incorporate fees into their order 
routing decisions.\794\ Additionally, the Commission agrees with the 
commenter who stated that, to the extent that broker-dealers' order 
routing algorithms are programmed to the exchange, and not the 
individual security, the Pilot will increase complexity by requiring an 
adjustment to this methodology.\795\ The Commission estimates that the 
costs to broker-dealers that are members of exchanges to make the 
initial adjustment to their order routing systems at the outset of the 
Pilot would be approximately $9,000 per broker-dealer, or $3,573,000 in 
aggregate across the 397 broker-dealers that are currently members of 
equities exchanges.\796\ The

[[Page 5275]]

Commission further estimates that broker-dealers would bear a similar 
cost to adjust their order routing systems at the conclusion of the 
Pilot.
---------------------------------------------------------------------------

    \793\ See Table 2 in Section IV.B.2.f supra.
    \794\ In addition, the Commission recognizes the potential costs 
to exchanges of this complexity above in Section IV.C.2.a.
    \795\ See Larry Harris Letter, at 10-11.
    \796\ This estimate is based on the following, which reflects 
the Commission's experiences with and burden estimates for broker-
dealer systems changes: [(Attorney (5 hours) x $401) + (Compliance 
Manager (10 hours) x $298) + (Programmer Analyst (10 hours) x $232) 
+ (Senior Business Analyst (5 hours) x $265)] [ap] $9,000 per 
broker-dealer that is a member of at least one exchange. As of 
December 31, 2016, 397 unique broker-dealers were members of 
exchanges (Form X-17a-5). The aggregate costs of updating order 
routing systems to reflect the Transaction Fee Pilot requirements 
would cost $9,000 x 397 [ap] $3,573,000. Note that smaller broker 
dealers will often use the smart order router of larger broker 
dealers or those offered by exchanges, and will therefore benefit 
indirectly from the work done by the providers of their smart order 
routing services.
---------------------------------------------------------------------------

    Additionally, the Commission expects that broker-dealers would 
update their order routing systems with changes to fees or rebates 
submitted by exchanges through Form 19b-4 fee filings to the Commission 
during the Pilot. As discussed in the baseline, exchanges, on average, 
make changes to fees or rebates approximately seven times per year; 
therefore, broker-dealers are likely to have experience in updating the 
order routing systems to reflect these routine changes to fees and 
rebates.\797\ As in the estimates of the costs of the initial and final 
adjustments, broker-dealers are likely to face higher costs per update 
as a result of the Pilot because of the added complexity of having to 
update multiple modules within their order routing systems. The 
Commission's estimates of these updates assume that exchanges update 
their fees schedules as often during the pilot as at present. 
Therefore, the costs to broker-dealers associated with the Pilot are 
the additional costs associated with the complexity of the updates and 
not the total cost of the updates.\798\ In other words, broker-dealers 
would have updated their systems (or routing tables) anyway in the 
absence of the Pilot to reflect the same number of exchange fee and 
rebate changes. The Commission estimates described below reflect the 
additional cost of the Pilot (``additional costs''), which is how much 
more an update might cost during the Pilot compared to a scenario 
without the Pilot.
---------------------------------------------------------------------------

    \797\ Several commenters made similar statements. See, e.g., 
Vanguard Letter, at 3; Healthy Markets Letter I, at 34.
    \798\ The Commission cannot estimate and commenters provided no 
insight into the degree to which the number of fee and rebate 
revisions by exchanges will increase or decrease during the Pilot.
---------------------------------------------------------------------------

    The Commission believes that the per-update additional costs 
associated with these changes are likely to be a small fraction of the 
costs associated with the initial costs of adjusting the routing 
systems to reflect the required fee and rebate revisions at the outset 
of the Pilot. The Commission estimates that the additional costs to 
broker-dealers that are members of exchanges to make periodic 
adjustments to their order routing systems to reflect changes in fees 
and rebates would be $265 per adjustment, or approximately $105,000 in 
aggregate across the 397 broker-dealers that are members of U.S. 
equities exchanges.\799\ As shown above, the Commission expects that 
exchanges, if submitting changes to fees and rebates at the same rate 
as they have in the last five years, would submit 182 total revisions 
to fees and rebates over the two-year pilot duration. Therefore, the 
aggregate costs of updating order routing systems would be $48,000 per 
broker-dealer, or $19,056,000 in total across all broker-dealers.\800\ 
If the Pilot were to automatically sunset at the end of the first year, 
the aggregate costs of updating order routing systems would be $24,000 
per broker-dealer, or $9,528,000 in total across all broker-dealers.
---------------------------------------------------------------------------

    \799\ This estimate is based on the following, which reflects 
the Commission's experiences with and burden estimates for broker-
dealer systems changes: [(Compliance Manager (0.5 hours) x $298) + 
(Programmer Analyst (0.5 hours) x $232)] = $265 per broker-dealer 
that is a member of at least one exchange. The aggregate costs 
updating order routing systems to reflect the periodic fee and 
rebate revisions would cost $265 x 397 [ap] $105,000.
    \800\ If 182 total fee and rebate changes were to occur over the 
duration of the Pilot (13 equities exchanges x 7 revisions per year 
x 2 years = 182), each broker-dealer would bear costs of updating 
its order routing systems of $265 x 182 [ap] $48,000, or $19,056,000 
($48,000 x 397) in aggregate across all broker-dealers over the 
first year of the Pilot. The Commission estimates that costs would 
be $9,528,000 ($265 x 13 exchanges x 7 updates x 397 broker-dealers) 
if the Commission determined that Pilot automatically sunset at the 
end of the first year.
---------------------------------------------------------------------------

    In sum the Commission believes that the all in costs to broker-
dealers of updating their order routing systems as a result of the 
Pilot will average approximately $66,000 per broker-dealer to update 
their systems over the entire Pilot Period. If the Pilot automatically 
sunsets at the end of the first year, the costs associated with these 
updates will be approximately $42,000 per broker-dealer.\801\ The 
Commission notes that these estimates may be overstated. Not all 
broker-dealers are members of all exchanges, which would reduce the 
total number of changes to the order-routing systems that they would 
implement. Additionally, the exchanges could resort to more simplified 
fee schedules relative to the current baseline, which would reduce 
broker-dealers' costs of updating their systems for the Pilot.
---------------------------------------------------------------------------

    \801\ These costs reflect the estimated cost of $9,000 at the 
outset of the Pilot to update the order routing system to reflect 
the changes to the fee structure for securities in the test groups, 
$48,000 to reflect the incremental costs of the estimated 182 
revisions to fee schedules during the Pilot ($265 per revisions x 7 
revisions per year x 2 years x 13 exchanges), and $9,000 at the 
conclusion of the Pilot to unwind changes to the order routing 
systems, for a total of $66,000 per broker-dealer. If the Pilot were 
to automatically sunset at the end of one year, then these costs 
would be approximately $42,000 ($265 x 7 revisions x 13 
exchanges+2*$9,000) per broker-dealer.
---------------------------------------------------------------------------

iii. Temporary Increase in Brokerage Commissions
    Beyond the implementation and compliance costs for exchanges and 
broker-dealers associated with the Pilot, the changes to the exchange 
transaction-based fee and rebate structure could lead to temporary 
increases in brokerage commissions charged to their customers. Several 
studies show, and several commenters concurred, that brokerage 
commissions today are at historically low levels.\802\ Brokerage 
clients may have a preference for low commissions with services 
provided by broker-dealers, and in turn, may allow broker-dealers to 
capture rebates (and bear the costs of access fees), either through 
explicit contracts or implicit agreements.\803\ As a result, the Pilot 
could lead to higher overall commissions as rebates obtained by broker-
dealers fall,\804\ thereby temporarily reducing the overall welfare of 
retail brokerage clients as a result of increased commissions.\805\
---------------------------------------------------------------------------

    \802\ See, e.g., Angel, Harris, & Spatt, supra note 530.
    \803\ See Regulation NMS Subcommittee Recommendation for an 
Access Fee Pilot (June 10, 2016), available at https://www.sec.gov/spotlight/emsac/emsac-regulation-nms-recommendation61016.pdf (``June 
Recommendation''). See also Shawn O'Donoghue, 2015, ``The Effect of 
Maker-Taker Fees on Investor Order Choice and Execution Quality in 
U.S. Stock Markets'', Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2607302.
    \804\ Several commenters made similar statements. See, e.g., 
NYSE Letter I, at 13; ASA Letter, at 2.
    \805\ The Commission acknowledges differing effects on brokerage 
commissions could occur as a result of the Pilot depending on 
whether the client is a retail customer versus an institutional 
customer. For instance, some brokerage accounts charge per-
transaction commissions to retail clients. Institutional 
commissions, on the other hand, are highly negotiated and may be 
based on something other than a per trade or per share basis, such 
as a flat fee for use of a broker's order routing algorithm; 
however, data on the structure or magnitude of institutional 
commissions is not publicly available.
---------------------------------------------------------------------------

    For instance, the elimination of rebates and Linked Pricing in Test 
Group 2 could result in a transfer from broker-dealers to exchanges. 
Assuming, as discussed above, the margin between fees and rebates is 
approximately $0.0002 per share,\806\ with transaction fees of $0.0030 
per share and rebates of $0.0028 per share, Test Group 2 could result 
in a transfer of $0.0028 from broker-dealers to the exchanges with

[[Page 5276]]

respect to their passively posted non-marketable orders, particularly 
because exchanges would be prohibited from offering Linked Pricing 
mechanisms that could act as substitutes for cash rebates.\807\ The 
estimates of the potential increased revenue to exchanges are as 
follows.
---------------------------------------------------------------------------

    \806\ There are approximately 8,000 NMS securities and just 
under 800 will be included in Test Group 2.
    \807\ Although the Commission believes that competition among 
exchanges would drive transaction fees down for Test Group 2 as a 
result of the elimination of rebates, exchanges could charge 
transaction fees as high as the current cap of $0.0030.
---------------------------------------------------------------------------

    Assuming that the share volume in Test Group 2 would be 
approximately 12.5% of the total share volume across all 
securities,\808\ using data from Table 2 in the baseline, Test Group 2 
would have share volume of approximately 11.5 billion each month.\809\ 
If the margin between fee revenue and rebate cost is $0.0002, as 
discussed above, then under the assumption that exchanges reduce fees 
to $0.0002 in Test Group 2, the Commission anticipates no change in 
revenue for exchanges, and no transfer from broker-dealers. If, 
instead, exchanges charged the maximum fees of $0.0030 while they are 
prohibited from paying rebates or Linked Pricing in Test Group 2, the 
Commission estimates a monthly aggregate increase in revenues across 
all exchanges of $32,200,000.\810\ If the volume on each exchange does 
not change, then the estimated annual average increase in revenues 
across all exchanges would be $386.4 million [$32,200,000 x 12 = 
$386.4M]. This transfer of rebates from the broker-dealers to exchanges 
could potentially increase exchange revenue by approximately 
64.1%.\811\ Moreover, these costs could likely fall to investors in the 
form of higher commissions or fees charged to cover the decrease in 
broker-dealer revenue due to losses in rebates for securities in Test 
Group 2.\812\
---------------------------------------------------------------------------

    \808\ As designed, the Pilot would allocate an equal number of 
securities to the two test groups and the control group (e.g., the 
test groups combined would have approximately 25% of the NMS 
securities and the control group would have 75%). Each test group 
will have one-half of the combined test group allocation, thereby, 
in total leaving each test group with 12.5% of NMS securities 
included in the pilot. Assuming that the allocation of share volume 
would be similar due to the stratification of the sample discussed 
above, each test group would have approximately 12.5% of total share 
volume each month.
    \809\ Table 2 in the baseline shows aggregate exchange share 
volume for July 2017 was 91.7 billion shares, of which 12.5% would 
be 11.5 billion shares. Further, the Commission estimates that these 
volume figures would be similar across all months, assuming no 
seasonality in share volume.
    \810\ If Test Group 2 has monthly share volume of 11.5 billion 
shares, and the margin would increase by $0.0028 ($0.0030--$0.0002), 
the revenue increase per month is estimated to be 11.5 billion x 
$0.0028 [ap] $32,200,000.
    \811\ As discussed in section IV.B.2.d, the net of rebate 
revenue for NYSE (NYSE, NYSE Arca, NYSE American, and NYSE 
National), Nasdaq (Nasdaq, BX, and PSX), and Cboe (Cboe BZX, Cboe 
BYX, Cboe EDGA, and Cboe EGDX), was $602 million during 2017 ($196M 
+ $253M + $153M). If the estimated margin increased by $386.4 
million, then the percentage increase in this margin would be $386.4 
million/$602 million [ap] 64.1%.
    \812\ Consistent with this idea one commenter suggested that, 
any benefits or costs accruing to broker-dealers as a result of 
changes in fees and rebates are likely to be passed onto their 
customers. See Decimus Letter, at 2.
---------------------------------------------------------------------------

    The Commission further acknowledges that if brokerage commissions 
were to increase as a result of the Pilot, broker-dealers could 
continue to charge higher commissions even after the conclusion of the 
Pilot. However, due to competition among broker-dealers, including the 
proliferation of low-cost online broker-dealers, the Commission 
believes that broker-dealers would be unlikely to significantly 
increase brokerage commissions as a result of the Pilot.\813\
---------------------------------------------------------------------------

    \813\ See supra Section IV.B.2. and IV.D.2. (discussing the 
competitive environment for broker-dealer services). But cf. Decimus 
Letter, at 2-4; NYSE Letter I, at 13; ASA Letter, at 2 (noting the 
possibility that commissions would increase).
---------------------------------------------------------------------------

    Lastly, the Commission acknowledges that brokerage commissions may 
decrease during the Pilot if the Pilot results in lower execution costs 
for some test groups, then those lower costs may be passed on to 
investors in the form of lower commissions. For example, if a broker-
dealer pays the transaction fee more often than they earn the rebate, 
the reduction of fee caps would reduce the cost of transacting for this 
broker-dealer, which the broker-dealer may pass onto investors in the 
form of lower commissions.\814\
---------------------------------------------------------------------------

    \814\ See Decimus Letter, at 2-4.
---------------------------------------------------------------------------

iv. Temporary Reduction in Liquidity
    The effect of the Pilot on liquidity is uncertain as there are 
reasons why the Pilot may increase as well as decrease liquidity. 
Several commenters expressed concern that the Pilot would reduce 
liquidity. These commenter statements largely focus on the impact of 
the reduction or elimination of rebates. In considering the comments, 
and as analyzed in the following sections, the Commission considered 
the impact of the direct effect of rebates on quoted spreads, the 
impact of a loss of liquidity provision on quoted spreads and depth, 
the impact of changes in adverse selection on transaction costs, and 
the impact of potential conflicts of interest on execution quality. In 
addition, the Commission analyzed estimates of the costs of a potential 
reduction in liquidity provided by commenters.
    The Pilot could result in a positive, negative, or neutral change 
in liquidity for the stocks in test groups. Adding to this uncertainty, 
some commenters felt that to the extent that there are liquidity 
effects, such effects would be minimal.\815\ Also, the impacts of the 
Pilot on liquidity may not be uniform across all securities and several 
commenters believed that widening of spreads would be limited to a 
small number of securities. Some commenters stated that the widening of 
spreads is unlikely to affect the most and least liquid securities, or 
will not adversely affect liquidity at all.\816\ Further, as some 
commenters explained, less liquid stocks tend to have wider spreads, 
and therefore, the impact of rebates as an incentive to provide 
liquidity may become less relevant for these securities.\817\
---------------------------------------------------------------------------

    \815\ See, e.g., Angel Letter II, at 3.
    \816\ See, e.g., Citigroup Letter, at 3; Credit Suisse Letter, 
at 1; Decimus Letter, at 4; MFS Letter, at 1.
    \817\ See, e.g., IEX Letter II, at 5; Credit Suisse Commentary, 
at 3.
---------------------------------------------------------------------------

(1) Direct Impact of Fees and Rebates on Quoted Spreads
    The Commission believes the impact of the Pilot on liquidity and 
transaction costs through a direct adjustment of the quoted prices is 
uncertain. One study argues that transaction-based rebates may 
artificially narrow the quoted spread on make-take exchanges by the 
amount of the rebate.\818\ This effect would particularly impact retail 
investors whose orders are largely internalized at the best quoted 
prices. However, whether rebates can effectively narrow quoted spreads 
in a given stock depends on whether that stock's natural quoted spread 
(without artificial narrowing) is constrained by the tick size. For 
example, if a stock has a natural quoted spread of less than one penny, 
which is the minimum tick size, then rebates cannot possibly 
artificially narrow the quoted spread. Many of the most active stocks 
have average quoted spreads very close to a penny and the Commission 
believes that the natural spread in some of these stocks could be at or 
less than a penny. Consequently, the Commission believes that rebates 
might not artificially narrow spreads in at least some of the most 
active stocks and, therefore, that the Pilot might not result in wider 
quoted spreads in all stocks.\819\
---------------------------------------------------------------------------

    \818\ See Angel, Harris, & Spatt, supra note 530.
    \819\ See also TD Ameritrade Letter, at 3 (concurring with the 
view that the Pilot is less likely to affect highly liquid 
securities).
---------------------------------------------------------------------------

(2) Potential Reduction in Liquidity Provision
    The Commission recognizes that the Pilot could reduce the 
incentives to

[[Page 5277]]

provide liquidity, but believes that the impact of this reduced 
incentive on quoted spreads and transaction costs could be positive or 
negative and could vary across securities. In particular, the 
Commission believes that despite a potential reduction in liquidity 
provision, some investors could actually experience lower or higher 
transaction costs in some securities for several reasons. Generally, 
this section provides reasons to expect an increase in transaction 
costs as well as reasons to expect a decrease in transaction costs. 
Likely, several of these effects will offset to create a new 
equilibrium, but the Commission cannot predict whether investors will 
face higher or lower transaction costs in this new equilibrium.
    First, some commenters stated that the removal of rebates could 
cause some liquidity providers to stop providing liquidity, which would 
result in a temporary increase in transaction costs during the Pilot as 
the remaining liquidity providers would face less competition for their 
services and therefore could charge wider spreads to liquidity 
demanders.\820\ One Commenter suggested that this effect could be seen 
by comparing spreads on non-rebate exchanges like Cboe EDGA with the 
rebate paying exchange Cboe EDGX. The Commenter noted that average 
spreads on Cboe EDGX tend to be lower than those on Cboe EDGA.\821\ 
However, the Commission does not believe that this data point provides 
robust evidence that spreads will widen across all securities because 
EDGA and EDGX tend to trade securities with different characteristics, 
consistent with another commenter who stated that ``EDGA only traffics 
in the most liquid names'' consequently comparing average spreads on 
EDGA and EDGX is not appropriate. Additionally this analysis does not 
establish a causal link between rebates and quote quality.\822\
---------------------------------------------------------------------------

    \820\ See also Pragma Letter, at 2; Magma Letter, at 2; STA 
Letter, at 3; STANY Letter, at 2; Morgan Stanley Letter, at 3-4; 
Energizer Letter, at 1.
    \821\ See NYSE Letter II, at 2, 9. See also, Nasdaq Letter III, 
at 4-6 (presenting similar data suggesting that quote quality on 
make-take exchanges is better than on inverted exchanges).
    \822\ See section IV.C.1.a.ii.(3) for a discussion on causality, 
See also Mulson Letter II, at 1.
---------------------------------------------------------------------------

    The Commission notes that a reduction in liquidity provision might 
not result in wider quoted spreads and greater transaction costs, 
particularly in more active securities. In particular, as suggested by 
some commenters, if rebates result in excessive intermediation,\823\ or 
if ``natural'' buyers and sellers set quoted prices,\824\ a reduction 
in rebates need not widen quoted spreads and increase transaction costs 
and could actually reduce transaction costs to the benefit of 
investors. Excessive intermediation makes it more difficult for non-
market makers to get passive orders to the front of the queue and could 
induce them to cross the spread to trade aggressively a greater 
fraction of the time. If a reduction in rebates can result in less 
excessive intermediation, then a reduction in liquidity provision by 
market makers might not adversely impact transaction costs but could 
instead decrease queue lengths faced by non-market maker liquidity 
providers such as institutional investors. This could allow investors 
trading test group stocks to potentially experience better execution 
quality because they could be able to obtain better queue priority on 
their passive orders. Better queue priority would both diminish adverse 
selection costs for passive orders and also decrease the fraction of 
time investors are required to pay the spread and potential take fee to 
execute a trade.\825\ The Commission does not have the data necessary 
to empirically analyze whether rebates indeed result in excessive 
intermediation, but expects the Pilot to facilitate such analysis.
---------------------------------------------------------------------------

    \823\ See NYSE Letter II, at 4 (noting that ``some institutions 
believe maker-taker pricing unnecessarily subsidizes quoting in 
sufficiently liquid securities, resulting in `excessive 
intermediation' that crowds out long-term investor participation in 
the market.''). See also T. Rowe Price Letter, at 2.
    \824\ See, e.g., Mulson Letter.
    \825\ See Pragma Letter, at 2; IEX Letter I, at 6; IEX Letter 
III, at 4-6. But cf. NYSE Letter II, at 11.
---------------------------------------------------------------------------

    The Commission recognizes the risk, noted by some commenters, that 
the Pilot could increase the cost of transacting if the reduction of 
rebates leads to a reduction in quoted depth.\826\ If the reduction in 
rebates in test group securities results in liquidity providers such as 
market makers posting less displayed liquidity, quoted depth could 
decline even if quoted spreads does not decline. This lower depth could 
result in increased costs of transacting larger quantities. These 
effects could be more pronounced in small stocks if, as some commenters 
suggest, rebates are important to induce market makers to provide 
liquidity in small stocks either directly or through cross 
subsidization of liquidity.\827\
---------------------------------------------------------------------------

    \826\ See Pragma Letter, at 2; Nasdaq Letter I, at 6.
    \827\ See Nasdaq Letter I, at 8-9; Nasdaq Letter III, at 9. 
However another commenter suggested that the impact of the Pilot on 
small stocks would be mitigated by the fact that small stocks tend 
to have wider spreads, and thus rebates form a smaller fraction of 
total market making incentives. See Decimus Letter, at 4-5
---------------------------------------------------------------------------

    The Commission also recognizes the potential for a reduction in 
liquidity and an increase in transaction costs for ETPs and 
particularly less active ETPs. Multiple commenters expressed concern 
that the Pilot might particularly reduce liquidity in ETPs.\828\ These 
commenters noted that, unlike in stocks, the Pilot might affect 
liquidity for ETPs in one of two ways: It may affect liquidity in 
shares of the ETP, or it may affect liquidity in the underlying assets 
of the ETP. The Pilot may reduce liquidity in the shares of the ETP if 
the reduction of or elimination of rebates induces market makers to 
stop or reduce providing liquidity for shares of an ETP. Moreover, 
another commenter expressed concern that the Pilot is inconsistent with 
exchanges programs for ETP market makers, whereby incentives are made 
available to market makers to act as liquidity providers for small, 
less liquid ETPs and therefore the negative impact of the Pilot could 
be the most pronounced among illiquid ETPs.\829\ Additionally, the 
Pilot may affect the liquidity of ETPs if it impacts the liquidity of 
the underlying securities. If the Pilot affects liquidity in shares of 
an ETP or impacts the liquidity of the ETP's underlying securities, it 
will also affect the costs to authorized participants of eliminating 
ETP mispricing by participating in the create-redeem process.\830\
---------------------------------------------------------------------------

    \828\ See, e.g., ICI Letter I, at 4; BlackRock Letter, at 1-2; 
FIA Letter, at 4; SIFMA Letter, at 4; Issuer Network Letter I, at 3; 
Schwab Letter, at 3; Fidelity Letter, at 9; Invesco Letter, at 2; 
State Street Letter, at 3; Clearpool Letter, at 8; STA Letter, at 4; 
STANY Letter, at 4; Healthy Markets Letter II, at 8; Healthy Markets 
Letter I, at 11; Nasdaq Letter I, at 8; NYSE Letter I, at 7; Cboe 
Letter I, at 17; Credit Suisse Commentary, at 6; Morgan Stanley 
Letter, at 3-4.
    \829\ See Virtu Letter, at 7.
    \830\ See infra Section IV.D.1.
---------------------------------------------------------------------------

    Additionally, the Commission recognizes that the Pilot might result 
in other unforeseen changes to market dynamics,\831\ including improved 
or diminished execution quality by certain trading centers which could 
shift the level of market participation. Also, the Pilot may affect the 
ability of exchanges and ATSs to draw liquidity provision through 
innovative methods other than rebates. The effects of these changes may 
have a positive, neutral, or negative effect on liquidity. 
Consequently, the Commission believes that there is significant 
uncertainty surrounding the effects of the Pilot on liquidity.
---------------------------------------------------------------------------

    \831\ See IEX Letter II, at 7.
---------------------------------------------------------------------------

(3) Conflicts of Interest
    As noted above, the Commission is not certain of the extent to 
which some broker-dealers route investor orders to avoid fees or to 
capture rebates in such

[[Page 5278]]

a way that reduces execution quality. To the extent they do, the Pilot 
could improve execution quality. This would occur if, as many 
commenters and studies have argued, the offering of rebates produces a 
conflict of interest that induces orders to be routed to exchanges with 
sub-optimal execution quality.\832\ Consequently, the removal or 
reduction of rebates may cause orders to be routed to exchanges with 
better execution quality and the execution quality in the stocks in the 
Test Groups could improve. As noted above, commenters disagreed on 
whether broker-dealers act on such conflicts of interest and the 
Commission lacks sufficient information to determine the magnitude of 
any such conflicts. The Commission notes that the objective of the 
Pilot is, in part, to study such conflicts of interest.
---------------------------------------------------------------------------

    \832\ See Section III.A.
---------------------------------------------------------------------------

(4) Cost Estimates
    Multiple commenters provided quantitative cost estimates associated 
with expected changes in liquidity. The commenters' estimates all rely 
on the assumption that a reduction in rebates will increase quoted 
spreads and transaction costs but took different approaches, resulting 
in a wide range of estimates from $24 million to $4 billion per year. 
Overall, while the Commission appreciates the cost estimates, the 
Commission reiterates that the Pilot could either increase or decrease 
investor transaction costs for the reasons explained above. However, 
for the reasons discussed below, the Commission believes that each of 
the commenters overestimated the potential costs to investors. Below, 
the Commission first describes each estimate, adjusts the estimate for 
the change in the structure of the Pilot and then discusses how the 
assumptions might affect the estimation.
    The first commenter estimated costs of $24 million per year. Across 
all three proposed test groups, this commenter calculated an 
anticipated reduction in the average rebate of $0.002267 per share, and 
that approximately 50% of all liquidity providers will be affected by 
the rebate reduction by ``updating their quotes to less aggressive 
prices,'' leading to an increased cost to cross the spread of $0.001134 
per share.\833\ Assuming only stocks with an average quoted spread in 
excess of $0.02 will be adversely affected by the rebate reduction, 
this commenter estimated that the costs to its customers of a wider 
quoted spread would be $24 million annually.\834\
---------------------------------------------------------------------------

    \833\ See TD Ameritrade Letter, at 3.
    \834\ See id.
---------------------------------------------------------------------------

    To account for the changes to the Pilot since the proposal, 
Commission staff estimate that this commenter's approach would estimate 
a cost of $12.7 million per year. To arrive at this estimate, the 
Commission adjusted the average rebate reduction to 0.0024 to account 
for the change to the test groups and adjusted the average implied 
volume to account for the inclusion of less than half the number of 
stocks in test groups.
    Despite these adjustments, the Commission notes that the estimate 
is likely imprecise. In particular, this estimate relies on an 
assumption that the spreads will widen by 50% of the reduction in 
rebates but does not provide support for this assumption. The commenter 
does not explain why they expect this relation between rebates and 
liquidity or provide an explanation for why they feel that 50% is the 
appropriate adjustment to use. Further, this adjustment does not allow 
for some liquidity demanders to supply liquidity more often if queue 
lengths decline with rebates. Such a switch would reduce the impact on 
transaction costs. The commenter also does not explain whether the 
share volume used to estimate the costs was all share volume in 
securities with average quoted spreads of less than two cents or just 
that portion likely to be in a test group. If the commenter included 
all volume, the estimates would be closer to $6.34 million.
    A second commenter estimated that if effective spreads widened by 
10% for the 100 top securities, ``the Pilot could conservatively cost 
investors over $400 million more in annual execution costs.'' \835\ The 
commenter does not provide an analysis, either quantitative or 
qualitative, to support their belief that a 10% increase is appropriate 
to use or explain their methodology. The commenter provided little 
information about its assumptions or underlying data that would allow 
the Commission to examine the robustness of the estimate or to adjust 
the estimate for the changes in the Pilot since the proposal. As such 
the best way for the Commission to adjust the estimate for the changes 
in the Pilot is to divide it by two, $200 million, because the changes 
reduced the number of securities in the Pilot by slightly more than 
half. However, because of uncertainties about methodology and 
assumptions, the Commission cannot adjust with any certainty the $400 
million estimate and does not believe that a $200 million estimate is 
reliable. The Commission recognizes that the changes to the Pilot could 
also change the commenter's estimate of how much spreads widen.
---------------------------------------------------------------------------

    \835\ Cboe Letter I, at 3.
---------------------------------------------------------------------------

    A third commenter provided an analysis that suggested that, due to 
wider spreads, the increased costs to investors would be at least $1 
billion per year and potentially $4 billion.\836\ Like the first 
commenter, this $1 billion estimate assumes an adjustment to 
transaction costs based on the reduction in the rebate, except that 
this commenter doubled the rebate to adjust transaction costs. To 
compute their estimate, the commenter estimates the weighted reduction 
in rebates across all stocks, taking into account the fact that most 
stocks will see no change in rebates. The commenter then uses the 
expected weighted average reduction in rebates to compute their 
estimate for the Pilot's impact on average spreads across all stocks. 
The commenter then multiplies the expected impact on spreads by total 
trading volume to arrive at a total of approximately $1 billion in 
estimated costs per year.\837\ Using the commenter's method, the 
adopted rule would have an average rebate reduction of approximately 
$0.0004, which would widen spreads by $0.0009, or approximately half 
the prior increase, for a new cost estimate of $600 million per year.
---------------------------------------------------------------------------

    \836\ See NYSE Letter I, at 13 and NYSE Letter IV, at 4. The 
commenter estimated the $1 billion increase in expected costs by 
computing a new consolidated spread, equal to the current 
consolidated spread + (rebated reduction x 2), where the rebate 
reduction is the blended average fee change of $0.00082, and 
multiplied this rebate reduction by 2 as market makers on both sides 
of the quote will adjust to reflect the rebate reduction. The 
commenter indicated that this estimation results in a 1.1% increase 
in average spreads to 28.1 bps. Id. at Addendum 4-5. For principal 
trades, the anticipated increase in costs as calculated by this 
commenter is the cost to cross the wider spread netted against lower 
access fees, while for agency trades, the costs equal the cost to 
cross the new wider spread. The commenter showed, ``on net, an 
estimated cost of $1.08bn to the industry, of which $721MM would be 
incurred by agency flow.'' Id. at Addendum 5. See also STANY Letter, 
at 2.
    \837\ The Commenter adjusts their estimate to account for agency 
verses principle flow using the following formulas. Agency cost = 
Change in Spread*1/2 * Market Notional Value * Agency Share; 
Principal Cost = [Change in Spread*1/2 * Market Notional Value * 
Principal Share]--[Fee Reduction * Market Volume * Principal Share * 
Maker/Taker Venue Share].
---------------------------------------------------------------------------

    Other commenters responded to this commenter's $1 billion estimate 
in various ways. One commenter criticized the use of quoted spreads to 
estimate costs.\838\ Likewise, several commenters

[[Page 5279]]

suggested that the commenter's estimates of potential harm are 
overstated by as much as 90%.\839\
---------------------------------------------------------------------------

    \838\ See IEX Letter II, at 6. ``Given that institutional 
investor orders are typically far larger than [the quoted spread], 
and retail investor orders are generally executed off-exchange,'' 
the quoted spread is ``particularly relevant'' in ``cases where a 
market participant is attempting to buy or sell, on an exchange, 
fewer shares than the total amount displayed at the [NBBO][.]'' Id. 
NYSE responded to this comment by noting that nearly all trading on 
exchange is for amounts smaller than the quoted depth, so the quoted 
spread is relevant. See NYSE Letter II, at 10.
    \839\ See, e.g., IEX Letter II, at 4; Healthy Markets Letter II, 
at 2 (arguing that the NYSE cost estimate to investors of $1 billion 
has been ``sufficiently debunked as purely fictional''); Decimus 
Letter, at 4 (arguing that the NYSE approach ignores potential 
indirect benefits to market participants of lower access fees (and 
possibly lower brokerage commissions), and that the Pilot would 
provide the information necessary to obtain meaningful analysis of 
changes to fees and rebates on order routing decisions and execution 
quality).
---------------------------------------------------------------------------

    The Commission views the commenter's $1 billion estimate as likely 
overstating the realistic costs associated with the Pilot should it 
result in increased spreads. One reason the estimate may be overstated 
is that, as some commenters have noted, and as discussed in section 
IV.C.2.b.iv.(1), the Pilot might have a diminished impact on penny 
constrained securities. In a supplemental analysis using TAQ data from 
the last quarter of 2017 and the first two quarters of 2018, the 
Commission estimates that between 50-70% of share trading volume occurs 
in stocks that are penny constrained.\840\ Consequently, to the extent 
that rebates play a diminished or no role in determining the spread of 
penny constrained stocks the commenter's estimates will significantly 
overstate the impact of increased spreads on transaction costs. Also, 
the commenter's estimate assumes that spreads will widen by twice the 
reduction in rebates, an assumption that some commenters question and 
that the Commission views as a likely upper limit to the impact of the 
Pilot on quoted spreads.\841\ This assumption does not take into 
account that non-market makers may begin to provide liquidity more 
often during the Pilot in securities with lower or no rebates due to a 
potential decrease in intermediation by market makers, which may 
mitigate the impact of less intermediation by market makers as a result 
of lower rebates.\842\ Consequently, the Commission acknowledges that 
to the extent that the Pilot impacts spreads in a certain small number 
of test group stocks, this could engender costs to investors. However, 
as described above, the Commission believes that the estimate of $1 
billion per year is likely a significant overstatement of the actual 
costs that would be incurred in such a scenario.\843\
---------------------------------------------------------------------------

    \840\ To determine if a stock is penny constrained, the 
Commission applied the simple filter: If the stock's trade weighted 
quoted spread was less than 1.1 cents, then the stock was considered 
penny constrained. This threshold yielded approximately 50% of 
trading volume occurring in stocks that are penny constrained. If 
the threshold is lifted to 2 cents (implying that at least some of 
the time the stock was penny constrained), then the fraction of 
trading volume in penny constrained stocks rises to 70%. Note that 
the sample period for the supplemental analysis is during the Tick 
Size Pilot. As such, these figures could underestimate the 
percentage of volume in penny constrained securities.
    \841\ See Section IV.2.b.iv.(1).
    \842\ One assumption made by NYSE is that ``a reduction in the 
average passive rebate. . .will result in both the bid and offer 
being backed off, on average, by the exact same amount as the rebate 
reduction.'' However, as another commenter argued this ``assumes 
that only rebate driven liquidity providers set the quote'' when 
``in reality the quote is almost always set by natural investors, 
who have a view of fair price, that is informed by both fundamental 
and quantitative research as well as the likely impact of their own 
short term trading intentions. See Mulson Letter, at 1. As discussed 
earlier in this section, the many potential effects of rebates on 
quoted spreads create significant uncertainty. See also Decimus 
Letter, at 4; Mulson Letter, at 1; IEX Letter II, at 4. NYSE 
responded to these comments by noting that even if their volume 
estimates are overstated by 20%, the cost is still significant and 
suggesting that investors would not provide liquidity because doing 
so would increase leakage costs. See NYSE Letter II, at 10-11.
    \843\ See Mulson Letter I, at 1 and IEX Letter II, at 4.
---------------------------------------------------------------------------

    The commenter's $4 billion estimate is based on the comparison 
between the spreads on a maker-taker exchange compared to the spreads 
on a taker-maker exchange described above in Section IV.C.2.b.iv(2), 
which the Commission views as even more imprecise than the $1 billion 
estimate for the reasons laid out above. Beyond the concerns expressed 
in Section IV.C.2.b.iv(2), the Commission notes that the difference 
between the spreads of a maker-taker exchange and a taker-maker 
exchange would result from the difference between the fee paid to post 
an order and the rebate to post. As such, the implied impact of no 
rebates would be no more than \1/2\ the spread difference. Thus, thus 
using the full spread difference overstates costs by a factor of 2. 
Further, to get the $4 billion estimate, the commenter applied the 
spread differential to all NMS securities. Because Test Group 2 will be 
only about 12.5% of securities, applying the spread differential to all 
NMS securities overstates the cost by a factor of 8. In sum, using the 
commenter's approach, but correcting for these issues, would yield a 
cost 16 times smaller than the commenter's, or $125 million.
v. Impact on Issuers
    Several commenters expressed concerns that adverse effects to 
liquidity could induce long-term costs, such as higher costs of capital 
for issuers subject to certain Test Groups where the incentives to 
provide liquidity are reduced, likely affecting small and mid-
capitalization issuers most severely.\844\ One commenter believed that 
issuers would have higher costs of capital as a result of wider 
spreads, making any attempts to raise capital more expensive, 
particularly for issuers in certain Test Groups of the Pilot.\845\ 
Additionally, a number of commenters also expressed concern that wider 
spreads due to a reduction in rebates could also adversely affect 
issuers that engage in share repurchase programs.\846\
---------------------------------------------------------------------------

    \844\ See NYSE Letter I, at 3, 13-14; ASA Letter, at 3; e.g., 
Level Brands Letter, at 1; Johnson Letter, at 1; P&G Letter, at 1; 
Sensient Letter, at 1; Apache Letter, at 2; Ethan Allen Letter, at 
1-2.
    \845\ See NYSE Letter I, at 3 and section IV.D.3 for further 
discussion of NYSE's cost of capital estimates.
    \846\ See, e.g., Apache Letter, at 2; ACCO Letter, at 1; 
NorthWestern Letter, at 2; Weingarten Letter, at 1.
---------------------------------------------------------------------------

    The Commission addresses these comments in the capital formation 
analysis in Section IV.D.3 and concludes that the Pilot is not expected 
to have a large impact on issuer cost of capital. While the Commission 
acknowledges the risk that the Pilot may impact liquidity for some 
securities, as explained above, the Commission believes that the impact 
of such an effect on the cost of capital for such securities would 
likely be minimal.\847\
---------------------------------------------------------------------------

    \847\ See section IV.D.3
---------------------------------------------------------------------------

    With the exception of the impact on cost of capital, one commenter 
stated that the Pilot will require burdensome expenditures by public 
companies at the start and conclusion of the Pilot.\848\ The Commission 
recognizes that some national securities exchanges and broker-dealers 
are public companies that could incur the costs described in Sections 
IV.C.2.a and IV.C.2.b.ii at the start and conclusion of the Pilot. 
However, the commenter did not provide details on what expenditures 
other public companies will incur as a result of the Pilot. The 
Commission does not know what such expenditures would be or what they 
would entail; nevertheless, we do not believe that there will be any 
such expenditures.
---------------------------------------------------------------------------

    \848\ See Nasdaq Letter I at 10.
---------------------------------------------------------------------------

vi. Costs to Broker-Dealers of Reverse Engineering Identities in the 
Order Routing Data
    Some commenters expressed concern that proposed public 
dissemination of order routing information would enable competitors to 
gain proprietary information regarding trading strategies.\849\ The 
commenters suggested

[[Page 5280]]

that, for example, market participants could learn the identities of 
individual broker-dealers by sending a specific broker-dealer an order 
for a relatively thinly-traded security and then study the order 
routing reports to identify which broker-dealers transacted that 
security on a given day. The concern is that if market participants can 
identify the primary venues that certain broker-dealers tend to rout 
to, then they may be able to use this information along with live 
market data to identify specific trading algorithms of individual 
broker-dealers. This could increase transaction costs for broker-
dealers if the market participants are able to use this data to 
identify when a certain algorithm is being used to execute a trade in 
live time and then to opportunistically trade around the algorithm to 
profit from any price impact created by the trades.
---------------------------------------------------------------------------

    \849\ See, e.g., FIA Letter, at 3; Virtu Letter, at 7-8; SIFMA 
Letter, at 6; FIF Letter, at 2; Citadel Letter, at 4; Citi Letter, 
at 6; TD Ameritrade Letter, at 5; STANY Letter, at 5; IEX Letter I, 
at 10; Credit Suisse Commentary, at 6; Morgan Stanley Letter, at 4.
---------------------------------------------------------------------------

    As described above, the Commission has modified its proposal in 
response to these comments. Consequently, the Commission is not 
adopting the requirement that exchanges publicly post the order routing 
datasets and instead the Commission will receive the order routing 
data. This change significantly reduces the risks identified by the 
commenters about reverse engineering, and the Commission is sensitive 
to the need to protect the data from unauthorized disclosure.

D. Impact on Efficiency, Competition, and Capital Formation

    The Commission has considered the effects of the Pilot on 
efficiency, competition, and capital formation.\850\ As discussed in 
further detail below, the Commission believes that many of the direct 
effects of this rule on efficiency, competition, and capital formation 
would likely be temporary in nature and affect markets only for the 
duration of the Pilot. The Commission believes that the information 
obtained as a result of the Pilot could improve regulatory efficiency, 
because analyses of this data are likely to provide a more 
representative view of the effect of transaction-based fees on order 
routing decisions than would be available to the Commission in the 
absence of the Pilot. Further, the Pilot may have a number of temporary 
effects on price efficiency, the competitive dynamics between 
exchanges, exchanges and off-exchange trading venues, broker-dealers, 
and issuers, including ETPs. Although the Pilot may temporarily affect 
liquidity,\851\ the Commission does not believe that this will result 
in the Pilot having a significant effect on capital formation. One 
commenter believed that the Commission did not sufficiently address the 
impacts of the Pilot on efficiency, competition, and capital formation 
in the proposing release.\852\ Several other commenters stated that the 
Commission inadequately provided justification for the assertions in 
the proposing release that the effects on efficiency, competition, and 
capital formation would be temporary in nature and ``would affect 
markets only for the duration of the [proposed] Pilot.'' \853\ The 
Commission addresses below commenters' concerns about issues stemming 
from efficiency, competition, and capital formation.
---------------------------------------------------------------------------

    \850\ Exchange Act Section 3(f) requires the Commission when 
engaging in rulemaking to consider or determine whether an action is 
necessary or appropriate in the public interest, and to consider, in 
addition to the protection of investors, whether the action will 
promote efficiency, competition, and capital formation. See 15 
U.S.C. 78c(f).
    \851\ See supra Section IV.C.2.b.iv.
    \852\ See Nasdaq Letter I, at 3, 8. This commenter expressed 
concern that the Proposal did not considered the effects on issuers 
and ETPs. See id., at 8. This commenter also stated that ``the 
Proposal is a blunt tool lacking nuance that will negatively affect 
efficiency, competition, and capital formation--none of which have 
been adequately addressed by the Commission.'' See id.
    \853\ See NYSE Letter I, at 15-16. See also, e.g., Level Brands 
Letter, at 1; Johnson Letter, at 1; Knight-Swift Letter, at 1.
---------------------------------------------------------------------------

1. Efficiency
    This section discusses the potential impact the Pilot could have on 
efficiency. The Commission believes that information learned from the 
Pilot could potentially improve future regulatory efficiency. 
Additionally, the Commission believes that the Pilot could have a 
number of temporary impacts on efficiency, including: The efficiency of 
capital allocation, price efficiency and price discovery, and the 
efficiency of fees and rebates.
    As discussed in detail above,\854\ the Commission believes that 
there is significant uncertainty regarding the effect, if any, that the 
Pilot will have on liquidity and trading volume on exchanges. 
Therefore, the Commission is unable to determine ex ante the overall 
effects the Pilot will have on the efficiency of capital allocation, 
price efficiency, or the efficiency of fees and rebates.\855\ However, 
the Commission believes that the Pilot will provide useful data that 
will better inform future policy recommendations of the effects of fees 
and rebates on price efficiency.\856\
---------------------------------------------------------------------------

    \854\ See supra Sections IV.C.2.b.i and IV.C.2.b.iv.
    \855\ One commenter stated that it did not ``expect that a 
reduction or outright removal of rebates will have any significant 
or harmful effects on the quality of prices displayed in the public 
lit market, interfere with genuine liquidity and price formation, or 
negatively impact [its] stock's trading volume, spread or displayed 
size.'' See T. Rowe Price Letter, at 5.
    \856\ See supra Section IV.C.1.a.ii.
---------------------------------------------------------------------------

    The Pilot will provide the Commission with an opportunity to 
empirically examine the effects of an exogenous shock to transaction 
fees and rebates on order routing behavior, execution quality and 
market quality. Insofar as the data produced by the Pilot permits the 
Commission and the public to evaluate and comment upon the potential 
impacts of alternative policy options, the rule may promote regulatory 
efficiency.\857\ In the absence of the Pilot, the Commission would have 
to rely on currently available data to inform future policy decisions 
related to transaction-based fees and rebates and data limitations may 
impair the efficiency of policy decisions based on this 
information.\858\
---------------------------------------------------------------------------

    \857\ See supra Section IV.C.1.a.i for a discussion of the 
potential benefits from studying the Pilot data and supra Section 
IV.C.1.a.iii for a discussion of the potential limitations of 
studying the Pilot data.
    \858\ See supra Section IV.B.1.b.
---------------------------------------------------------------------------

    The temporary efficiency impacts the Commission expects during the 
Pilot depend on how the Pilot fee and rebate restrictions for the two 
Test Groups balance the interests of different groups of market 
participants. For example, if during the Pilot, the lower fee cap and 
no-rebate restriction induced by the Pilot cause broker-dealers to be 
more likely to route customer orders to trading centers with better 
pricing, higher speed of execution, or higher probability of execution, 
rather than to trading centers with the largest rebates,\859\ the Pilot 
may temporarily improve the efficiency of capital allocation by 
lowering execution costs.\860\ Alternatively, the efficiency of capital 
allocation could be reduced if, as a response to the loss in revenue 
from rebates, broker-dealers increase commissions or fees charged to 
customers.\861\ Higher commissions or fees could reduce customers' 
willingness to trade or could lead to a lower injection of capital into 
the markets by investors because a larger fraction of each investable 
dollar would go to compensate broker-dealers for the lost revenue. 
However, because rebates are generally accompanied by higher 
transaction fees, the overall costs to broker-dealers to route orders 
to exchanges could decline for some Test Groups, which could lead to a 
decrease in commissions or fees and temporarily

[[Page 5281]]

increase the efficiency of capital allocation.
---------------------------------------------------------------------------

    \859\ See supra Section IV.C.1.b.
    \860\ See supra Section IV.C.2.b.iv.
    \861\ See supra Section IV.C.2.b.iii.
---------------------------------------------------------------------------

    For the duration of the Pilot, lower transaction fees could improve 
the liquidity of stocks and ETPs in some Test Groups by reducing the 
costs to execute marketable orders.\862\ As marketable orders become 
less costly, these orders are likely to be routed to exchanges with 
lower transaction fees, improving execution quality and possibly 
creating a liquidity externality,\863\ whereby lower transaction fee 
venues will become the preferred trading center for marketable and non-
marketable orders.\864\ An increase in liquidity could improve 
informational efficiency by allowing securities prices to adjust more 
quickly to changes in fundamentals.
---------------------------------------------------------------------------

    \862\ See supra Section IV.C.1.b.
    \863\ As discussed in detail above, improvements in execution 
quality could present as better prices for execution, higher 
probability of execution, and faster time to execution. See supra 
Section IV.C.2.b.iv.
    \864\  See infra Section IV.D.2.b.
---------------------------------------------------------------------------

    As a result of the Pilot, price efficiency might also improve; 
quoted spreads also may more closely reflect the net cost of trading 
and could temporarily increase price transparency for securities in 
certain test groups.\865\ Currently, most broker-dealers do not relay 
information about amounts of fees paid or rebates received on trades to 
their customers, thereby limiting the transparency of the total costs 
incurred to execute a trade. The Pilot would not mandate disclosure by 
the exchanges or the broker-dealers of order-level transaction-based 
fees and, therefore, will not resolve the limitations to transparency 
of the total fees paid and rebates received by broker-dealers for 
particular orders. As fees decline or rebates are removed in some Test 
Groups, however, the deviation in the net cost of trading from the 
quoted spread could shrink, thereby at least partially improving price 
transparency for the duration of the Pilot, and temporarily improving 
pricing efficiency and price discovery.\866\ Therefore, as an 
additional benefit of the Pilot, the Pilot will allow an examination of 
the temporary effect of revisions to transaction fees and rebates on 
quoted spreads, to better inform future policy recommendations of the 
effects of exchange transaction-based fees and rebates on price 
efficiency.\867\
---------------------------------------------------------------------------

    \865\ See supra Section IV.C.1.b.
    \866\ Some commenters argued that transaction fees and rebates 
harm price transparency because the prices displayed by exchanges do 
not include fee or rebate information and therefore do not fully 
reflect net trade prices. See ICI Letter I, at 2; Goldman Sachs 
Letter, at 3; Invesco Letter, at 2; State Street Letter, at 2; 
Wellington Letter, at 1; Oppenheimer Letter, at 2; Capital Group 
Letter, at 3; Citi Letter, at 2. A number of academic studies also 
made this argument. See, e.g., Angel, Harris, & Spatt, supra note 
530, and Harris, id.
    \867\ See supra Section IV.C.1.a.ii.
---------------------------------------------------------------------------

    On the other hand, if the reduction in rebates and Linked Pricing 
harms liquidity,\868\ or causes more informed order flow to be routed 
to off-exchange trading venues,\869\ then the Pilot may temporarily 
impair price efficiency and the price discovery process.\870\ A 
reduction in rebates could cause informed traders to route more of 
their non-marketable orders to off-exchange trading venues, which could 
reduce price discovery, because these orders would no longer be 
included in displayed quotes or limit order book depth. If liquidity 
temporarily worsens, then it may lead to a temporary widening of the 
NBBO, which could lead to a decline in the overall informational 
efficiency of prices. If liquidity worsens, it could also cause 
informed traders to route more of their marketable orders off-exchange, 
which could harm price discovery by reducing the ability of market 
participants to discern the direction of their order flow. However, if 
spreads widen or queues shorten, it could attract informed non-
marketable orders onto exchanges, which could improve price discovery, 
because exchange quotes would be more informative. Because the 
Commission cannot ex ante predict the effects of the Pilot on liquidity 
and competition between exchanges and off-exchange trading venues for 
order flow,\871\ the Commission is unable to determine the overall 
effects of the Pilot on price efficiency and the price discovery 
process.
---------------------------------------------------------------------------

    \868\ See supra Section IV.C.2.b.iv.
    \869\ See infra Section IV.D.2.a.
    \870\ Some commenters argued that rebates improved price 
discovery by promoting displayed liquidity on exchanges and 
narrowing the NBBO. See, e.g., State Street Letter, at 2; Virtu 
Letter, at 3; Magma Letter, at 3; Schwab Letter, at 1; Fidelity 
Letter, at 3; Cboe Letter I, at 15-16. One commenter argues that the 
removal of rebates could harm price discovery by causing more market 
participants to route their orders to off-exchange venues, instead 
of lit exchanges, where they would be included in the price 
discovery process. See Nasdaq Letter I, at 2, 4.
    \871\ See supra Section IV.C.2.b.iv and infra Section IV.D.2.a.
---------------------------------------------------------------------------

    Changes in liquidity could also impact the price efficiency of 
ETPs. A change in liquidly for either the ETP itself or the underlying 
securities could impact the create-redeem process for ETPs. This 
process is an important element in ETP price efficiency and helps to 
keep the price of the ETP in line with the value of its underlying 
securities. If there is a mispricing, authorized participants can trade 
on the mispricing by either purchasing the underlying shares to create 
a share of the ETP, or by redeeming a share of the ETP and selling the 
assets underlying the ETP. These actions affect the existing supply of 
ETP shares and help to eliminate mispricing. Consequently, if the Pilot 
impacts liquidity in either the underlying assets, or the ETP itself, 
it will impact the cost to authorized participants of eliminating 
mispricing by participating in the create-redeem process. Since the 
Commission does not ex ante know how the Pilot will impact 
liquidity,\872\ it cannot quantify the effects of the Pilot on ETP 
price efficiency. If the Pilot results in improved liquidity for the 
stocks in the various Test Groups, or for the ETP itself, then its 
impact on the create-redeem process may be positive and ETP price 
efficiency may increase as its value may more closely track the value 
of their underlying assets through a lower cost create-redeem process. 
The opposite is true if the Pilot negatively affects liquidity in 
either the ETPs or the underlying securities.
---------------------------------------------------------------------------

    \872\ See supra Section IV.C.2.b.iv.
---------------------------------------------------------------------------

    Finally, the Commission acknowledges that the fee caps and 
prohibition on rebates or Linked Pricing imposed on the Test Groups 
during the Pilot further constrain the exchanges' abilities to 
strategically choose fee and rebate schedules and for some NMS stocks 
may restrict the fees and rebates further beyond the current levels, 
which could be less efficient from the exchanges' perspective. The rule 
could temporarily result in more or less efficient fee and rebate 
schedules because the exchanges might not be able to optimize their 
pricing structure for some Test Groups of securities.\873\ While the 
Commission does not currently have information to determine the current 
level of efficiency of fees and rebates, the information that the 
Commission and the public receive from the Pilot could enable the 
analysis of market impacts stemming from changes to fees, potentially 
permitting the Commission to assess alternative requirements for 
transaction-based fees and rebates that may be more efficient.
---------------------------------------------------------------------------

    \873\ See supra Section IV.C.2.b.i.
---------------------------------------------------------------------------

    Several commenters asserted that fee and rebate restrictions 
proposed by the Commission would be government imposed price-controls 
that would increase inefficiencies and harm consumers.\874\ One of 
these commenters elaborated that ``Government-imposed price controls 
are well understood to have a negative impact on competition and 
innovation'' and that ``they are only

[[Page 5282]]

indicated where they overcome severe market imperfection such as 
monopoly ownership of a critical resource.'' \875\ As discussed in 
detail above,\876\ the Commission believes that the current fee and 
rebate system may have resulted in a number of market failures, 
including rebates incentivizing brokers to route orders to trading 
venues that pay the highest rebates, instead of the venues that offer 
better execution. However, the Commission currently lacks the data to 
estimate the extent of any existing market failures.\877\ While the 
Commission acknowledges that the Pilot's restrictions on rebates and 
fees could potentially harm efficiency, if these market failures 
currently do exist, then the fee and rebate restrictions in Test Group 
stocks could temporarily improve efficiency for the duration of the 
Pilot. Additionally, the information the Commission learns from the 
Pilot could be used by the Commission in future rulemakings to inform 
future policy decisions.\878\
---------------------------------------------------------------------------

    \874\ See Nasdaq Letter I, at 2, 5; Cboe Letter I, at 7.
    \875\ See Nasdaq Letter I, at 11-12.
    \876\ See supra Section IV.A.
    \877\ See supra Section IV.B.1. and Section IV.C.1.a.iii.
    \878\ See supra Section IV.C.1.a.
---------------------------------------------------------------------------

2. Competition
    This section discusses the potential effects of the Pilot on 
competition. The Commission believes that the Pilot could have a 
temporary effect on the competitive dynamics between exchanges, 
exchanges and off-exchange trading venues, broker-dealers, and issuers, 
particularly ETPs. Additionally, as discussed in detail below,\879\ the 
Pilot could potentially have competitive effects for smaller exchanges 
that last beyond the Pilot. This could occur if the Pilot attenuates 
the potentially distortive impact of transaction-based fees and rebates 
and causes broker-dealers to route orders to trading centers they 
perceive as more liquid. This could have a lasting effect on the order 
flow and revenue of smaller exchanges if it produces a liquidity 
externality that persists beyond the Pilot.\880\ However, the 
Commission believes that this is unlikely to occur, because the Pilot 
would be for a limited duration and the effects are unlikely to be 
significant enough to cause this result.\881\
---------------------------------------------------------------------------

    \879\ See infra Section IV.D.2.b (Competition Between 
Exchanges).
    \880\ See Proposing Release, supra note 2, at 13042, for a 
discussion of a liquidity externality.
    \881\ See infra Section IV.D.2.b (Competition Between 
Exchanges).
---------------------------------------------------------------------------

    Because the Commission is unable to determine ex ante the Pilot's 
effects on liquidity,\882\ the Commission is unable to quantify many of 
the effects of the Pilot on competition. In the sections below the 
Commission offers a qualitative discussion of the effects of the Pilot 
on competitive.
---------------------------------------------------------------------------

    \882\ See supra Section IV.C.2.b.iv.
---------------------------------------------------------------------------

a. Competition Between Exchanges and Off-Exchange Trading Venues
    This section discusses the potential effects of the Pilot on 
competition between exchanges and off-exchange trading venues, 
including ATSs, which, as discussed in the baseline,\883\ execute 
approximately 14% of trading volume. Although the Pilot could 
temporarily affect the competition for order flow between exchanges and 
off-exchange trading venues, the Commission believes that the overall 
effects of the Pilot on this competition are unclear, because, as 
discussed in detail below, there are reasons why the Pilot may 
temporarily increase as well as decrease the order flow routed to off-
exchange trading venues.
---------------------------------------------------------------------------

    \883\ See supra Section IV.B.2.a.
---------------------------------------------------------------------------

    A number of commenters argued that restricting exchange rebates and 
fees for stocks in the test Groups without placing similar restrictions 
on off-exchange venues could place exchanges at a competitive 
disadvantage.\884\ Although the Commission acknowledges that the Pilot 
may potentially place exchanges at a competitive disadvantage relative 
to off-exchange trading venues, the Commission believes that the 
overall effects of the Pilot on this competition would depend on how 
on-exchange liquidity is affected by the Pilot as well as the 
renegotiation costs that off-exchange trading venues would incur in 
order to take advantage of the restrictions on exchange fees and 
rebates. For example, as discussed in detail above,\885\ ATSs sometimes 
negotiate bespoke agreements with individual subscribers for a bundle 
of services. If the costs of renegotiating these agreements are high, 
then off-exchange trading venues may not be able to adjust their 
pricing models to take advantage of the exchange pricing restrictions, 
in which case competition between exchanges and off-exchange venues 
could be unaffected.\886\ Additionally, as discussed below, if off-
exchange renegotiation costs are high, some of the restrictions on 
transaction fees could give certain exchanges a competitive advantage 
relative to off-exchange venues in attracting certain types of order 
flow. However, if off-exchange renegotiation costs are small or the 
Pilot fee and rebate restrictions place certain exchanges at a 
disadvantage relative to the current pricing policies of some off-
exchange trading venues, then the Pilot could affect competition 
between exchanges and off-exchange trading venues.
---------------------------------------------------------------------------

    \884\ Commenters expressed concern that the Pilot would inhibit 
exchanges' ability to compete with off-exchange trading centers, in 
part due to a reduced ability to innovate on changes to fees and 
rebates. See, e.g., Cboe Letter I, at 7, 16-17; Nasdaq Letter I, at 
6; NYSE Letter I, at 1-2, 4-5; Magma Letter, at 2; FIA Letter, at 3-
4; ASA Letter, at 3; P&G Letter, at 1; ACCO Letter, at 1; Johnson 
Letter, at 1.
    \885\ See supra note 47 and accompanying text.
    \886\ It might be difficult for an ATS to renegotiate these 
agreements with all of their clients in order to take advantage of 
the exchange price restrictions on a subset of securities (i.e., 
stocks in the Test Groups).
---------------------------------------------------------------------------

    Although the Commission acknowledges that the distribution of 
trading volume could change between exchanges and off-exchange trading 
venues, the Commission believes these changes are difficult to 
determine in advance and cannot predict ex ante whether these changes 
would increase or decrease exchange market share.\887\ As discussed 
above,\888\ the Commission lacks data on the current pricing schedules 
offered by off-exchange venues as well as information on how this 
affects the routing decisions of broker-dealers. The Commission also 
lacks information on how difficult it is for off-exchange trading 
venues to adjust their pricing schedules. Additionally, as discussed 
above,\889\ the Pilot's effects on liquidity could be either positive 
or negative and vary across securities. Therefore, the Commission is 
unable to quantify or determine the overall effects that the Pilot will 
have on competition between exchanges and off-exchange trading venues. 
However, if competitive rebalancing among trading centers occurs as a 
result of the Pilot, it could provide information to the Commission 
about order routing decisions and execution quality to inform future 
policy actions.
---------------------------------------------------------------------------

    \887\ One commenter agreed and stated the Pilot could cause a 
shift in the balance of activity between exchanges and off-exchange 
trading centers, but that the direction of such a shift cannot be 
presupposed. See Decimus Letter, at 5. This commenter also noted 
that transaction-based fees are one of the drivers behind the 
current shift by market participants to off-exchange trading 
centers. Id. at 5-6.
    \888\ See supra Section IV.B.1.b.vii.
    \889\ See supra Section IV.C.2.b.iv.
---------------------------------------------------------------------------

    Commenter statements regarding the effects of the Pilot on 
competition between exchanges and off-exchange trading venues indicated 
that the Pilot could have different effects on the competition for 
marketable and non-marketable order flow. In considering the comments, 
and as analyzed in the following sections, the Commission considered 
the differential impact

[[Page 5283]]

changes in exchange fees and rebates could have on the competition 
between exchanges and off-exchange trading venues for marketable and 
non-marketable order flow. As the discussion above indicates, and as 
commenters point out, it is not clear how the Pilot will affect the 
competition for both marketable and non-marketable order flow.\890\ 
Additionally, since the impacts of the Pilot on liquidity may not be 
uniform across all securities,\891\ the effects of the Pilot on 
competition for marketable and non-marketable order flow may not be 
uniform across all securities. Therefore, as discussed above, the 
Commission is unable to quantitatively estimate how the Pilot could 
affect competition between exchanges and off-exchange trading venues to 
attract different types of order flow. In the sections below the 
Commission offers a qualitative discussion regarding how various 
effects of the Pilot could affect this competition.
---------------------------------------------------------------------------

    \890\ See Decimus Letter, at 5-6.
    \891\ See supra Section IV.C.2.b.iv.
---------------------------------------------------------------------------

i. Marketable Order Flow
    The Pilot could increase or decrease the share of marketable order 
flow routed to off-exchange trading venues. This is reflected in the 
divergent views of commenters, who argue over the effects that reduced 
access fees and rebates could have on the share of marketable order 
flow routed to off-exchange trading venues. In considering these 
comments, the Commission considered a number of ways the Pilot could 
potentially impact competition for marketable order flow, including: 
The impact of changes in liquidity, the direct impact of changes in 
access fees and rebates, the impact of changes in off-exchange fill 
rates, and the impact of the Order Protection Rule.
    Changes in liquidity caused by the Pilot could affect how much 
marketable order flow is directed to off-exchange trading venues. 
However, because the overall effects of the Pilot on liquidity could be 
positive or negative and vary across securities,\892\ the overall 
effects of changes in liquidity on the direction of marketable order 
flow are also unclear. Therefore, the Commission is unable to predict 
the overall effect that changes in liquidity caused by the Pilot will 
have on the competition for marketable order flow between exchanges and 
off-exchange trading venues.
---------------------------------------------------------------------------

    \892\ See supra Section IV.C.2.b.iv.
---------------------------------------------------------------------------

    A number of commenters argued that if the Pilot temporarily 
decreases liquidity in the test Groups due to the elimination or 
reduction of rebates,\893\ more order flow will likely be directed to 
off-exchange trading venues.\894\ As the Commission previously 
discussed,\895\ the competition between on and off exchange venues for 
order flow is characterized as providing a tradeoff between immediacy 
and execution quality. Off exchange venues tend to get better trade 
execution on average than lit exchanges, largely because they trade 
between the prevailing NBBO, but at the cost of not being able to 
guarantee that a transaction will occur. Thus, the impact of the Pilot 
on the competition between exchanges and off exchange venues for 
marketable order flow will depend on how the Pilot impacts execution 
quality and the cost of immediacy on exchanges compared to the 
potential for price improvement and the chance of filling an order at 
an off-exchange venue.
---------------------------------------------------------------------------

    \893\ See id.
    \894\ See, e.g., Magma Letter, at 2; Home Depot Letter, at 1.
    \895\ See Securities Exchange Act Release No. 76474 (Nov. 18, 
2015), 80 FR 80998 (Dec. 28, 2015), 81116-81117. See also Securities 
Exchange Act Release Nos. 83663 (July 18, 2018), 83 FR 38768 (August 
7, 2018), 38891-38892.
---------------------------------------------------------------------------

    If a reduction in rebates causes quoted spreads to widen,\896\ it 
could increase the attractiveness of off-exchange price improvement and 
would likely cause more institutional or proprietary marketable order 
flow to be directed to off-exchange ATSs. Additionally, if spreads 
widen, broker-dealers would likely be incentivized to internalize more 
marketable institutional order flow. If spreads do not widen, a 
decrease in quoted depth could also result in more marketable orders 
being routed off-exchange. If quoted depth decreases,\897\ and if 
market participants believe that off-exchange venues offer improved 
execution, it could cause more large marketable orders to get routed to 
ATSs or be internalized, in order to avoid the increased costs of 
walking up the book. Alternatively, if liquidity improves, it could 
reduce the cost of immediacy and the benefits of off-exchange price 
improvement, which could result in more marketable order flow being 
routed to exchanges.
---------------------------------------------------------------------------

    \896\ See supra Section IV.C.2.b.iv.2.
    \897\ See id.
---------------------------------------------------------------------------

    Changes in exchange access fees and rebates for stocks in the test 
groups could also directly affect whether some types of marketable 
order flow are routed to exchanges or off-exchange trading venues. 
However, as discussed in detail above,\898\ the Commission currently 
faces limitations in determining the effects that exchange transaction 
fees and rebates have on order routing decisions. The Commission is 
unable to quantify how changes in exchange transaction fees and rebates 
for stocks in the test groups will affect the routing decisions for 
marketable order flow between exchanges and off-exchange trading 
venues. Therefore, the Commission is unable to determine in advance 
what effect changes in exchange transaction fees and rebates caused by 
the Pilot will have on the competition for marketable order flow. One 
of the goals of the Pilot is to provide the Commission with data so 
that it can better evaluate these effects.
---------------------------------------------------------------------------

    \898\ See supra Section IV.B.1.a and Section IV.B.1.b.
---------------------------------------------------------------------------

    If renegotiation costs are too high for off-exchange trading venues 
to adjust their pricing schedules, lower transaction fees on maker-
taker exchanges could cause some marketable order flow that would be 
routed to ATSs and other off-exchange trading centers to instead be 
routed to these exchanges. For example, if the equilibrium transaction 
fee in Test Group 2 is below $0.0030 in the absence of rebates, 
exchanges may be able to draw order flow away from off-exchange trading 
centers.
    Several commenters agreed that lower access fees could induce some 
market participants to bring order flow back to exchanges.\899\ One of 
these commenters stated that ``the potential that substantially lower 
take fees in test group securities will counter any potential loss of 
rebate-driven volume.'' \900\ One commenter disagreed and noted that 
lowering fees would not attract marketable order flow to 
exchanges.\901\ This commenter noted

[[Page 5284]]

that if high access fees drove market participants to route orders to 
off-exchange trading centers, then lower cost venues, such as NYSE 
American or EDGA would have larger market share.\902\ Another commenter 
disagreed and argued that ``the cost of accessing lit markets in the 
form of access fees on securities exchanges has been one of the key 
drivers behind the continuing proliferation of non-exchange trading 
venues.'' \903\ Given the disagreement among commenters, the Commission 
believes it is possible that lower transaction fees could potentially 
result in more marketable order flow being routed to exchanges. 
However, as discussed above, the Commission faces limitations in 
quantifying the effects that lower exchange transaction fees will have 
on marketable order flow and is unable to determine how likely this is 
to occur. One of the goals of the Pilot is to provide the Commission 
with data so that it can better evaluate these effects.
---------------------------------------------------------------------------

    \899\ See, e.g., IEX Letter II, at 7, 8-9; TD Ameritrade Letter, 
at 7; Citi Letter, at 4; Decimus Letter, at 5-6.
    \900\ See IEX Letter II, at 8.
    \901\ See NYSE Letter II, at 12; NYSE Letter I, at 16. This 
commenter argued that market participants choose to send orders to 
off-exchange venues for reasons other than avoiding fees, such that 
simply lowering fees would not attract marketable order flow to 
exchanges. See NYSE Letter I, at 16. Another commenter noted that 
the Commission's assertion that any potential degradation of the 
effective bid-ask spread due to lower or reduced rebates could be 
mitigated by lower access fees was ``not supported by empirical data 
or substantive analysis.'' See Nasdaq Letter I, at 8-9. In response 
to these comments, the Commission notes that its belief is support 
by some theoretical studies that show that it is the net fees, i.e., 
the rebates plus fees, that affect trading costs. See e.g. Colliard, 
J.E. & Foucault, T. (2012). ``Trading fees and efficiency in limit 
order markets.'' Review of Financial Studies, Vol. 25 (11), 3389-
3421 (available at: https://academic.oup.com/rfs/article/25/11/3389/1566107). Some empirical studies produce similar results. See, e.g. 
Malinova, K. & Park, A. (2015). ``Subsidizing Liquidity: The Impact 
of Make/Take Fees on Market Quality.'' Journal of Finance, Vol 
70(5), 509-36 (available at: https://onlinelibrary.wiley.com/doi/10.1111/jofi.12230). According to this literature, the effects of a 
reduction in rebates could potentially be offset by lower 
transaction fees. The Commission also notes that some commenters 
acknowledged this could be a potential effect of lower access fees. 
See supra note 23. However, other academic literature shows that in 
the presence of a fixed tick size, changes in fees and rebates can 
still affect trading volume, even in the absence of a change in the 
total fee. See e.g. Foucault, T., Kadan, O., & Kandel, E. (2013). 
``Liquidity Cycles and Make/Take Fees in Electronic Markets.'' 
Journal of Finance, Vol. 68(1), 299-341 (available at: https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2012.01801.x). 
According to this literature, a reduction in transaction fees may 
not fully offset the effects of an equal reduction in rebates. Given 
the mixed results from the academic literature and the disagreement 
among commenters, the Commission believes it is possible that lower 
transaction fees could potentially reduce some of the effects of an 
increase in effective bid-ask spreads caused by a reduction rebates, 
although the magnitude of this reduction is uncertain. The 
Commission believes that the Pilot would generate data and analysis 
that would help the Commission better understand the cumulative 
effects of changes in transactions fees and rebates on spreads and 
trading costs. See supra Section IV.C.1.a.i.
    \902\ See NYSE Letter II, at 12.
    \903\ See Decimus Letter, at 5-6.
---------------------------------------------------------------------------

    To the extent that conflicts of interest affect order routing,\904\ 
lower rebates on taker-maker venues could potentially increase the off-
exchange share of trading volume by causing broker-dealers to increase 
the internalization of smaller marketable orders, even if on-exchange 
liquidity or execution quality does not change.
---------------------------------------------------------------------------

    \904\ See supra Section IV.A.1 (Market Failure at the Broker-
Dealer Level).
---------------------------------------------------------------------------

    Changes in the fill rates of orders at off-exchange trading venues 
could also affect how much marketable order flow is directed to off-
exchange trading venues. However, there are reasons the Pilot could 
increase or decrease the fill rates of orders at off-exchange trading 
venues. Therefore, the effect these changes will have on the 
competition for marketable order flow is uncertain.
    As discussed below,\905\ there are reasons the Pilot could cause an 
increase or decrease in the non-marketable order flow routed to off-
exchange trading venues. If there is an increase in the non-marketable 
order flow routed to off-exchange trading venues, then the fill rates 
of marketable orders routed to off-exchange trading venues would 
increase, which could cause more marketable order flow to be directed 
to off-exchange trading venues. Alternatively, a decrease in the non-
marketable order flow routed to off-exchange trading venues would cause 
a decrease in the fill rate for marketable orders, which would cause 
less marketable order flow to be directed to off-exchange trading 
venues.
---------------------------------------------------------------------------

    \905\ See infra Section IV.D.2.a.ii (Nonmarketable Order Flow).
---------------------------------------------------------------------------

    One factor that could reduce the chance of marketable orders being 
routed away from exchanges is that exchanges have a protected quote. 
One commenter believed that any off-exchange shifts are likely to be 
limited because these trading centers do not have a protected quote, 
and any shifts that would occur would still need to be consistent with 
best execution and not just redistribution to account for market 
participants' cost considerations.\906\ However, given that 34% of all 
transaction volume occurs off-exchange at trading venues without a 
protected quote, it is unclear how much effect a protected quote will 
have on this competition.\907\
---------------------------------------------------------------------------

    \906\ See Healthy Markets Letter, at 10. Another commenter also 
emphasized that exchanges have the advantage of a protected quote 
and that they have an advantage in receiving orders that require 
immediate execution. See IEX Letter II, at 8.
    \907\ See supra Section IV.B.2.a.
---------------------------------------------------------------------------

    The Commission does not expect the Pilot will have a significant 
effect on the competition for retail marketable orders. Normally, these 
orders are internalized by off-exchange wholesale broker-dealers who 
pay retail broker-dealers for the order flow.\908\ Since the Pilot does 
not restrict these rebates, the Commission does not expect the Pilot to 
affect the routing of marketable retail order flow.
---------------------------------------------------------------------------

    \908\ See Battalio Equity Market Study, supra note 530.
---------------------------------------------------------------------------

ii. Nonmarketable Order Flow
    The Pilot could increase or decrease the share of non-marketable 
order flow routed to off-exchange trading venues. This is reflected in 
the divergent views of commenters, who argue over the effects that 
reduced rebates could have on the share of non-marketable order flow 
routed to off-exchange trading venues. In considering these comments, 
and as discussed below, the Commission considered factors that could 
affect the decision to supply liquidity on exchanges or at off-exchange 
trading venues. Furthermore, in considering comments, the Commission 
also considered a number of ways the Pilot could potentially impact 
competition for non-marketable order flow, including: The impact of 
changes in rebates, the impact of changes in liquidity, and the impact 
of changes in off-exchange fill rates.
    The decision to submit a non-marketable order on-exchange or route 
it to an off-exchange trading venue is a trade-off between the profits 
earned from providing liquidity on-exchange compared to the expected 
execution price and probability of having the order filled off-
exchange. Higher exchange rebates, wider spreads, higher on-exchange 
fill rates (shorter on-exchange queue lengths), and lower off-exchange 
fill rates would all increase the chance of a trader deciding to 
provide liquidity on-exchange compared to routing an order to an off-
exchange venue.\909\ The impact of the Pilot on the competition between 
exchanges and off-exchange venues for non-marketable order flow will 
depend on how the Pilot affects these dimensions.
---------------------------------------------------------------------------

    \909\ See supra Section IV.B.2.b.
---------------------------------------------------------------------------

    The Commission believes that the overall effect on the competition 
between exchanges and off-exchange venues for non-marketable order flow 
from a reduction in rebates for stocks in the test groups is unclear, 
because a reduction in rebates could result in either an increase or 
decrease in liquidity.\910\ In theory, a reduction in exchange rebates 
without any changes in liquidity or fill rates would likely cause more 
non-marketable order flow to be routed to off-exchange trading venues. 
However, the Commission believes that this event is unlikely, because a 
reduction in exchange rebates and transaction fees could also affect 
liquidity. Since a reduction in exchange rebates and transaction fees 
could cause liquidity to increase or decrease,\911\ it could also cause 
the share of non-marketable order flow routed to off-exchange trading 
venues to increase or decrease.
---------------------------------------------------------------------------

    \910\ See supra Section IV.C.2.b.iv.
    \911\ See id.
---------------------------------------------------------------------------

    Several commenters voiced concerns that reduced rebates could cause 
liquidity to migrate from exchanges to

[[Page 5285]]

non-exchange trading centers, because exchanges will be restricted from 
providing rebates as incentives for liquidity provision, whereas non-
exchange trading centers could freely offer rebates and other 
incentives to draw orders away from exchanges.\912\ In contrast, 
several commenters disagreed and noted that ATSs generally do not pay 
rebates and tend to charge lower fees than the large exchanges,\913\ 
and that such a pricing model would make it challenging for ATSs to 
start providing rebates sufficiently large enough to draw volume from 
exchanges. If rebates incentivize liquidity provision by providing 
extra revenue to liquidity providers, a reduction in rebates for stocks 
in the Test Groups could incentivize them to divert some of their non-
marketable liquidity providing orders from maker-taker exchanges to 
off-exchange trading venues.\914\ However, this decision could also be 
affected by how the rebate reductions impacted other dimensions of 
liquidity, so the overall effect is difficult to determine.
---------------------------------------------------------------------------

    \912\ See, e.g., Cboe Letter I, at 7-8; Themis Trading Letter I, 
at 1; MFS Investment Letter, at 2; Wellington Management Letter, at 
1; FIA Letter, at 3-4; ASA Letter, at 3; Era Letter, at 2; Knight-
Swift Letter, at 2. One of the commenters suggested the Commission 
should evaluate how disparate treatment of liquidity provision 
between exchanges and non-exchange trading centers could affect 
market participants' incentives to compete for displayed liquidity. 
See Mastercard Letter, at 2. Another of the commenters also noted 
that the competitive balance between exchanges and off-exchange 
trading centers is uneven due to differences in regulatory 
oversight, including filings of fee changes; the ability to assess 
different fees to different customers; and the ability to offer sub-
penny price improvements. See Cboe Letter I, at 8.
    \913\ See IEX Letter II, at 8. One commenter disagreed and noted 
that although ``few ATSs currently use maker-taker fee structures, 
but they have done so in the past and would be incentivized to do so 
in the future'' and that ``restricting fee structures on exchanges 
only would encourage those off-exchange venues to expand their use 
of order-routing incentives to gain a competitive advantage.'' See 
NYSE Letter I, at 4-5
    \914\ It could also result in market makers reducing their 
overall submission of non-marketable orders to supply liquidity, if 
it is the case that rebates encourage market makers to engage in 
excessive intermediation. This in turn could result in a reduction 
in trading volume. See supra note 823 and accompanying text.
---------------------------------------------------------------------------

    As discussed above, changes in liquidity could also affect the 
decision regarding where to route non-marketable limit orders. Since 
the effects of the Pilot on liquidity could be either positive or 
negative, The Commission is uncertain how these changes will affect the 
competition for non-marketable order flow between exchanges and off-
exchange trading venues. If on-exchange liquidity worsens and bid-ask 
spreads widen or quoted depth decreases,\915\ then institutional 
traders could direct more of their non-marketable orders to supply 
liquidity on maker-taker exchanges, either because realized spreads 
increased or because the queue position and fill rates of their on-
exchange nonmarketable orders increased.\916\ Alternatively, if 
liquidity improves and either bid-ask spreads tighten or quoted depth 
increases,\917\ institutional traders could direct more their non-
marketable orders to off-exchanges venues, because the profits earned 
from providing liquidity decreased.
---------------------------------------------------------------------------

    \915\ See supra Section IV.C.2.b.iv.
    \916\ It could incentivize institutional or proprietary traders 
to substitute their marketable orders with nonmarketable limit 
orders on maker-taker exchanges.
    \917\ See supra Section IV.C.2.b.iv.
---------------------------------------------------------------------------

    Change in the rate that orders are filled off-exchange could also 
cause changes in the routing of non-marketable orders between exchanges 
and off-exchange trading venues. However, as discussed below, the 
effect of the Pilot on the fill rate of off-exchange non-marketable 
orders is unclear. Therefore it is difficult to determine the Pilot's 
effect on the routing of non-marketable orders. Changes in the rates at 
which non-marketable orders are filled off-exchange depend on how the 
routing of marketable order flow to off-exchange trading venues 
changes. If a reduction in fees causes more marketable orders to be 
routed to exchanges \918\ it could reduce the fill rate of off-exchange 
orders, which could cause institutions or proprietary traders to 
substitute some of their off-exchange orders with non-marketable orders 
to supply liquidity on maker-taker exchanges. Alternatively, if the 
Pilot causes more marketable orders to be routed to off-exchange 
trading venues,\919\ it could increase off-exchange fill rates, which 
could cause more orders that would have supplied liquidity on exchange 
to be routed to off-exchange venues. However, as discussed above, the 
Commission is unclear whether the share of marketable order flow routed 
to off-exchange trading venues will increase or decrease.
---------------------------------------------------------------------------

    \918\ See supra Section IV.D.2.a.i.
    \919\ See id.
---------------------------------------------------------------------------

    The Commission does not expect the Pilot will have a significant 
effect on the competition between exchanges and off-exchange trading 
venues for retail non-marketable orders. Often, these orders are routed 
by retail broker-dealers to maker-taker exchanges or to wholesale 
broker-dealers who pay retail broker-dealers for the order flow. The 
Commission believes that, despite the reduction in rebates, these 
orders will still be routed to exchanges or to wholesale broker-dealers 
who pay them for their order flow.\920\
---------------------------------------------------------------------------

    \920\ As discussed in detail below, the Commission believes 
retail non-marketable orders for securities in Test Group 1 will 
still be routed to maker-taker exchanges. The restrictions on 
rebates in Test Group 2 may cause some of these orders to be routed 
to taker-maker venues, if they result in better execution quality. 
See infra Section IV.D.2.b.
---------------------------------------------------------------------------

b. Competition Between Exchanges
    This section discusses the potential effects of the Pilot on 
competition between exchanges that use transaction-based fee and rebate 
pricing models. Although the Pilot could temporarily affect the 
competition for order flow between exchanges, the Commission believes 
that many of the effects of the Pilot on this competition, including 
the expected redistribution of market share among the existing 
exchanges, are unclear and difficult to determine in advance. This is 
reflected in the divergent views of commenters, who disagree about the 
effects that reduced rebates and transaction fees could have on 
competition between different types of exchanges.
    Exchanges that pay fees and remit rebates frequently revise their 
fee schedules in order to remain competitive and to attract order flow. 
The impact of the rule on competition depends on the extent to which 
the fee cap and prohibition on rebates or Linked Pricing restrict 
exchanges' transaction-based fee strategies. As discussed in detail 
above,\921\ the Commission believes that the Pilot, while changing 
either transaction fees or rebates on certain subsets of securities, 
could leave the margins that exchanges obtain from transaction-based 
pricing models unchanged. On the one hand, this could preserve the 
current state of competition among exchanges in the market for those 
securities. For instance, it may be possible for exchanges to modify 
fee structures in a way that leaves margins unchanged and does not 
impact competition between exchanges.\922\
---------------------------------------------------------------------------

    \921\ See supra Section IV.C.2.b.i.
    \922\ One commenter agreed with this view and suggested that 
even though the fee cap for the Proposed Test Group 1 was half of 
the current level, ``there was still significant enough 
differentiation available in the fee structure that trading may not 
appear materially different than the control group.'' See Credit 
Suisse Commentary, at 3. However, another commenter argued that the 
fee cap in Proposed Test Group 1 would reduce the exchange's ability 
to compete on fees by 50%. See Cboe Letter I, at 16.
---------------------------------------------------------------------------

    On the other hand, the restrictions on fees and rebates could also 
alter the competitive dynamics between different exchanges. For 
example, the restrictions on fees and rebates could make

[[Page 5286]]

exchanges more similar in Test Group stocks.\923\ This could alter 
competition between exchanges by causing market participants to focus 
less on differences in fees and rebates and more on other metrics, such 
as execution quality when deciding to which exchanges to route order 
flow.
---------------------------------------------------------------------------

    \923\ See supra Section IV.C.2.b.i.
---------------------------------------------------------------------------

    As discussed in detail above,\924\ the Commission cannot ex ante 
predict whether the Pilot will increase or decrease trading volume on 
certain exchanges. Consequently, the Commission acknowledges 
significant uncertainty with respect to the effect of the Pilot on 
exchange competition.
---------------------------------------------------------------------------

    \924\ See id.
---------------------------------------------------------------------------

    One commenter suggested that ``inverted venues would likely 
increase market share as maker rebates disappear and the fee 
differential between venues declines for market makers, lowering the 
relative cost for queue priority.'' \925\ The Commission acknowledges 
that it is possible that a reduction in rebates in Test Group stocks 
could make maker-taker exchanges less competitive for non-marketable 
orders and cause liquidity provision to migrate to inverted venues. 
However, if a reduction in rebates reduces excessive 
intermediation,\926\ causes market makers to shift their liquidity 
provision off-exchange,\927\ or worsens liquidity,\928\ then 
institutional or proprietary traders' non-marketable orders could get 
better queue position and have higher fill rates on maker-taker venues, 
which could attract non-marketable order flow from taker-maker venues, 
where maker participants pay fees for better queue positions and fill 
rates.
---------------------------------------------------------------------------

    \925\ See Credit Suisse Commentary, at 4.
    \926\ See supra note 823 and accompanying text.
    \927\ See supra Section IV.D.2.a.
    \928\ See supra Section IV.C.2.b.iv.
---------------------------------------------------------------------------

    If the Pilot causes changes in liquidity between exchanges in Test 
Group stocks,\929\ it could affect the decision where to route 
marketable order flow. If an exchange experiences an improvement/
decline in liquidity it may also experience an increase/decline in 
marketable order flow, especially since lower differences in fees/
rebates between exchanges could reduce broker-dealer conflicts of 
interest and make them rely more on execution quality when deciding 
where to route marketable orders.\930\ Additionally, it is also 
possible that lower transaction fees on maker-taker venues could make 
these venues more competitive and better able to attract marketable 
order flow in Test Group stocks from inverted venues.
---------------------------------------------------------------------------

    \929\ See id.
    \930\ See supra Section IV.C.1.b.
---------------------------------------------------------------------------

    The Pilot could also alter competition between exchanges by causing 
exchanges to choose to compete less intensively for order flow in one 
Test Group, and instead focus on stocks and ETPs in the other Test 
Group. Some of the shortfall in the competition for order flow for this 
subset of securities could be filled by off-exchange trading 
centers.\931\ Alternatively, exchanges may revise pricing strategies 
for stocks in other groups, choosing to implicitly subsidize rebates 
for stocks in Test Group 1 using fees from Control Group stocks.\932\ 
This may increase competition for order flow in one Test Group while 
reducing it in the other. In the presence of tighter restrictions on 
transaction-based fees during the Pilot Period, exchanges could also 
compete in other ways to attract trading volume (e.g., discounts on 
connectivity fees or increased volume discounts), although the 
Commission believes that for Test Group 1 the ability to offer 
meaningful volume discounts would be limited in light of the $0.0010 
fee cap in that group.\933\
---------------------------------------------------------------------------

    \931\ See supra Section IV.D.2.a.
    \932\ See, e.g., Healthy Markets Letter I, at 27 (noting that 
exchanges use fees collected to pay rebates).
    \933\ For NMS stocks included in Test Group 2 order flow 
incentives would be substantially reduced, particularly any new 
inducements that provide a discount or incentive on one side of the 
market that is linked to activity on the opposite side of the 
market.
---------------------------------------------------------------------------

    The Pilot also could affect competition between large and small 
exchanges. The restrictions on rebates resulting from the Pilot could 
harm smaller exchanges that may be competing by paying large rebates 
rather than by producing better prices or execution quality.\934\ As 
discussed in the Proposal,\935\ liquidity tends to consolidate. 
Therefore, if smaller exchanges are unable to pay larger rebates in 
test stocks, they may lose order flow to larger, more liquid exchanges. 
To the extent that increased order flow in a security directed to a 
particular venue encourages broker-dealers to route more orders for 
that security to the venue, a liquidity externality may develop, making 
the venue the preferred routing destination for all orders.\936\ 
Although these effects would likely last only for the duration of the 
Pilot, depending on the extent of the liquidity externalities, smaller 
exchanges could experience long-lasting competitive effects, such as a 
reduction in trading volume that continues after the expiration of the 
Pilot.\937\ The Pilot also could temporarily discourage entry of new 
exchanges that might otherwise emerge to take advantage of the maker-
taker and taker-maker pricing models.\938\
---------------------------------------------------------------------------

    \934\ See supra Section IV.B.2.a.
    \935\ See the discussion of a liquidity externality in the 
Proposing Release, supra note 2, at 13042.
    \936\ See id.
    \937\ One commenter suggested that the effects of the Pilot may 
be permanent. See NYSE Letter I, at 4, 8.
    \938\ Academic studies suggest a number of new exchanges emerged 
specifically to take advantage of maker-taker and taker-maker 
pricing models. See, e.g., Angel, Harris & Spatt, supra note 530. 
However, some commenters suggested that the loss of fee 
differentiation would lead to an increase in venues as exchanges try 
to make up for lost revenue through other means. See, e.g., Fidelity 
Letter, at 8; Cboe Letter I, at 16-17.
---------------------------------------------------------------------------

    While the consolidation of liquidity may benefit market 
participants, it may also make it difficult for trading centers with 
low volumes in particular securities to compete with trading centers 
that represent liquidity centers in these securities.\939\ In theory, 
this could lead to consolidation or exit by small exchanges as a result 
of the Pilot.\940\ However, the Commission believes that either of 
those events is unlikely because the anticipated revenue shortfall, as 
discussed above,\941\ would be for a limited duration and would not be 
significant enough to cause this result.
---------------------------------------------------------------------------

    \939\ One commenter said that restricting transaction fees would 
disproportionally hurt small exchanges because ``large exchanges 
have diversified revenues away from transaction fees.'' See Magma 
Letter, at 2.
    \940\ One commenter believed that the loss in fee 
differentiation could lead to consolidation and fewer venues 
overall. See Credit Suisse Commentary, at 5.
    \941\ See supra Section IV.C.2.b.i (Loss of Exchanges' Fee 
Revenue).
---------------------------------------------------------------------------

    The Commission recognizes that the potential temporary competitive 
impacts stemming from the Pilot would generally depend on the exposure 
of each trading center to each Test Group and the Control Group of NMS 
stocks, because the constraints on fees and rebates apply differently 
to each group. For instance, if a high portion of an exchange's volume 
was derived from stocks in Test Group 2, it may be at a particular 
competitive disadvantage relative to an exchange that served markets 
across all groups, because the prohibition on rebates and Linked 
Pricing applicable to Test Group 2 would apply to a higher proportion 
of its trading volume. However, the Commission believes that, given its 
aim of producing representative groups of stocks and ETPs for the 
purposes of the Pilot, trading centers are not likely to be 
substantially more exposed to NMS stocks in any one group.

[[Page 5287]]

c. Competition Between Broker-Dealers
    The Pilot also could affect competition between broker-dealers. One 
commenter believed that, due to differences in broker-dealer business 
models, any reduction in rebate incentives or other forms of payment 
for order flow will increase transaction costs, and that large broker-
dealers would be better able to adapt to increased trading costs and 
rebate reductions than small or middle-market broker-dealers.\942\ The 
commenter believed that the Pilot would disproportionately advantage 
large broker-dealers who specialize in low touch execution or own ATSs 
because more customers and order flow would migrate to the largest 
brokers, and that the ``Commission should and is required to undertake 
a rigorous cost-benefit analysis to justify any policy that favors one 
group of Brokers over another.'' \943\
---------------------------------------------------------------------------

    \942\ See ASA Letter, at 2.
    \943\ Id. at 2-3.
---------------------------------------------------------------------------

    The Commission believes that the Pilot could differentially affect 
small and large broker-dealers, but differences in the potential 
compliance costs they face make it unclear whether the Pilot will 
disproportionately advantage large broker-dealers over small or middle-
market broker-dealers. Although larger broker-dealers may possess 
economies of scale which may enable them adapt better to changes in 
fees and rebates, they are also more likely to be members of exchanges 
and subject to the compliance costs of adjusting their systems due to 
changes in exchange fee and rebate schedules discussed above.\944\ As 
of December 2017, of the approximately 3,860 broker-dealers registered 
with the Commission, only 397 are listed as having memberships with at 
least one exchange and would encompass the set of executing broker-
dealers that would be most affected by the Pilot. Therefore, it is 
likely that many small or middle-market broker-dealers will not have to 
bear the compliance costs discussed above.\945\
---------------------------------------------------------------------------

    \944\ See supra Section V.C.2.b.ii (Broker-Dealer Systems 
Costs).
    \945\ See id.
---------------------------------------------------------------------------

    Additionally, since larger broker-dealers are more likely to be 
subject to these compliance costs, they may need to increase their 
commission rates more than smaller broker-dealers to compensate for 
these increased costs. This could potentially offset any advantage that 
larger broker-dealers may possess in being able to absorb any revenue 
loss caused by a reduction in payment for order flow, such as by being 
able to offer smaller increases in commissions compared to smaller 
broker-dealers. However, the Commission cannot quantify this 
difference, because it lacks sufficient data on the differences in 
commission rates between large and small broker-dealers.\946\
---------------------------------------------------------------------------

    \946\ See supra note 805.
---------------------------------------------------------------------------

d. Competition Between Issuers
    A number of commenters noted that the Commission, in the Proposing 
Release, did not discuss the competitive effects to issuers (common 
stocks) from inclusion in various Test Groups of the Pilot.\947\ While 
the Pilot could potentially affect product market competition between 
issuers that compete in the same product market by affecting their 
ability to raise capital,\948\ the Commission does not believe that 
this is likely to occur. Since the Commission does not believe that the 
Pilot will have a significant effect on the ability of issuers to raise 
capital,\949\ the Commission does not believe the Pilot will have a 
significant effect on product market competition between issuers.
---------------------------------------------------------------------------

    \947\ See, e.g., Anixter Letter, at 1; STANY Letter, at 2; NYSE 
Letter, at 2; Johnson Letter, at 1; Cott Letter, at 1; P&G Letter, 
at 1; Nasdaq Letter I, at 8-9. One of these commenters ``urge[d] the 
Commission to further analyze and study the potential impact of the 
Transaction Fee Pilot on issuers and their securities (as well as 
investors in those securities), including the impact on competition 
between issuers in the pilot test groups and those in the control 
group.'' See Anixter Letter, at 1. Another commenter argued that the 
Commission was ``treating all issuers the same without consideration 
for the very significant differences in how the securities of 
different sized and priced companies trade.'' See Nasdaq Letter I, 
at 8.
    \948\ See infra Section IV.D.3 (Capital Formation).
    \949\ See id.
---------------------------------------------------------------------------

    Some commenters argued that the Pilot could inadvertently pick 
``winners and losers'' through the selection of securities to Test 
Groups.\950\ One commenter believed that issuers in certain Test Groups 
could become ``less attractive investments than control group issuers'' 
\951\ while another thought this could ``skew the competitive dynamic 
between issuers and impact the ability of the affected issuers to raise 
capital.'' \952\ They argue that among securities with similar 
characteristics, securities that can offer higher rebates will attract 
more liquidity and trading volume at the expense of securities with 
lower rebates. Several commenters argued that issuers included in the 
test groups with reduced access fees or rebates would experience wider 
spreads, which would put them at a competitive disadvantage compared to 
peer firms in the control group by making it more expensive for them to 
engage in secondary offerings or conduct share repurchase 
programs.\953\ One commenter argued that this would disproportionately 
affect ``small to medium issuers'' where ``[l]iquidity rebates can be 
critical . . . to motivate market makers to support the stock with 
aggressive and actionable quotations.'' \954\ Although some securities 
may experience changes in liquidity as a result of the Pilot,\955\ as 
discussed in detail below,\956\ the Commission does not believe that 
issuers, including small and mid-capitalization issuers, will 
experience significant increases in the cost of capital as a result of 
the Pilot.
---------------------------------------------------------------------------

    \950\ See Nasdaq Letter I, at 10; Invesco Letter, at 2 
(discussing the competitive effects for ETPs).
    \951\ See NorthWestern Letter, at 2.
    \952\ See Ethan Allen Letter, at 1. See also McDermott Letter, 
at 1; ProAssurance Letter, at 1; Era Letter, at 2; Avangrid Letter, 
at 1-2.
    \953\ See NYSE Letter I, at 6-7; Apache Letter, at 2; Mastercard 
Letter, at 2; Era Letter, at 2.
    \954\ See Nasdaq Letter I, at 8-9.
    \955\ See supra Section IV.C.2.b.iv.
    \956\ See infra Section IV.D.3 (Capital Formation).
---------------------------------------------------------------------------

    However, if the Pilot does differentially affect the cost of firms 
in the same product market to raise capital, it could affect product 
market competition by making it more difficult for the firms that 
experienced an increase in capital costs to compete. While the 
Commission acknowledges that theoretical and empirical studies suggest 
that an increase in costs of capital can affect product market 
competition,\957\ the Commission does not believe the Pilot will have 
such an effect on product market competition between issuers. While the 
Commission acknowledges that some issuers may observe a widening of 
spreads and possible reductions in liquidity provision,\958\ as 
discussed below,\959\ the Commission does not believe that the Pilot 
will have a significant effect on capital formation for issuers.\960\ 
Therefore, the Commission does not believe the Pilot will have a 
significant effect on product market competition between issuers. 
Furthermore, the Pilot will allow the Commission to obtain data to be 
able to analyze the impact of

[[Page 5288]]

changes to fees and rebates and how those changes affect a myriad of 
issues, including their impact on competition between issuers.
---------------------------------------------------------------------------

    \957\ See, e.g., Maksimovic, V. (1995). ``Financial Structure 
and Product Market Competition.'' Ch. 27 in Handbooks in Operations 
Research and Management Science, Vol. 9, 887-920 (available at: 
https://www.sciencedirect.com/science/article/abs/pii/S0927050705800714) and Campello, M. (2006). ``Debt Financing: Does 
It Boost or Hurt Firm Performance in Product Markets?'' Journal of 
Financial Economics, 82(1), 135-172 (available at: https://www.sciencedirect.com/science/article/pii/S0304405X05001777) 
(hereafter ``Campello (2006)'').
    \958\ See supra Section IV.C.2.b.iv.
    \959\ See infra Section IV.D.3 (Capital Formation).
    \960\ One commenter agreed and argued that ``there simply is no 
evidence that the Pilot will cause any imminent danger to any 
issuer's stock price or liquidity.'' See Better Markets Letter, at 
3.
---------------------------------------------------------------------------

e. Competition Between ETPs
    The Pilot may also impact the competitive dynamics between 
ETPs.\961\ Although some ETPs could potentially be harmed by the 
Pilot's effect on this competition, there is uncertainty regarding the 
Pilot's effect on the liquidity of ETPs and therefore on competition 
between ETPs.\962\
---------------------------------------------------------------------------

    \961\ A number of commenters stated concerns that the Commission 
had not fully considered the competitive effects on ETPs resulting 
from the Pilot. See, e.g., NYSE Letter I, at 7; ICI Letter I, at 4; 
State Street Letter, at 3; STA Letter, at 4; Schwab Letter, at 3; 
STANY Letter, at 4; Clearpool Letter, at 7-8; Cboe Letter I, at 17-
18; Nuveen Letter, at 1,3; BlackRock Letter, at 1-2; Fidelity 
Letter, at 9; SIFMA Letter, at 4-5; Credit Suisse Commentary, at 6; 
Healthy Markets Letter II, at 8; Oppenheimer Letter, at 3; ICI 
Letter II, at 5; Nasdaq Letter I, at 8.
    \962\ See supra Section IV.C.2.b.iv.2.
---------------------------------------------------------------------------

    Unlike common stocks, whereby trading and investing in those 
securities is likely driven by firm-specific characteristics, ETPs with 
similar investment strategies may be more substitutable. For example, 
some ETPs may follow the same underlying index, and only differ in 
expense ratios, trading characteristics, and in some cases, tracking 
error. Although some of these characteristics may be meaningful 
distinctions for long-term investors, such as expense ratios, other 
characteristics, such as trading characteristics, including transaction 
costs, are likely to be meaningful to market participants that trade 
rather than invest in some ETPs.\963\ One concern is that changes in 
liquidity between similar ETPs in different Pilot groups could have an 
impact on competition by harming ETPs that experience a decline in 
liquidity.\964\ A decline in ETP liquidity could affect competition by 
causing trading volume (demand) to migrate from an ETP that experienced 
a decline in liquidity to a nearly identical ETP in another Pilot group 
that might have experienced an improvement in liquidity.\965\ For 
example, ETPs that are subject to higher rebates may benefit and 
attract more liquidity and trading volume at the expense of similar 
ETPs in different Test Groups that are restricted to offering lower 
rebates.\966\ A decrease/increase in secondary market demand for an ETP 
could cause a decrease/increase in the total assets under management of 
the ETP's sponsor by causing authorized participants to redeem/create 
creation units of ETP shares in order to take advantage of arbitrage 
opportunities in the secondary market.\967\ However, one commenter 
(itself an ETP sponsor) noted that the competitive effects for ETPs 
would likely be temporary and minimal, and would have little effect on 
investor behavior; therefore, the benefits of including ETPs in the 
Pilot outweigh the potential costs of competitive impacts for 
ETPs.\968\
---------------------------------------------------------------------------

    \963\ For example, three ETFs that track the S&P 500 Index have 
expense ratios of 9 bps (SPY), 5 bps (IVV), and 4 bps (VOO). On a 
$10,000 holding over a year, this results in fees of $9, $5, and $4, 
respectively, whereas on a 100-share trade, a widening of spreads by 
one tick would result in a cost of $1.
    \964\ See supra Section IV.C.2.b.iv.
    \965\ A decline in an ETP's liquidity could also cause demand to 
migrate to another type of investment vehicle, such as a mutual 
fund, that follows the same investment strategy.
    \966\ One commenter noted that ETPs in test groups with 
significant rebate reductions or restrictions could be disadvantaged 
competitively to similar ETPs not subject to changes to rebates, and 
because of the nature of ETPs, may lose market share to their 
competitors. See Nasdaq Letter I, at 8. Many commenters agreed with 
this argument. See ICI Letter I, at 4; MFS Letter, at 1; Nuveen 
Letter, at 2; FIA Letter, at 4; SIFMA Letter, at 4-5; Issuer Network 
Letter I, at 3; Schwab Letter, at 3; Fidelity Letter, at 9; Invesco 
Letter, at 2; State Street Letter, at 3; Oppenheimer Letter, at 3; 
Clearpool Letter, at 7-8; Angel Letter I, at 2; STANY Letter, at 4; 
Healthy Markets Letter I, at 11; Cboe Letter I, at 17; NYSE Letter 
I, at 7; Morgan Stanley Letter, at 3-4; BlackRock Letter, at 1-2. 
One commenter believed that the Pilot could ``unintentionally 
advantage ETFs in the lower fee group.'' Credit Suisse Commentary, 
at 6.
    \967\ See supra Section IV.B.2.d (Market for Assets Under 
Management).
    \968\ See Vanguard Letter, at 2. Many commenters believed that 
ETPs should only be included in the Pilot if an alternative design 
was implemented for ETPs, such a placing similar ETPs in the same 
group or rotating ETPs between groups. See supra Section II.B.3.b 
and infra Section IV.E.5.h for a summary of these comments and 
discussions of the costs and benefits of alternative Pilot designs 
for ETPs.
---------------------------------------------------------------------------

    One commenter stated that these competitive effects are likely to 
be more challenging for small or less liquid ETPs that rely on ``market 
maker support and require those same firms to provide seed capital 
(e.g., capital investments).'' \969\ These commenters raised concerns 
that reductions or prohibitions on rebates in certain Test Groups could 
exacerbate the anticompetitive effects for the small, less liquid ETPs 
in these programs by causing degradation in liquidity provision for 
these ETPs.\970\
---------------------------------------------------------------------------

    \969\ See Nasdaq Letter I, at 8.
    \970\ See id. One commenter noted that 477 ETPs trade less than 
2,000 shares per day, while 234 trade between 2,000 and 5,000 shares 
per day. In aggregate, these ETPs have approximately $32 billion in 
AUM, and the Pilot could adversely impact liquidity provision to 
these names leading to unintended investor harm. See Virtu Letter, 
at 7.
---------------------------------------------------------------------------

    The Commission acknowledges that the Pilot could potentially alter 
the competitive dynamics between and demand for similar ETPs that are 
placed in different Test and Control groups. The Pilot could 
inadvertently create ``winners and losers'' among ETPs through both 
competitive shifts and the potential exit of liquidity providers, and 
for some ETPs if these costs are severe, could lead to exit by certain 
ETPs from the market. However, as discussed in detail above,\971\ since 
the Commission does not know ex ante how the Pilot will impact the 
liquidity of ETPs, it is unable to quantify the effects that the Pilot 
will have on competition between ETPs. One of the goals of the Pilot is 
to provide the Commission with data so that it can better evaluate 
these effects.
---------------------------------------------------------------------------

    \971\ See supra Section IV.C.2.b.iv.
---------------------------------------------------------------------------

    In addition to affecting ETP competition through changes in ETP 
liquidity, the Pilot could also affect ETP competition through its 
effects on ETPs underlying securities. As discussed in detail 
above,\972\ if the Pilot impacts the liquidity of the underlying 
securities, it could impact the create-redeem process for ETPs. This 
could affect the price efficiency of the ETP by impacting the cost to 
authorized participants of eliminating mispricing by participating in 
the create-redeem process. For example, if the majority of an ETP's 
underlying securities are placed in the same Test Group and experience 
a decline in liquidity, it could cause the deviation between the ETPs 
price and its NAV to increase, i.e., the price of the ETP could deviate 
more from the price of its underlying securities. This could cause 
demand for the ETP to decline and trading volume to migrate to a 
similar ETP with a lower deviation between its price and NAV, whose 
underlying securities might not have experienced a decrease in 
liquidity.\973\ However, because of the random nature of the assignment 
of securities to Pilot groups and the fact that similar ETPs may 
experience similar liquidity changes in their underlying securities, 
the Commission does not believe that this will have a significant 
impact on competition between ETPs.
---------------------------------------------------------------------------

    \972\ See id.
    \973\ ETPs might not hold all of the securities in the index 
that they track. ETPs that track similar indexes may hold different 
underlying securities in their representative portfolios.
---------------------------------------------------------------------------

3. Capital Formation
    The Commission does not expect the Pilot to have a substantial 
permanent impact on capital formation because the Pilot is limited in 
duration and because it is not expected to have a large impact on 
issuer cost of capital. However, many of the implementation costs 
associated with the Pilot would require exchanges to expend resources 
that they may have otherwise invested elsewhere or distributed to 
shareholders in order to

[[Page 5289]]

maintain the List of Pilot Securities and any changes to those lists, 
as well as the maintenance of the Exchange Transaction Fee Summary and 
the order routing data.\974\
---------------------------------------------------------------------------

    \974\ The costs associated with implementation and compliance 
with the Pilot are discussed in more detail above. See supra Section 
IV.C.2.a.
---------------------------------------------------------------------------

    As discussed above,\975\ the Commission is unable to determine ex 
ante the overall temporary impact of the Pilot on liquidity and total 
transaction costs, because the Pilot's effects on liquidity could be 
positive or negative and vary across securities. As a result, it is 
unclear to what degree the Pilot will temporarily promote or harm 
capital formation. On one hand, the Pilot could temporarily reduce 
total transaction costs for many market participants by consolidating 
liquidity and improving execution quality.\976\ To the extent that such 
cost reductions are realized, they may, for instance, permit market 
participants to more efficiently deploy financial resources by reducing 
the cost of hedging financial risks.\977\ As a result, the Pilot may 
marginally and temporarily promote capital formation. Improvements in 
both liquidity and price efficiency could make capital markets more 
attractive, at least for the duration of the Pilot.
---------------------------------------------------------------------------

    \975\ See supra Section IV.C.2.b.iv.
    \976\ See id.
    \977\ One commenter argues that ``the current system increases 
transaction costs to the public and . . . increases the issuer 
capital costs.'' See Larry Harris Letter, at 9.
---------------------------------------------------------------------------

    On the other hand, the temporary reduction in rebates to certain 
Test Groups as a result of the implementation of the Pilot could widen 
quoted spreads, thereby potentially leading to worse execution prices 
and subsequently reducing liquidity for the duration of the Pilot.\978\ 
This would have similar indirect impacts on capital formation but in 
the opposite direction, by increasing the cost of hedging financial 
risks.
---------------------------------------------------------------------------

    \978\ See Chacko, G.C., Jurek, J.W., & Stafford, E. (2008). 
``The Price of Immediacy.'' Journal of Finance, Vol. 63(3), 1253-
1290 (available at: https://onlinelibrary.wiley.com/doi/epdf/10.1111/j.1540-6261.2008.01357.x). According to Chacko et al., 
liquidity has three important dimensions: Price, quantity, and 
immediacy. A market for a security is considered ``liquid'' if an 
investor can quickly execute a significant quantity at a price at or 
near fundamental value. See also supra Section IV.C.2.b.iv.
---------------------------------------------------------------------------

    Potentially, if the Pilot leads to a significant deterioration in 
liquidity for some listed issuers,\979\ longer term, it could affect 
capital formation for these securities by increasing the costs for them 
to raise capital.\980\ Further, the Pilot could lead to a delay by some 
issuers to raise additional capital during the Pilot's duration.\981\ A 
number of commenters agreed with these assessments and expressed 
concern that random assignment to certain Test Groups could adversely 
affect issuers' ability to raise capital or manage their capital 
structure, by increasing the cost of secondary offerings or the costs 
associated with share repurchase programs.\982\
---------------------------------------------------------------------------

    \979\ See supra Section IV.C.2.b.iv.
    \980\ See supra Section IV.C.2.b.v.
    \981\ Another commenter asserted that the Pilot could harm 
thinly traded stocks and the IPO market. See Nasdaq Letter III, at 
9. With respect to thinly traded securities, the Commission notes 
that the Pilot will exclude NMS stocks that trade less than 30,000 
shares per day. The Commission notes that the Pilot will exclude new 
publicly traded companies whose IPO occurs after the Pilot 
Securities are selected, and therefore the Pilot should not harm the 
market for new IPOs. See Section II.C.6. supra (discussing the 
exclusion of certain thinly traded securities); see also Section 
IV.C.2.b.v. supra (discussing the potential impact of the Pilot on 
issuers).
    \982\ See e.g., Nasdaq Letter I, at 2; ASA Letter, at 3; ACCO 
Letter, at 1; NorthWestern Letter, at 2.; Unitil Letter, at 1-2; 
McDermott Letter, at 1; Weingarten Letter, at 1; ProAssurance 
Letter, at 1; SMP Letter, at 1; Halliburton Letter, at 1; Era 
Letter, at 2; Newpark Letter, at 1; Knight-Swift Letter, at 1; 
Avangrid Letter, at 1-2; NYSE Letter I, at 3, 6-7, 13-14; e.g., 
Level Brands Letter, at 1; Johnson Letter, at 1; P&G Letter, at 1; 
Sensient Letter, at 1; Apache Letter, at 2; Ethan Allen Letter, at 
1-2. See also the discussion in supra Section IV.C.2.b.v (Impact on 
Issuers).
---------------------------------------------------------------------------

    Several commenters argued that these effects would be worse for 
small and medium sized companies.\983\ In theory, if the temporary 
impacts on liquidity acutely impact some firms, it could lead to the 
potential exit of these issuers from the capital markets, either 
through acquisition or delisting. These risks could be greater for 
smaller issuers, because they may not possess enough capital to ride 
out negative liquidity shocks. However, the Commission does not believe 
that this is likely to occur because smaller issuers tend to have high 
transaction costs relative to fee and rebates.\984\
---------------------------------------------------------------------------

    \983\ See Nasdaq Letter I, at 2; ASA Letter, at 4.
    \984\ While the Commission acknowledged this possibility in the 
Proposing Release, it did not suggest that such effects were likely. 
Rather, the Commission stated that it did not ``expect the proposed 
Pilot to have a substantial permanent impact on capital formation . 
. . .'' See Proposing Release, supra note 2, at 13068-69.
---------------------------------------------------------------------------

    Alternatively, a number of commenters disagreed and did not think 
the Pilot would have a significant impact on issuers' ability to raise 
capital.\985\ The Commission agrees with these commenters. As discussed 
in detail below, due to the limited magnitude of the effects of the 
Pilot study, and the uncertain impacts on liquidity, the Commission 
does not expect the Pilot will have significant effects on the ability 
of firms to raise capital.
---------------------------------------------------------------------------

    \985\ See IEX Letter II, at 3-4; Healthy Markets Letter II, at 
2; ICI Letter II at 4-5; T. Rowe Price Letter, at 4-5.
---------------------------------------------------------------------------

    The Pilot may also affect capital formation through its impact on 
discretionary accounts. A number of broker-dealers have discretionary 
agreements with their clients, wherein the broker can transact in the 
client's account without the client's consent. For the duration of the 
Pilot, some broker-dealers may alter the composition of their clients' 
portfolios to trade and hold greater proportions of the accounts in 
high-rebate NMS stocks (including ETPs) in the Control Group. Such 
revisions to portfolio composition as a result of the Pilot are not 
necessarily efficient from an investor's perspective and could have a 
detrimental impact on capital formation insofar as they increase the 
riskiness of client portfolios or decrease client portfolios' expected 
returns.\986\ This behavior would temporarily distort the market for 
high-rebate stocks and ETPs, creating a higher demand for these 
securities and potentially leading to an inefficient allocation of 
capital based on signals that are unrelated to firm fundamentals.
---------------------------------------------------------------------------

    \986\ Allocative efficiency in the context of investment choice 
is optimized when there are no restrictions on the set of investment 
opportunities available to an investor. See, e.g., Nielsen, N.C. 
(1976). ``The Investment Decision of the Firm under Uncertainty and 
the Allocative Efficiency of Capital Markets.'' Journal of Finance, 
Vol. 31(2), 587-602 (available at: https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6261.1976.tb01908.x) If the Pilot potentially 
leads some broker-dealers to alter the investment opportunity set to 
avoid securities that do not pay rebates, then allocative efficiency 
for those investors would likely be impaired since the opportunity 
set is restricted.
---------------------------------------------------------------------------

    One commenter analyzed secondary offerings from its listed issuers 
during 2017 and found that lower liquidity was associated with a higher 
cost of capital.\987\ The Commission points out that the analysis 
performed by this study merely examines associations between spreads 
and capital costs and does not establish that wider quoted spreads 
cause higher costs of capital.\988\ To supplement this comment, 
Commission staff analyzed the same secondary offerings and found that 
after controlling for fundamental issuer characteristics, such as size, 
book-to-market, and analyst coverage, the size of the quoted spread was 
not positively related to issuers' costs of capital.\989\
---------------------------------------------------------------------------

    \987\ See NYSE Letter I, at 3.
    \988\ One commenter agreed that there is no evidence that 
``issuer costs of capital are caused by quoted spreads.'' See IEX 
Letter II, at 4.
    \989\ Depending on how exchanges measure discounts (a proxy 
measure for the cost of capital), whether from the bid price or the 
midpoint, there could be mechanical variation imposed simply by 
differences on how data vendors measure discounts. Staff analyses 
relied on SDC measures of discounts to approximate issuers' costs of 
capital, and observed that using the same spread breakpoints, 
discounts were approximately 3.6% for issuers with spreads below 20 
bps, and 7.6% for issuers with spreads above 20 bps, indicating 
differences in methodologies of how discounts are computed can 
affect magnitudes. Regardless of the difference in magnitudes of the 
discounts, low-spread issuers, on average, had lower discounts than 
high spread issuers, consistent with NYSE's spread-discount 
relationship. See NYSE Letter I, at 3.

---------------------------------------------------------------------------

[[Page 5290]]

    The Commission notes that a temporary effect on transaction costs 
may not have the same impact on cost of capital as a permanent effect 
on liquidity and does not believe that any temporary increase in 
transaction costs resulting from the Pilot could be significant enough 
to affect issuers' costs of capital. Indeed, the experience with the 
recent Tick Size Pilot provides an example of a temporary change in 
liquidity that did not affect cost of capital. While several studies 
found that the Tick Size Pilot increased transaction costs,\990\ the 
findings of a DERA white paper suggest that the market did not expect 
the Pilot to affect stock prices of companies in the Test Groups.\991\ 
Specifically, the paper finds that the announcement of the assignment 
of stocks to the Test Groups and the Control Group did not generate 
significant abnormal returns for stocks in the Test Groups, either in 
absolute terms or relative to stocks in the Control Group.\992\ Under 
the standard assumption that the market's expectations about the 
effects of the Pilot were correct, this result indicates that the 
increase in quoted spreads and transaction costs during with the Pilot 
had no impact on stock prices. Thus, these findings cast doubt on the 
idea that temporary changes in transaction costs affected the cost of 
capital of small capitalization companies. In addition, because the 
Tick Size Pilot enacted a 500% increase in the tick size, that pilot 
could arguably have a bigger direct impact on transaction costs than 
the Transaction Fee Pilot, which would reduce rebates by 30% of a tick.
---------------------------------------------------------------------------

    \990\ See e.g., Hu, E., Hughes, P., Ritter, J., Vegella, P., & 
Zhang, H. (2018). ``The Tick Size Pilot Plan and Market Quality.'' 
SEC White Paper (available at: https://www.sec.gov/dera/staff-papers/white-papers/dera_wp_tick_size-market_quality).
    \991\ See Pachare, S. & Rainer, I. (2018). ``Does the Tick Size 
Affect Stock Prices? Evidence from the Tick Size Pilot Announcement 
of the Test Groups and the Control Group,'' SEC White Paper 
(available at: https://www.sec.gov/dera/staff-papers/white-papers/dera_wp_does_the_tick_size_affect_stock_prices). See also fn. 13 in 
Albuquerque, R.A., Song, S., & Yao, C. (2018). ``The Price Effects 
of Liquidity Shocks: A Study of SEC's Tick Size Experiment.'' 
Working Paper (available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3081125), reporting on their finding that the 
stock prices did not react to the announcement of which stocks were 
in the pilot.
    \992\ The results were similar when they limit the analysis to 
stocks with pre-Pilot quoted spreads smaller than $0.05.
---------------------------------------------------------------------------

    One commenter disagreed and believed that the findings of the DERA 
white paper were flawed.\993\ This commenter argued that the DERA study 
``relies on a selective, narrow, and irrelevant data set'' and that 
``focusing on a few days around the time when stocks were assigned to 
test groups within the Tick Pilot, and not a materially longer period 
of time during which the Tick Pilot's quoting and trading restrictions 
were in effect, is a clear indication that DERA narrowly tailored its 
study to reach a specific and flawed conclusion.'' \994\ This commenter 
stated that it ``does not believe that the White Paper supports any 
conclusion regarding the impact of the Tick Pilot on investors or the 
potential impact of the Transaction Fee Pilot on issuers.'' \995\
---------------------------------------------------------------------------

    \993\ See NYSE Letter V, at 1.
    \994\ See id. at 2.
    \995\ See id. at 3.
---------------------------------------------------------------------------

    However, another commenter noted that ``DERA's event study is 
informative to a central criticism'' raised by some commenters that 
``upon implementation of the [Pilot], spreads will widen in stocks 
chosen for the `low rebate' or `no rebate' buckets and that wider 
spreads will harm issuers of the impacted stocks.'' \996\ This 
commenter found the ``lack of price impact . . . telling,'' because 
``the price of . . . stock is the primary measure'' of ``potential harm 
to issuers . . . .'' \997\ This commenter explained that, ``if 
liquidity diminishes, or expected returns of the stock decline, this 
would be reflected in the value of the stock--and no such statistically 
significant decline in value was found.'' \998\ The commenter believed 
that the short duration of DERA event study was appropriate because 
``markets rapidly incorporate new information'' into stock prices.\999\ 
The Commission agrees with this commenter and believes that the DERA 
white paper used an appropriate methodology to study how the increase 
in quoted spreads and transaction costs from the Tick Size Pilot 
affected the stock prices and cost of capital of firms in the Test 
groups. The Commission believes that the DERA white paper did not rely 
on a ``selective, narrow, and irrelevant data set'' and instead picked 
the appropriate time period, the few days surrounding publication of 
the list of which stocks would be included in the test and control 
groups, to examine how the market reacted to the information about 
which stocks would have their spreads widen as a result of the Tick 
Size Pilot. This approach is standard in the academic literature 
because information is quickly incorporated into stock prices at the 
time it is made public. The Commission believes that the DERA white 
paper is relevant to this Pilot because it examines how a firm's cost 
of capital is affected by a temporary widening of the firm's spreads, 
which is a potential effect of this Pilot.\1000\ As discussed above and 
noted by the commenter,\1001\ if a firm's cost of capital increased as 
a result of the wider spreads caused by the Tick Size Pilot, we would 
expect that stock's price to decline during the announcement of test 
and control groups.
---------------------------------------------------------------------------

    \996\ See Verret Letter II, at 1.
    \997\ See id. at 2.
    \998\ See id.
    \999\ See id. at 3.
    \1000\ See supra Section IV.C.2.b.iv.
    \1001\ See Verret Letter II, at 2.
---------------------------------------------------------------------------

    The Commission recognizes that another paper comes to the opposite 
conclusion regarding the impact of the Tick Size Pilot on costs of 
capital, but does not find the paper convincing. This paper compares 
the stock price reactions of stocks in the test and control groups 
around the time the Tick Size Pilot was implemented.\1002\ They find 
that stocks in the test groups that experienced a decrease in liquidity 
when the tick size widened also experienced a decrease in prices, 
relative to stocks in the control group, around the time the Tick Size 
Pilot was implemented.\1003\ However, it is unclear exactly what the 
return differences documented in the study are measuring. If investors 
expected that test group stocks would experience a temporary reduction 
in liquidity during the Tick Size Pilot and that this would make it 
more costly for those stocks to raise capital, then standard economic 
assumptions would expect to see a negative stock price reaction for 
test group stocks around the announcement of the Tick Size Pilot test 
and control group stocks, not during the time period following the Tick 
Size Pilot implementation.
---------------------------------------------------------------------------

    \1002\ See Albuquerque et al. (2018), supra note 991.
    \1003\ The list of stocks assigned to the Tick Size Pilot test 
and control groups was announced on September 3, 2016. The rollout 
of the Tick Size Pilot was implemented on a staggered basis over 
October 2016. See Hu et al. (2018), supra note 990.
---------------------------------------------------------------------------

    Given the results of the DERA study and the uncertainty surrounding 
the Albuquerque et al (2018) results, combined with the fact that the 
average trading cost increase, i.e. decrease in liquidity, during the 
Tick Size Pilot is greater than the expected potential effects on 
liquidity during the Transaction Fee Pilot, the Commission

[[Page 5291]]

believes that the costs of capital are unlikely to significantly 
increase for Test Group stocks due to a temporary decrease in liquidity 
during the Transaction Fee Pilot. Because the Tick Size Pilot was 
conducted on firms with small market capitalizations, this should also 
help alleviate concerns for small to mid-capitalization issuers about 
temporary decreases in liquidity increasing the costs related to 
raising capital. One commenter agreed that, although some issuers may 
have temporary widening of spreads over the Pilot duration, any changes 
to liquidity caused by the Pilot are unlikely to affect the costs to 
firms when raising capital.\1004\ Therefore, the Commission does not 
believe that issuers, including small and mid-capitalization issuers, 
will experience significant increases in the cost of capital as a 
result of the Pilot.
---------------------------------------------------------------------------

    \1004\ See IEX Letter II, at 3-4.
---------------------------------------------------------------------------

E. Alternatives

    The Commission considered several alternatives to the Pilot, 
including: (1) Proceed to propose rule amendments without first 
conducting a Pilot; (2) expand the Pilot to include off-exchange 
venues, including ATSs; (3) include a trade-at provision; (4) conduct 
alternative pilots; and (5) adjust the design of the Pilot (e.g., 
including a number of alternatives proposed by commenters).
1. Propose Rulemaking Without Conducting a Pilot
    Several commenters suggested that the Commission should proceed 
with rulemaking rather than first conducting the Pilot. For example, as 
discussed elsewhere in this release,\1005\ as an alternative to 
conducting the Pilot, one commenter suggested that the Commission 
impose a ``gradual reduction of the current fee cap across all stocks 
periodically.'' \1006\ Such an approach would address the concerns 
raised by a number of commenters, discussed above, about the potential 
impact on largely identical ETPs and listed issuers that are placed in 
different test groups, without the added cost and complexity of 
rotating stratified samples through the Pilot.\1007\ In addition, such 
an approach could provide data on successive reductions in the current 
fee cap, which could be useful to the Commission if it considers future 
policy making to reduce the Rule 610(c) fee cap.
---------------------------------------------------------------------------

    \1005\ See supra Section II.C.8(g) and (h) and Section IV.E.4.
    \1006\ Morgan Stanley Letter, at 2.
    \1007\ See supra note 104 and accompanying text.
---------------------------------------------------------------------------

    However, depending on the number of fee caps to be tested, this 
alternative would increase instability in the markets in terms of the 
fee regime that markets are subject to. This would occur because the 
cap would be reduced successively and linearly and each tranche would 
need to be in place for a sufficient amount of time in order to obtain 
statistical power. Further, without a control group, researchers would 
be unable able to conduct a differences-in-differences analysis as the 
data would be subject to the impact of events across time, which would 
frustrate the ability of researchers to compare groups to one another 
over time. The Commenter was open to having a control group not subject 
to the decline in fees, which would allow for identifying causality. 
However, even with the inclusion of a control group, this alternative 
would still increase the time in which markets are subject to 
instability in fees and rebates and the time needed to understand the 
impact of fees and rebates because at each different fee level the 
Commission would need to test that fee level for a sufficient time to 
gain statistical power. Further, including a control group in this 
alternative could potentially result in different treatment for largely 
identical ETPs, as in the adopted Pilot, but with an increase in the 
potential time needed for study.
    Alternatively, this commenter suggested that the Commission 
implement ``dynamic, stock specific ticks with transaction fees capped 
at, for example, 10% of the tick size (e.g. $0.0010 per share if a 
penny tick; $0.0050 per share if a nickel tick.)'' \1008\ Another 
commenter suggested that, rather than pursuing the Pilot, the 
Commission should amend Rule 610(c) to reduce the access fee cap to 
$0.0010 and also conduct ``an abbreviated study of the effects of 
eliminating rebates'' similar to the ``no-rebate'' Test Group.\1009\ 
One commenter recommended that the Commission ``ban maker-taker and 
inverted transaction fee pricing as well as all volume-based discounts 
that are not clearly and directly related to cost savings'' \1010\ 
while another suggested that the Commission enhance the duty of best 
execution in lieu of a pilot.\1011\
---------------------------------------------------------------------------

    \1008\ Id. at 2-3.
    \1009\ Goldman Sachs Letter, at 1-4.
    \1010\ Larry Harris Letter, at 9.
    \1011\ See Nasdaq Letter, at 1, 3.
---------------------------------------------------------------------------

    Several commenters opined on the potential benefits and reduced 
costs of these alternatives as compared to proceeding with the Pilot. 
For example, according to one commenter, a gradual ``walk down'' 
approach would be preferable to the Pilot because it would allow the 
Commission to ``observe order routing behavior changes, while applying 
the same economics to all stocks uniformly'' and would ``eliminate 
concerns about issuers being subject to disparate treatment.'' \1012\ 
According to this commenter, it also would ``eliminate[ ] concerns that 
the Pilot results will not reflect the actual outcome if such changes 
are applied more broadly to stocks outside of the Pilot.'' \1013\ 
Similarly, another commenter noted that it would be ``more effective 
and less damaging to the equities market to strengthen and better 
articulate the broker-dealers' Duty of Best Execution'' than proceeding 
with the Pilot, which the commenter believed would impost ``tremendous 
costs'' to investors and potentially ``upend[ ] the existing economics 
and framework around equity executions.'' \1014\ Further, one commenter 
noted that because ``there is broad recognition'' that the access fee 
cap should be reduced, there is no need to incur the costs associated 
with the Pilot and the Commission should simply reduce the fee cap to 
$0.0010 to ensure that displayed prices reflect the actual economic 
costs of an execution, while also allowing exchanges to continue to 
offer rebates to incentivize liquidity provision if they chose to do 
so, while also maintaining their net capture rates.\1015\ This 
commenter believed that lowering the fee cap to $0.0010 would provide 
``immediate benefits to the equities markets with respect to price 
transparency and addressing conflicts of interest'' \1016\ and would be 
``better calibrated with today's market pricing.'' \1017\ Another 
commenter argued that ``the effects of maker-taker and inverted 
transaction fee pricing on the markets are well understood'' and 
therefore concluded that it was very unlikely that ``we will learn 
anything of value about the economics of exchange transaction fee 
pricing'' from the Pilot.\1018\ Consequently, this commenter believed 
that the Commission should mandate that the exchanges return to a 
traditional transaction fee pricing

[[Page 5292]]

model, which the commenter believed would not result in much cost to 
market participants.\1019\
---------------------------------------------------------------------------

    \1012\ Morgan Stanley Letter, at 2.
    \1013\ Id. at 2.
    \1014\ Cboe Letter I, at 12, 21-22. See also Nasdaq Letter I, at 
2 (referring to the Pilot as a ``risky experiment'').
    \1015\ Goldman Sachs Letter, at 1, 3.
    \1016\ Id. at 1-3.
    \1017\ Id. at 4.
    \1018\ Larry Harris Letter, at 9-11. See also Goldman Sachs 
Letter, at 4 (stating there is ``broad support in favor of lowering 
the Fee Cap today,'' and the Pilot ``will not yield a different 
conclusion.'').
    \1019\ Id.
---------------------------------------------------------------------------

    However, other commenters strongly supported the Pilot as a first 
step because it ``should provide data to enable the Commission to 
determine the impact of transaction-based fees and rebates on order 
routing behavior, on execution quality and on market quality'' and 
believed the data collected would ``support appropriate reforms to U.S. 
equity market structure.'' \1020\ Among those who supported conducting 
the Pilot before considering rulemaking, one commenter noted the lack 
of information regarding the rebates paid by each exchange to each 
broker and stated that such lack of disclosures ``reinforce the 
difficulty in assessing the impact of the structure of a[cc]ess fees on 
distorting best execution, conflict[s] of interest and competitiveness 
of exchange pricing.'' \1021\ Still another commenter opined that the 
Pilot ``is a necessity'' to provide a ``quantitative approach to which 
stocks require liquidity support and how much a rebate should be to 
incent support.'' \1022\
---------------------------------------------------------------------------

    \1020\ RBC Letter I, at 2.
    \1021\ Spatt Letter, at 4.
    \1022\ Babelfish Letter, at 3.
---------------------------------------------------------------------------

    The diversity of opinion and lack of consensus among the commenters 
regarding the impact of fees and rebates on market quality and order 
routing behavior support the view that further study in this area is 
warranted before permanently adopting any changes through rulemaking. 
As discussed above, there was sharp disagreement between commenters 
about the potential impacts of reductions in fees and rebates, yet 
there is little data available to evaluate these claims on a broad 
scale. As discussed above, the Commission believes that there is no 
need to delay proceeding with the Pilot in order to pursue other 
potential equity market structure initiatives. Equity market structure 
issues have been considered for a number of years and, as a result of 
several initiatives in this area, the Commission has developed the 
Pilot, which is focused on and is intended to gather empirical evidence 
on the impact of exchange transaction fees and rebates. Similarly, the 
Commission does not believe that it needs to complete the Pilot before 
proceeding to consider all other equity market structure initiatives. 
The Commission expects that it will continue to evaluate the need for 
other changes to equity market structure during the pending of the 
Pilot.
2. Expand Transaction Fee Pilot To Include Non-Exchange Trading Centers
    The Transaction Fee Pilot would not require ATSs or other non-
exchange trading venues to comply with the limits to transaction fees 
or rebates imposed by the Pilot. Some commenters believed that non-
exchange trading centers should be included in the Pilot and that the 
representativeness of the data obtained from the Pilot would be 
impaired by the exclusion of ATSs and other off-exchange trading 
centers.\1023\ For example, one commenter stated that the Pilot ``would 
not gather any insight into the trading patterns at those centers'' 
because the Commission would be unable to ``follow order flow across 
all trading venues in the market, leaving it with an incomplete picture 
of the issue it seeks to study.'' \1024\ Another commenter believed 
that excluding non-exchange trading centers could skew the results of 
the Pilot, as broker-dealers could shift order flow away from exchanges 
in response to the Pilot, thereby limiting the Commission's 
understanding of the overall impact of changes to transaction-based 
fees and rebates.\1025\
---------------------------------------------------------------------------

    \1023\ See Section II.A.4 for a summary of these comments. Some 
commenters believed that non-exchange trading centers should only be 
subject to the rebate prohibitions of the no-rebate Test Group. See, 
e.g., Capital Group Letter, at 3; AJO Letter, at 1; Nasdaq Letter 
III, at 9.
    \1024\ NYSE Letter I, at 9. See also, e.g., Cboe Letter I, at 
12, 19; Nasdaq Letter I, at 2, 5; ViableMkts Letter, at 1-2.
    \1025\ Wellington Letter, at 2. See also, e.g., Oppenheimer 
Letter, at 3. One commenter also believed that the Pilot could 
affect the way that securities are traded off-exchange and confound 
the Commission's ability to understand the baseline for remuneration 
occurring off-exchange or the impact that the Pilot has on that 
baseline. Nasdaq Letter I, at 7. The Commission does not believe 
that its ability to analyze the impact of changes to transaction-
based fees and rebates will be unduly limited, due to information 
that is now available from Regulation ATS-N and Rule 606.
---------------------------------------------------------------------------

    An alternative design that includes non-exchange trading centers 
like ATSs would be broader than the Pilot--not only because such a 
design would include more trading venues, but also because such a 
design would have to account for the fact that non-exchange trading 
centers like ATSs use other inducements, besides transaction-based fees 
and rebates, to incent order flow.\1026\ The inclusion of non-exchange 
trading centers could, therefore, supply information about a more 
complete set of order routing decisions, increase the 
representativeness of the results obtained, and provide a deeper 
understanding regarding the ways in which exogenous shocks to 
transaction-based fees and rebates (and other inducements) affect order 
routing decisions. For example, a pilot that included non-exchange 
trading centers, and regulated the inducements used by such centers, 
might impact payment for the internalization of retail order flow, 
which would allow researchers to evaluate how these inducements affect 
retail order routing. A pilot that addressed payment for order flow on 
non-exchange trading centers could, in turn, result in more retail 
order flow being routed to lit exchanges, which also could increase 
displayed liquidity and potentially improve price efficiency.
---------------------------------------------------------------------------

    \1026\ See, e.g., Morgan Stanley Letter, at 3 n.5; BIDS Letter, 
at 1-2; AJO Letter, at 2.
---------------------------------------------------------------------------

    However, the inclusion of non-exchange trading venues may be 
difficult to implement. First, non-exchange trading venues charge 
idiosyncratic and individually-negotiated fees to market participants, 
and often bundle fees for ATS usage with other broker-dealer fees, such 
that it would be exceptionally difficult to create and then impose a 
uniform fee regime on such venues.\1027\ For example, it is unclear how 
an ATS that charges an ``all in'' flat fee for service and does not 
charge individually for executions would be able to comply with a 
transaction-based fee cap. To comply with the Pilot's transaction-based 
pricing restrictions, non-exchange venues may be required to entirely 
restructure their customer relationships to move to a transaction-based 
pricing model for the duration of the Pilot, which would impose notable 
costs on those venues. Further, any alternative design would address 
other inducements provided by non-exchange trading centers aside from 
transaction-based fees and rebates, in order to produce a fully 
accurate analysis of the impact of fees and inducements on order 
routing behavior, market quality, and execution quality. Such a design 
would be much more complex that the current Proposal. Finally, an 
alternative design that included non-exchange trading centers also 
would impose costs on such venues that would be higher relative to the 
costs imposed on exchanges under the current design, because the Pilot 
would require non-exchange trading venues to track and report more 
detailed information than is currently required by the

[[Page 5293]]

Commission.\1028\ As discussed above, exchanges are required to file 
each fee change with the Commission on Form 19b-4 and to disclose the 
entirety of their schedule of fees on their website, while non-
exchanges venues are not subject to those requirements. Thus, including 
non-exchange trading venues in an alternative version of the Pilot 
would likely increase the costs of the Pilot because it would require a 
dramatic shift in the disclosure regime for these trading centers.
---------------------------------------------------------------------------

    \1027\ See, e.g., AJO Letter, at 2-3. It is possible that non-
exchange trading venues might respond to the Pilot by choosing to 
change their existing fee structures to align with the maker-taker 
(or taker-maker) pricing models employed by exchanges, which could 
lead to additional costs for such venues. See, e.g., Virtu Letter, 
at 6; SIFMA Letter, at 5; Clearpool Letter, at 4; Healthy Markets 
Letter I, at 9-10.
    \1028\ Although Form ATS-N requires ATSs to provide public 
disclosures about the different types of fees they charge, along 
with the ranges of those fees and service bundling, these 
disclosures do not provide as much information as the fee 
disclosures that will be required by the Pilot.
---------------------------------------------------------------------------

    Although the Pilot excludes non-exchange trading centers, the 
Commission will still be able to obtain information regarding the 
proportion of trades executing on such platforms from several sources. 
First, several transaction datasets, including trade reporting facility 
(TRF) data and TAQ data, provide information on off-exchange trades, 
including ATS trades. Further, FINRA produces periodic (weekly) data on 
the total shares of NMS securities executed on individual ATSs.\1029\ 
Thus, researchers would obtain information from the Pilot to identify 
whether exogenous shocks to transaction-based fees on exchanges have an 
effect on order routing decisions, including whether broker-dealers 
alter their routing of order to ATSs during the Pilot.
---------------------------------------------------------------------------

    \1029\ By combining the FINRA volume data executed by ATSs for a 
given security with other data, such as TAQ, which would provide 
total share volume for a given security, a researcher would be able 
to estimate the fraction of ATS trading as a percentage of total 
trading in NMS securities over the same time period.
---------------------------------------------------------------------------

3. Trade-At Test Group
    The Commission considered an alternative in which the Transaction 
Fee Pilot would include a ``trade-at'' provision in conjunction with 
the changes to the fees and rebates currently in the Pilot. The trade-
at alternative would require that orders be routed to a market with the 
best displayed price or are executed at a materially improved price.
    Some commenters supported including a trade-at subgroup to provide 
supplemental information to the Commission about how a combination of 
trade-at provisions coupled with revisions to transaction-based fees 
and rebates affect broker-dealer order routing decisions.\1030\ Some 
other commenters, however, asserted that including a trade-at 
requirement could compromise the results of the Pilot as it would 
introduce an additional variable to one or more treatment groups.\1031\ 
To address this concern, the Pilot could include separate test 
subgroups that also include a trade-at requirement, in addition to 
requirements regarding transaction fees and/or rebates.
---------------------------------------------------------------------------

    \1030\ See, e.g., Adorney Letter, at 1; Birch Bay Letter, at 1; 
NYSE Letter II, at 5.
    \1031\ See, e.g., See Citadel Letter, at 6; Fidelity Letter, at 
10; Citigroup Letter, at 3; SIFMA Letter, at 4; TD Ameritrade 
Letter, at 7; Virtu Letter, at 5; ICI Letter I, at 2.
---------------------------------------------------------------------------

    Such an approach would require including more stocks in the Pilot. 
If the amount of securities in each Test Group were too small, the 
Pilot results would not achieve statistical power. Accordingly, in 
order to provide information on the impacts of an exogenous shock to 
transaction fees and rebates while also providing additional 
information on the effects of a trade-at requirement, the Pilot either 
would need to increase the number of Pilot securities or add to its 
duration.
    The expected impact on liquidity of the inclusion of a trade-at 
test group is unclear. The recently concluded Tick Size Pilot included 
a trade-at test group. The Tick Size Pilot included a trade-at group 
because exchanges were concerned that, in the current market 
environment, a significantly larger tick size could induce order flow 
to go off exchange.\1032\ For the Transaction Fee Pilot, commenters 
were split on whether marketable order flow will be more or less likely 
to flow to off-exchange trading centers, with some believing that as 
access fees for some test groups decline, order flow could be drawn 
back to exchanges. However, in considering the Tick Size Pilot, it is 
important to note that it only considered the impacts of trade-at when 
the tick size was increased and only for smaller, less liquid stocks. 
The effects might not be the same with 1 cent tick size and more liquid 
stocks that are included in the Pilot. One commenter noted that in the 
trade-at test group for the Tick Size Pilot, the number of shares 
displayed at the NBBO increased and quote volatility was reduced in the 
trade-at test group relative to the other test groups.\1033\ 
Nevertheless, analysis of the Tick Size Pilot data does not reveal 
significant execution quality or market quality effects of a trade-at 
rule. Specifically, the data suggests there was no change in effective 
spreads or price efficiency due to the trade-at requirement.\1034\ 
Results from the Tick Size Pilot also suggest that trade-at impacts 
trade location. Specifically, off-exchange share of trading volume 
decreased and on-exchange market share increased, particularly at 
inverted exchanges. However, volume for midpoint crossing off-exchange 
venues increased, but this could be the result of the midpoint 
exception to the Tick Size Pilot's trade-at requirements.\1035\ This 
shift in trading volume may occur because a trade-at provision 
increases incentives to display prices because off-exchange trading 
centers would no longer be able to match the best price offered 
elsewhere, but instead would have to provide significant price 
improvement or start displaying their quotes at the NBBO. These 
findings suggest that the inclusion of a trade-at test group may 
benefit exchanges, which may experience increased trading volumes, but 
be costly for off-exchange venues, which may lose trading volume.
---------------------------------------------------------------------------

    \1032\ See Tick Size Pilot Approval Order at 27538-42. As 
discussed above in Section IV.D.2, a number of commenters have 
expressed similar concerns with respect to the Transaction Fee 
Pilot, whereby a reduction in rebates could widen spreads and lead 
to a migration of order flow to off-exchange trading centers. In the 
Tick Size Pilot, the trade-at provision applied when the tick size 
was increased and only smaller, less liquid stocks were included in 
that pilot. The Transaction Fee Pilot, on the other hand, also will 
include more liquid stocks and does not test the wider tick 
increments that were the subject of the Tick Size Pilot, so the 
effects of trade-at may or may not be the same between the two 
pilots.
    \1033\ See Birch Bay Capital Letter, at 1. Other commenters that 
supported the inclusion of a trade-at test group. See, e.g., C&C 
Letter, at 1. But see Citadel Letter, at 6 (noting that there was no 
evidence of improvement in market quality in the trade-at test 
groups in the Tick Size Pilot).
    \1034\ Id. at 990. See also Farley, Ryan and Eric Kelley and 
Walter Puckett, Dark Trading Volume and Market Quality: A Natural 
Experiment (April 3, 2018) available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3088715.
    \1035\ See Comerton-Forde, Carole and Gregoire, Vincent and 
Zhong, Zhuo, Inverted Fee Structures, Tick Size, and Market Quality 
(August 10, 2018), Journal of Financial Economics (JFE), 
Forthcoming, available at SSRN: https://ssrn.com/abstract=2939012 or 
http://dx.doi.org/10.2139/ssrn.2939012.
---------------------------------------------------------------------------

4. Alternative Pilot
    One commenter suggested an alternative to the Pilot that would 
involve directly lowering the Rule 610(c) access fee cap to $0.0010 and 
establishing a moratorium on fee increases for existing market data, 
connectivity, and co-location services.\1036\ The commenter believed 
its alternative would allow a direct test of the ``anachronistic'' 
610(c) fee cap level and make exchange fees more competitive with non-
exchange venues.\1037\ In addition, similar to the other alternative 
discussed directly above, it would impose a lower cap on

[[Page 5294]]

all NMS stocks simultaneously and thereby address the potential 
competitive impact on largely identical ETPs and listed issuers. The 
commenter suggested this alternative would reduce the complexity of 
implementation and would avoid ``introducing new classes of 
restrictions'' including prohibition on payment of transaction-based 
rebates.\1038\ Further, in linking transaction fees to market data and 
connectivity fees, the commenter suggested that its alternative would 
address commenters' desire ``to reduce their cost to trade'' without 
banning rebates for liquidity provision, which it argued could 
negatively impact displayed quotes.\1039\
---------------------------------------------------------------------------

    \1036\ See NYSE Letter III, at 3; see also Issuer Network Letter 
II, at 4.
    \1037\ See id.
    \1038\ See id. The commenter also suggested that avoiding this 
``new class of restrictions'' would limit the ``likelihood of court 
challenge'' to the Pilot. Id.
    \1039\ See id.
---------------------------------------------------------------------------

    However, the combined fee cap and moratorium would not feature a 
control group. While the commenter suggested the Commission could ``use 
comparisons to the preceding period to evaluate its efficacy,'' the 
absence of a control group could frustrate researchers' ability to 
detect changes as the results could be influenced by short-term 
external events. This alternative also does not directly test the 
absence of rebates.
    Further, the direct link between transaction fees and market data 
and connectivity fees is unclear in the context of the Pilot's 
objectives. In particular, the potential distortions that can accompany 
fee-and-rebate pricing models are unique to exchange transaction fee-
and-rebate pricing models and do not directly result from market data 
and connectivity services. It is therefore unclear how the moratorium 
on market data fees would impact the objective of the Pilot to study 
how rebates and fees affect order routing decisions and market quality.
    Finally, the commenter's suggested moratorium would only apply to 
``existing'' market data and connectivity and would therefore preserve 
current fee levels for those services and would seem to not restrict an 
exchange's ability to offer new and improved market data, connectivity, 
and co-location services potentially at higher fee levels. While a 
moratorium on market data and connectivity fees during a transaction 
fee experiment could be beneficial to the extent it holds steady a 
separate variable that can have a marginal impact on order routing, 
those costs are fixed and therefore the impact, if any, would be 
slight. Further, to the extent that exchanges were free to introduce 
new products at different price points, the moratorium could be easily 
circumvented. Accordingly, with the exception of the moratorium on 
market data fees, the suggested alternative is substantively similar to 
the alternative discussed above to not conduct any pilot and instead 
proceed to immediately lower the 610(c) fee cap.
5. Adjustments to the Transaction Fee Pilot Structure
    The alternatives described above provide significant revisions to 
the approach or the representativeness of the Transaction Fee Pilot. 
This section complements and expands on the discussion in Section 
II.C., above, to discuss a number of alternatives and adjustments to 
the basic structure of the Pilot. These include an alternative time 
frame for the Pilot duration or the pre- and post-Pilot Periods, a zero 
access fee test group, alternative access fee caps, and the inclusion 
of non-displayed liquidity or depth-of-book provisions in Test Group 1.
a. Length of the Core Pilot
    The core Pilot would last for two years with an automatic sunset at 
the end of the first year unless the Commission publishes a notice 
determining that the Pilot shall continue for up to one additional 
year.\1040\ Alternatively, the Pilot could feature an earlier or later 
Pilot sunset or a longer or shorter Pilot duration. As discussed above 
in Section II.D., a number of commenters discussed the proposed Pilot 
duration, with some believing the proposed duration would incentivize 
participation and disincentivize ``waiting out'' the Pilot, with others 
believing that a shorter duration would be sufficient to produce 
results and still others recommending that the Pilot run for a full two 
year period with no automatic sunset. Further, one commenter questioned 
the Commission's statement that the market reacts quickly to pricing 
changes implemented by exchanges, but that some market participants 
might not change their behavior unless the Pilot was in place for at 
least a year.\1041\
---------------------------------------------------------------------------

    \1040\ See supra Section II.D. for a summary and discussion of 
the commenters discussing the Pilot's proposed duration.
    \1041\ See NYSE Letter I, at 16.
---------------------------------------------------------------------------

    As alternatives to the Pilot's duration, the Commission considered 
an earlier Pilot sunset that would shorten the anticipated Pilot 
duration, reducing the time period during which potential negative (or 
positive) temporary effects resulting from the Pilot could occur. 
However, if the anticipated duration of the Pilot were too short, some 
broker-dealers could choose to not alter their current order routing 
behavior and wait out the length of the Pilot, which would limit the 
usefulness of the information obtained by the Pilot.\1042\ In other 
words, in response to the comment noted above, while many market 
participants may quickly adopt their order routing in response to fee 
and rebate changes, others may take longer to respond. A shorter 
anticipated duration also could reduce the usefulness of the 
information and the benefits provided by the Pilot, if it reduced the 
statistical power of any analyses, because it would make it more 
difficult for researchers to detect whether an effect actually 
exists.\1043\
---------------------------------------------------------------------------

    \1042\ See infra Section IV.C.1.a.iii, which discusses the 
potential limitations associated with pilots, including a discussion 
that some market participants could choose to not alter their 
behavior if the Pilot had a short duration.
    \1043\ To address commenter concerns about the size of the 
Pilot, the Commission performed a supplemental analysis that refined 
the power analysis included in the Proposing Release. Based on this 
refined power analysis, the Commission estimates that it would 
require a minimum Pilot duration of 12 months to achieve sufficient 
statistical power to detect whether an effect is actually present; 
therefore, any Pilot duration shorter than 12 months would have 
diminished ability to detect the effect of transaction-based fees 
and rebates on order routing decisions, execution quality, and 
market quality. See Section IV.C.1.a.ii.(1) and supra note 695 for 
further information on this supplemental analysis.
---------------------------------------------------------------------------

    Conversely, as the anticipated Pilot duration increases so too 
would the costs for exchanges, as this would extend the duration of the 
changes to their revenue models and the costs of compliance with the 
Pilot requirements. However, all else being equal, increasing the 
duration beyond the automatic sunset at one year, or up to the maximum 
two years, is unlikely to provide any significant increases in the 
benefits identified above, unless some event occurs during the first 
year that impacts the Pilot study in a way that potentially could make 
the results unrepresentative, in which case an extension of the Pilot 
for additional time (up to two years) could increase the benefits. As 
discussed in Section IV.C.1.a.i, the Commission believes that the Pilot 
duration with a one-year sunset would make it economically worthwhile 
for broker-dealers to alter their order-routing decisions, because it 
would likely be costly for broker-dealers to sit out the full duration 
of the Pilot or retain pre-Pilot order routing decisions for its 
duration. Further, a longer Pilot duration would increase the exposure 
of market participants to the uncertain outcomes of the pilot in terms 
of liquidity, trading volume, market

[[Page 5295]]

share, competition etc. that are discussed above.
    The Commission could alternatively adopt a pilot with a fixed two-
year duration. A two-year pilot without the possibility of an automatic 
sunset at the end of the first year would have the same maximum costs 
as a pilot with a sunset, but would not have the potential to reduce 
costs in the event that the sunset occurs. On the other hand, broker-
dealers could perceive higher expected costs of not adapting to the 
Pilot under the alternative because they could expect the sunset to 
reduce the anticipated duration of the Pilot. However, the Commission 
believes that broker-dealers that base their order routing decisions on 
transaction-based fees and rebates will incur sufficient costs from not 
enacting changes to their order routing decisions in response to the 
Pilot with an expected one-year sunset such that they are not likely to 
sit out the Pilot Period; therefore, a mandatory two-year pilot would 
not likely provide any additional behavioral change that would not 
already be obtainable from the Pilot.
b. Length of Pre- and Post-Pilot Periods
    The Pilot requires a six-month pre-Pilot Period and a six-month 
post-Pilot Period, which would allow the Commission and the public to 
compare order routing decisions in the same stocks both with and 
without the Pilot restrictions as well as across stocks in different 
test groups. Alternatively, the Commission could adopt shorter pre-
Pilot and post-Pilot Periods, which a few commenters recommended.\1044\ 
Shorter pre- and post-Pilot Periods would reduce costs to exchanges of 
having to provide the Exchange Transaction Fee Summary and order 
routing data. These reduced costs come at the trade-off of shorter 
horizons for data collection that could lead to reduced statistical 
power and reduced ability of the Pilot to produce representative 
results.\1045\
---------------------------------------------------------------------------

    \1044\ See IEX Letter I, at 4; FIA Letter, at 4. But cf. FIF 
Letter, at 9; Health Markets Letter I, at 19.
    \1045\ The Commission staff estimates that with the given number 
of stocks in the Pilot, that the Pilot would need to produce 
approximately six months of pre and post Pilot data to detect 
changes unique to ETPs and stocks, The power tests determined the 
number of days of data that would be required to detect a 10% change 
in the daily volume of various subgroups of securities for stocks 
and a 10% change in quoted spreads for ETPs.
---------------------------------------------------------------------------

    In particular, a short pre-Pilot Period introduces additional risk 
that analysis of certain Pilot data may be uninformative. Even if 
researchers were to wait until the conclusion of the post-Pilot period 
to begin analysis, they may not be able to identify the effects of the 
Pilot because data obtained from the post-Pilot period could be 
confounded by information about the Pilot. For example, if exchanges 
alter their fee structures in the post-Pilot period as a result of the 
Pilot (rather than revert back to their fee models in effect prior to 
the Pilot), data from the post-Pilot period likely would be unable to 
supplement or substitute for data obtained from a shorter pre-Pilot 
Period, underscoring the importance of a longer pre-Pilot Period. Thus, 
the value of any analyses obtained from the Pilot may be limited, 
thereby reducing the information obtained from such analyses for any 
potential regulatory recommendations.
c. Zero Access Fee Test Group
    As discussed above, a few commenters recommended that the Pilot 
include a zero access fee test group to further test the relationship 
between exchange fee models and order routing, which would effectively 
serve to temporarily remove a source of revenue for exchanges entirely 
from a subset of securities.\1046\ This approach could produce 
additional information, such as how order routing behavior and 
execution quality change in the absence of transaction-based fees (and 
likely rebates), that could be useful to the Commission to facilitate 
future policy decisions regarding the transaction-based pricing 
structures of exchanges.
---------------------------------------------------------------------------

    \1046\ See, e.g., Healthy Markets Letter I, at 8; OMERS Letter, 
at 2.
---------------------------------------------------------------------------

    The inclusion of a zero access fee test group would eliminate the 
transaction-based fee model for a subset of securities, which could 
force exchanges to create entirely new revenue models for securities in 
this test group with uncertain outcomes for both exchanges and market 
participants. Doing so presents the risk that if coupled to the current 
Pilot, the inclusion of a zero access fee test group could contaminate 
the analysis of both the current test groups and the zero access fee 
test group. This could occur if exchanges determine that it is cheaper 
to subsidize trading in the zero access fee group with revenue earned 
from the control group and the other test groups. In this case the 
inclusion of the zero access fee test group would alter the behavior of 
the exchanges with regard to all their other securities, which would 
weaken the exogeneity of the shock imposed by the Pilot for all test 
groups.
d. Alternative Test Groups
    As discussed above, the Pilot will have two test groups: (1) One 
that caps access fees at $0.0010 and (2) one that prohibits rebates or 
Linked Pricing for displayed and non-displayed liquidity and along the 
entire depth of the limit order book. Alternatively, the Commission 
could have proposed other test groups with different caps on access 
fees. For example, the Commission could instead have proposed only caps 
on access fees (i.e., fees for removing liquidity), similar to those in 
the EMSAC recommendation,\1047\ or could have increased the number of 
test groups to test more gradations in alternative fee caps. As a few 
commenters suggested, and as discussed above, the Commission also could 
have included a test group with a higher fee cap level than Rule 610(c) 
or no cap on fees at all.\1048\ Further, as discussed above, a few 
commenters suggested other alternatives, like basis point pricing or 
pricing based on the tick size.
---------------------------------------------------------------------------

    \1047\ The maximum access fee caps under the EMSAC 
recommendation would be $0.0020 (Test Group 1), $0.0010 (Test Group 
2), and $0.0002 (Test Group 3).
    \1048\ See, e.g., Angel Letter II, at 2; Cboe Letter I, at 28
---------------------------------------------------------------------------

    Many alternatives would have replaced the no-rebate test group with 
another access fee cap group. These options could provide information 
to help refine the analysis of the impact of access fees on various 
market outcomes. However, if the Pilot did not include a no-rebate test 
group and only studied exogenous shocks to access fees, it would 
produce more limited information about the role that rebates play in 
affecting market outcomes. As discussed in more detail above, the 
Commission believes that it is important to have a test group that 
specifically focuses on the removal of rebates and the corresponding 
impact on conflicts of interest, execution quality, and market quality.
    An alternative to increase the number of test groups to study the 
impact of the various levels of access fee on various market outcomes 
could produce additional refinement to the data currently in the Pilot. 
However, to produce more gradation in the caps to access fees, would 
increase the complexity of the Pilot, and potentially increase the 
implementation costs to account for the additional test groups. 
Increasing the number of test groups would also increase the number of 
stocks subject to the pilot thereby increasing the fraction of the 
market exposed to the uncertain outcomes of the Pilot.
e. Non-Displayed Liquidity and Depth of Book
    Only Test Group 2, which eliminates rebates or Linked Pricing, 
would restrict

[[Page 5296]]

fees or rebates or Linked Pricing in non-displayed liquidity and depth-
of-book, though a small number of commenters suggested expanding those 
conditions to Test Group 1.\1049\ As discussed in Section II.C., under 
the Pilot, incentives to move liquidity away from the displayed 
liquidity or the top-of-book could be created if rebates are not 
eliminated along the entire depth of the book as well as for displayed 
and non-displayed liquidity. If an exchange were to offer rebates for 
those types of orders, it would reduce the benefits of the no-rebate 
test group as it would inhibit the Commission's ability to collect data 
on a treatment group in which rebates do not exist and thus cannot 
impact or potentially distort the markets and market participants.
---------------------------------------------------------------------------

    \1049\ See Clearpool Letter, at 3-4; Healthy Markets Letter I, 
at 16.
---------------------------------------------------------------------------

    An alternative could have applied the transaction fee restrictions 
in Test Group 1 to both non-displayed liquidity and the depth-of-book. 
However, the Commission believes this is unnecessary. In particular, 
the Commission does not believe that exchanges would have the incentive 
to charge higher fees or pay higher rebates for executions against or 
of non-displayed and depth of book compared to fees and rebates charged 
against or of top-of book depth in Test Group 1 securities. Unlike the 
problem associated with exchanges offering rebates (in the no-rebate 
test group) for these types of orders that could emerge if rebates or 
Linked Pricing were not prohibited across the entire depth of the limit 
order book, the Commission does not believe that under the Pilot 
incentives would emerge for exchanges to charge higher fees to access 
non-displayed interest or depth-of-book quotes. Charging more for non-
displayed liquidity as well as the depth of the limit order book would 
lead to increased uncertainty for market participants that take 
liquidity, as they would not be able to control whether their 
executions are with displayed or non-displayed liquidity and would be 
uncertain of their fees when they enter their orders. If the fees 
differed between displayed and non-displayed liquidity, broker-dealers 
would face cost uncertainty when making routing decisions over what 
access fees they would incur. From the exchanges' perspective, having 
differing fees for posting or interacting with displayed and non-
displayed liquidity would be burdensome to track and more costly to 
administer and, to the extent the uncertainty it creates dissuades 
market participants from routing to their market, could ultimately 
cause them to lose order flow.
f. Linked Pricing
    Test Group 2 will prohibit rebates and Linked Pricing. As discussed 
above, a few commenters suggested that the Commission also prohibit 
exchanges from offering other inducements, including discounts on non-
transaction fees that are linked to trading volumes in the no-rebate 
Test Group.\1050\ While such an approach would have the added benefit 
of testing a greater absence of exchange-offered inducements, it would 
further increase costs and add to the complexity and scope of the 
Pilot. As currently designed, the no-rebate Test Group is intended to 
test the extent to which exchange rebates introduce potential 
distortions to execution quality and market quality and introduce 
conflicts of interest in order routing. Adding more variables to the 
Pilot will increase its complexity, size, and cost, while potentially 
reducing benefits by inhibiting the Commission's stated focus on 
gathering data specifically on the impact of exchange transaction 
rebates. With more variables, it becomes difficult to isolate the 
impact of any particular change without dramatically expanding the 
size, scope, and complexity of the Pilot.
---------------------------------------------------------------------------

    \1050\ See RBC Letter I, at 3; MFS Letter, at 2-3.
---------------------------------------------------------------------------

    Alternatively, the Commission could instead prohibit only rebates, 
without also prohibiting Linked Pricing, in Test Group 2. While such an 
approach would reduce costs and simplify the Pilot design, it could 
reduce the benefits of Test Group 2. Specifically, one of the aims of 
Test Group 2 is to examine the impact between take fees (rebates) and 
make rebates (fees) in current exchange fee-and-rebate pricing models. 
For example, as discussed above, fees may be set above their 
equilibrium price (within the current regulatory structure) in order to 
subsidize rebates. An alternative that prohibits rebates but not the 
ability of an exchange to cross-subsidize make rebates from take fees 
(or vice versa) would provide opportunities for exchanges to work 
around the rebate prohibition thus perpetuating the potential 
subsidization distortion. Consequently, such an alternative would 
reduce the benefits of Test Group 2 by reducing the effectiveness of 
the information received about NMS stocks in the no-rebate Test Group.
    Finally, the Commission could ban Linked Pricing for all market 
participants in Test Group 2, including market makers. This alternative 
would allow the Commission to study how markets react in the absence of 
both rebates and Linked Pricing incentives, whereas the adopted Rule 
does not allow this analysis. The Commission recognizes that banning 
Linked Pricing in Test Group 2 may yield different results than under 
the adopted Rule, which permits an exchange to adopt rules to provide 
non-rebate Linked Pricing to its registered market makers in 
consideration for the market maker meeting rules-based market quality 
metrics. However, the Commission is interested in specifically 
exploring the effect of eliminating rebates, but continuing to allow 
Linked Pricing for a narrow, targeted segment of the market, i.e., 
market makers with specific obligations designed to improve an 
exchange's market quality without the various effects previously 
discussed that may be associated with rebates, in order to understand 
any effects of rebates on liquidity. In so much as this is an 
alternative that could be considered at the completion of the Pilot, 
the Commission seeks to test specifically for this scenario.
g. Execution Quality Data
    The Pilot does not require the exchanges to produce publicly 
available information on order execution quality statistics. As an 
alternative, the Commission could require that the exchanges produce 
daily order execution quality statistics similar to that required in 
Appendix B.1 of the Tick Size Pilot Plan. Compared to the Pilot, this 
alternative could provide information on order-based measures of 
execution quality such as effective spreads, price improvement, and 
realized spreads for liquidity taking orders, in addition to the trade-
based measures available from public data sources. As noted in the 
baseline, order-based measures of execution quality from the 
incorporation of order size and the costs of latency. Exchanges 
currently have systems in place to produce daily order-based execution 
quality data, which would limit implementation costs. However, the 
Commission recognizes that exchanges incur ongoing costs to produce 
these data.
    Unlike for the Tick Size Pilot, the Commission does not believe 
that daily order-based execution quality statistics are as important 
for the Transaction Fee Pilot as it was for the Tick Size Pilot and 
that the benefits for the Transaction Fee Pilot could be marginal. In 
particular, the Commission believes that trade-based execution quality 
statistics will be sufficient to measure execution quality for 
liquidity taking orders and notes that the order routing data to be 
received by the Commission will contain data that

[[Page 5297]]

can facilitate the measurement of execution quality for liquidity 
providing orders.
h. Excluding or Rotating Securities
    As discussed above in Section II.B., some commenters were concerned 
that the Pilot could introduce unintended adverse competitive effects 
for ETPs or corporate issuers that were placed in certain test groups 
if those test groups resulted in negative impacts on the trading 
characteristics of those securities. Accordingly, some commenters, 
discussed above, recommended either excluding ETPs from the Pilot, 
clustering ETPs following similar strategies into a single test group, 
or rotate ETPs through the various test groups and the control 
group.\1051\ Other commenters, discussed above, suggested allowing 
issuers to opt out of the Pilot.\1052\ The benefits of such an approach 
would be the avoidance of potential harm or disparate impact on a 
particular ETP or issuer vis-[agrave]-vis its peers and primary 
competitors. As discussed more fully above, that potential for harm is 
uncertain at best and commenters held deeply conflicting views with 
some asserting that the Pilot could cause widespread harm while others 
argued that its impact will be mostly positive when considering the 
potential distortions that will be mitigated or alleviated in the 
absence of exchange rebates or lower fees.
---------------------------------------------------------------------------

    \1051\ See supra Section II.B.
    \1052\ See id.
---------------------------------------------------------------------------

    Although there is a potential for temporary competitive effects as 
a result of the Pilot, outright exclusion of ETPs or clustering like 
ETPs in the same test group would harm the representativeness of the 
data produced by the Pilot or the ability of the Pilot to facilitate 
causal analyses. Exclusion of ETPs, for example, could undermine the 
ability of the Commission to use the Pilot results to inform future 
policy making with respect to exchange fees, particularly if ETPs have 
the potential to respond differently to changes to fees and rebates 
than do other types of NMS stocks.
    Similarly, as discussed above, allowing issuers to opt out of the 
Pilot could undermine the representativeness of the Pilot's treatment 
groups and potentially bias the Pilot's results, depending on the 
number of issuers that opt out and whether some unobservable 
characteristic is correlated with both an issuer's decision to opt out 
and market outcomes. In turn, the benefits of the Pilot would be 
reduced if researchers are less able to draw specific conclusions about 
the impact of the Pilot as a result of issuers opting out of the Pilot.
    Another alternative solution would be to rotate all stocks and or 
ETPs through each of the test groups for a given amount of time such 
that all stocks and ETPs spend the same amount of time in each test 
group. This methodology would reduce potential costs by mitigating 
potential competitive effects of the Pilot on issuers by ensuring that 
all stocks and ETPs receive similar exposure to each test group. 
Rotation would also have the advantage of allowing many more changes 
from one test group to another, which would create additional 
independent observations about the effect of the Pilot on various 
outcomes, potentially increasing statistical power.
    The realization of the benefit of additional statistical power 
would depend on how broker-dealers react to the changes. If broker-
dealers need to adjust after every change, the statistical power could 
be lower with rotation than without. To the extent that broker-dealers 
design their order routing algorithms to the test group, then the time 
needed for broker-dealers to adapt to a set of Pilot securities that 
changes every few months would be minimal. The broker-dealer would 
simply replace one list of securities in a given test group with 
another. In this case there would likely be a period at the beginning 
of the Pilot where broker-dealers experiment somewhat to optimize their 
algorithms in which the data on broker dealer behavior would be 
noisier, but after that initial adjustment, broker-dealers would not 
need to repeat their experimentation after every rotation. However, to 
the extent that broker-dealers' order routing algorithms are bespoke to 
a given security, rotation could decrease the statistical power of the 
tests because each rotation would include a period of time during which 
broker-dealers adjust where the data is noisier and harder to extract a 
signal from.
    This alternative, however, is also likely to be more complex and 
have higher costs than the Pilot. The exchange compliance costs of 
rotation would be marginally greater than the compliance costs of the 
Pilot because it would involve additional compliance checks and 
complexity, but would likely be largely automated. The added complexity 
for exchanges could be more significant because complexity increases 
the risk of errors. To the extent that broker-dealers set up their 
systems to automate the rotation, they, too would have only marginally 
higher costs with rotation. However, to the extent that broker-dealers' 
order routing algorithms are bespoke to a given security, then rotation 
would be both more costly for broker-dealers who would have to re-
optimize their algorithms every time a stock is included or excluded 
from a given test group.

V. Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (``RFA'') \1053\ requires Federal 
agencies, in promulgating rules, to consider the impact of those rules 
on small entities. The Commission certified, pursuant to section 605(b) 
of the RFA,\1054\ that, if adopted, Rule 610T would not have a 
significant impact on a substantial number of small entities.\1055\
---------------------------------------------------------------------------

    \1053\ 5 U.S.C. 601 et seq.
    \1054\ 5 U.S.C. 605(b).
    \1055\ The Pilot is discussed in detail in Sections I and II, 
above. We discuss the potential economic consequences, including the 
estimated compliance costs and burdens, of the Pilot in Section IV 
(Economic Analysis) and Section III (Paperwork Reduction Act) above.
---------------------------------------------------------------------------

    The Commission solicited comments regarding this certification and 
received 1 comment.\1056\ The commenter stated that ``the Commission is 
obligated under the RFA to adequately address the Proposal's costs to 
small-capitalization issuers covered under the statute.'' \1057\ The 
commenter cited Aeronautical Repair Station Ass'n v. FAA as support for 
its assertion that the RFA requires the Commission to take into account 
costs to small-capitalization issuers as they are ``third-party 
entities incur[ing] downstream costs.'' \1058\ The Commission believes 
the commenter misconstrues the legal finding in the case to which it 
cited, as the case confirms the general premise that the RFA analysis 
shall focus on the impact of a rule on a substantial number of small 
entities that are ``directly affected and therefore regulated by,'' in 
other words subject to, such rule's requirements.\1059\ For purposes of 
the Commission rulemaking in connection with the RFA, Rule 610T, by its 
terms, applies only to national securities exchanges registered with 
the Commission under Section 6 of the Exchange Act.\1060\
---------------------------------------------------------------------------

    \1056\ See NYSE Letter I, at 13-14.
    \1057\ Id. at 14, n.50.
    \1058\ See id. (citing 494 F.3d 161, 177 (D.C. Cir. 2007)).
    \1059\ See Aeronautical Repair Station Ass'n v. FAA, 494 F.3d 
161, 177 (D.C. Cir. 2007) (further stating that the RFA ``requires 
that the agency conduct the relevant analysis or certify `no impact' 
for those small businesses that are `subject to' the regulation, 
that is, those to which the regulation `will apply.' '').
    \1060\ See supra Sections III (Paperwork Reduction Act) and IV 
(Economic Analysis) (discussing, among other things, the current 
market environment and compliance obligations for national 
securities exchanges).

---------------------------------------------------------------------------

[[Page 5298]]

    With regard to a national securities exchange, the Commission's 
definition of a small entity is an exchange that has been exempt from 
the reporting requirements of 17 CFR 242.601 (Rule 601 of Regulation 
NMS), and is not affiliated with any person (other than a natural 
person) that is not a small business or small organization.\1061\ None 
of the national securities exchanges registered under Section 6 of the 
Exchange Act that would be subject to the Pilot are ``small entities'' 
for purposes of the RFA. In particular, none of the equities exchanges 
are exempt from Rule 601 of Regulation NMS. Accordingly, the proposed 
rule will not apply to any ``small entities.'' Therefore, for the 
foregoing reasons, the Commission again certifies that Rule 610T will 
not have a significant economic impact on a substantial number of small 
entities for purposes of the RFA.
---------------------------------------------------------------------------

    \1061\ See 17 CFR 240.0-10(e).
---------------------------------------------------------------------------

VI. Statutory Authority and Text of the Rule Amendments

    Pursuant to the Exchange Act, and particularly Sections 3(b), 5, 6, 
11A, 15, 17, and 23(a) thereof, 15 U.S.C. 78c, 78e, 78f, 78k-1, 78o, 
78q, and 78w(a), the Commission amends title 17 of the Code of Federal 
Regulations in the manner set forth below.

List of Subjects

17 CFR Part 200

    Administrative practice and procedure, Authority delegations 
(Government agencies), Organization and functions (Government 
agencies).

17 CFR Part 242

    Brokers, Reporting and recordkeeping requirements, Securities.

    For the reasons set out in the preamble, the Commission amends 
title 17, chapter II of the Code of Federal Regulations as follows:

PART 200--ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND 
REQUESTS

0
1. The authority citation for part 200 continues to read in part as 
follows:

    Authority:  15 U.S.C. 77c, 77o, 77s, 77z-3, 77sss, 78d, 78d-1, 
78d-2, 78o-4, 78w, 78ll(d), 78mm, 80a-37, 80b-11, 7202, and 7211 et 
seq., unless otherwise noted.
* * * * *

0
2. Amend Sec.  200.30-3 by adding (a)(84) to read as follows:


Sec.  200.30-3  Delegation of authority to Director of Division of 
Trading and Markets.

* * * * *
    (a) * * *
    (84) To issue notices pursuant to 17 CFR 242.610T(b)(1)(i) and (c) 
(Rule 610T(b)(1)(i) and (c)).
* * * * *

PART 242--REGULATIONS M, SHO, ATS, AC, NMS AND SBSR AND CUSTOMER 
MARGIN REQUIREMENTS FOR SECURITY FUTURES

0
3. The authority citation for part 242 continues to read as follows:

    Authority:  15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2), 
78i(a), 78j, 78k-1(c), 78l, 78m, 78n, 78o(b), 78o(c), 78o(g), 
78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-29, and 
80a-37.


0
4. Add Sec.  242.610T to read as follows:


Sec.  242. 610T  Equity transaction fee pilot.

    (a) Pilot pricing restrictions. Notwithstanding Sec.  242.610(c), 
on a pilot basis for the period specified in paragraph (c) of this 
section, in connection with a transaction in an NMS stock, a national 
securities exchange shall not:
    (1) For Test Group 1, impose, or permit to be imposed, any fee or 
fees for the display of, or execution against, the displayed best bid 
or best offer of such market that exceed or accumulate to more than 
$0.0010 per share;
    (2) For Test Group 2, provide to any person, or permit to be 
provided to any person, a rebate or other remuneration in connection 
with an execution, or offer, or permit to be offered, any linked 
pricing that provides a discount or incentive on transaction fees 
applicable to removing (providing) liquidity that is linked to 
providing (removing) liquidity, except to the extent the exchange has a 
rule to provide non-rebate linked pricing to its registered market 
makers in consideration for meeting market quality metrics; and
    (3) For the Control Group, impose, or permit to be imposed, any fee 
or fees in contravention of the limits specified in Sec.  242.610(c).
    (b) Pilot securities--(1) Initial List of Pilot Securities. (i) The 
Commission shall designate by notice the initial List of Pilot 
Securities, and shall assign each Pilot Security to one Test Group or 
the Control Group. Further, the Commission may designate by notice the 
assignment of NMS stocks that are interlisted on a Canadian securities 
exchange to Test Group 2 or the Control Group.
    (ii) For purposes of this section, ``Pilot Securities'' means the 
NMS stocks designated by the Commission on the initial List of Pilot 
Securities pursuant to paragraph (b)(1)(i) of this section and any 
successors to such NMS stocks. At the time of selection by the 
Commission, an NMS stock must have a minimum share price of $2 to be 
included in the Pilot and must have an unlimited duration or a duration 
beyond the end of the post-Pilot Period. In addition, an NMS stock must 
have an average daily volume of 30,000 shares or more to be included in 
the Pilot. If the share price of a Pilot Security in one of the Test 
Groups or the Control Group closes below $1 at the end of a trading 
day, it shall be removed from the Pilot.
    (iii) For purposes of this section, ``primary listing exchange'' 
means the national securities exchange on which the NMS stock is 
listed. If an NMS stock is listed on more than one national securities 
exchange, the national securities exchange upon which the NMS stock has 
been listed the longest shall be the primary listing exchange.
    (2) Pilot Securities Exchange Lists. (i) After the Commission 
selects the initial List of Pilot Securities and prior to the beginning 
of trading on the first day of the Pilot Period each primary listing 
exchange shall publicly post on its website downloadable files 
containing a list, in pipe-delimited ASCII format, of the Pilot 
Securities for which the exchange serves as the primary listing 
exchange. Each primary listing exchange shall maintain and update this 
list as necessary prior to the beginning of trading on each business 
day that the U.S. equities markets are open for trading through the end 
of the post-Pilot Period.
    (ii) The Pilot Securities Exchange Lists shall contain the 
following fields:
    (A) Ticker Symbol;
    (B) Security Name;
    (C) Primary Listing Exchange;
    (D) Security Type:
    (1) Common Stock;
    (2) ETP;
    (3) Preferred Stock;
    (4) Warrant;
    (5) Closed-End Fund;
    (6) Structured Product;
    (7) ADR; and
    (8) Other;
    (E) Pilot Group:
    (1) Control Group;
    (2) Test Group 1; and
    (3) Test Group 2;
    (F) Stratum Code; and
    (G) Date the Entry Was Last Updated.
    (3) Pilot Securities Change Lists. (i) Prior to the beginning of 
trading on each trading day the U.S. equities markets are open for 
trading throughout the end of the post-Pilot Period, each primary 
listing exchange shall publicly post on its website downloadable files 
containing a Pilot Securities Change List, in pipe-delimited ASCII 
format, that lists each separate change applicable to any Pilot 
Securities for

[[Page 5299]]

which it serves or has served as the primary listing exchange. The 
Pilot Securities Change List will provide a cumulative list of all 
changes to the Pilot Securities that the primary listing exchange has 
made to the Pilot Securities Exchange List published pursuant to 
paragraph (b)(2) of this section.
    (ii) In addition to the fields required for the Pilot Securities 
Exchange List, the Pilot Securities Change Lists shall contain the 
following fields:
    (A) New Ticker Symbol (if applicable);
    (B) New Security Name (if applicable);
    (C) Deleted Date (if applicable);
    (D) Date Security Closed Below $1 (if applicable);
    (E) Effective Date of Change; and
    (F) Reason for the Change.
    (4) Posting requirement. All information publicly posted in 
downloadable files pursuant to paragraphs (b)(2) and (3) of this 
section shall be and remain freely and persistently available and 
easily accessible by the general public on the primary listing 
exchange's website for a period of not less than five years from the 
conclusion of the post-Pilot Period. In addition, the information shall 
be presented in a manner that facilitates access by machines without 
encumbrance, and shall not be subject to any restrictions, including 
restrictions on access, retrieval, distribution and reuse.
    (c) Pilot duration. (1) The Pilot shall include:
    (i) A six-month ``pre-Pilot Period;''
    (ii) A two-year ``Pilot Period'' with an automatic sunset at the 
end of the first year unless, no later than thirty days prior to that 
time, the Commission publishes a notice that the Pilot shall continue 
for up to one additional year; and
    (iii) A six-month ``post-Pilot Period.''
    (2) The Commission shall designate by notice the commencement and 
termination dates of the pre-Pilot Period, Pilot Period, and post-Pilot 
Period, including any suspension of the one-year sunset of the Pilot 
Period.
    (d) Order routing datasets. Throughout the duration of the Pilot, 
including the pre-Pilot Period and post-Pilot Period, each national 
securities exchange that facilitates trading in NMS stocks shall 
prepare and transmit to the Commission a file, in pipe-delimited ASCII 
format, no later than the last day of each month, containing sets of 
order routing data, for the prior month, in accordance with the 
specifications in paragraphs (d)(1) and (2) of this section. For the 
pre-Pilot Period, order routing datasets shall include each NMS stock. 
For the Pilot Period and post-Pilot Period, order routing datasets 
shall include each Pilot Security. Each national securities exchange 
shall treat the order routing datasets as regulatory information and 
shall not access or use that information for any commercial or non-
regulatory purpose.
    (1) Dataset of daily volume statistics, with field names as the 
first record and a consistent naming convention that indicates the 
exchange and date of the file, that include the following 
specifications of liquidity-providing orders by security and separating 
orders by order designation (exchanges may exclude auction orders) and 
order capacity:
    (i) Code identifying the submitting exchange.
    (ii) Eight-digit code identifying the date of the calendar day of 
trading in the format ``yyyymmdd.''
    (iii) Symbol assigned to an NMS stock (including ETPs) under the 
national market system plan to which the consolidated best bid and 
offer for such a security are disseminated.
    (iv) The broker-dealer's CRD number and MPID.
    (v) Order type code:
    (A) Inside-the-quote orders;
    (B) At-the-quote limit orders; and
    (C) Near-the-quote limit orders.
    (vi) Order size codes:
    (A) <100 share bucket;
    (B) 100-499 share bucket;
    (C) 500-1,999 share bucket;
    (D) 2,000-4,999 share bucket;
    (E) 5,000-9,999 share bucket; and
    (F) >=10,000 share bucket.
    (vii) Number of orders received.
    (viii) Cumulative number of shares of orders received.
    (ix) Cumulative number of shares of orders cancelled prior to 
execution.
    (x) Cumulative number of shares of orders executed at receiving 
market center.
    (xi) Cumulative number of shares of orders routed to another 
execution venue.
    (xii) Cumulative number of shares of orders executed within:
    (A) 0 to < 100 microseconds of order receipt;
    (B) 100 microseconds to < 100 milliseconds of order receipt;
    (C) 100 milliseconds to < 1 second of order receipt;
    (D) 1 second to < 30 seconds of order receipt;
    (E) 30 seconds to < 60 seconds of order receipt;
    (F) 60 seconds to < 5 minutes of order receipt;
    (G) 5 minutes to < 30 minutes of order receipt; and
    (H) >= 30 minutes of order receipt.
    (2) Dataset of daily volume statistics, with field names as the 
first record and a consistent naming convention that indicates the 
exchange and date of the file, that include the following 
specifications of liquidity-taking orders by security and separating 
orders by order designation (exchanges may exclude auction orders) and 
order capacity:
    (i) Code identifying the submitting exchange.
    (ii) Eight-digit code identifying the date of the calendar day of 
trading in the format ``yyyymmdd.''
    (iii) Symbol assigned to an NMS stock (including ETPs) under the 
national market system plan to which the consolidated best bid and 
offer for such a security are disseminated.
    (iv) The broker-dealer's CRD number and MPID.
    (v) Order type code:
    (A) Market orders; and
    (B) Marketable limit orders.
    (vi) Order size codes:
    (A) <100 share bucket;
    (B) 100-499 share bucket;
    (C) 500-1,999 share bucket;
    (D) 2,000-4,999 share bucket;
    (E) 5,000-9,999 share bucket; and
    (F) >=10,000 share bucket.
    (vii) Number of orders received.
    (viii) Cumulative number of shares of orders received.
    (ix) Cumulative number of shares of orders cancelled prior to 
execution.
    (x) Cumulative number of shares of orders executed at receiving 
market center.
    (xi) Cumulative number of shares of orders routed to another 
execution venue.
    (e) Exchange Transaction Fee Summary. Throughout the duration of 
the Pilot, including the pre-Pilot Period and post-Pilot Period, each 
national securities exchange that facilitates trading in NMS stocks 
shall publicly post on its website downloadable files containing 
information relating to transaction fees and rebates and changes 
thereto (applicable to securities having a price equal to or greater 
than $1). Each national securities exchange shall post its initial 
Exchange Transaction Fee Summary prior to the start of trading on the 
first day of the pre-Pilot Period and update its Exchange Transaction 
Fee Summary on a monthly basis within 10 business days of the first day 
of each calendar month, to reflect data collected for the prior month. 
The information prescribed by this section shall be made available 
using the most recent version of the XML schema published on the 
Commission's website. All information publicly posted pursuant to this

[[Page 5300]]

paragraph (e) shall be and remain freely and persistently available and 
easily accessible on the national securities exchange's website for a 
period of not less than five years from the conclusion of the post-
Pilot Period. In addition, the information shall be presented in a 
manner that facilitates access by machines without encumbrance, and 
shall not be subject to any restrictions, including restrictions on 
access, retrieval, distribution, and reuse. The Exchange Transaction 
Fee Summary shall contain the following fields:
    (1) Exchange Name;
    (2) Record Type Indicator:
    (i) Reported Fee is the Monthly Average;
    (ii) Reported Fee is the Median; and
    (iii) Reported Fee is the Spot Monthly;
    (3) Participant Type:
    (i) Registered Market Maker; and
    (ii) All Others;
    (4) Pilot Group:
    (i) Control Group;
    (ii) Test Group 1; and
    (iii) Test Group 2;
    (5) Applicability to Displayed and Non-Displayed Interest:
    (i) Displayed only;
    (ii) Non-displayed only; and
    (iii) Both displayed and non-displayed;
    (6) Applicability to Top and Depth of Book Interest:
    (i) Top of book only;
    (ii) Depth of book only; and
    (iii) Both top and depth of book;
    (7) Effective Date of Fee or Rebate;
    (8) End Date of Currently Reported Fee or Rebate (if applicable);
    (9) Month and Year of the monthly realized reported average and 
median per share fees and rebates;
    (10) Pre/Post Fee Changes Indicator (if applicable) denoting 
implementation of a new fee or rebate on a day other than the first day 
of the month;
    (11) Base and Top Tier Fee or Rebate:
    (i) Take (to remove):
    (A) Base Fee/Rebate reflecting the standard amount assessed or 
rebated before any applicable discounts, tiers, caps, or other 
incentives are applied; and
    (B) Top Tier Fee/Rebate reflecting the amount assessed or rebated 
after any applicable discounts, tiers, caps, or other incentives are 
applied; and
    (ii) Make (to provide):
    (A) Base Fee/Rebate reflecting the standard amount assessed or 
rebated before any applicable discounts, tiers, caps, or other 
incentives are applied; and
    (B) Top Tier Fee/Rebate reflecting the amount assessed or rebated 
after any applicable discounts, tiers, caps, or other incentives are 
applied;
    (12) Average Take Fee (Rebate)/Average Make Rebate (Fee), by 
Participant Type, Test Group, Displayed/Non-Displayed, and Top/Depth of 
Book; and
    (13) Median Take Fee (Rebate)/Median Make Fee (Rebate), by 
Participant Type, Test Group, Displayed/Non-Displayed, and Top/Depth of 
Book.

    By the Commission.

    Dated: December 19, 2018.
Brent J. Fields,
Secretary.

    Note: The following Appendix will not appear in the Code of 
Federal Regulations.

Appendix A

Key to Comment Letters Cited in Proposed Transaction Fee Pilot for NMS 
Stocks (File No. S7-05-18):

1. E-mail from David Adorney, C & C Trading LLC, to Commission, dated 
March 15, 2018 (``Adorney E-mail'').
2. Letter from Peter L. Swan, Professor of Finance, School of Banking 
and Finance, UNSW Sydney Business School, to Brent J. Fields, 
Secretary, Commission, dated March 26, 2018 (``Swan Letter'').
3. Letter from O. Mason Hawkins, CFA, Chairman & CEO, et al., 
Southeastern Asset Management, Inc., et al., to Brent J. Fields, 
Secretary, Commission, dated April 6, 2018 (``Joint Asset Managers 
Letter'').
4. Letter from Adam D. Clark-Joseph, University of Illinois at Urbana-
Champaign, to Brent J. Fields, Secretary, Commission, dated April 9, 
2018 (``Clark-Joseph Letter'').
5. Letter from Brent Woods, Chief Executive Officer, and Joseph 
Scafidi, Director of Trading, Brandes Investment Partners, to Brent J. 
Fields, Secretary, Commission, dated April 10, 2018 (``Brandes 
Letter'').
6. Letter from Sal Arnuk and Joe Saluzzi, Partners, Co-Founders and Co-
Heads of Equity Trading, Themis Trading LLC, to Brent J. Fields, 
Secretary, Commission, dated April 27, 2018 (``Themis Trading Letter 
I'').
7. Presentation from the Institutional Equity Division, Morgan Stanley, 
to the Division of Trading and Markets, Commission, dated May 1, 2018 
(``Morgan Stanley Presentation'').
8. E-mail from Tim Quast, President, Modern Networks IR LLC, to Brett 
Redfearn, Director, Division of Trading and Markets, Commission, dated 
May 2, 2018 (``ModernIR E-mail'').
9. Letter from Sean D. Paylor, Trader, AJO, L.P., to Brent J. Fields, 
Secretary, Commission, dated May 7, 2018 (``AJO Letter'').
10. Letter from Tim Quast, President & Founder, Modern Networks IR LLC, 
to Brent J. Fields, Secretary, Commission, dated May 9, 2018 
(``ModernIR Letter'').
11. Letter from Jeffrey P. Mahoney, General Counsel, Council of 
Institutional Investors, to Brent J. Fields, Secretary, Commission, 
dated May 10, 2018 (``CII Letter'').
12. Letter from Kelvin To, Founder& President, Data Boiler 
Technologies, LLC, to Brent J. Fields, Secretary, Commission, dated May 
14, 2018 (``Data Boiler Letter'').
13. Letter from Chris Barnard to Commission, dated May 14, 2018 
(``Barnard Letter'').
14. Letter from David Mechner, Chief Executive Officer, Pragma 
Securities, to Brent J. Fields, Secretary, Commission, dated May 14, 
2018 (``Pragma Letter'').
15. Letter from Stuart J. Kaswell, Executive Vice President & Managing 
Director, General Counsel, Managed Funds Association, to Brent J. 
Fields, Secretary, Commission, dated May 15, 2018 (``MFA Letter'').
16. Letter from Timothy J. Mahoney, Chief Executive Officer, BIDS 
Trading L.P., to Brent J. Fields, Secretary, Commission, dated May 15, 
2018 (``BIDS Letter'').
17. Letter from Brent Robertson, Managing Director, Trading, and Rob 
Gouley, Principal, Trading, Ontario Municipal Employees Retirement 
System Administration Corporation, to Brent J. Fields, Secretary, 
Commission, dated May 15, 2018 (``OMERS Letter'').
18. Letter from Marc Lipson, Robert F. Vandell Research Professor, 
Professor of Business Administration, University of Virginia School, 
Darden School of Business, to Commission, dated May 15, 2018 (``Lipson 
Letter'').
19. Letter from Anthony W. Godonis, Principal, Director of Trading, 
Copeland Capital Management, LLC, to Brent J. Fields, Secretary, 
Commission, dated May 18, 2018 (``Copeland Letter'').
20. Letter from George Hessler, CEO, Magma Trading, to Brent J. Fields, 
Secretary, Commission, dated May 18, 2018 (``Magma Letter'').
21. Letter from Eric Swanson, CEO, XTX Markets LLC, to Brent J. Fields,

[[Page 5301]]

Secretary, Commission, dated May 22, 2018 (``XTX Letter'').
22. Letter from Douglas A. Cifu, Chief Executive Officer, Virtu 
Financial Inc., to Brent J. Fields, Secretary, Commission, dated May 
23, 2018 (``Virtu Letter'').
23. Letter from Susan M. Olson, General Counsel, Investment Company 
Institute, to Brent J. Fields, Secretary, Commission, dated May 23, 
2018 (``ICI Letter I'').
24. Letter from Mary E. Keefe, Managing Director, Regulatory Affairs, 
Nuveen, LLC, to Brent J. Fields, Secretary, Commission, dated May 23, 
2018 (``Nuveen Letter'').
25. Letter from Thomas K. Lee, Executive Director & CIO, et al., New 
York State Teachers' Retirement System, to Brent J. Fields, Secretary, 
Commission, dated May 23, 2018 (``NYSTRS Letter'').
26. Letter from Hubert De Jesus, Global Head of Market Structure and 
Electronic Trading, and Joanne Medero, U.S. Head of Global Public 
Policy, BlackRock, Inc., to Brent J. Fields, Secretary, Commission, 
dated May 23, 2018 (``BlackRock Letter'').
27. Letter from Frank L. Jobert, Jr., Executive Director, Louisiana 
Trustee Education Council, to Brent J. Fields, Secretary, Commission, 
dated May 23, 2018 (``LATEC Letter'').
28. Letter from Joanna Mallers, Secretary, FIA Principal Traders Group, 
to Brent J. Fields, Secretary, Commission, dated May 24, 2018 (``FIA 
Letter'').
29. Letter from Theodore R. Lazo, Managing Director & Associate General 
Counsel, Securities Industry and Financial Markets Association, to 
Brent J. Fields, Secretary, Commission, dated May 24, 2018 (``SIFMA 
Letter'').
30. Letter from Patrick J. Healy, Founder & CEO, Issuer Network, to 
Brent J. Fields, Secretary, Commission, dated May 24, 2018 (``Issuer 
Network Letter I'').
31. Letter from Linda M. Giordano, Co-Founder & CEO, and Jeffrey M. 
Alexander, Co-Founder & President, Babelfish Analytics, Inc., to Brent 
J. Fields, Secretary, Commission, dated May 24, 2018 (``Babelfish 
Letter'').
32. Letter from Dennis M. Kelleher, President & CEO, et al., Better 
Markets, Inc., to Brent J. Fields, Secretary, Commission, dated May 24, 
2018 (``Better Markets Letter'').
33. Letter from Rich Steiner, Electronic Trading Strategist, RBC 
Capital Markets, to Brent Fields, Secretary, Commission, dated May 24, 
2018 (``RBC Letter I'').
34. Letter from William H. Hebert, Managing Director, Financial 
Information Forum, to Brent J. Fields, Secretary, Commission, dated May 
24, 2018 (``FIF Letter'').
35. Letter from Paul M. Russo, Managing Director, Goldman Sachs & Co. 
LLC, to Brent J. Fields, Secretary, Commission, dated May 24, 2018 
(``Goldman Sachs Letter'').
36. Letter from Tyler Gellasch, Executive Director, Healthy Markets 
Association, to Brent J. Fields, Secretary, Commission, dated May 24, 
2018 (``Healthy Markets Letter I'').
37. Letter from Jason Clague, Executive Vice President, Operational 
Services, Charles Schwab & Co., Inc., to Brent J. Fields, Secretary, 
Commission, dated May 25, 2018 (``Schwab Letter'').
38. Letter from Joseph Brennan, Principal & Global Head of Equity 
Investment Group, Vanguard, to Brent J. Fields, Secretary, Commission, 
dated May 25, 2018 (``Vanguard Letter'').
39. Letter from Marc R. Bryant, Deputy General Counsel, Fidelity 
Investments, to Brent J. Fields, Secretary, Commission, dated May 25, 
2018 (``Fidelity Letter'').
40. Letter from Stephen John Berger, Managing Director, Government & 
Regulatory Policy, Citadel Securities, to Brent J. Fields, Secretary, 
Commission, dated May 25, 2018 (``Citadel Letter'').
41. Letter from Kevin Cronin, Global Head of Trading, Invesco Ltd., to 
Brent J. Fields, Secretary, Commission, dated May 25, 2018 (``Invesco 
Letter'').
42. Letter from Micah Hauptman, Financial Services Counsel, Consumer 
Federation of America, to Brent J. Fields, Secretary, Commission, dated 
May 25, 2018 (``CFA Letter'').
43. Letter from Heidi W. Hardin, General Counsel, MFS Investment 
Management, to Brent J. Fields, Secretary, Commission, dated May 25, 
2018 (``MFS Letter'').
44. Letter from Timothy J. Coyne, Global Head of ETF Capital Markets, 
and Nathaniel N. Evarts, Head of Trading, Americas, State Street Global 
Advisors, to Brent J. Fields, Secretary, Commission, dated May 25, 2018 
(``State Street Letter'').
45. Letter from Dennis Simmons, Executive Director, Committee on 
Investment of Employee Benefit Access, to Brent J. Fields, Secretary, 
Commission, dated May 25, 2018 (``CIEBA Letter'').
46. Letter from Lisa Mahon Lynch, Director, Trading & Counterparty 
Services, Wellington Management Company LLP, to Brent J. Fields, 
Secretary, Commission, dated May 25, 2018 (``Wellington Letter'').
47. Letter from Kevin Duggan, Managing Director, Execution & Treasury, 
Capital Markets, Ontario Teachers' Pension Plan, et al., to Brent J. 
Fields, Secretary, Commission, dated May 25, 2018 (``Joint Pension Plan 
Letter'').\1062\
---------------------------------------------------------------------------

    \1062\ The Commission notes that it separately received a copy 
of a signatory page already attached to this letter from Karl Polen, 
Chief Investment Officer, Arizona State Retirement System, dated May 
21, 2018. For purposes of this summary, the copy has not been 
counted as a separate letter or comment.
---------------------------------------------------------------------------

48. Letter from Tim Gately, Managing Director, Head of Americas 
Equities, Citigroup Global Markets Inc., to Brent J. Fields, Secretary, 
Commission, dated May 25, 2018 (``Citi Letter'').
49. Letter from Michael Jacejko, Birch Bay Capital, LLC, to Brent J. 
Fields, Secretary, Commission, dated May 25, 2018 (``Birch Bay 
Letter'').
50. Letter from Cynthia Lo Bessette, General Counsel & Executive Vice 
President, OFI Global Asset Management, Inc., et al., OppenheimerFunds, 
Inc., to Brent J. Fields, Secretary, Commission, dated May 25, 2018 
(``Oppenheimer Letter'').
51. Letter from Ray Ross, Chief Technology Officer, Clearpool Group, to 
Brent J. Fields, Secretary, Commission, dated May 25, 2018 (``Clearpool 
Letter'').
52. Letter from James J. Angel, Associate Professor of Finance, 
Georgetown University, McDonough School of Business, to Commission, 
dated May 25, 2018 (``Angel Letter I'').
53. Letter from Chester Spatt, Former Chief Economist, Commission, to 
Brent J. Fields, Secretary, Commission, dated May 25, 2018 (``Spatt 
Letter'').
54. Letter from Joseph Kinahan, Managing Director, Client Advocacy & 
Market Structure, TD Ameritrade, Inc., to Brent J. Fields, Secretary, 
Commission, dated May 25, 2018 (``TD Ameritrade Letter'').
55. Letter from Edward S. Knight, Executive Vice President & Global 
Chief Legal & Policy Officer, Nasdaq, Inc., to Brent J. Fields, 
Secretary, Commission, dated May 25, 2018 (``Nasdaq Letter I'').
56. Letter from Edward T. Tilly, Chairman & Chief Executive Officer,

[[Page 5302]]

Cboe Global Markets, Inc., to Brent J. Fields, Secretary, Commission, 
dated May 25, 2018 (``Cboe Letter I'').
57. Letter from Matt D. Lyons, Global Equity Trading Manager, and Peter 
D. Stutsman, U.S. Regional Equity Trading Manager, The Capital Group 
Companies, to Brent J. Fields, Secretary, Commission, dated May 30, 
2018 (``Capital Group Letter'').
58. Letter from Mike Rask, Chairman of the Board, and James Toes, 
President & CEO, Security Traders Association, to Brent J. Fields, 
Secretary, Commission, dated May 31, 2018 (``STA Letter'').
59. Letter from Alan Harris, to Commission, dated May 31, 2018 
(``Harris Letter'').
60. Letter from Elizabeth K. King, General Counsel & Corporate 
Secretary, NYSE Group, Inc., to Brent J. Fields, Secretary, Commission, 
dated May 31, 2018 (``NYSE Letter I'').
61. Letter from Kimberly Unger, CEO & Executive Director, The Security 
Traders Association of New York, Inc., to Brent J. Fields, Secretary, 
Commission, dated June 1, 2018 (``STANY Letter'').
62. Letter from John Ramsay, Chief Market Policy Officer, Investors 
Exchange LLC, to Brent J. Fields, Secretary, Commission, dated May 30, 
2018 (``IEX Letter I'').
63. Market Commentary by Victor Lin, Credit Suisse, dated June 4, 2018 
(``Credit Suisse Commentary'').
64. Letter from Rajesh Sharma, Corporate Secretary, Apache Corporation, 
to Brent J. Fields, Secretary, Commission, dated June 7, 2018 (``Apache 
Letter'').
65. Letter from ``Danny Mulson'' to Commission, dated June 7, 2018 
(``Mulson Letter I'').
66. Letter from J.W. Verret, Associate Professor of Law, George Mason 
University, Antonin Scalia Law School, to Brent J. Fields, Secretary, 
Commission, dated June 11, 2018 (``Verret Letter I'').
67. Letter from James D. Rollins III, Chairman & Chief Executive 
Officer, BancorpSouth Bank, to Brent J. Fields, Secretary, Commission, 
dated June 11, 2018 (``BancorpSouth Letter'').
68. Letter from Jonathan A. Clark, Chief Executive Officer, and James 
C. Dolan, Chief Compliance Officer, Luminex Trading & Analytics LLC, to 
Brent J. Fields, Secretary, Commission, dated June 12, 2018 (``Luminex 
Letter'').
69. Letter from Mehmet Kinak, Vice President--Global Head of Systematic 
Trading & Market Structure, and Jonathan Siegel, Vice President--Senior 
Legal Counsel (Legislative & Regulatory Affairs), T. Rowe Price, to 
Brent J. Fields, Secretary, Commission, dated June 12, 2018 (``T. Rowe 
Price Letter'').
70. Letter from Jon R. Moeller, Vice Chairman & Chief Financial 
Officer, The Procter & Gamble Company, to Brent J. Fields, Secretary, 
Commission, dated June 13, 2018 (``P&G Letter'').
71. Letter from William P. Neuberger, Managing Director, Global Co-Head 
of Morgan Stanley Electronic Trading, and Andrew F. Silverman, Managing 
Director, Global Co-Head of Morgan Stanley Electronic Trading, Morgan 
Stanley & Co. LLC, to Brent J. Fields, Secretary, Commission, dated 
June 14, 2018 (``Morgan Stanley Letter'').
72. Letter from Larry Harris, Fred V. Keenan Chair in Finance, USC 
Marshall School of Business, to Brent J. Fields, Secretary, Commission, 
dated June 15, 2018 (``Larry Harris Letter'').
73. Letter from Keith Neumeyer, President & CEO, First Majestic Silver 
Corp., to Brent J. Fields, Secretary, Commission, dated June 19, 2018 
(``First Majestic Letter'').
74. Letter from ``Avarice Pleonexia'' to Commission, dated June 20, 
2018 (``Pleonexia Letter'').
75. Letter from John M. Freeman, Executive Vice President, Chief Legal 
Officer & Corporate Secretary, McDermott, to Brent J. Fields, 
Secretary, Commission, dated June 21, 2018 (``McDermott Letter'').
76. Letter from Janet McGinness, Corporate Secretary, Mastercard, Inc., 
to Brent J. Fields, Secretary, Commission, dated June 21, 2018 
(``Mastercard Letter'').
77. Letter from Mark Elliott, Chief Financial Officer, Level Brands, 
Inc., to Brent J. Fields, Secretary, Commission, dated June 21, 2018 
(``Level Brands Letter'').
78. Letter from Geir [Oslash]ivind Nyg[aring]rd, Chief Investment 
Officer Asset Strategies, and Simon Emrich, Head of Market Structure 
Strategies, Norges Bank Investment Management, to Brent J. Fields, 
Secretary, Commission, dated June 21, 2018 (``Norges Letter'').
79. Letter from Neal V. Fenwick, Executive Vice President & Chief 
Financial Officer, ACCO Brands, Inc., to Brent J. Fields, Secretary, 
Commission, dated June 21, 2018 (``ACCO Letter'').
80. Letter from Thomas R. Kubera, Chief Accounting Officer & Interim 
Chief Financial Officer, SIFCO Industries, Inc., to Brent J. Fields, 
Secretary, Commission, dated June 21, 2018 (``SIFCO Letter'').
81. Letter from J.A. to Brent J. Fields, Secretary, Commission, dated 
June 22, 2018 (``JA Letter I'').
82. Letter from Timothy P. Olson, Senior Corporate Counsel & Corporate 
Secretary, NorthWestern Corporation, to Brent J. Fields, Secretary, 
Commission, dated June 22, 2018 (``NorthWestern Letter'').
83. Letter from Eric D. Koster, General Counsel & Secretary, Ethan 
Allen Interiors, Inc., to Brent J. Fields, Secretary, Commission, dated 
June 22, 2018 (``Ethan Allen Letter'').
84. Letter from Mark H. Collin, Senior Vice President, Chief Financial 
Officer & Treasurer, Unitil Corporation, to Brent J. Fields, Secretary, 
Commission, dated June 22, 2018 (``Unitil Corporation'').
85. Letter from Michael R. Peterson, Vice President, Corporate 
Secretary, & Associate General Counsel, to Brent J. Fields, Secretary, 
Commission, dated June 22, 2018 (``Johnson Letter'').
86. Letter from ``Anonymous Anonymous'' to Commission, dated June 22, 
2018 (``Anonymous Letter I'').
87. Letter from Stephen C. Richter, Executive Vice President & CFO, 
Weingarten Realty, to Brent J. Fields, Secretary, Commission, dated 
June 22, 2018 (``Weingarten Letter'').
88. Letter from Richard L. Travis, Jr., Chief Financial Officer, Ennis, 
Inc., to Brent J. Fields, Secretary, Commission, dated June 22, 2018 
(``Ennis Letter'').
89. Letter from Bryan H. Fairbanks, Chief Financial Officer, Trex 
Company, to Brent J. Fields, Secretary, Commission, dated June 22, 2018 
(``Trex Letter'').
90. Letter from John J. Manning, Vice President, General Counsel & 
Secretary, Sensient Technologies Corporation, to Brent J. Fields, 
Secretary, Commission, dated June 25, 2018 (``Sensient Letter'').
91. Letter from John Christofilos, Senior Vice-President & Chief 
Trading Officer, AGF Investments Inc., to Brent J. Fields, Secretary, 
Commission, dated June 25, 2018 (``AGF Letter'').
92. Letter from Dean Shigemura, Vice Chairman & Chief Financial 
Officer, Bank of Hawaii Corporation, to Brent J. Fields, Secretary,

[[Page 5303]]

Commission, dated June 25, 2018 (``Hawaii Letter'').
93. Letter from Jerry Fowden, Chief Executive Officer, Cott 
Corporation, to Brent J. Fields, Secretary, Commission, dated June 26, 
2018 (``Cott Letter'').
94. Letter from Adam F. Wergeles, EVP & General Counsel, Leaf Group 
Ltd., to Brent J. Fields, Secretary, Commission, dated June 26, 2018 
(``Leaf Letter'').
95. Letter from Haim Bodek, Managing Principal, and Stanislav 
Dolgopolov, Chief Regulatory Officer, Decimus Capital Markets, LLC, to 
Brent J. Fields, Secretary, Commission, dated June 26, 2018 (``Decimus 
Letter'').
96. Letter from Michael Sherman, Senior Vice President & General 
Counsel, Genesis Healthcare, Inc., to Brent J. Fields, Secretary, 
Commission, dated June 26, 2018 (``Genesis Letter'').
97. Letter from ``Anonymous Anonymous'' to Commission, dated June 27, 
2018 (``Anonymous Letter II'').
98. Letter from Michael J. Schewel, Vice-President, General Counsel & 
Secretary, Tredegar Corporation, to Brent J. Fields, Secretary, 
Commission, dated June 27, 2018 (``Tredegar Letter'').
99. Letter from Nicholas C. Taylor, Chairman & CEO, Mexco Energy 
Corporation, to Brent J. Fields, Secretary, Commission, dated June 27, 
2018 (``Mexco Letter'').
100. Letter from John Ramsay, Chief Market Policy Officer, Investors 
Exchange LLC, to Brent J. Fields, Secretary, Commission, dated June 27, 
2018 (``IEX Letter II'').
101. Presentation from Security Traders Association to Commission, 
dated June 28, 2018 (``STA Presentation'').
102. Letter from Timothy W. Gorman, Executive Vice President & Chief 
Financial Officer, Energizer Holdings, Inc., to Brent J. Fields, 
Secretary, Commission, dated June 28, 2018 (``Energizer Letter'').
103. Letter from Christopher A. Iacovella, Chief Executive Officer, 
American Securities Association, to Brent J. Fields, Secretary, 
Commission, dated June 28, 2018 (``ASA Letter'').
104. Letter from W. Stancil Starnes, Chairman, President & Chief 
Executive Officer, ProAssurance Corporation, to Brent J. Fields, 
Secretary, Commission, dated June 29, 2018 (``ProAssurance Letter'').
105. Letter from Isabel Janci, Vice President, Investor Relations, The 
Home Depot, to Brent J. Field[s], Secretary, Commission, dated June 29, 
2018 (``Home Depot Letter'').
106. Letter from Eric P. Sills, CEO & President, Standard Motor 
Products, Inc., to Brent J. Fields, Secretary, Commission, dated July 
2, 2018 (``SMP Letter'').
107. Letter from Christopher T. Weber, Executive Vice President & Chief 
Financial Officer, Halliburton, to Brent J. Fields, Secretary, 
Commission, dated July 2, 2018 (``Halliburton Letter'').
108. Letter from Jennifer D. Whalen, Senior Vice President & Chief 
Financial Officer, Era Group Inc., to Brent J. Fields, Secretary, 
Commission, dated July 2, 2018 (``Era Letter'').
109. Letter from David M. Weisberger, Head of Equities, ViableMkts, to 
Brent J. Fields, Secretary, Commission, dated July 2, 2018 
(``ViableMkts Letter'').
110. Letter from John S. Fischer, General Counsel, Natural Grocers by 
Vitamin Cottage, Inc., to Brent J. Fields, Secretary, Commission, dated 
July 3, 2018 (``Natural Grocers Letter'').
111. Letter from Mark J. Airola, Senior Vice President, General 
Counsel, Chief Administrative Officer & Corporate Secretary, Newpark 
Resources, Inc., to Brent J. Fields, Secretary, Commission, dated July 
3, 2018 (``Newpark Letter'').
112. Letter from Jenny H. Parker, Senior Vice President--Finance, 
Secretary & Treasurer, Haverty Furniture Companies, Inc., to Brent J. 
Fields, Secretary, Commission, dated July 3, 2018 (``Haverty Letter'').
113. Letter from Adam W. Miller, Chief Financial Officer & Treasurer, 
Knight-Swift Transportation Holdings Inc., to Brent J. Fields, 
Secretary, Commission, dated July 5, 2018 (``Knight-Swift Letter'').
114. Letter from Tyler Gellasch, Executive Director, Healthy Markets 
Association, to Brent J. Fields, Secretary, Commission, dated July 6, 
2018 (``Healthy Markets Letter II'').
115. Letter from R. Dale Lynch, Executive Vice President--Chief 
Financial Officer, Federal Agricultural Mortgage Corporation, to Brent 
J. Fields, Secretary, Commission, dated July 9, 2018 (``Farmer Mac 
Letter'').
116. Letter from Elizabeth K. King, General Counsel & Corporate 
Secretary, New York Stock Exchange, to Brent J. Fields, Secretary, 
Commission, dated July 10, 2018 (``NYSE Letter II'').
117. Letter from ``Danny Mulson'' to Commission, dated July 10, 2018 
(``Mulson Letter II'').
118. Letter from Maria Trainor, Vice President, General Counsel & 
Secretary, Ampco-Pittsburgh Corporation, to Brent J. Fields, Secretary, 
Commission, dated July 11, 2018 (``Ampco-Pittsburgh Letter'').
119. Letter from Ted A. Dosch, Executive Vice President--Finance & 
Chief Financial Officer, Anixter International Inc., to Brent J. 
Fields, Secretary, Commission, dated July 13, 2018 (``Anixter 
Letter'').
120. Letter from John K. Lines, SVP/Secretary & General Counsel, 
National HealthCare Corporation, to Brent J. Fields, Secretary, 
Commission, dated July 16, 2018 (``NHC Letter'').
121. E-mail from Patrick Healy, Founder & CEO, Issuer Network, to David 
Shillman, Commission, dated July 17, 2018 (``Issuer Network E-mail'').
122. Letter from R. Scott Mahoney, Senior Vice President--General 
Counsel & Secretary, AVANGRID, Inc., to Brent J. Fields, Secretary, 
Commission, dated July 18, 2018 (``Avangrid Letter'').
123. Letter from J.A. to Brent J. Fields, Secretary, Commission, dated 
July 19, 2018 (``JA Letter II'').
124. Letter from Ruairidh Ross, Deputy General Counsel & Assistant 
Secretary, HP Inc., to Brent J. Fields, Secretary, Commission, dated 
July 31, 2018 (``HP Letter'').
125. Letter from Glenn E. Tynan, Vice President & Chief Financial 
Officer, Curtiss-Wright Corporation, to Brent J. Fields, Secretary, 
Commission, dated August 3, 2018 (``Curtiss-Wright Letter'').
126. Letter from James J. Angel, Associate Professor of Finance, 
Georgetown University, McDonough School of Business, to Commission, 
dated August 3, 2018 (``Angel Letter II.'')
127. Letter from John Ramsay, Chief Market Policy Officer, Investors 
Exchange LLC, to Brent J. Fields, Secretary, Commission, dated August 
8, 2018 (``IEX Letter III'').
128. Letter from Fiona Reynolds, Chief Executive Officer, Principles 
for Responsible Investment, to Brent J. Fields, Secretary, Commission, 
dated August 15, 2018 (``PRI Letter'').
129. Letter from Walter K. Compton, Executive Vice President & General 
Counsel, Murphy Oil Corporation, to Brent J. Fields, Secretary,

[[Page 5304]]

Commission, dated August 15, 2018 (``Murphy Letter'').
130. Letter from Sal Arnuk & Joe Saluzzi, Partners, Co-Founders & Co-
Heads of Equity Trading, Themis Trading LLC, to Brent J. Fields, 
Secretary, Commission, dated August 16, 2018 (``Themis Trading Letter 
II'').
131. Letter from Jeffrey S. Davis, Nasdaq, Inc., to Brent J. Fields, 
Secretary, Commission, dated August 31, 2018 (``Nasdaq Letter II'').
132. Recommendation of the Investor Advisory Committee, dated September 
13, 2018 (``IAC Recommendation'').
133. Letter from Sanda E. O'Connor, Chief Regulatory Affairs Officer, 
JPMorgan Chase & Co., to Brent J. Fields, Secretary, Commission, dated 
September 14, 2018 (``JPMorgan Letter'').
134. Letter from Anonymous Anonymous to Commission, dated September 21, 
2018 (``Anonymous Letter III'').
135. Letter from John Ramsay, Chief Market Policy Officer, Investors 
Exchange LLC, to Brent J. Fields, Secretary, Commission, dated 
September 24, 2018 (``IEX Letter IV'').
136. Letter from Chris Concannon, President & Chief Operating Officer, 
Cboe Global Markets, Inc., to Brent J. Fields, Secretary, Commission, 
dated September 28, 2018 (``Cboe Letter II'').
137. Letter from Susan M. Olson, General Counsel, Investment Company 
Institute, to Brent J. Fields, Secretary, Commission, dated October 1, 
2018 (``ICI Letter II'').
138. Letter from Katya Malinova, Mackenzie Investments Chair in 
Evidence-Based Investment Management, DeGroote School of Business, 
McMaster University, et al., to Brent J. Fields, Secretary, Commission, 
dated October 1, 2018 (``CSA Letter'').
139. Letter from ``Richard P. Grasso,'' ``Grasso Plumbing LLC,'' to 
Brent J. Fields, Secretary, Commission, dated October 1, 2018 (``Grasso 
Letter'').
140. Letter from Ira S. Lederman, W.R. Berkley Corporation, to Brent J. 
Fields, Secretary, Commission, dated October 2, 2018 (``Berkley 
Letter'').
141. Letter from Stacey Cunningham, President, New York Stock Exchange, 
to Brent J. Fields, Secretary, Commission, dated October 2, 2018 
(``NYSE Letter III'').
142. Letter from Rich Steiner, Electronic Trading Strategist, RBC 
Capital Markets, to Brent Fields, Secretary, Commission, dated October 
16, 2018 (``RBC Letter II'').
143. Letter from Elizabeth K. King, General Counsel & Corporate 
Secretary, NYSE Group, to Brent J. Fields, Secretary, Commission, dated 
November 9, 2018 (``NYSE Letter IV'').
144. Letter from Elizabeth K. King, General Counsel & Corporate 
Secretary, NYSE Group, Inc., to Brent J. Fields, Secretary, Commission, 
dated November 20, 2018 (``NYSE Letter V'').
145. Letter from J.A. to Brent J. Fields, Secretary, Commission, dated 
December 3, 2018 (``JA Letter III'').
146. Letter from J.W. Verret to Brent J. Fields, Secretary, Commission, 
dated December 4, 2018 (``Verret Letter II'').
147. Letter from Patrick J. Healy, Founder & CEO, Issuer Network, to 
Brent J. Fields, Secretary, Commission, dated December 14, 2018 
(``Issuer Network Letter II'').
148. Letter from Jeffrey S. Davis, Vice President & Deputy General 
Counsel, Nasdaq, Inc., to Brent J. Fields, Secretary, Commission, dated 
December 17, 2018 (``Nasdaq Letter III'').

    Note: The following Exhibit will not appear in the Code of 
Federal Regulations.

Exhibit 1: Data definitions for the Exchange Transaction Fee Summary

The table below represents the data model for the reporting 
requirements of an Exchange Transaction Fee Summary. This data model 
reflects the disclosures required by 17 CFR 242.610T(e) and the logical 
representation of those disclosures to a corresponding XML element. The 
Commission's XML schema is the formal electronic representation of this 
data model.
 Concept--the information content as described in 17 CFR 
242.610T(e) items 1 through 13.
 Element--a name for the XML element.
 Type--the XML data type, either a list of possible values or a 
general type such as ``number''.
 Spot, Monthly--How the element appears in a record of that 
type.
    [cir] R--Required. The XML file is not valid unless this element is 
present.
    [cir] NA--Not applicable. The element may appear in the record but 
its value is not to be used.
    [cir] O--Optional. The XML file is valid without that element; 
whether it appears for a particular SRO, record type, test group, etc., 
depends on the actual fee being described. XML validation by itself 
cannot determine this.
 When Absent--If the element is absent, its value is 
interpreted as if it had been present with the value shown.
 Definition--Text to be included in the XML definition file 
(``schema'').

--------------------------------------------------------------------------------------------------------------------------------------------------------
     Concept               Element                    Type              Spot          Monthly         When absent                 Definition
--------------------------------------------------------------------------------------------------------------------------------------------------------
Exchange........  exch                       Non-empty Text         R            R                  ...............  A required unique code to identify
                                                                                                                      each exchange in the Transaction
                                                                                                                      Fee Pilot.
Record Type.....  rt                         S or M                 R            R                  ...............  A required record type indicator.
                                                                                                                      M, if the fee type reported is the
                                                                                                                      monthly realized fee (average or
                                                                                                                      median fee); S, if the fee type
                                                                                                                      reported is a spot fee schedule
                                                                                                                      (base or top tier fee).
Participant Type  ptcpt                      MM, Other or Blank     O            O                  Blank            MM, if the fees are for market
                                                                                                                      makers, or else Other. Required
                                                                                                                      for spot records if the exchange
                                                                                                                      charged market makers and others
                                                                                                                      different base and top tier fees.
                                                                                                                      Required for monthly fee records
                                                                                                                      if the exchange charged different
                                                                                                                      average or median fees or pays
                                                                                                                      different average or median fees.
                                                                                                                      Otherwise blank or absent.
Pilot Group.....  grp                        1, 2, or C             R            R                  ...............  A required indicator that
                                                                                                                      identifies the test or control
                                                                                                                      group during the Pilot and post-
                                                                                                                      Pilot Period. 1, 2--Test Groups 1,
                                                                                                                      2; C--Control group.

[[Page 5305]]

 
Displayed.......  disp                       D, N, or B             R            R                  ...............  D--Displayed, N--Not displayed, B--
                                                                                                                      Both. For spot fee type records,
                                                                                                                      if the fees are the same between
                                                                                                                      displayed and non-displayed
                                                                                                                      liquidity, then the exchange may
                                                                                                                      report both in a single ``B``
                                                                                                                      record. For monthly records, this
                                                                                                                      should be segmented into the
                                                                                                                      average and median fee per share
                                                                                                                      for displayed liquidity, and the
                                                                                                                      average and median fee for non-
                                                                                                                      displayed liquidity unless there
                                                                                                                      are no differences between the
                                                                                                                      average and median fees for
                                                                                                                      displayed and non-displayed
                                                                                                                      liquidity, in which case the
                                                                                                                      exchange can report the average
                                                                                                                      and median fee in a single ``B''
                                                                                                                      record.
Top/Depth.......  topOrDepth                 T, D, or B             R            R                  ...............  T--Fees for top-of-book liquidity;
                                                                                                                      D--Fees for depth-of-book
                                                                                                                      liquidity; B--Both. For spot
                                                                                                                      records, if the fees are the same
                                                                                                                      between top-of-book and depth-of-
                                                                                                                      book liquidity, then the exchange
                                                                                                                      may report both fees in a single
                                                                                                                      ``B`` record. For monthly records,
                                                                                                                      if there are no differences
                                                                                                                      between the fees for top-of-book
                                                                                                                      and depth-of-book liquidity, then
                                                                                                                      the exchange may include only the
                                                                                                                      average and median fees in a
                                                                                                                      single ``B`` record.
Start Date......  start                      YYYY-MM-DD             R            O                  ...............  The start date element must be
                                                                                                                      present for a spot fee record, and
                                                                                                                      the end element cannot appear
                                                                                                                      alone. The effective date for any
                                                                                                                      fee changes. This should
                                                                                                                      correspond to the effective date
                                                                                                                      referenced in the Form 19b-4 fee
                                                                                                                      filings submitted to the
                                                                                                                      Commission. This is needed in a
                                                                                                                      monthly record only if fees
                                                                                                                      changed on a day other than the
                                                                                                                      first of the month; otherwise
                                                                                                                      blank or absent.
End Date........  end                        YYYY-MM-DD or Blank    O            O                  Blank            The last date that a given fee is
                                                                                                                      viable prior to any fee changes.
                                                                                                                      This column will be blank unless a
                                                                                                                      mid-month change to fees is made.
                                                                                                                      This should correspond to the last
                                                                                                                      date that a given fee is
                                                                                                                      applicable prior to the effective
                                                                                                                      date of the new fee reflected in
                                                                                                                      Form 19b-4 fee filings submitted
                                                                                                                      to the Commission to capture any
                                                                                                                      revisions to transaction-based
                                                                                                                      fees and rebates. This is needed
                                                                                                                      in a monthly record only if fees
                                                                                                                      changed on a day other than the
                                                                                                                      first of the month.
Month and Year..  YearMonth                  YYYY-MM                NA           R                  ...............  The year and month of the monthly
                                                                                                                      realized reported average and
                                                                                                                      median per share fees.
Pre/Post........  preOrPost                  1, 2, or Blank         O            O                  Blank            An indicator variable needed only
                                                                                                                      if the exchange changed fees on a
                                                                                                                      day other than the first day of
                                                                                                                      the month. Blank-there were no fee
                                                                                                                      changes other than on the first
                                                                                                                      day of the month. 1--The average
                                                                                                                      and median are the pre-change
                                                                                                                      average and median for the part of
                                                                                                                      the month prior to the change. 2--
                                                                                                                      The average and median are the
                                                                                                                      post-change average and median for
                                                                                                                      the part of the month after the
                                                                                                                      change.
Base Taker Fee..  baseTakeFee                Number                 R            NA                 ...............  The Base Taker Fee is the standard
                                                                                                                      per share fee assessed or rebate
                                                                                                                      offered before any applicable
                                                                                                                      discounts, tiers, caps, or other
                                                                                                                      incentives are applied. Fees have
                                                                                                                      a positive sign; rebates have a
                                                                                                                      negative sign.
Top Tier Taker    topTierTakeFee             Number                 R            NA                 ...............  The Top Tier Taker Fee is the per
 Fee.                                                                                                                 share fee assessed or rebate
                                                                                                                      offered after all applicable
                                                                                                                      discounts, tiers, caps, or other
                                                                                                                      incentives are applied. Fees have
                                                                                                                      a positive sign; rebates have a
                                                                                                                      negative sign.
Average Taker     avgTakeFee                 Number                 NA           R                  ...............  The monthly average realized Taker
 Fee.                                                                                                                 fee assessed or rebate offered per
                                                                                                                      share by category (i.e., test
                                                                                                                      group, participant type, displayed
                                                                                                                      vs. non-displayed, and top-of-book
                                                                                                                      vs. depth-of-book). Fees have a
                                                                                                                      positive sign; rebates have a
                                                                                                                      negative sign.
Median Taker Fee  medianTakeFee              Number                 NA           R                  ...............  The monthly median realized Taker
                                                                                                                      fee assessed or rebate offered per
                                                                                                                      share by category (i.e., test
                                                                                                                      group, participant type, displayed
                                                                                                                      vs. non-displayed, and top-of-book
                                                                                                                      vs. depth-of-book), across broker-
                                                                                                                      dealers. Fees have a positive
                                                                                                                      sign; rebates have a negative
                                                                                                                      sign.
Base Maker Fee..  baseMakeFee                Number                 R            NA                 ...............  The Base Maker Fee is the standard
                                                                                                                      per share fee assessed or rebate
                                                                                                                      offered before any applicable
                                                                                                                      discounts, tiers, caps, or other
                                                                                                                      incentives are applied. Fees have
                                                                                                                      a positive sign; rebates have a
                                                                                                                      negative sign.
Top Tier Maker    topTierFee                 Number                 R            NA                 ...............  The Top Tier Maker Fee is the per
 Fee.                                                                                                                 share fee assessed or rebate
                                                                                                                      offered all applicable discounts,
                                                                                                                      tiers, caps, or other incentives
                                                                                                                      are applied per share. Fees have a
                                                                                                                      positive sign; rebates have a
                                                                                                                      negative sign.
Average Maker     avgMakeFee                 Number                 NA           R                  ...............  The monthly average realized Maker
 Fee.                                                                                                                 fee assessed or rebate offered per
                                                                                                                      share by category (i.e., test
                                                                                                                      group, participant type, displayed
                                                                                                                      vs. non-displayed, and top-of-book
                                                                                                                      vs. depth-of-book). Fees have a
                                                                                                                      positive sign; rebates have a
                                                                                                                      negative sign.

[[Page 5306]]

 
Median Maker Fee  medianMakeFee              Number                 NA           R                  ...............  The monthly median realized Maker
                                                                                                                      fee assessed or rebate offered per
                                                                                                                      share by category (i.e., test
                                                                                                                      group, participant type, displayed
                                                                                                                      vs. non-displayed, or top-of-book
                                                                                                                      vs. depth-of-book), across broker-
                                                                                                                      dealers. Fees have a positive
                                                                                                                      sign; rebates have a negative
                                                                                                                      sign.
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[FR Doc. 2018-27982 Filed 2-19-19; 8:45 am]
 BILLING CODE 8011-01-P