[Federal Register Volume 91, Number 116 (Wednesday, June 17, 2026)]
[Proposed Rules]
[Pages 36656-36735]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2026-12163]
[[Page 36655]]
Vol. 91
Wednesday,
No. 116
June 17, 2026
Part II
Securities and Exchange Commission
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17 CFR Parts 240 and 242
The Trade-Through Rule and Locked and Crossed Markets Provisions of
Regulation NMS; Proposed Rule
Federal Register / Vol. 91 , No. 116 / Wednesday, June 17, 2026 /
Proposed Rules
[[Page 36656]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 240 and 242
[Release No. 34-105655; File No. S7-2026-20]
RIN 3235-AN50
The Trade-Through Rule and Locked and Crossed Markets Provisions
of Regulation NMS
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Securities and Exchange Commission (``Commission'' or
``SEC'') is proposing amendments to Regulation NMS (``Regulation NMS'')
under the Securities Exchange Act of 1934 (``Exchange Act''). The
proposed amendments would rescind the trade-through rule for NMS
stocks, the provision regarding locking and crossing quotations for NMS
stocks, and certain defined terms. The proposed amendments would also
make conforming changes to other related provisions.
DATES: Comments should be received on or before August 17, 2026.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/comments/s7-2026-20/amendments-regulation-nms); or
Send an email to [email protected]. Please include
File Number S7-2026-20 on the subject line.
Paper Comments
Send paper comments to Secretary, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number S7-2026-20. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method of submission. The Commission will post all
comments on the Commission's website (https://www.sec.gov/rules-regulations/public-comments/s7-2026-20). Do not include personal
identifiable information in submissions; you should submit only
information that you wish to make available publicly. We may redact in
part or withhold entirely from publication submitted material that is
obscene or subject to copyright protection.
Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any materials will
be made available on our website. To ensure direct electronic receipt
of such notifications, sign up through the ``Stay Connected'' option at
www.sec.gov to receive notifications by email.
A summary of the proposal of not more than 100 words is posted on
the Commission's website (https://www.sec.gov/rules-regulations/2026/06/s7-2026-20).
FOR FURTHER INFORMATION CONTACT: Theodore S. Venuti, Assistant
Director; Kevin Brennan, Special Counsel; Sarah Counts, Special
Counsel; Jennifer Dodd, Special Counsel; David Liu, Special Counsel;
Gita Subramaniam, Special Counsel, at (202) 551-5500, Office of Market
Supervision, Division of Trading and Markets, U.S. Securities and
Exchange Commission, 100 F Street NE, Washington, DC 20549.
SUPPLEMENTARY INFORMATION: The Commission is proposing amendments for
public comment to the following rules.
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Commission reference CFR citation (17 CFR)
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Exchange Act:
Rule 15c3-5..................... Sec. 240.15c3-5
Rule 15b9-1..................... Sec. 240.15b9-1
Regulation NMS:
Rule 600........................ Sec. 242.600
Rule 610........................ Sec. 242.610
Rule 611........................ Sec. 242.611
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Table of Contents
I. Introduction
A. Overview of Proposal
B. Background
II. Rule 611
A. Description of Rule 611
1. Intermarket Price Protection
2. Exceptions Under Rule 611(b)
B. Proposed Rescission of Rule 611
1. Allowing Market Forces To Shape Equity Market Structure
2. Addressing the Adverse Consequences of Rule 611
3. Rule 611 Is Unnecessary
C. Request for Comment
III. Rule 610(e)
A. Description of Rule 610(e)
B. Proposed Rescission of Rule 610(e)
1. Evolution of Market Structure and Investor Sophistication
2. Potential for Improved Price Discovery and Competition
3. Reduction in Complexity and Compliance Costs
4. Crossed Markets
C. Request for Comment
IV. Conforming Amendments to Regulation NMS Definitions and Related
Rules
A. Description
B. Proposed Rescissions and Amendments to Related Rules
1. Proposed Rescission of Related Defined Terms in Rule 600(b)
of Regulation NMS
2. Proposed Conforming Amendments to Other Rules in Regulation
NMS
3. Proposed Conforming Amendments to Rules Outside of Regulation
NMS
C. Request for Comment
V. Paperwork Reduction Act
A. Rescission of Rule 611
B. Request for Comment
VI. Economic Analysis
A. Introduction
B. Economic Baseline
1. Regulatory Baseline
2. Economic Effects of Current Rule 611
3. Economic Effects of Current Rule 610(e)
4. Current Exchange Competition, Revenue, Market Data, and
Connectivity Services
5. Competition in the Market for Trading Services and Broker
Execution Services
C. Benefits and Costs
1. Rescinding Rule 611
2. Rescinding Rule 610(e)
3. Combined Economic Effects
4. Monetized Benefits and Costs
D. Effect on Efficiency, Competition, and Capital Formation
1. Efficiency
2. Competition
3. Capital Formation
E. Reasonable Alternatives
1. Venue Trading Volume Threshold for Protected Quotes
2. Large Trade Exception From Rule 611
3. Only Rescind Locked Market Prohibition, Keep Prohibition on
Crossed Markets.
F. Request for Comment
[[Page 36657]]
VII. Regulatory Flexibility Act Certification
VIII. Congressional Review Act
IX. Other Matters
Statutory Authority
I. Introduction
A. Overview of Proposal
Rule 611 of Regulation NMS was adopted in 2005 and established
intermarket protection against trade-throughs for all national market
system stocks. A trade-through occurs when one trading center executes
an order at a price that is inferior to the price of a protected
quotation displayed by another trading center. Rule 610(e) was also
adopted in 2005 under Regulation NMS and contains restrictions on
locking and crossing quotations in national market system stocks. A
locked market occurs when the best bid price equals the best offer
price, and a crossed market occurs when the best bid price is higher
than the best offer price.
Since the adoption of these rules, the structure of the U.S. equity
markets has evolved dramatically, and today's markets are highly
automated, interconnected, fast, and competitive. While a goal of Rule
611 was to incentivize displayed liquidity, since its adoption the
percentage of orders interacting with non-displayed liquidity on- and
off-exchange has consistently increased. In addition, since the
adoption of Rules 611 and 610(e), U.S. equity markets have become
increasingly fragmented and complex.
The Commission is proposing to rescind Rules 611 and 610(e) under
Regulation NMS. Rules 611 and 610(e) have led to a myriad of
consequences in today's trading environment, including increased costs
and market structure complexity, limiting order handling and execution
choice, and contributing to exchange proliferation and fragmentation of
trading on equity exchanges. Moreover, technologies, particularly with
respect to access and order handling and routing, have advanced
significantly and obviate any continued need for Rule 611, which was
adopted at a time when exchanges and market participants were not as
well connected and many linkages that did exist were relatively slow.
Also, given this highly automated and interconnected nature of our
equity markets today, Rule 611 is not needed to backstop a broker's
duty of best execution to seek the most favorable terms for customer
orders reasonably available under the circumstances. Similarly, such
increases in automation and interconnectivity, as well as increases in
market participant access to market data, obviate the need for Rule
610(e). Rescinding Rules 611 and 610(e) would reduce compliance costs
and benefit U.S. equity markets by eliminating regulations to allow
competition, innovation, and other market forces to shape the U.S.
equity market's continued evolution.
B. Background
Congress, through section 11A of the Exchange Act (``section
11A''),\1\ charged the Commission in 1975 with facilitating the
establishment of a national market system, and identified five key
components for such a system to function properly: (1) economically
efficient execution of securities transactions; (2) fair competition
among broker-dealers, among exchange markets, and between exchange
markets and non-exchange markets; (3) price transparency; (4) best
execution of investor orders; and (5) an opportunity, consistent with
economic efficiency and best execution, for investor orders to meet
without the participation of a dealer.\2\ Following the adoption of
section 11A, over the next three decades the Commission sought to
facilitate the development of the national market system for NMS
securities \3\ by adopting rules, and working with various self-
regulatory organizations (``SROs'') to adopt rules and establish
national market system plans (``NMS Plans''), relating to, among other
things, linkages between markets; the collection, consolidation, and
dissemination of quotation and transaction information; the display of
quotations; and intermarket price protection.\4\
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\1\ 15 U.S.C. 78k-1.
\2\ Exchange Act section 11A(a)(1)(C)(i) through (v); 15 U.S.C.
78k-1(a)(1)(C)(i) through (v).
\3\ Rule 600(b)(64) of Regulation NMS defines ``NMS security''
to include ``any security or class of securities for which
transaction reports are collected, processed, and made available
pursuant to an effective transaction reporting plan, or an effective
national market system plan for reporting transactions in listed
options.'' See 17 CFR 242.600(b)(64). In other words, NMS securities
include NMS stocks and listed options.
\4\ See Securities Exchange Act Release No. 49325 (Feb. 26,
2004), 69 FR 11126 (Mar. 9, 2004) (``NMS Proposing Release'') at
11130-31. See also infra note 13.
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The years leading up to 2005 were a time of considerable
transformation for the secondary markets for U.S. listed equities. In
particular, ``the equity markets [had] experienced sweeping changes,
ranging from new technologies to new types of markets to the initiation
of trading in penny increments'' \5\ and a majority of the Commission
at that time believed there was an ``inescapable'' and ``pressing''
need to modernize the national market system.\6\ Significant increases
in the usage of electronic trading systems resulted in more transparent
order handling and routing practices; at the same time, intensifying
competition drove commissions lower and penny pricing reshaped the
mechanics of trading.\7\ After the ``culmination of a long and
comprehensive rulemaking process,'' \8\ and while acknowledging the
wide range of different opinions on many contentious issues,\9\ the
Commission adopted Regulation NMS in 2005, which it described as ``a
series of initiatives designed to modernize and strengthen the national
market system'' for NMS securities.\10\
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\5\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496 (June 29, 2005) (``NMS Adopting Release'') at
37497.
\6\ Id. at 37497. But see Dissent of Commissioners Cynthia A.
Glassman and Paul S. Atkins to the Adoption of Regulation NMS, id.
at 37639-43 (``Joint NMS Dissent'').
\7\ See Remarks at the Roundtable on Trade-Through Prohibitions
by Paul S. Atkins, Chairman, Commission (Sept. 18, 2025), available
at https://www.sec.gov/newsroom/speeches-statements/atkins-091825-remarks-roundtable-trade-through-prohibitions (``Chairman Remarks at
First TTR Roundtable'').
\8\ NMS Adopting Release at 37498; see also id. at 37497-98
(describing in detail the process the Commission engaged in prior to
adopting Regulation NMS in 2005).
\9\ Id. at 37497.
\10\ Id. at 37496.
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In adopting Regulation NMS, the Commission stated that it sought to
promote certain principles and objectives for the national market
system, namely: (1) competition among markets and competition among
orders; and (2) serving the interests of long-term investors and listed
companies.\11\ At the same time, the Commission acknowledged that its
primary challenge in facilitating the establishment of a national
market system was to maintain an appropriate competitive balance,
stating that it particularly sought to avoid the two extremes of
``[i]solated markets that trade an NMS stock without regard to trading
in other markets and thereby fragment the competition among buyers and
sellers in that stock'' and ``a totally centralized system that loses
the benefits of vigorous competition and innovation among individual
markets.'' \12\
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\11\ Id. at 37498-501.
\12\ Id. at 37499.
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Under Regulation NMS, the Commission consolidated the then-existing
national market system rules previously adopted under section 11A \13\
[[Page 36658]]
and adopted several significant new rules, including Rule 611 (relating
to restrictions on trade-throughs), Rule 610 (relating to access to
quotations and restrictions on locking and crossing quotations), Rule
612 (relating to minimum increments for orders and quotations), and
Rule 603 (relating to the distribution, consolidation, and display of
market data).\14\ Thus, as originally adopted in 2005, Regulation NMS
consisted of twelve rules, along with a definitional rule (Rule
600).\15\
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\13\ The national market system rules predating Regulation NMS
are the requirements relating to: NMS defined terms (Rule 600,
previously Exchange Act Rule 11Aa2-1); public dissemination of trade
reports (Rule 601, previously Exchange Act Rule 11Aa3-1) and
quotations (Rule 602, previously Exchange Act Rule 11Ac1-1 and
commonly referred to as the ``Quote Rule''); distribution,
consolidation and display of quotes and transactions in NMS stocks
(Rule 603, previously Exchange Act Rule 11Ac1-2 and commonly
referred to as the ``Vendor Display Rule''); public display of
customer limit orders (Rule 604, previously Exchange Act Rule 11Ac1-
4 and commonly referred to as the ``Limit Order Display Rule'');
public disclosure of order execution and routing information (Rules
605, previously Exchange Act Rule 11Ac1-5, and 606, previously
Exchange Act Rule 11Ac1-6); customer account statements (Rule 607,
previously Exchange Act Rule 11Ac1-3); national market system plans
(Rule 608, previously Exchange Act Rule 11Aa3-2); and registration
of securities information processors (``SIPs'') (Rule 609,
previously Exchange Act Rule 11Ab2-1).
\14\ See 17 CFR 242.611, 17 CFR 242.610, 17 CFR 242.612, and 17
CFR 242.603, respectively.
\15\ 17 CFR 242.600-612. Subsequent to the adoption of
Regulation NMS in 2005, the Commission adopted: Rule 613 of
Regulation NMS, which required national securities exchanges and
national securities associations to submit a national market system
plan to create, implement, and maintain a consolidated audit trail
with respect to the trading of NMS securities (``CAT'') (Securities
Exchange Act Release No. 67457 (July 18, 2012), 77 FR 45722 (Aug. 1,
2012) (``CAT Adopting Release'')); and Rule 614, relating to the
registration and responsibilities of competing consolidators
(Securities Exchange Act Release No. 90610 (Dec. 9, 2020), 86 FR
18596 (Apr. 9, 2021) (``Market Data Infrastructure Adopting
Release'')). Currently, Regulation NMS consists of fourteen
substantive rules. 17 CFR 242.600-614.
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Rule 611 (referred to in the NMS Adopting Release as the ``order
protection rule,'' and referred to herein as the ``trade-through
rule'') was the core of the rules adopted by the Commission in
Regulation NMS and established intermarket protection against trade-
throughs \16\ for all NMS stocks. In adopting Rule 611, the Commission
emphasized that intermarket price protection was designed to promote
national market system objectives by promoting the use of displayed
``non-marketable'' limit orders (orders with limit prices that are not
immediately executable at current quoted prices) \17\ and minimizing
the extent to which investor market orders and marketable limit orders
are executed at inferior prices.\18\
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\16\ A ``trade-through'' means ``the purchase or sale of an NMS
stock during regular trading hours, either as principal or agent, at
a price that is lower than a protected bid or higher than a
protected offer.'' 17 CFR 242.600(b)(105).
\17\ Trade-through protection for displayed non-marketable limit
orders was designed to encourage the use of such orders by
increasing the likelihood of their receiving an execution in a
timely manner, as greater use of displayed limit orders was believed
to improve the price discovery process and contribute to increased
liquidity and depth. NMS Adopting Release at 37505-07.
\18\ Trade-through protection for market and marketable limit
orders was designed both to prevent unfairness to investors and to
facilitate broker-dealers' ability to achieve best execution of
their customer orders. If a broker-dealer routes an order to a
trading venue that cannot execute the order at the best price, the
venue cannot simply execute the order at an inferior price. It can
either cancel the order back to the broker-dealer or route the order
to another venue that will execute the order at the best price or
better. See NMS Adopting Release at 37505-07.
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Broadly speaking,\19\ Rule 611 requires ``trading centers'' \20\
(which encompass national securities exchanges (``exchanges''),\21\
alternative trading systems (``ATSs''),\22\ over-the-counter (``OTC'')
market makers, and any other broker-dealer that executes orders
internally) to establish, maintain, and enforce written policies and
procedures reasonably designed to prevent trade-throughs,\23\ i.e., the
execution of an order at a price that is inferior to the price of a
``protected quotation.'' \24\ To be ``protected,'' a quotation must be
immediately and automatically accessible up to its full displayed size
and must be the best-priced quotation (highest bid to buy and lowest
offer to sell) in round-lot sizes \25\ of an exchange or a national
securities association (currently the Financial Industry Regulatory
Authority, Inc. (``FINRA'') is the only registered national securities
association and it operates the Alternative Display Facility
(``ADF'')).\26\
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\19\ See infra section II.A. for a more detailed discussion of
Rule 611's requirements and exceptions.
\20\ 17 CFR 242.600(b)(106) (definition of ``trading center'').
\21\ See infra note 22.
\22\ Section 3(a)(1) of the Exchange Act defines an ``exchange''
as ``any organization, association, or group of persons. . .which
constitutes, maintains, or provides a market place or facilities for
bringing together purchasers and sellers of securities or for
otherwise performing with respect to securities the functions
commonly performed by a stock exchange as that term is generally
understood. . .'' 15 U.S.C. 78c(a)(1). Exchange Act Rule 3b-16(a)
provides a functional test to assess whether a trading system meets
the definition of ``exchange'' under section 3(a)(1) of the Exchange
Act. Under Rule 3b-16(a), an organization, association, or group of
persons ``constitutes, maintains, or provides a market place or
facilities for bringing together purchasers and sellers of
securities'' if it (1) brings together the orders for securities of
multiple buyers and sellers; and (2) uses established, non-
discretionary methods (whether by providing a trading facility or by
setting rules) under which such orders interact with each other, and
the buyers and sellers entering such orders agree to the terms of a
trade. See 17 CFR 240.3b-16(a). A national securities exchange and
ATS each meet the definition of exchange under section 3(a)(1) of
the Act and Rule 3b-16(a) thereunder but are subject to different
registration requirements. When used herein, ``exchange'' is used to
mean ``national securities exchange'' unless the context specifies
otherwise.
\23\ See supra note 16.
\24\ 17 CFR 242.600(b)(82) (definition of ``protected
quotation''); see also 17 CFR 242.600(b)(81) (definition of
``protected bid or protected offer'').
\25\ By its terms, Rule 611 only applies to round lots, as
``quotation'' is defined in Rule 600(b)(86) as ``a bid or offer,''
which, in turn, is defined in Rule 600(b)(16) to be the bid price or
the offer price communicated by a member of a national securities
exchange or member of a national securities association to any
broker or dealer, or to any customer, at which it is willing to buy
or sell one or more ``round lots'' of an NMS security, as either
principal or agent, but shall not include indications of interest.
In 2024, the Commission amended the definition of ``round lot'' to
implement a tiered approach based on an NMS stock's average closing
price on its primary listing exchange. The change to the definition
of ``round lot'' went into effect in November 2025. See Securities
Exchange Act Release No. 101070 (Sept. 18, 2024), 89 FR 81620 (Oct.
8, 2024) (``2024 Regulation NMS Amendments'').
\26\ See also infra note 90 and accompanying text (discussing
the ADF, which currently has no active quoting participants).
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Accordingly, Rule 611 provides for intermarket price priority of an
exchange's or the ADF's best bid and offer (``BBO''); \27\ it does not
establish time priority among quotations at different trading centers,
nor does it protect ``depth-of-book'' quotations (quotations with
prices outside an exchange's BBO). Rule 611 also provides certain
exceptions to its requirements, including an ``intermarket sweep
order'' (``ISO'') \28\ exception that allows, among other things, a
trader simultaneously to sweep multiple price levels outside of a
protected quotation, as long as one or more ISOs, as necessary, are
routed at the same time to execute against the full displayed size of
any protected quotations with better prices.\29\
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\27\ 17 CFR 242.600(b)(15) (definition of ``best bid and best
offer''); see also 17 CFR 242.600(b)(16) (definition of ``bid or
offer'').
\28\ 17 CFR 242.600(b)(47) (definition of ``intermarket sweep
order'').
\29\ This allows, for example, a block trader to access large-
sized quotations at prices outside protected quotations.
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Another significant new rule adopted by the Commission under
Regulation NMS was Rule 610 of Regulation NMS.\30\ Rule 610 contains
provisions relating to fair access to quotations, and includes, among
other things, a cap on the fees a trading center may impose for access
to quotations and restrictions on locked and crossed markets.\31\ In
[[Page 36659]]
particular and relevant to this release, Rule 610(e) requires each
exchange and national securities association to implement rules
requiring members reasonably to avoid displaying quotations that lock
or cross protected quotations.\32\ The Commission stated that ``[t]he
restrictions on locking or crossing quotations, in conjunction with
[Rule 611], should encourage trading against displayed quotations and
enhance the depth and liquidity of the markets.'' \33\
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\30\ See infra section III.A. for a more detailed discussion of
Rule 610's requirements.
\31\ See Rule 610(a) through (f). With respect to access fee
caps under paragraph (c) of Rule 610, when first adopted in 2005 the
Commission limited exchange fees for accessing protected quotations
with prices of $1 or greater to 0.3 cents per share (or 30 cents per
100 shares). Subsequently, in 2024, the Commission amended Rule
610(c) to reduce the access fee caps to $0.001 (or 10 mils) per
share for NMS stocks with prices of $1 or greater. At the same time,
the Commission established a second minimum pricing increment of
$0.005 under Rule 612 for quoting certain ``tick constrained'' NMS
stocks and adopted new definitions of ``round lot'' and ``odd-lot
information.'' See 2024 Regulation NMS Amendments. The changes to
the access fee cap in Rule 610(c) and the minimum pricing increment
in Rule 612 have yet to be implemented. See infra note 76.
\32\ 17 CFR 242.610(e). A locking quotation is when a bid is
displayed with a price equal to the price of a previously displayed
offer, or when an offer is displayed with a price equal to the price
of a previously displayed bid. A crossing quotation is when a bid is
displayed with a price higher than the price of a previously
displayed offer, or when an offer is displayed with a price lower
than the price of a previously displayed bid.
\33\ NMS Adopting Release at 37584.
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As discussed above, the Commission approved Regulation NMS at a
time of considerable transformation in the U.S. equity markets.\34\
Since the adoption of Regulation NMS in 2005, U.S. securities markets
have evolved further and continue to evolve and innovate. Trading has
moved from two traditional models of equity market structure that had
dominated trading prior to 2005--namely, floor-based auctions for
stocks listed on the New York Stock Exchange LLC (``NYSE'') and dealer-
based competition for stocks listed on the Nasdaq Stock Market LLC
(``Nasdaq'')--to evolve into today's highly automated, electronic
market structure model where exchange-listed stocks trade on a wide
range of different types of electronic trading centers, connected by
private linkages, including exchanges, ATSs, single-dealer trading
platforms (``SDPs''),\35\ and other broker-dealer trading systems.
Rapid changes in technology led to the rise of sophisticated
algorithmic trading strategies and high-volume proprietary trading
firms.
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\34\ See supra notes 5-7 and accompanying text.
\35\ An SDP is a type of business operated by some OTC market
makers which primarily seeks to attract the orders of institutional
investors for internal execution. See Where Do Stocks Trade?, FINRA
(Sept. 28, 2023) available at https://www.finra.org/investors/insights/where-do-stocks-trade (for further discussion about SDPs).
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Moreover, since the adoption of Regulation NMS in 2005, the number
of national securities exchanges for NMS stocks has proliferated,
further fragmenting the trading landscape. Currently, there are 17
operating national securities exchanges that trade NMS stocks and three
exchanges approved to trade NMS stocks but not yet operating,\36\ as
compared to eight national securities exchanges that traded NMS stocks
in 2005 (plus Nasdaq, which did not become an exchange until 2006).\37\
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\36\ The 17 operating national securities exchanges are: Cboe
BYX Exchange, Inc. (``Cboe BYX''); Cboe BZX Exchange, Inc. (``Cboe
BZX''); Cboe EDGA Exchange, Inc. (``Cboe EDGA''); Cboe EDGX
Exchange, Inc. (``Cboe EDGX''); Investors Exchange LLC (``IEX'');
Long-Term Stock Exchange, Inc. (``LTSE''); MEMX LLC (``MEMX''); MIAX
Pearl, LLC (``MIAX PEARL''); Nasdaq Texas, LLC. (``Nasdaq TX'');
Nasdaq PHLX LLC (``Nasdaq Phlx''); The Nasdaq Stock Market LLC
(``Nasdaq''); NYSE; NYSE American LLC (``NYSE American''); NYSE
Arca, Inc. (``NYSE Arca''); NYSE Texas, Inc. (``NYSE Texas''); NYSE
National, Inc. (``NYSE National''); and 24X National Exchange LLC
(``24X''). The three national securities exchanges approved to trade
NMS stocks, but not yet operating, are: Green Impact Exchange, LLC
(``GIX''); MX2 LLC (``MX2'') and Texas Stock Exchange LLC
(``TXSE'').
\37\ See NMS Adopting Release at 37576, n.730 (listing the eight
national securities exchanges that traded NMS stocks in 2005).
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There has also been a significant increase in the volume and
proportion of trading executing against non-displayed liquidity.\38\
Since the adoption of Rule 611, fragmentation among non-displayed
venues has occurred as trading volumes in U.S. equities have increased
on off-exchange venues, such as ATSs, SDPs, and wholesalers,\39\ with
the market share of off-exchange trading steadily increasing in the
last decade, and, since the end of 2024, now regularly exceeding 50% of
overall volume.\40\ Even on exchanges, the percentage of volume
executed against liquidity that is not displayed (i.e., is ``hidden''
or ``dark'') has steadily increased.\41\
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\38\ See, e.g., Staff of the Division of Trading and Markets,
Trade Through Roundtable Supporting Data, pp. 10-15 (Sept.12, 2025),
available at: https://www.sec.gov/files/trade-through-roundtable-supporting-data.pdf (providing measures of the number of round lots
at the best bid and number best bids from 2015-2025); see also
Memorandum re: Rule 611 of Regulation NMS from SEC Division of
Trading and Markets to SEC Market Structure Advisory Committee,
dated Apr. 30, 2015 at 21, available at https://www.sec.gov/spotlight/emsac/memo-rule-611-regulation-nms.pdf (``EMSAC Market
Structure Memo'').
\39\ Wholesalers fall within the definition of an OTC market
maker in Rule 600(b)(75) of Regulation NMS--any dealer that holds
itself out as being willing to buy from and sell to its customers,
or others, in the United States, an NMS stock for its own account on
a regular or continuous basis otherwise than on a national
securities exchange in amounts of less than block size. The term
``wholesaler'' is not defined in Regulation NMS but commonly refers
to an OTC market maker that seeks to attract orders from broker-
dealers that service the accounts of retail investors.
\40\ For example, from February 2005 to February 2014, the total
percentage of volume executed by non-displayed ATSs and broker-
dealers rose from 29.4% to 38.6% for Nasdaq-listed stocks and from
13.0% to 34.6% for NYSE-listed stocks. See EMSAC Market Structure
Memo at 9-12. From February 2014 to January 2026, these off-exchange
volumes have risen even further, with total percentage of volume
executed off-exchange for Nasdaq-listed stocks climbing to 51.9% and
NYSE-listed stocks climbing to 47%. See 2026 Data Update of the 2015
EMSAC Market Structure Memo, by Staff of the Office of Analytics and
Research, Division of Trading and Markets (June 11, 2026), available
at https://www.sec.gov/rules-regulations/public-comments/s7-2026-20.
See The Volume Explosion No One Saw Coming, by Jeff O'Oconnor,
Liquidnet (Oct. 20, 2025) (noting that off-exchange volumes first
began to consistently clear 50% of total market volumes in Q4 of
2024). See also Rosenblatt Trading Talk--Market Structure Analysis
(Feb 6, 2026). For daily and monthly summaries of NMS stock volumes
executed on each exchange or reported to each trade reporting
facility, see https://www.cboe.com/us/equities/market_statistics/historical_market_volume/.
\41\ See, e.g., Summary Metrics by Exchange, available at
https://www.sec.gov/data-research/sec-markets-data/marketstructuredata-exchange. Analysis of this data indicates, for
example, that in the first quarter of 2015, the median proportion of
equity exchange volume executed against non-displayed orders for
stocks was 16.0%, but in the second quarter of 2025, it was 30.7%,
and that comparable numbers for ETPs were 12% and 16.6%. This change
was an increase of 92% for stocks and 38% for ETPs. Similarly, in
the first quarter of 2015, the exchange with the smallest proportion
of volume executed against hidden orders for stocks had 3.7% and the
largest 28.4%, but in the second quarter of 2025, the smallest had
13.7% and the largest had 54.6%. In the first quarter of 2015, the
exchange with the smallest proportion of volume executed against
hidden orders for ETPs had 1.5% and the largest 17.1%, but in the
second quarter of 2025, the smallest had 5.6% and the largest had
43.1%. This analysis is based on quarterly averages of the
``etp_hidden_volume'' and ``stock_hidden_volume'' data for each
exchange, and excluded one exchange that consistently executed
nearly all trades against non-displayed liquidity. See also It's
Darkest in the Middle of the Day, by Phil Mackintosh, Nasdaq,
available at https://www.nasdaq.com/articles/its-darkest-middle-day
(discussing off-exchange market share rising above 50% for the first
time in 2025 and lit price discovery (exchange trades at the NBBO)
at around 30% during portions of the trading day).
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The U.S. equities markets are continuing to evolve rapidly.
Advances in technology and increased automation and efficiencies have
recently enabled settlement times to shrink \42\ and have made near 24
hour equity trading a reality.\43\ In addition, innovative
[[Page 36660]]
technology such as distributed ledger technology (``DLT'') allows
issuers to tokenize a security by issuing it in the format of a crypto
asset and facilitate trading among market participants.\44\ The use of
DLT, including smart contract applications undergirding automated
market makers, has introduced new methods of trading securities and
opened access to such trading to various types of market participants.
Such innovative technology also raises challenges and questions
relating to current equities market structure and the application of
current regulatory requirements.\45\
---------------------------------------------------------------------------
\42\ See Securities Exchange Act Release No. 96930 (Feb. 15,
2023), 88 FR 13872 (Mar. 6, 2023) (Shortening the Securities
Transaction Settlement Cycle).
\43\ National securities exchanges have recently been approved
to trade NMS stocks on an almost 24/5 basis. See Securities Exchange
Act Release Nos. 102400 (Feb. 11, 2025), 90 FR 9794 (Feb. 18, 2025)
(order approving NYSE Arca Inc. proposal to lengthen its trading
session to 22 hours per day, 5 days per week); 101777 (Nov. 27,
2024); 89 FR 97092 (order approving application of 24X National
Exchange, LLC for registration as a national securities exchange and
to trade 23 hours per day, 5 days per week, once the SIPs are able
to concurrently collect, consolidate, process and disseminate
consolidated data at all times during that time). In addition,
certain ATSs make NMS stocks available for trading during the
overnight session.
\44\ See Statement on Tokenized Securities; Division of
Corporation Finance, Division of Investment Management, Division of
Trading and Markets; Commission, Jan. 28, 2026, available at https://www.sec.gov/newsroom/speeches-statements/corp-fin-statement-tokenized-securities-012826-statement-tokenized-securities.
\45\ See, e.g., Beyond Reg NMS: A Market Structure Framework for
the Modern Era, Michael Cahill, CEO, and Brandon Ferrick, General
Counsel, Duoro Labs LLC (``Duoro Labs Paper''), at 18-19.
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Given the importance of the U.S. national market system, the
Commission and its staff have periodically engaged in assessments of
equity market structure over the two decades since the adoption of
Regulation NMS,\46\ most recently examining the impact of Rule 611 and
related rules on equity market structure. To this end, the Commission
held two public roundtables in late 2025 and engaged a range of
panelists, including representatives from exchanges, ATSs, retail and
institutional broker-dealers, investor advocacy groups, academics, and
regulators.\47\ In conjunction with the TTR Roundtables, the Commission
also welcomed public comments regarding issues relating to Rule 611 and
related rules.\48\ Through the TTR Roundtables and the public comment
process, the Commission received a wide range of input on Regulation
NMS broadly, and the current Rule 611 trade-through prohibition
specifically, from a variety of market participants, including industry
groups, exchanges, broker-dealers, financial services firms, and
individual investors. While some commenters \49\ indicated support for
the trade-through rule in its current form,\50\ many commenters
criticized Rule 611 \51\ and its effect on equity market structure.\52\
---------------------------------------------------------------------------
\46\ For example, in 2010 the Commission conducted a broad
review of equity market structure and invited public comment on a
wide range of market structure issues, including high frequency
trading, order routing, market data linkages, and liquidity. See
Securities Exchange Act Release No. 61358 (Jan. 14, 2010), 75 FR
3594 (Jan. 21, 2010) (``Concept Release on Equity Market
Structure''). In 2015 the Commission established an Equity Market
Structure Advisory Committee (``EMSAC'') to provide the Commission
with ``diverse perspectives on the structure and operations of the
U.S. equities markets, as well as advice and recommendations on
matters related to equity market structure.'' See Securities
Exchange Act Release No. 74092 (Jan. 20, 2015), 80 FR 3673 (Jan. 23,
2015). The EMSAC used its inaugural meeting in May 2015 to focus on
Rule 611. See https://www.sec.gov/newsroom/press-releases/2015-70
and EMSAC Market Structure Memo at 18. See also supra note 15
(discussing amendments to Regulation NMS following its 2005
adoption). Even preceding the adoption of Regulation NMS, the
Commission and its staff have undertaken periodic reevaluations of
market structure. See, e.g., Concept Release on Market
Fragmentation, 65 FR 10577 (Feb. 28, 2000); Market 2000: An
Examination of Current Equity Market Developments, Division of
Market Regulation, Commission (Jan. 1994) (``Market 2000 Study'').
\47\ The first Roundtable on Trade-Through Prohibitions (``First
TTR Roundtable'') was held at the Commission's Washington DC
headquarters on September 18, 2025. A transcript and webcast of the
First TTR Roundtable can be found at: https://www.sec.gov/newsroom/meetings-events/roundtable-trade-through-prohibitions (``First TTR
Roundtable Transcript''). Data analysis supporting this roundtable
can be found at: https://www.sec.gov/files/trade-through-roundtable-supporting-data.pdf. The second Roundtable on Rule 611 (``Second TTR
Roundtable'' and, together with the First TTR Roundtable, the ``TTR
Roundtables'') was held in Austin, TX on December 16, 2025. A
transcript and webcast of the Second TTR Roundtable can be found at:
https://www.sec.gov/newsroom/meetings-events/roundtable-rule-611-regulation-nms (``Second TTR Roundtable Transcript''). A broad
overview from the roundtables is summarized below.
\48\ See https://www.sec.gov/comments/4-862/4-862.htm.
\49\ The term ``commenters'' throughout this document refers to
both the panelists at the TTR Roundtables and those who submitted
written comments.
\50\ See, e.g., letter from Allen Spence (Aug. 13, 2025) at 1-2;
letter from R. T. Leuchtkafer (Aug. 25, 2025) (``Leuchtkafer
Letter'') at 4; letter from Haoxiang Zhu, Associate Professor of
Finance, MIT Sloan School of Management (Dec. 15, 2025) (``Zhu
Letter'') at 1; First TTR Roundtable Transcript at 36 (Julie
Andress, Securities Traders Association and KeyBanc Capital
Markets). Some of these commenters also expressed support for
maintaining other aspects of Regulation NMS, such as Rule 610(e)'s
prohibition on locked and crossed markets. See, e.g., Leuchtkafer
Letter at 5-6; letter from Christopher Nagy, Research Director,
Healthy Markets Association (Dec. 12, 2025) (``Healthy Markets
Letter II'') at 2 n.7.
\51\ See, e.g., letter from James J. Angel, Associate Professor,
Georgetown University, McDonough School of Business (Sept. 1, 2025)
(``J. Angel Letter'') at 1, 16; letter from Matt Billings,
President, Robinhood Financial, LLC and Robinhood Securities, LLC
(Sept. 16, 2025 (``Robinhood Letter'') at 2-5; letter from Raz
Tirosh and Calvin Hayes, Jane Street (Sept. 23, 2025) (``Jane Street
Letter'') at 2 (stating the continuation of Rule 611 ``imposes
negative externalities''); letter from Joseph Saluzzi, Partner,
Themis Trading LLC (Dec. 17, 2025) at 3 (calling Rule 611 flawed and
offering reforms).
\52\ See, e.g., letter from Ari Burstein, General Counsel,
Imperative Execution, IntelligentCross (Sept. 17, 2025)
(``IntelligentCross Letter'') at 3-4; Kelvin To, Founder and
President, Data Boiler Technologies, Can Order Protection be
replaced by Competing Market Forces? (Sept. 8, 2025) (``Data Boiler
Comment'') at 1, 4; letter from John A. Zecca, Executive Vice
President, Global Chief Legal, Risk & Regulatory Officer, Nasdaq
(Sept. 24, 2025) (``Nasdaq Letter I'') at 1-2.
---------------------------------------------------------------------------
In particular, some commenters questioned whether the trade-through
rule is at least partly to blame for the substantial increase in the
number of exchanges and excessive fragmentation of liquidity among
trading venues.\53\ Some commenters contended that, by requiring market
participants to consider the protected quotations of all exchanges and
to route orders to execute against those quotations in certain
contexts, Rule 611 enables more exchanges to stay in business than may
have otherwise been the case.\54\ Similarly, some commenters argued
that the proliferation of exchanges increases costs and complexity for
market participants by, for example, requiring them to connect to each
exchange, directly or indirectly, and to pay for and monitor market
data from each exchange, regardless of such venue's utility.\55\
---------------------------------------------------------------------------
\53\ See, e.g., Robinhood Letter at 3-5; letter from William
O'Brien, Former CEO, Direct Edge (Sept. 16, 2025) (``O'Brien
Letter'') at 5; First TTR Roundtable Transcript at 57 (Pankil Patel,
Bank of America), at 277 (Daniel Gerhardstein, FIA Principal Traders
Group and Jump Trading Group).
\54\ See, e.g., Jane Street Letter at 2; First TTR Roundtable
Transcript at 235 (Mehmet Kinak, T. Rowe Price).
\55\ See, e.g., Robinhood Letter at 2, 5; First TTR Roundtable
Transcript at 68-69 (Pankil Patel, Bank of America).
---------------------------------------------------------------------------
Some commenters also attributed other market structure concerns to
Rule 611. For example, some stated that the trade-through rule has
indirectly led to more non-displayed trading by constraining the nature
of competition on displayed venues to factors such as speed and
fees.\56\ In addition, some commenters stated that Rule 611 has led to
unnecessary costs and complexity for market participants \57\ and to
the proliferation of complex order types.\58\ Others have stated that
the trade-through rule has harmed institutional investors that seek to
trade in large size by forcing them to access small-sized quotations
that may signal their trading intentions to short-term proprietary
traders.\59\ Commenters critical of Rule 611 generally contended that
it has not
[[Page 36661]]
succeeded in achieving the Commission's stated objective of enhancing
the reward for the display of limit orders and has produced negative
unintended consequences for market participants.\60\
---------------------------------------------------------------------------
\56\ See, e.g., Nasdaq Letter I at 1-2. Non-displayed trading is
sometimes referred to as ``dark'' liquidity and can include off-
exchange trading as well as non-displayed (or ``hidden'') liquidity
on exchanges. Displayed trading is sometimes referred to as ``lit''
trading.
\57\ See, e.g., Robinhood Letter at 5; O'Brien Letter at 6.
\58\ See, e.g., Robinhood Letter at 4; FIA PTG Position Paper--
Regulation NMS: A Renewed Call for Reform, FIA PTG Principal Traders
Group, Sept. 2025 (``FIA PTG Paper'') at 4; First TTR Roundtable
Transcript at 78-80 (Maureen O'Hara, Cornell University, SC Johnson
Graduate School of Management), at 169 (Armando Diaz, PureStream).
\59\ See, e.g., letter from Christopher Nagy, Research Director,
Healthy Markets Association (Sept. 16, 2025) (``Healthy Markets
Letter I'') at 8.
\60\ See, e.g., First TTR Roundtable Transcript at 57 (Pankil
Patel, Bank of America), 144-45 (Adam Nunes, Hudson River Trading).
---------------------------------------------------------------------------
Based on these critiques, some commenters recommended rescinding
Rule 611 in its entirety.\61\ Other commenters offered alternatives to
rescission of Rule 611, including modifications to Rule 611 \62\ or
modifications to other aspects of Regulation NMS instead.\63\ Several
commenters described the interconnectedness of the trade-through rule
with best execution obligations \64\ and some commenters recommended,
in light of possible changes to Rule 611, consideration of ways to
support best execution compliance.\65\ Some commenters suggested that
if the Commission rescinds Rule 611, it would need to change other
parts of Regulation NMS, including eliminating or modifying the access
fee caps set forth in Rule 610(c) \66\ or the prohibition on locked and
crossed markets in Rule 610(e).\67\
---------------------------------------------------------------------------
\61\ See, e.g., Second TTR Roundtable Transcript at 51-52
(Mehmet Kinak, T. Rowe Price), at 52-53 (Dmitry Bulkin, Bernstein),
at 53 (Brett Redfearn, Panorama Financial Markets Advisory);
Robinhood Letter at 2; O'Brien Letter at 7.
\62\ See, e.g., Healthy Markets Letter I at 8-10; Zhu Letter at
1-2; letter from Timothy J. Boyle, Chief Operating Officer, McKay
Brothers, LLC (Sept. 5, 2025) (``McKay Letter'').
\63\ See, e.g., letter from Patrick Sexton, EVP, General
Counsel, and Corporate Secretary, Cboe Global Markets, Inc. (Dec.
15, 2025) (``Cboe Letter II'') at 3-6.
\64\ See, e.g., letter from Adrian Griffiths, Head of Market
Structure, MEMX LLC (Sept. 18, 2025) (``MEMX Letter'') at 9-10 n.9;
Healthy Markets Letter I at 5; FIA FTG Paper at 2-3; Jane Street
Letter at 1-2.
\65\ See, e.g., Nasdaq Letter I at 3-7; McKay Letter at 2-3;
Healthy Markets Letter II at 6-7.
\66\ See, e.g., letter from Patrick Sexton, EVP, General
Counsel, and Corporate Secretary, Cboe Global Markets, Inc. (Sept.
15, 2025) (``Cboe Letter I'') at 4; Nasdaq Letter I at 4; Second TTR
Roundtable Transcript at 34-35 (Kevin Tyrell, New York Stock
Exchange). See also O'Brien Letter at 7 (recommending the Commission
rescind Rule 611 and modify Rules 605 (disclosure of order execution
information) and 612 (minimum pricing increment)).
\67\ See, e.g., MEMX Letter at 17-18; FIA PTG Paper at 6; Cboe
Letter I at 4-5; First TTR Roundtable Transcript at 129-130
(Jonathan Kellner, MEMX); Second TTR Roundtable Transcript at 55
(Brett Redfearn, Panorama Financial Markets Advisory).
---------------------------------------------------------------------------
The Commission is cognizant of the complex and interconnected
nature of our equity market structure and believes that proceeding with
any changes requires taking a holistic view to help ensure that changes
result in improvements in, and not a deterioration of, our national
market system. Changes to a single rule could have profound effects,
both expected and unexpected, on a multitude of other rules and aspects
of market structure. Thus, changes to, and modernizations of, the U.S.
regulatory structure for our equity markets should be done through a
deliberative and calibrated process that is designed to result in
improved market efficiency and reduced costs and complexity for
investors.
Based on the experience of the Commission and its staff overseeing
the equity markets and taking into consideration the input from
panelists at the TTR Roundtables and other comments received, the
Commission is proposing certain targeted changes to Regulation NMS.
Specifically, as described below in greater detail, the Commission
proposes to:
Rescind Rule 611 of Regulation NMS in its entirety; \68\
---------------------------------------------------------------------------
\68\ See infra section II.
---------------------------------------------------------------------------
Rescind Rule 610(e) of Regulation NMS in its entirety;
\69\ and
---------------------------------------------------------------------------
\69\ See infra section III.
---------------------------------------------------------------------------
Make conforming revisions to Regulation NMS and other
Commission rules to reflect the rescission of Rules 611 and 610(e),
including amending the definitional rule of Rule 600 to rescind terms
that would no longer be necessary to retain in Regulation NMS given the
proposed rescissions of Rules 611 and 610(e).\70\
---------------------------------------------------------------------------
\70\ See infra section IV. Specifically, the provisions of
Regulation NMS that are proposed to be rescinded are Rules
600(b)(6), (7), (47), (54), (81), (82) and (105); the provisions of
Regulation NMS that are proposed to be revised are Rules 600(b)(26),
(72), and (89), and Rule 610(c); and the other Commission rules that
are proposed to be revised are Rules 15c3-5 and 15b9-1 under the
Exchange Act.
---------------------------------------------------------------------------
The Commission understands these proposed changes could impact
related aspects of equity market structure. To the extent other changes
may be warranted to Commission rules, SRO rules, and NMS Plans \71\ in
light of this proposal, the Commission requests market participants to
submit comments explaining these market structure impacts and other
needed changes.\72\ Such areas for comment may include, but are not
limited to: (i) whether, and to what extent, best execution
requirements and guidance should be updated if the proposed amendments
to Regulation NMS are adopted; \73\ (ii) whether, and to what extent,
revisions should be made to market data revenue allocation formulas;
\74\ (iii) whether, and to what extent, conforming changes would be
required to SRO rules and NMS Plan provisions if the proposed
[[Page 36662]]
amendments to Regulation NMS are adopted; \75\ and (iv) whether, and to
what extent, the access fee caps under Rule 610(c) under Regulation NMS
should be revised.\76\
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\71\ See Rule 608 (Filing and amendment of national market
system plans), 17 CFR 242.608, which allows two or more SROs, acting
jointly, or the Commission itself to propose amendments to effective
NMS Plans.
\72\ Listed options have their own rules prohibiting trade-
throughs and locked and crossed markets, which is set forth in the
Options Order Protection and Locked/Crossed Market Plan, a
Commission approved NMS Plan. See infra note 83. The options markets
are materially different than the equities markets in a number of
ways. For example, as highlighted by commenters, there is no off-
exchange trading in listed options, options are more commonly quote-
driven versus order-driven, and there are a great deal more listed
options than listed equities. See, e.g., First TTR Roundtable
Transcript at 94-98 (Chris Isaacson, Cboe Global Markets, Inc.;
Chris Solgan, MIAX Exchange Group). These differences between the
equities and options markets necessitate a separate review of the
options markets to determine if any structural changes are
warranted. To that end, the Commission hosted a roundtable on April
16, 2026, to discuss listed options market structure, including
facilitating competition in a quote driven market, evaluating the
customer experience, and identifying opportunities and challenges
for continued growth. See https://www.sec.gov/newsroom/press-releases/2026-24-sec-announces-roundtable-options-market-structure-reform.
\73\ A broker's duty of best execution derives from common law
agency principles and fiduciary obligations, and is incorporated
implicitly, through judicial and Commission decisions, in the
antifraud provisions of the Federal securities laws. Securities
Exchange Act Release No. 37619A, 61 FR 48290, 48322 (Sept. 12, 1996)
(``Order Execution Obligations Adopting Release''), citing Market
2000 Study at V-1, 2 and sources cited therein. The Commission has
stated that the duty of best execution requires broker-dealers to
execute customers' trades at the most favorable terms reasonably
available under the circumstances. Id. FINRA's best execution rule
(FINRA Rule 5310) requires FINRA member firms to ``use reasonable
diligence to ascertain the best market'' for a customer order for a
securities transaction and to execute in such market to provide the
customer with a price that is ``as favorable as possible under
prevailing market conditions.'' FINRA Rule 5310(a)(1).
\74\ The Commission recognizes that the quality of consolidated
data, including the national best bid and national best offer
(``NBBO''), is critical to the health of our markets. When the
Commission adopted Regulation NMS, it also implemented a new market
data formula for revenue allocation among the relevant SROs,
essentially allocating half of market data revenues to trading and
half to quoting. See NMS Adopting Release at 37557-70. Some have
criticized the formula's quoting component, which they argued has
contributed to the creation of new exchanges and subsidizes
exchanges that quote but rarely trade, thus providing minimal value
to market participants. See, e.g., Jane Street Letter; FIA PTG
Paper; McKay Letter. On June 2, 2026, the members of the CT Plan LLC
(``CT Plan'') filed Amendment No. 3 to the CT Plan pursuant to Rule
608 of Regulation NMS (proposing certain revisions to the provisions
of the plan that govern the allocation of net revenues received
under the CT Plan among its members to impose a limit on the ratio
of revenue distributed to each individual member that is
attributable to its quoting activity compared to revenue such member
receives for trading activity under the revenue formula). The CT
Plan was approved in November 2024 to become the successor to and
replacement for the Nasdaq UTP Plan and the CTA/CQ Plans. See
Securities Exchange Act Release No. 101672 (Nov. 20, 2024), 89 FR
94924 (Nov. 29, 2024) (``CT Plan Approval Order''). The CT Plan is
expected to begin disseminating quote and trade data in the second
quarter of 2027. See CT Plan FAQs, available at https://thectplanllc.com/faqs/.
\75\ For example, if the proposed amendments to Regulation NMS
are adopted, SROs would no longer be required to have rules
restricting trade-throughs and locking or crossing quotations. In
such a case, the Commission believes, that most, if not all, SROs
would seek to amend rules originally designed for compliance with
Rules 611 and 610(e). Similarly, if the proposed amendments to
Regulation NMS are adopted, key terms such as ``protected quote,''
``trade-through,'' and ``intermarket sweep orders'' would no longer
be defined in Regulation NMS and SRO rulebooks would need to
redefine or eliminate such terms. In addition, the text of certain
NMS Plans may reference Regulation NMS requirements or defined terms
that are being proposed to be rescinded and plan participants may
choose to amend such plans. For example, the NMS Plans relating to
the collection, consolidation, processing and dissemination of
consolidated equity market data by the SIPs, including the CT Plan,
the Nasdaq UTP Plan and the CTA/CQ Plan, currently determine ``quote
credits'' based on certain automated quotations that do not lock or
cross a previously displayed automated quotation. See CT Plan
Approval Order; Securities Exchange Release Nos. 104670 (Jan. 22,
2026), 91 FR 3609 (Jan. 27, 2026) (Notice of Filing of the Fifty-
Fifth Amendment to the Joint Self-Regulatory Organization Plan
Governing the Collection, Consolidation and Dissemination of
Quotation and Transaction Information for Nasdaq-Listed Securities
Traded on Exchanges on an Unlisted Trading Privileges Basis); and
104665 (Jan. 22, 2026), 91 FR 3602 (Jan. 27, 2026) (Notice of Filing
of Fortieth Substantive Amendment to the Second Restatement of the
CTA Plan and Thirty-First Substantive Amendment to the Restated CQ
Plan). As discussed further below, the Commission is proposing to
rescind the defined term ``automated quotation'' and to eliminate
the prohibitions on locking and crossing markets. As a result, plan
participants may determine to amend such plans to revise how ``quote
credits'' are determined under the plans. But see, e.g., Second TTR
Roundtable Transcript at 56 (Brett Redfearn, Panorama Financial
Markets Advisory) (stating that even if the Commission rescinds the
prohibition on locked and crossed markets, the SIP revenue
allocation formula should not reward participants for actively
locking or crossing a market). See also, e.g., section VI.A.1. of
the NMS Plan to Address Extraordinary Market Volatility (``Limit Up/
Limit Down Plan''), available at https://www.luldplan.com/plans
(which excludes from certain requirements of the plan ``transactions
excepted or exempt from Rule 611 under Regulation NMS''); section
8.1.2. of Appendix D of the Limited Liability Company Agreement of
Consolidated Audit Trail, LLC, dated Aug. 29, 2019, available at
https://catnmsplan.com/sites/default/files/2026-01/LLC_Agreement_of_Consolidated_Audit_Trail_LLC-as-of-01.13.26.pdf
(referencing ``protected best bid and offer'').
\76\ Rule 610(c) was adopted at the same time as Rule 611 and
Rule 610(e), and was designed to promote fair and non-discriminatory
access to quotations displayed in the national market system, ensure
the fairness and accuracy of displayed quotations by establishing an
outer limit on the cost of accessing such quotations, and preclude
trading centers that posted protected quotations from raising their
fees in an attempt to take improper advantage of the trade-through
protections. See 2024 Regulation NMS Amendments at 81643-44. In
2024, the Commission adopted amendments to the Rule 610(c) access
fee caps in conjunction with changes to Rule 612 of Regulation NMS
(Minimum Pricing Increment). See 2024 Regulation NMS Amendments.
These amendments to Rules 610(c) and 612 are scheduled to be
implemented in November 2026. See Securities Exchange Act Release
No. 104172 (Oct. 31, 2025), 90 FR 51418 (Nov. 17, 2025) (``2025
Temporary Exemptive Relief''). However, on Feb. 26, 2026, the
Commission received a request for exemptive relief from the November
2026 implementation deadline, which request was published for
comment on Mar. 20, 2026. See Securities Exchange Act Release No.
105058 (Mar. 20, 2026), 91 FR 14602 (Mar. 25, 2026). See also infra
notes 231-238 and accompanying text (discussing access fee caps and
locked and crossed markets).
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II. Rule 611
Rule 611 was adopted as the most significant and controversial
piece of Regulation NMS.\77\ At the time, the Commission believed that,
in adopting Rule 611: (1) investors, particularly retail investors,
would be assured that orders would be filled at the best prices,
thereby giving them greater confidence that they would be treated
fairly when they participated in the equity markets; and (2) the
promotion of the best displayed and accessible prices would promote
deep and stable markets that minimized investor transaction costs.\78\
Rule 611 was the centerpiece of Regulation NMS and has been likened to
the ``head of an octopus'' because of its ability to impact many
different areas of equity market structure.\79\ Rule 611 has recently
been analogized to the scaffolding of the national market system, akin
to a temporary structure that can now be taken down because it is no
longer necessary.\80\
---------------------------------------------------------------------------
\77\ See, e.g., NMS Adopting Release at 37498 (``Clearly, the
Order Protection Rule was most controversial and attracted the most
public comment and attention.''); see also Joint NMS Dissent at
37633-35.
\78\ NMS Adopting Release at 37498.
\79\ See First TTR Roundtable Transcript at 45-46 (Katie
Kolchin, SIFMA) (``Like the octopus, market structure involves many
moving, interconnected pieces, and Rule 611 represents the head of
this octopus. If you move or change one piece, other parts could
move as well.''). See also supra notes 66-67 and accompanying text
(relating to other areas of Regulation NMS commenters believed to be
closely connected to Rule 611).
\80\ See First TTR Roundtable Transcript at 123 (Jim Angel,
Georgetown University). See also J. Angel Letter; Jane Street Letter
at 2 (stating that modern automated electronic markets have now
evolved beyond the baseline requirements of Rule 611 and that
``[w]hile arguably Rule 611 served a historical function, its
continuation imposes negative externalities on market
participants'').
---------------------------------------------------------------------------
A. Description of Rule 611
1. Intermarket Price Protection
The core of Rule 611 is paragraph (a)(1), which promotes
intermarket price protection of orders by restricting the execution of
trades on one venue at prices that are inferior to displayed quotations
at another venue. Specifically, it requires a ``trading center'' \81\
to establish, maintain, and enforce written policies and procedures
that are reasonably designed to prevent trade-throughs on that trading
center of ``protected quotations,'' \82\ unless one of the exceptions
to the trade-through restrictions set forth in paragraph (b) of the
rule applies. A ``trade-through'' is defined as the purchase or sale of
an ``NMS stock'' \83\ during ``regular trading hours'' \84\ either as
agent or principal, at a price that is lower than a protected bid or
higher than a protected offer.\85\
---------------------------------------------------------------------------
\81\ Rule 600(b)(106) defines ``trading center'' to mean ``a
national securities exchange or national securities association that
operates an SRO trading facility, an alternative trading system, an
exchange market maker, an OTC market maker, or any other broker or
dealer that executes orders internally by trading as principal or
crossing orders as agent.'' 17 CFR 242.600(b)(106). Trading center
is defined broadly to include venues that execute trades in today's
equity market structure, including registered exchanges, ATSs, OTC
market makers, and any other broker-dealers that execute orders
internally, whether as principal or agent.
\82\ Rule 600(b)(82) provides that ``protected quotation'' means
``a protected bid or a protected offer.'' 17 CFR 242.600(b)(82).
Rule 600(b)(81) provides that a ``protected bid or protected offer''
means ``a quotation in an NMS stock that: (i) is displayed by an
automated trading center; (ii) is disseminated pursuant to an
effective national market system plan; and (iii) is an automated
quotation that is the best bid or best offer of a national
securities exchange, or the best bid or best offer of a national
securities association.'' 17 CFR 242.600(b)(81).
\83\ An NMS stock generally means any exchange-listed security
(other than listed options) for which consolidated market data is
disseminated. Rule 600(b)(65) defines an ``NMS stock'' to mean ``any
NMS security other than an option.'' 17 CFR 242.600(b)(65). See
supra note 3 (defining NMS security). Listed options have their own
trade-through rule, which is set forth in the Options Order
Protection and Locked/Crossed Market Plan. That NMS Plan introduced
features to the listed options markets analogous to Rule 611 for the
equity markets, including requiring its participants to establish,
maintain and enforce written policies and procedures that are
reasonably designed to prevent trade-throughs, and provided for a
number of exceptions to the trade-through requirement (including
ISOs). In addition, the plan requires participants to have rules to
reasonably avoid displaying locked and crossed markets. See
Securities Exchange Act Release No. 60405 (July 30, 2009), 74 FR
39362 (Aug. 6, 2009).
\84\ Rule 600(b)(88) defines ``regular trading hours'' to mean
``the time between 9:30 a.m. and 4:00 p.m. Eastern Time, or such
other time as is set forth in the procedures established pursuant to
17 CFR 242.605(a)(2).'' 17 CFR 242.600(b)(88).
\85\ 17 CFR 242.600(b)(105) (definition of ``trade-through'').
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The definition of ``protected bid or protected offer'' \86\
(collectively, ``protected quotations'') includes several key elements.
First, they must be ``automated quotations'' \87\ displayed by
[[Page 36663]]
an ``automated trading center.'' \88\ The definitions of automated
trading center and automated quotation generally require that
quotations must be immediately and automatically executable, without
any programmed delay.\89\ Second, to be protected, a quotation must be
disseminated in the consolidated market data feeds. Consequently, Rule
611 does not apply when the consolidated market data feeds are not
operating. Third, to be protected, a quotation must be the ``best bid''
(highest-priced bid) or ``best offer'' (lowest-priced offer) of an
exchange or a national securities association (currently FINRA through
its ADF). Currently, 17 exchanges quote and trade NMS stocks but there
are no active quoting participants in the ADF,\90\ which means that,
practically, Rule 611 only applies to the best round-lot prices on an
exchange. Rule 611 does not cover any additional depth-of-book prices
(lower prices for bids and higher prices for offers) that are outside
the best prices displayed by an automated trading center.
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\86\ See supra note 82.
\87\ Rule 600(b)(6) defines the term ``automated quotation'' as
``a quotation displayed by a trading center that: (i) permits an
incoming order to be marked as immediate-or-cancel; (ii) immediately
and automatically executes an order marked as immediate-or-cancel
against the displayed quotation up to its full size; (iii)
immediately and automatically cancels any unexecuted portion of an
order marked as immediate-or-cancel without routing the order
elsewhere; (iv) immediately and automatically transmits a response
to the sender of an order marked as immediate-or-cancel indicating
the action taken with respect to such order; and (v) immediately and
automatically displays information that updates the displayed
quotation to reflect any change to its material terms.'' 17 CFR
242.600(b)(6).
\88\ Rule 600(b)(7) defines the term ``automated trading
center'' as ``a trading center that: (i) has implemented such
systems, procedures, and rules as are necessary to render it capable
of displaying quotations that meet the requirements for an automated
quotation set forth in [Rule 600(b)(6)]; (ii) identifies all
quotations other than automated quotations as manual quotations;
(iii) immediately identifies its quotations as manual quotations
whenever it has reason to believe that it is not capable of
displaying automated quotations; and (iv) has adopted reasonable
standards limiting when its quotations change from automated
quotations to manual quotations, and vice versa, to specifically
defined circumstances that promote fair and efficient access to its
automated quotations and are consistent with the maintenance of fair
and orderly markets.'' 17 CFR 242.600(b)(7).
\89\ See NMS Adopting Release at 37534 (``The term ``immediate''
precludes any coding of automated systems or other type of
intentional device that would delay the action taken with respect to
a quotation.''). In 2016, the Commission updated its interpretation
of the term ``immediate'' given technological and market
developments since the adoption of Regulation NMS and stated that
``immediate'' in the context of Regulation NMS does not preclude a
de minimis intentional delay--i.e., a delay so short as to not
frustrate the purposes of Rule 611 by impairing fair and efficient
access to an exchange's quotations. See Securities Exchange Act
Release No. 78102 (June 17, 2016), 81 FR 40785 (June 23, 2016).
\90\ See https://www.finra.org/filing-reporting/alternative-display-facililty-adf (stating ``[c]urrently, there are no active
quoting ADF participants.'').
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Rule 611 restricts trades at prices worse than a protected
quotation, though it does not affirmatively require the routing of
orders to trading centers that are displaying the best prices. Any
trading center is free to execute trades at prices that are equal to or
better than a protected quotation, regardless of whether such trading
center is currently quoting at that price or is a non-displayed trading
center that never displays quotations.\91\ Thus, for example, Rule 611
does not prohibit the execution of trades on non-displayed trading
centers (non-displayed ATSs which are sometimes referred to as ``dark
pools,'' off-exchange market makers, and other broker-dealers that
execute orders internally) at prices that match displayed prices at
displayed trading centers. Moreover, Rule 611 does not mandate
transparency or force investors to display their trading interest when
they wish not to do so.\92\ Any investor can choose not to display an
order, whether on an exchange or a non-displayed trading center, and
such orders can be executed as long as they are executed at NBBO prices
or better.
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\91\ Stated another way, Rule 611 does not require orders to be
routed to execute against displayed quotations before trades could
be executed at matching prices (sometimes referred to as a ``trade-
at'' restriction).
\92\ For example, Rule 604 of Regulation NMS provides an
exception from display for all block-sized limit orders (unless the
customer requests display), as well as an exception for limit orders
of any size for which the customer expressly requests non-display.
Rule 604 of Regulation NMS (Display of Customer Limit Orders). 17
CFR 242.604.
---------------------------------------------------------------------------
2. Exceptions under Rule 611(b)
Paragraph (b) of Rule 611 sets forth nine exceptions to the trade-
through restrictions of paragraph (a). Two of the most significant of
these involve the use of intermarket sweep orders.\93\ ISOs are defined
as limit orders that are routed, as necessary, to execute against the
full displayed size of all protected quotations with prices that are
better than the price of the ISO. Thus, while ISOs are exceptions to
Rule 611, they remain consistent with the trade-through rule's
objective of promoting intermarket price priority. One ISO exception
allows a trading center to execute a trade immediately at any size and
price as long as it simultaneously routes ISOs to execute against any
better-priced protected quotations.\94\ The other ISO exception allows
a trading center to execute an order it receives immediately at any
size and price when the order is identified as an ISO.\95\ This
exception enables order routers to control the execution of their own
orders, while effectively relieving trading centers of the necessity of
checking protected quotations at other trading centers. For example, if
an order router wishes to immediately access a large-sized quotation
with a price inferior to protected quotations at other trading centers,
it can route an ISO to execute against the large-sized quotation, while
simultaneously routing additional ISOs to execute against all of the
better-priced protected quotations.
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\93\ Rule 600(b)(47) defines an ``intermarket sweep order'' to
mean ``a limit order for an NMS stock that meets the following
requirements: (i) when routed to a trading center, the limit order
is identified as an intermarket sweep order; and (ii) simultaneously
with the routing of the limit order identified as an intermarket
sweep order, one or more additional limit orders, as necessary, are
routed to execute against the full displayed size of any protected
bid, in the case of a limit order to sell, or the full displayed
size of any protected offer, in the case of a limit order to buy,
for the NMS stock with a price that is superior to the limit price
of the limit order identified as an intermarket sweep order. These
additional routed orders also must be marked as intermarket sweep
orders.'' 17 CFR 242.600(b)(47).
\94\ Rule 611(b)(6); 17 CFR 242.611(b)(6).
\95\ Rule 611(b)(5); 17 CFR 242.611(b)(5).
---------------------------------------------------------------------------
Another significant exception to Rule 611 is the ``one-second
window.'' \96\ This exception was primarily designed to deal with the
practical difficulties that existed when Regulation NMS was adopted of
preventing intermarket trade-throughs during a fast-moving market when
quotations can change rapidly (sometimes referred to as ``flickering
quotes'').\97\ This exception provides that if a trade is executed at a
price that would not have been a trade-through of protected quotations
as they stood at any point within the previous one second (the one-
second window), then the trade is excepted from Rule 611.
---------------------------------------------------------------------------
\96\ Rule 611(b)(8); 17 CFR 242.611(b)(8).
\97\ In adopting the exception in 2005, the Commission stated
that it ``generally does not believe that the benefits would justify
the costs imposed on trading centers of attempting to implement an
intermarket price priority rule at the level of sub-second time
increments.'' NMS Adopting Release at 37523. The Commission
emphasized, however, that the exception is not an exception to the
duty of best execution. For example, a broker-dealer that owes a
duty of best execution to its customers cannot disregard a quotation
for purposes of best execution if experience shows that it is likely
to be accessible. Id. at n. 213 (``In making a best execution
determination, for example, a broker-dealer cannot rely on the
Rule's exception for flickering quotations to justify ignoring a
recently displayed, better-priced quotation when experience shows
that the quotation is likely to be accessible.'').
---------------------------------------------------------------------------
Other exceptions to Rule 611 include: (1) the ``self-help'' remedy
that allows market participants to disregard the protected quotations
of trading centers that are experiencing systems problems; \98\ (2)
transactions that are not ``regular way contracts''; \99\ (3) single-
priced opening, reopening, and closing transactions; \100\ (4) trades
during a
[[Page 36664]]
crossed market when a protected bid is higher than a protected offer;
\101\ (5) trades executed at benchmark prices rather than current
quoted prices (such as volume-weighted average price (``VWAP'')
transactions and other types of average price transactions); \102\ and
(6) transactions in ``stopped orders.'' \103\ The Commission has also
issued several exemptions from Rule 611.\104\
---------------------------------------------------------------------------
\98\ Rule 611(b)(1); 17 CFR 242.611(b)(1).
\99\ Rule 611(b)(2); 17 CFR 242.611(b)(2).
\100\ Rule 611(b)(3); 17 CFR 242.611(b)(3).
\101\ Rule 611(b)(4); 17 CFR 242.611(b)(4).
\102\ Rule 611(b)(7); 17 CFR 242.611(b)(7).
\103\ Rule 611(b)(9); 17 CFR 242.611(b)(9). In particular, Rule
611(b)(9) provides an exception for the execution by a trading
center of an order for which, at the time of receipt of the order,
the trading center had guaranteed an execution at no worse than a
specified price (a ``stopped order''), where: (i) the stopped order
was for the account of a customer; (ii) the customer agreed to the
specified price on an order-by-order basis; and (iii) the price of
the trade-through transaction was, for a stopped buy order, lower
than the national best bid in the NMS stock at the time of execution
or, for a stopped sell order, higher than the national best offer in
the NMS stock at the time of execution. Id.
\104\ See Securities Exchange Act Release No. 54389 (Aug. 31,
2006), 71 FR 52829 (Sept. 7, 2006), as modified by Securities
Exchange Act Release No. 57620 (Apr. 4, 2008), 73 FR 19271 (Apr. 9,
2008) (exemptive order for ``qualified contingent trades'');
Securities Exchange Act Release No. 54678 (Oct. 31, 2006), 71 FR
65018 (Nov. 6, 2006) (exemptive order for certain sub-penny trade-
throughs); Securities Exchange Act Release No. 55884 (June 8, 2007),
72 FR 32926 (June 14, 2007) (exemptive order for certain error
correction transactions); Securities Exchange Act Release No. 55883
(June 8, 2007), 72 FR 32927 (June 14, 2007) (exemptive order for
certain print protection transactions); Securities Exchange Act
Release No. 57621 (Apr. 4, 2008), 73 FR 19270 (Apr. 9, 2008)
(exemptive order for non-convertible preferred securities).
---------------------------------------------------------------------------
B. Proposed Rescission of Rule 611
The Commission proposes to rescind Rule 611 in its entirety. The
Commission recognizes that our national market system is complex and
interconnected, and that any changes could impact other parts of the
national market system and result in unintended consequences. It is
precisely for these reasons that the Commission has sought the input of
market participants in assessing Regulation NMS and Rule 611 in advance
of formulating this proposal.\105\
---------------------------------------------------------------------------
\105\ See, e.g., supra notes 47-67 and accompanying text
(discussing TTR Roundtables).
---------------------------------------------------------------------------
The Commission has engaged in a broad assessment of the regulatory
environment since the adoption of Rule 611 and the economic effects of
Rule 611 \106\ and has taken into consideration the comments and input
received. Based on its assessment, rescinding Rule 611 and its trade-
through restrictions may be appropriate and beneficial for the national
market system and, in particular, our equity markets. As discussed in
more detail below, Rule 611 has contributed to a myriad of consequences
that have resulted in costs to market participants. In addition, equity
markets have significantly evolved since 2005 such that the trade-
through prohibition in Rule 611 may no longer be needed in our current
equity markets because of advancements in technologies, particularly
with respect to access and order handling and routing.\107\ Also, best
execution obligations should continue to ensure brokers use reasonable
diligence to secure the most favorable terms for customer orders.\108\
Moreover, removing the trade-through prohibition of Rule 611 would
allow market participants greater freedom in order handling execution
and routing decisions, which could promote competition and foster
innovation among trading centers and executing brokers.
---------------------------------------------------------------------------
\106\ See infra section VI.
\107\ See infra section II.B.3.a.
\108\ See infra section II.B.3.b.
---------------------------------------------------------------------------
In general, our equity markets are well served by allowing
competition, innovation, and other market forces, rather than
prescriptive requirements on market participants, to shape their
continued evolution to the greatest extent possible. If Rule 611 were
to be rescinded, U.S. equity markets may benefit from reduced costs
associated with the reduction in market structure complexity and
fragmentation, and competition, innovation, and other market forces
would no longer be constrained by the restrictions of Rule 611.\109\
Today's trading environment is highly competitive, interconnected, and
automated, which was not the case when the Commission adopted Rule 611.
Rule 611 therefore is unnecessary given that the Commission's concern
expressed at the time of adoption of Rule 611 regarding the lack of
mechanisms to connect markets is no longer relevant. Rule 611 also is
not needed as a backstop to best execution given today's highly
automated, interconnected and competitive equity markets, where retail
investors have widely available access to market data and execution
quality information, and a broker's duty to provide best execution
would apply regardless.\110\
---------------------------------------------------------------------------
\109\ See infra section VI.C.1.
\110\ See Order Execution Obligations Adopting Release at 48323-
24.
---------------------------------------------------------------------------
Accordingly, the Commission believes that rescission of Rule 611
would be in the public interest and appropriate for the protection of
investors and the maintenance of fair and orderly markets in that
removing Rule 611 may, in furtherance of the goals of section 11A of
the Exchange Act,\111\ allow for more economically efficient executions
of securities transactions, the execution of investor orders in the
best market, and remove impediments to competition.\112\
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\111\ Exchange Act section 11A(a)(1)(C); 15 U.S.C. 78k-
1(a)(1)(C).
\112\ See id. See also supra notes 1-2 and accompanying text
(discussing section 11A).
---------------------------------------------------------------------------
1. Allowing Market Forces To Shape Equity Market Structure
The goal of the changes proposed in this rulemaking is to
strengthen our national market system and, in furtherance of section
11A of the Exchange Act,\113\ to allow for more economically efficient
executions of securities transactions, and to remove impediments to
competition,\114\ in order to help ensure that the U.S. remains the
preeminent securities market in the world, where issuers, investors,
and other market participants look to entrust their companies, savings,
and capital. When the Commission adopted Regulation NMS in 2005, the
U.S. equity markets were undergoing significant changes with respect to
technology, trading, and competition. At this time of still-emerging
and still-evolving technologies, the Commission adopted Regulation NMS,
which set forth a uniform trade-through rule, in order to address
inefficiencies in the equity market structure that existed at the time.
Rule 611 resulted in market participants needing, as a practical
matter, to connect, directly or indirectly, to all markets with
protected quotations.\115\ Moreover, Rule 611 led to market
participants focusing particularly on price and speed with respect to
executing trades, as described further in sections II.B.2. and II.B.3
below. While this may be beneficial to the execution quality of retail
orders, the overall execution quality for large institutional orders
may be negatively affected.\116\ Moreover, Rule 611's restriction on
trading through protected quotations may have had the effect of
incentivizing exchanges to adopt a particular trading protocol (i.e.,
price-time matching), thereby reducing innovation in exchange trading
models and limiting competition among exchanges.\117\
---------------------------------------------------------------------------
\113\ Exchange Act section 11A(a)(1)(C); 15 U.S.C. 78k-
1(a)(1)(C).
\114\ See supra notes 1-2 (discussing section 11A). See also
section VI.D.1.a. (discussing the Commission's Economic Analysis
regarding the benefits of rescinding Rule 611).
\115\ See infra note 121 and accompanying text (discussing the
practical need for market participants to connect to all markets).
\116\ See infra section VI.B.2.a. (discussing economic effects
on large institutional orders).
\117\ See infra section VI.B.4.
---------------------------------------------------------------------------
Markets are now once again undergoing a period of significant
technological change.\118\ U.S. equity
[[Page 36665]]
markets are highly competitive and resilient, and they should, whenever
possible, be allowed to develop on their own. The Commission's
involvement should be focused on those areas where its regulatory reach
can improve their functioning.\119\ Thus, core to the Commission's
proposal to rescind Rule 611 is that, where appropriate, market forces
should shape U.S. equity market structure. By proposing to remove the
regulatory restrictions contained in Rule 611, the Commission seeks to
simplify the regulation and structure of our equity markets rather than
continue to impose requirements and costs that are no longer necessary,
and thus empower market participants to compete on merit and
innovation--whether through service, price, technology, costs, or a
combination thereof. The Commission believes that removing such
restrictions could foster innovation in trading protocols and venue
design and increase competition among trading centers and executing
brokers.\120\
---------------------------------------------------------------------------
\118\ See, e.g., supra notes 42-45 and accompanying text
(discussing the rapidly changing technology in today's markets).
\119\ See Horses and Bourses: Remarks at the 12th Annual
Conference on Financial Market Regulation, by Commissioner Hester M.
Peirce (May 16, 2025), available at https://www.sec.gov/newsroom/speeches-statements/peirce-remarks-financial-market-regulation-051625.
\120\ See infra section VI.D.1.
---------------------------------------------------------------------------
2. Addressing the Adverse Consequences of Rule 611
a. Market Structure Complexity
Rule 611 and its numerous exceptions and exemptions have been at
the core of the complexity in our equity market structure since the
adoption of Regulation NMS in 2005. The prohibition against trade-
throughs effectively requires market participants to connect or have
routing capability to all exchanges and to monitor quotes and route
orders to exchanges that they otherwise might choose not to do business
with.\121\ This complexity may be particularly impactful for
institutional and larger-sized orders where requirements may result in
executions across multiple venues with varying fee structures and
latencies, potentially leading to worse overall execution quality than
alternative approaches.\122\
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\121\ Rule 611 does not mandate that trading centers connect to
all trading centers with protected quotes, or even that they have
routing capabilities to reach such trading centers. Trading centers
can operate without any routing capabilities so long as they abide
by the trade-through restrictions of Rule 611 (i.e., that, absent an
exception under Rule 611(b), they not trade-through protected quotes
at away markets); however, the practical effect of the rule for many
market participants has been that they have routing capabilities to
reach all trading centers with protected quotes, directly or
indirectly. Trade-Through Roundtable Supporting Data, by Staff of
the Office of Analytics and Research, Division of Trading and
Markets (Sept. 9, 2025, revised Sept. 12, 2025) (``121 Analysis''),
available at https://www.sec.gov/files/trade-through-roundtable-supporting-data.pdf.
\122\ See Jane Street Letter at 2. See also infra section VI.
---------------------------------------------------------------------------
In addition, since the adoption of Rule 611, there has been a
proliferation of order types offered by exchanges.\123\ Many of these
order types were developed in response to Rule 611 and other Regulation
NMS-related requirements and are now commonplace among equity
exchanges.\124\ These order types include but are not limited to ISOs
and ``price to comply'' orders and variations thereof.\125\ When such
order types are combined or interact with other similarly complex order
types offered by trading venues, the resulting mix of combinations and
permutations that need to be considered increases the complexity faced
by market participants.\126\ In addition, many order types themselves
have one or more modifiers, which can add even more market structure
complexity,\127\ which may increase costs to market participants.\128\
Moreover, this complexity and the costs associated therewith may
provide an advantage to more sophisticated market participants, such as
high-tech algorithmic traders with expansive data and processing
capacities who are more capable of managing increased complexity.\129\
---------------------------------------------------------------------------
\123\ See Robinhood Letter at 4 (citing ``Complaints Rise Over
Complex U.S. Stock Orders,'' by Herbert Lash, Reuters (Oct. 19,
2012)).
\124\ Some commenters have stated that this increase in order
types stems directly from Rule 611 and related Regulation NMS market
structure requirements (such as Rule 610(e)'s prohibition on locking
and crossing markets), and that such order types have been developed
to enable market participants to take advantage of the complexities.
See Nasdaq Letter I at 1-2 (citing EMSAC Market Structure Memo,
supra note 46). See also First TTR Roundtable Transcript at 230
(Matt Billings, Robinhood), at 78-80 (Maureen O'Hara, Cornell
University, SC Johnson Graduate School of Management), at 168 (Matt
Mackenzie, Optiver), at 169 (Armando Diaz, PureStream); Robinhood
Letter at 4; Healthy Markets Letter I at 9. One commenter stated
that certain order types are ``not designed to enhance execution
quality but to comply with display rules while maintaining [SIP]
visibility . . .'' See FIA PTG Paper at 4. See also First TTR
Roundtable Transcript at 165-66 (Hubert De Jesus, BlackRock). See
also First TTR Roundtable Transcript at 169 (Armando Diaz,
PureStream) (noting that ``the overwhelming majority of volume'' on
an exchange was using order types ``that are meant to suppress or
sidestep 611''), at 168 (Matt Mackenzie, Optiver).
\125\ ISO order types are designed to allow market participants
to avail themselves of the ISO exceptions under Rules 611(b)(5)
through (6); 17 CFR 242.611(b)(5) through (6). ``Price to comply''
orders and variations thereof seek to automatically adjust an
order's price to avoid locking or crossing markets. See, e.g.,
Nasdaq Rule 4702(b)(1). See also supra note 29 and accompanying text
and section II.A.2. (discussing the ISO exceptions and order types)
and infra section III.B.3. (discussing complexities associated with
Rule 610(e)).
\126\ See, e.g., First TTR Roundtable Transcript at 167 (Adam
Nunes, Hudson River) (``[O]ne of the things that adds a great deal
of complexity is that you have features to do one thing sitting on
top of features to do another thing, and the combinations of those
can get quite extreme.''); O'Brien Letter at 6-7 (discussing
complexity attributable to Rule 611); Robinhood Letter at 4 (stating
that ``[t]here has also been an exponential increase in the number
and complexity of order types offered by exchanges, with one source
estimating that exchanges offer 2,000 variations of order types'').
\127\ See, e.g., Trading Talk--An In-Depth Look at Exchange
Order Types, Rosenblatt Securities Inc. (June 26, 2013)
(``Rosenblatt Order Type Report''); No Order Type Conspiracy,
Rosenblatt Study Says, by Editorial Staff, Traders Magazine (July 5,
2013) (discussing findings of Rosenblatt Order Type Report,
including that ``the proliferation of order types had indeed added
to the complexities of the marketplace and that `undoubtedly creates
opportunities for the savviest market participants.''').
\128\ See infra section VI.C.1. (discussing estimated cost
savings due to reduced complexity if Rule 611 is rescinded). Some
commenters stated that this complexity also increases risks to
market IT infrastructure and systems. See, e.g., O'Brien Letter at
7. See also Robinhood Letter at 5; FIA PTG Paper at 4. One commenter
stated that Rule 611's rigid requirements make the equity markets
more ``brittle'' because of all the complexity they add. First TTR
Roundtable Transcript at 291 (Cameron Smith, Texas Stock Exchange).
\129\ See infra section VI.B.3.
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In addition to this equity market structure complexity, Rule 611's
trade-through prohibition has contributed to an environment where speed
has become the primary competitive advantage, allowing fast algorithms
to capture price discrepancies.\130\ As discussed below, Rule 611 has
contributed to the fragmentation of displayed liquidity across numerous
order books.\131\ This in turn creates latency arbitrage opportunities
and has incentivized massive investment in low-latency infrastructure
to gain a speed advantage over competitors, resulting in the rise of
high-frequency traders (``HFTs'').\132\ In today's equity markets,
participants are locked in a technology and latency arms race for
speed,\133\ and
[[Page 36666]]
the Commission believes that Rule 611 has contributed to this.
---------------------------------------------------------------------------
\130\ See First TTR Roundtable Transcript at 72-73 (Dave Lauer,
Urvin Finance and We the Investors) (citing Rule 611 as a factor
driving the ``speed race''), at 218 (Vlad Khandros, One Chronos)
(stating Rule 611 is exacerbating the ``latency arms race''). See
also Data Boiler Comment at 2 (stating that the trading community is
in a ``low-latency arms race'').
\131\ See infra section II.B.2.b.
\132\ See letter from Benjamin L. Schiffrin, Director of
Securities Policy, Better Markets, Inc. (Sept. 18, 2025) (``Better
Markets Letter''). This commenter states that HFTs pay the exchanges
fees for high-speed proprietary data feeds, fees for market data,
and fees for having their computers ``co-located'' in the exchanges'
data centers. Id. at 3.
\133\ See, e.g., First TTR Roundtable Transcript at 56-57
(Pankil Patel, Bank of America) (discussing a ``more sophisticated
technology arms race''), 218 (Vlad Khandros, OneChronos) (stating
that there is a ``latency arms race''), 219 (Jon Herrick, New York
Stock Exchange) (discussing ``the technological arms race that we're
faced with'').
---------------------------------------------------------------------------
The Commission believes that rescinding Rule 611 would reduce the
complexity in our equity market structure that has occurred since its
adoption in 2005, which would in turn reduce costs for market
participants and foster innovation and competition.
b. Exchange Proliferation and Fragmentation
Rule 611's trade-through restrictions have contributed to greater
fragmentation in the U.S. equity markets. Rule 611 effectively lowered
barriers to entry for exchanges by giving all exchanges, no matter
their trading volume or other competitive distinctions, an opportunity
to display a protected quotation, and thus avail themselves of
guaranteed market data and connectivity revenue as market participants
are effectively required to connect, directly or indirectly, to their
markets. As a result, Rule 611 and Regulation NMS have contributed to
the proliferation of exchanges in our equity markets.\134\ To be clear,
the Commission welcomes competition and believes that exchanges that
introduce innovations to our markets, such as providing new ways to
trade, can benefit the national market system overall. However, the
Commission believes that Rule 611 has distorted incentives in the U.S.
equity markets by providing new exchanges with protected quotation
status at their inception, essentially guaranteeing that market
participants must connect to them and subscribe to their market data
feeds,\135\ and this has led to a proliferation of exchanges.
---------------------------------------------------------------------------
\134\ See, e.g., O'Brien Letter at 5; Robinhood Letter at 3-4;
FIA PTG Paper at 3-4; First TTR Roundtable Transcript at 181-82
(Hubert De Jesus, BlackRock). See also infra section II.B.2.b.
(discussing exchange proliferation).
\135\ As one commenter stated, ``[a]ll a new venue needs to do
is post a quotation and the entire market must connect to its
infrastructure, code to its systems and re-shape its trading
algorithms to accommodate it.'' See O'Brien at 5. See also FIA PTG
Letter at 4; Robinhood Letter at 4 (stating that six exchanges
account for approximately 80% of the volume traded on all exchanges
while 10 exchanges individually account for less than a 2% market
share); First TTR Roundtable Transcript at 49, 72-73 (Dave Lauer,
Urvin Finance and We the Investors) (stating that most of the
additional exchanges have been ``copycat'' exchanges), at 288-89
(Mehmet Kinak, T.Rowe Price) (stating that the additional exchanges
have not offered anything to differentiate themselves from existing
exchanges), at 277 (Daniel Gerhardstein, FIA Principal Traders Group
and Jump Trading Group) (stating that ``Rule 611 creates artificial
incentives for the establishment of new exchanges'' and that
``[a]chieving the protected quote status provides exchanges with
guaranteed revenue through the forced connectivity, market data, and
access fees, without regard to new value delivered to market
participants'').
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This proliferation of exchanges has increased fragmentation of
trading on equity exchanges, spreading market share across the
increasing number of exchanges, resulting in a dispersal of
liquidity.\136\ This dispersal of displayed liquidity across numerous
exchange order books increases routing complexity and potentially thins
size at each exchange's best quotations.\137\ This fragmentation is
particularly impactful for large and institutional orders because, as
the fragmentation of displayed liquidity increases, institutional child
orders face more venues with small top-of-book sizes, which raises the
complexity and cost of routing to meet the requirements of Rule 611.
This greater dispersion across exchanges can make institutional trading
intentions easier to detect, which can increase slippage and hurt the
overall execution quality of the parent order.\138\
---------------------------------------------------------------------------
\136\ See, e.g., Better Markets Letter at 1-2; FIA PTG Paper at
2 (stating that during the first half of 2025, no exchange had more
than 20% market share based on notional volume and 9 exchanges had
market share of less than 1%, and that the primary listing exchanges
had a combined market share of less than 30% over the first half of
2025 (citing Cboe Exchange Inc, Historical Market Data Volume,
available at https://www.cboe.com/us/equities/market_statistics/historical_market_volume/)). See also infra section II.B.2.b.
(discussing exchange proliferation and fragmentation of displayed
liquidity).
\137\ See infra section VI.B.2.c.
\138\ See infra section VI.B.2.
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Moreover, with the increase in the number of U.S. equity exchanges,
costs for market participants have increased due to the need to connect
to trading centers with protected quotes, maintain such connections and
routing capabilities thereto, and subscribe to their market data
feeds.\139\ These costs include incurring connection, routing, and
market data fees to certain exchanges that some participants feel may
provide limited value, but that such participants must nevertheless
incur due to the requirements of Rule 611.\140\ In addition, market
participants incur costs to monitor for pre-trade and post-trade
compliance with Rule 611, which costs increase with the number of
venues providing protected quotes.\141\
---------------------------------------------------------------------------
\139\ See, e.g., O'Brien Letter at 6-7; Robinhood Letter at 3-5;
FIA PTG Paper at 1 (stating that major firms spend millions annually
on market data and connectivity fees to all U.S. exchanges), 3. See
also Jane Street at 2 (stating that these types of costs were a
``regulated subsidy for venue proliferation, as new exchanges can
effectively mandate that certain market participants purchase their
connectivity and market data services''); First TTR Roundtable
Transcript at 51, 70-71 (Joe Mecane, Citadel), at 56-58 (Pankil
Patel, Bank of America) (discussing increased costs for
infrastructure, colocation/connectivity, and market data), at 48,
72-73 (Dave Lauer, Urvin Finance and We the Investors), at 232-233,
277 (Daniel Gerhardstein, FIA Principal Traders Group and Jump
Trading Group) (stating that ``[a]chieving the protected quote
status provides exchanges with guaranteed revenue through forced
connectivity, market data, and access fees, without regard to new
value delivered to market participants''), at 246 (Vlad Khandros,
OneChronos). Certain commenters have stated that some of the costs
that emanate from Regulation NMS have come down due to advances in
technology and competition, particularly in areas relating to
routing. See, e.g., First TTR Roundtable Transcript at 158 (Allison
Bishop, Proof Trading), at 160 (Jeff Starr, Schwab). See also First
TTR Roundtable Transcript at 19-26 (Dan Mathisson, Commission,
Division of Trading and Markets, Office of Analytics and Research).
The Commission acknowledges that certain costs may have come down,
however, costs resulting from the trade-through prohibition in Rule
611 still remain high because, in practice, Rule 611 results in
market participants connecting to all protected markets, even if
indirectly through connectivity providers, and rescission of Rule
611 should result in reduced costs for market participants.
\140\ One commenter stated that, according to its calculations,
the increased costs to the industry as a whole for connectivity,
market data and options regulatory fees associated with small venues
(i.e., for equities venues with less than 2% market share and
options venues with less than 4% market share) is approximately $375
million a year, which is about two thirds of the total revenue for
those 21 venues. See First TTR Roundtable Transcript at 51, 70-71
(Joe Mecane, Citadel Securities). This commenter, however, also
stated that it did not believe that eliminating the trade-through
rule would impact that cost significantly for a variety of reasons,
including because firms are already connected to such venues and
because firms' best execution obligations would make it difficult to
simply disconnect from a venue to save costs. See id.
\141\ See, e.g., Robinhood Letter at 5; J. Angel Letter; First
TTR Roundtable Transcript at 90 (Julie Andress, Securities Traders
Association and KeyBanc Capital Markets) (discussing trade-through
compliance).
---------------------------------------------------------------------------
Without the requirements of Rule 611, market participants will no
longer effectively be required to connect, directly or indirectly, to
every exchange, which should reduce the connectivity, market data,
routing, and compliance costs associated with such connections.\142\ In
turn, this may result in fewer new exchanges and potentially fewer
existing exchanges, as the
[[Page 36667]]
exchange revenue streams currently associated with market data and
connectivity fees would no longer be guaranteed as they currently are.
In addition, without the requirements of Rule 611, market participants
will have greater choice in determining which trading center provides
the best market for execution of their orders given their investment
objectives. Among other things, if the Commission were to rescind Rule
611, market participants would have more flexibility to send their
orders to trading centers that have a consistently higher volume of
order flow, more reliable speed of execution, or lower adverse
selection costs, if they are not constrained by requirements to first
route to execute against any protected quotation. Fragmentation may be
reduced as broker-dealers concentrate their orders on more liquid
trading centers with better execution quality. In turn, trading centers
would have more flexibility to innovate and compete for order flow on
factors other than price and speed. And rescinding Rule 611 would allow
institutional investors more flexibility to route child orders, thereby
allowing them to avoid trading at exchanges that may increase their
information leakage and reducing slippage.\143\ Accordingly, rescinding
Rule 611 could lead to reduced exchange fragmentation, enable
competition and innovation among trading venues, reduce costs, and
remove unnecessary regulatory requirements that may advantage some
market participants over others in today's equity markets.
---------------------------------------------------------------------------
\142\ See infra section VI.C.1. One commenter estimated that the
fixed costs of connecting to U.S. equity exchanges are 350 percent
greater than the average connection costs of the top ten markets
that its firm trades in globally. First TTR Roundtable Transcript at
232-33 (Daniel Gerhardstein, FIA Principal Traders Group and Jump
Trading Group). Another commenter estimated its costs associated
with onboarding new exchanges and connectivity maintenance costs to
be $1.5 million for onboarding and $200,000 annually for
maintenance. First TTR Roundtable Transcript at 68-69 (Pankil Patel,
Bank of America) (stating that, with respect to onboarding a new
exchange, the costs for his firm were estimated to be approximately
$1.5 million and included not just connectivity and market data, but
costs associated with integration into the firm's ecosystem, such as
``third party sourcing, procurement, technology, testing, hardware,
CAD integration, [and] billing'' and that ongoing maintenance costs
were estimated at approximately $200,000 per year, and included
continued connectivity costs, maintaining upgrades, and ensuring
surveillance systems were up-to-date, among other things).
\143\ See infra section VI.C.1.
---------------------------------------------------------------------------
3. Rule 611 Is Unnecessary
a. Technology Has Advanced Significantly
When the Commission adopted Rule 611 and Regulation NMS, one of its
goals was to seek the proper balance between competition among markets
and competition among orders, and the Commission stated that investors
``must be assured that they are participants in a system which
maximizes the opportunities for the most willing seller to meet the
most willing buyer.'' \144\ The Commission expressed concern regarding
market fragmentation and the absence of mechanisms and linkages
``designed to assure that public investors are able to obtain the best
price for securities regardless of the type or physical location of the
market upon which his transaction may be executed.'' \145\ Following
the adoption of Regulation NMS in 2005, including Rule 611 and its
trade-through protections, market participants moved quickly towards
electronification of trading and invested in intermarket linkages and
routing technologies for the equity markets.\146\ One commenter stated
that Rule 611 ``helped spur investment in interlinkages between venues
as routing technology was developing, and best execution practices were
less sophisticated'' and ``served almost as `training wheels' for the
national market system, providing clear, objective standards for order
routing processes.'' \147\ While it is possible that such changes would
have occurred in our equity markets without the intervention of
Regulation NMS and some have argued that it would have been preferable
to allow the markets to evolve and develop such technology and
processes more naturally through competitive forces,\148\ the adoption
of Rule 611's requirements and Regulation NMS generally did push the
U.S. equity markets toward automation and away from the inefficiencies
that existed previously.\149\ Currently, the U.S. equity markets are
highly automated and interconnected and the Commission's concern
expressed at the time of Regulation NMS's adoption in 2005 regarding
the lack of mechanisms to connect markets is no longer an issue.
Today's market participants have quick, electronic access to the
markets and state-of-the-art routing technology is widely available for
those seeking it.\150\ Liquidity providers now routinely provide
enhanced execution results that surpass any minimum benefits of Rule
611, such as through price improvement relative to the national best
bid and offer and the execution of orders at midpoint prices.\151\ The
Commission believes that these execution quality benefits are not
dependent on Rule 611, but instead are due to the intense competition
among liquidity providers and the availability of execution quality
benchmarks and data,\152\ which will continue even if Rule 611 were to
be rescinded.
---------------------------------------------------------------------------
\144\ See NMS Adopting Release at 37499 (quoting H.R. Rep. 94-
123, 94th Cong., 1st Sess. 50 (1975)).
\145\ See id. at 37499, n.13.
\146\ See J. Angel Letter at 11-13.
\147\ Jane Street Letter at 2.
\148\ See, e.g., Robinhood Letter at 2. See also Chairman
Remarks at First TTR Roundtable.
\149\ See, e.g., First TTR Roundtable Transcript at 62 (Katie
Kolchin, SIFMA) (referring to the Intermarket Trading System that
previously linked various stock exchanges); O'Brien Letter at 3 and
Robinhood Letter at 3 (linking NYSE's adoption of electronic quoting
and trading to the status automated quotations under Rule 611).
\150\ See First TTR Roundtable Transcript at 21-23 (Dan
Mathisson, Commission, Division of Trading and Markets, Office of
Analytics and Research) (discussing the Division of Trading and
Market's analysis that showed that an overwhelming majority of firms
outsource some or all of their routing and fewer than 20 firms
directly connect to/trade on every exchange). While fewer than 20
firms have such direct connections, the practical effect of Rule 611
for nearly all trading centers has been that they incur costs for
routing capabilities to reach all trading centers with protected
quotes, whether directly or indirectly through a connectivity
provider. See also supra notes 121 and 139-140 and accompanying text
(costs of connecting to trading centers with protected quotes).
\151\ See Jane Street Letter at 2.
\152\ See, e.g., Rule 605 of Regulation NMS, 17 CFR 242.605
(requiring certain reporting entities to publicly disclose order
execution quality statistics).
---------------------------------------------------------------------------
The widely-available and fast routing capabilities and linkages in
today's equity markets contrast with the period before the adoption of
Regulation NMS, when exchanges and market participants were not as well
connected and many linkages that did exist were relatively slow.\153\
Because of the advances in these technologies and the competition among
liquidity providers since Regulation NMS's adoption in 2005,\154\ Rule
611 is no longer necessary to address the Commission's concerns in
2005. As discussed above, while Rule 611 may have served a historical
function, it also has resulted in adverse consequences in the equity
markets.\155\ As technological advancements have changed how the U.S.
securities markets operate since the adoption of Regulation NMS, to
remain effective, the Commission must continuously monitor the market
environment and, as appropriate, adjust and modernize our rules,
regulations, and oversight tools and activities. At this point, Rule
611 is unnecessary to the functioning of our equity markets, and the
continued maintenance of the rule may inhibit innovation and the
development of new technologies, products, and services that could
enhance competition in the U.S. equity markets to the benefit of
investors.\156\
---------------------------------------------------------------------------
\153\ See NMS Adopting Release at 37538-59 (describing linkages
in 2005 for exchange-listed stocks through the Intermarket Trading
System, or ``ITS'', Plan, with ``receiving markets generally having
up to 30 seconds to respond'').
\154\ See, e.g., J. Angel Letter at 12-13; O'Brien Letter at 5;
Jane Street Letter at 2; First TTR Roundtable Transcript at 62-64
(Katie Kolchin, SIFMA), at 216, 234 (Mehmet Kinak, T. Rowe Price).
\155\ See supra section II.B.2. (discussing market structure
complexity, exchange proliferation and fragmentation, and costs to
market participants).
\156\ See also IntelligentCross Letter at 3 (``The elimination
of the trade-through prohibitions would . . . foster a more
competitive playing field among lit venues, and more easily
facilitate the introduction of innovation to the displayed
markets.''); Duoro Labs Paper (describing generally how the crypto
market has evolved and innovated in the absence of prescriptive
regulatory requirements and stating that, because of prescriptive
rules like the trade-through rule, the equity markets ``have not
embraced mechanisms such as intents-based trading, automated market
makers, decentralized price oracles, or atomic cross-domain
settlement, which all emerged naturally in crypto'').
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[[Page 36668]]
b. Rule 611 Is Not Needed as a Backstop to Best Execution
When adopted, Rule 611 was ``designed to assure that public
investors are able to obtain the best price for securities'' given the
absence of robust intermarket linkages at the time.\157\ The Commission
was concerned that investors ``often may have difficulty monitoring
whether their orders receive the best available prices.'' \158\ The
Commission stated that ``furthering the interests of these investors in
obtaining best execution on an order-by-order basis is a vitally
important objective that warrants adoption of [Rule 611.]'' \159\ The
Commission further stated, in adopting Rule 611, that Rule 611 ``will
backstop a broker's duty of best execution on an order-by-order basis
by prohibiting the practice of executing orders at inferior prices,
absent an applicable exception.'' \160\
---------------------------------------------------------------------------
\157\ See NMS Adopting Release at 37499, n.13.
\158\ Id. at 37511.
\159\ Id.
\160\ Id. at 37516.
---------------------------------------------------------------------------
A broker-dealer has a legal duty to seek best execution of customer
orders.\161\ The duty of best execution predates the Federal securities
laws and is derived from an implied representation that a broker-dealer
makes to its customers.\162\ The duty of best execution is incorporated
into SRO rules and, through judicial and Commission decisions, the
antifraud provisions of the Federal securities laws.\163\ This
obligation requires that a ``broker-dealer seek to obtain for its
customer orders the most favorable terms reasonably available under the
circumstances.'' \164\ In other words, broker-dealers should execute
trades ``at the best reasonably available price.'' \165\ And, as the
Commission has recognized, price is a critical concern for
investors.\166\ In addition, the Commission has described a non-
exhaustive list of factors that may be relevant to broker-dealers' best
execution analysis. These factors include the size of the order,\167\
speed of execution, clearing costs, the trading characteristics of the
security involved, the availability of accurate information affecting
choices as to the most favorable market center for execution and the
availability of technological aids to process such information, and the
cost and difficulty associated with achieving an execution in a
particular market center.\168\ FINRA Rule 5310 requires broker-dealers
to use reasonable diligence to ascertain the best market for a security
such that the price the customer receives is as favorable as possible
under the prevailing market conditions.\169\
---------------------------------------------------------------------------
\161\ See, e.g., Newton v. Merrill, Lynch, Pierce, Fenner &
Smith, Inc., 135 F.3d 266, 269-70, 274 (3d Cir.), cert. denied, 525
U.S. 811 (1998).
\162\ See id. 135 F.3d at 270.
\163\ See supra note 73.
\164\ See id. (noting that a broker-dealer's duty of best
execution requires the execution of customer trades at the best
reasonably available price, recognizing several terms in addition to
price as relevant to best execution, and stating that a broker-
dealer must also take into account order size, trading
characteristics of the security, speed of execution, clearing costs,
and the cost and difficulty of executing an order in a particular
market). See also id. (citing Order Execution Obligations Adopting
Release).
\165\ Reg NMS Adopting Release at 37538.
\166\ See Securities Exchange Act Release No. 43590 (Nov. 17,
2000), 65 FR 75414, 75418 (Dec. 1, 2000) (``Order Execution and
Routing Practice Release'') (``The Commission strongly believes,
however, that most investors care a great deal about the quality of
prices at which their orders are executed, and that an opportunity
for more vigorous competition among market participants to provide
the best quality of execution will enhance the efficiency of the
national market system.'').
\167\ It is the Commission's understanding that when an
institutional customer gives a large order to be executed on behalf
of one account (e.g., a single mutual fund or pension fund), it
expects the broker-dealer that handles and executes such large order
to do so in a manner that ensures best execution is provided to the
``parent'' order. In other words, to the extent that a parent order
is split into smaller ``child'' orders, the institutional customer
expects the best execution analysis to evaluate whether the parent
order was executed at the most favorable price possible under
prevailing market conditions according to customer instructions.
See, e.g., Concept Release on Equity Market Structure at 3604-3605
(measuring the transaction costs of institutional investors ``can be
extremely complex'' because their ``large orders often are broken up
into smaller child orders and executed in a series of transactions''
and ``[m]etrics that apply to small order executions may miss how
well or poorly the large order traded overall.'').
\168\ See Order Execution and Routing Practice Release at 75418.
\169\ See supra note 73.
---------------------------------------------------------------------------
As noted above, to comply with their best execution obligations,
firms must consider a number of factors when handling and executing a
customer's order, which should include the best price.\170\ When
adopting Rule 611, the Commission made clear the duty of best execution
requires broker-dealers to ``periodically assess the quality of
competing markets to assure that order flow is directed to the markets
providing the most beneficial terms for their customer orders.'' \171\
And, broker-dealers ``must examine their procedures for seeking to
obtain best execution in light of market and technology changes and
modify those practices if necessary to enable their customers to obtain
the best reasonably available prices.'' \172\
---------------------------------------------------------------------------
\170\ See id.; FINRA Rule 5310. Some have been critical of Rule
611 with respect to best execution, because its focus on displayed
price did not take into account other factors that may be important
to clients. See, e.g., FIA PTG Paper at 2-3. See also Prepared
Remarks of Paul S. Atkins at the SEC Investor Advisory Committee, by
Paul Atkins (June 10, 2021), available at https://patomak.com/2021/06/10/prepared-remarks-of-paul-s-atkins-at-the-sec-investor-advisory-committee-june-10-2021/.
\171\ Regulation NMS Adopting Release at 37538.
\172\ Id.; see also Order Execution Obligations Adopting Release
at 48322-23.
---------------------------------------------------------------------------
Rule 611 is no longer needed to backstop a broker's duty of best
execution given the evolution of U.S. equity markets since 2005. Since
the adoption of Rule 611, U.S. equity markets have become highly
automated and interconnected, and routing technologies have become
increasingly sophisticated, resulting in increasingly accessible prices
for investors. In addition, since 2005, retail investor participation
in the equity markets has significantly increased,\173\ as has investor
access to market data and execution quality information.\174\ Given the
evolution of the U.S. equity markets since 2005 and the widely
available access to liquidity, market data, and execution quality
information, the concern the Commission had in 2005, that Rule 611 was
beneficial as a backstop to best execution because of investors'
difficulty monitoring whether their orders receive the best available
prices and the absence of robust intermarket linkages, is no longer
applicable.\175\ Moreover, a broker's duty to seek to obtain for its
customer orders the most favorable terms reasonably available under the
circumstances will continue to apply regardless of whether Rule 611 is
rescinded. And a firm's commercial and competitive incentives should
result in the firm routing orders to execute against the best price at
an away market when consistent with the
[[Page 36669]]
duty of best execution (rather than being required to do so by Rule
611).\176\
---------------------------------------------------------------------------
\173\ See, e.g., Caitlin McCabe, ``New Army of Individual
Investors Flexes Its Muscle,'' The Wall Street Journal (Dec. 30,
2020), available at https://www.wsj.com/articles/new-army-of-individual-investors-flexes-its-muscle-11609329600.
\174\ See, e.g., Rule 605 Amendments Adopting Release at section
IX.C. (discussing the availability of certain information to, and
how that information is used by, various types of market
participants); Charles M. Jones, Understanding the Market for U.S.
Equity Market Data (Aug. 31, 2018), available at https://www.sec.gov/comments/4-729/4729-4545881-176154.pdf at 3-8
(discussing available equity market data products and their uses).
See also Robinhood Letter at 7 (stating that ``[u]nlike any other
moment in history, retail investors today have easy access to tools
and platforms, educational resources, real-time market data and
investment analytics'').
\175\ As further discussed in section VI.C.2. infra, retail
brokers route most of their customers' marketable orders to off-
exchange wholesalers, who usually internalize the order (i.e.,
execute the order in a principal capacity). As a consequence, most
marketable retail orders do not directly interact with protected
quotes. The majority of marketable retail orders are instead
internalized off-exchange.
\176\ See First TTR Roundtable Transcript at 26-29 (Arun
Manoharan, Commission, Division of Trading and Markets, Office of
Analytics and Research) (discussing analysis of trade-through rates
during the second quarter of 2025, including that trade-through
rates during periods when Rule 611's requirements did not apply
(such as for odd-lot trades and pre- and after-market trading
sessions) remained relatively low, at 2.4% or less); OAR Roundtable
Analysis. See also infra section VI.C.1.c. (discussing analysis of
trade-throughs of odd-lot quotes inside the NBBO for high-priced
stocks, showing trade-through rates of 1-5% for trades that occur on
exchange and trade-through rates of 11-19% for trades that occur
off-exchange and are larger than one share).
---------------------------------------------------------------------------
For the reasons discussed above, the Commission proposes to rescind
Rule 611 in its entirety.
C. Request for Comment
The Commission generally requests comment from the public on the
proposed rescission of Rule 611. More specific requests for comment are
set forth below. Responses supported by empirical data are particularly
helpful.
1. Do commenters agree with the Commission's proposed rescission of
Rule 611? Why or why not? Are there benefits to maintaining Rule 611?
2. If Rule 611 is rescinded, should any other rules (of Regulation
NMS or otherwise) be modified or rescinded in addition to what the
Commission is proposing herein?
3. Rather than rescinding Rule 611, should the Commission instead
modify Rule 611? If so, please be specific and describe how Rule 611
should be modified. What advantages or disadvantages are there to such
a modification in comparison to the proposed rescission? Please also
describe how such a modification would address the adverse consequences
the Commission has identified in section II.B.2.
4. Would the rescission of Rule 611 affect investor confidence? Why
or why not? If it were to decrease investor confidence, how could that
effect be mitigated?
5. Given best execution obligations and the current level of
automation and interconnectedness of the U.S. equity markets, is Rule
611 still needed? Will a broker-dealer's processes to fulfill its best
execution obligations be affected by rescission of Rule 611? What steps
should be taken by the Commission and/or SROs with respect to best
execution if the Commission were to rescind Rule 611? Is there a need
for additional best execution guidance concerning retail order
handling? Institutional order handling? If so, what should that
guidance include and should that guidance be principles-based or more
prescriptive?
6. What impact has Rule 611 had on complexity in the equity
markets, including but not limited to order types, exchange
proliferation, and fragmentation? Will rescinding Rule 611 reduce the
complexity in our equity market structure that has occurred since its
adoption in 2005? Will rescinding Rule 611 reduce fragmentation of
liquidity in the equity markets? Will rescinding Rule 611 reduce costs
on market participants? If so, which costs and by how much?
7. What impacts have market technologies, including those relating
to routing and connectivity, had on Rule 611? Have market technologies
advanced to such a degree that Rule 611 is no longer needed? Why or why
not?
8. Are the concerns regarding equity market structure that the
Commission expressed when it adopted Rule 611 still relevant? Is Rule
611 necessary to the current functioning of our equity markets? Would
the continued maintenance of Rule 611 inhibit innovation and the
development of new technologies?
9. What is the impact of Rule 611 on the number of equity
exchanges? What would be the impact of the rescission of Rule 611 on
the number of equity exchanges? Would rescission of Rule 611 result in
fewer or more equity exchanges? Why or why not?
10. What is the impact of Rule 611 on displayed liquidity? Would
the rescission of Rule 611 result in more displayed liquidity, or
instead more non-displayed liquidity? Why or why not? What steps, if
any, should be taken to bolster displayed liquidity if Rule 611 were to
be rescinded? How would the availability of displayed liquidity and the
quality of the NBBO be impacted by the rescission of Rule 611?
11. What steps (if any) would broker dealers, exchanges, and other
market participants need to take to implement a rescission of Rule 611?
Are there any implementation concerns if the Commission were to rescind
Rule 611? For example, if Rule 611 is rescinded how long should the
implementation period be? Should implementation be done in phases or
tranches (and if yes, please be specific to describe what should be
phased and when)? Should the timing for implementation be tied to the
timing for implementation rescission of Rule 610(e), if applicable? If
so, in what way?
12. Are there any NMS Plan amendments that would be necessary or
desirable if Rule 611 is rescinded? If so, which ones, why, and in what
way?
13. Are there any amendments to SRO rules that would be necessary
or desirable if Rule 611 is rescinded? If so, which ones, why, and in
what way?
III. Rule 610(e)
As discussed above,\177\ the adoption of Regulation NMS included
the adoption of Rule 610, often referred to as the ``Access Rule.''
Broadly, Rule 610 was designed to promote fair and non-discriminatory
access to quotations displayed by NMS trading centers through a private
linkage approach for all NMS stocks.\178\ As originally adopted, Rule
610 primarily addressed: (1) the means of access to quotations; (2) the
fees for accessing protected quotations and any other quotations that
are the best bid or offer of a national securities exchange or national
securities association; and (3) locking and crossing quotations.\179\
---------------------------------------------------------------------------
\177\ See supra section I.
\178\ NMS Adopting Release at 37497.
\179\ Id. at 37539.
---------------------------------------------------------------------------
In conjunction with the proposed rescission of Rule 611, the
Commission is also proposing to rescind paragraph (e) of Rule 610,
which sets forth restrictions on locking and crossing quotations.
Advancements in the marketplace, including increased automation and
interconnectivity, that have occurred since the time the rule was
adopted may have rendered the rule no longer necessary. In addition,
rescinding Rule 610(e) could reduce unnecessary complexity in the U.S.
equity markets stemming from the rule's requirements. Recission of Rule
610(e) would also facilitate the benefits of the rescission of the
trade-through prohibition in Rule 611. The Commission is also proposing
conforming changes to Rule 610(c) to reflect the proposed rescission of
Rule 611 and the elimination of the concept of ``protected
quotations,'' as discussed in section IV.B. below.
A. Description of Rule 610(e)
Rule 610(e) of Regulation NMS addresses the locking and crossing of
quotations.\180\ Specifically, Rule 610(e) requires each national
securities exchange and national securities association to establish,
maintain, and enforce written rules that: (1) require their members to
reasonably avoid displaying quotations \181\ that lock or
[[Page 36670]]
cross any protected quotation in an NMS stock, and displaying manual
quotations \182\ that lock or cross any quotation in an NMS stock
disseminated pursuant to an effective NMS Plan; \183\ (2) are
reasonably designed to assure the reconciliation of locked and crossed
quotations in an NMS stock; \184\ and (3) prohibit their members from
engaging in a pattern or practice of displaying quotations that lock or
cross any protected quotation in an NMS stock, or from displaying
manual quotations that lock or cross any quotation in an NMS stock
disseminated pursuant to an effective NMS Plan, other than displaying
quotations that lock or cross any protected or other quotation as
permitted by an exception contained in its rules established pursuant
to Rule 610(e)(1).\185\ The rule does not prohibit trading centers from
displaying automated quotations that lock or cross the manual
quotations of other trading centers.\186\ Of note, Rule 610(e) also
does not itself impose prohibitions on the locking and crossing of
markets, but rather requires SROs to establish, maintain, and enforce
rules that comply with the rule's requirements. Throughout this
discussion, we refer to Rule 610(e)'s requirements generally as
``locked and crossed market prohibitions.''
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\180\ See supra note 32 (explaining locking and crossing
quotations). The other paragraphs of Rule 610, broadly relating to
access, are described generally in section I. supra note 31 and
accompanying text.
\181\ As with respect to Rule 611, by its terms, Rule 610(e)
only applies to round lots, as a result of the definition of
``quotation.'' See supra note 25.
\182\ Rule 600(b)(54) provides that a ``manual quotation'' means
``any quotation other than an automated quotation.'' 17 CFR
242.600(b)(54).
\183\ Rule 610(e)(1); 17 CFR 242.610(e)(1). In this regard, the
rule distinguishes between protected automated quotations and manual
quotations.
\184\ Rule 610(e)(2); 17 CFR 242.610(e)(2). For example, the
Commission stated that an SRO's rules must require the market
participant responsible for displaying the locking or crossing
quotation to take reasonable action to resolve the locked or crossed
market. NMS Adopting Release at 37550.
\185\ Rule 610(e)(3); 17 CFR 242.610(e)(3). Rule 610(e)(3),
together with the reasonable avoidance directive of Rule 610(e)(1),
was designed to recognize that locked and crossed markets may occur
accidentally (such as during updating of quoting), and that SRO
rules could include ``ship and post'' procedures that would require
a member to first attempt to execute against a relevant displayed
quotation while posting a quotation that could lock or cross such a
quotation. NMS Adopting Release at 37550.
\186\ NMS Adopting Release at 37503.
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Adoption of Rule 610(e) was driven by concerns over the rise in the
incidence of locked and crossed markets at the time due to market
fragmentation coupled with limitations on the level of
interconnectivity among markets.\187\ In addition, the economic
incentives created by access fee and liquidity rebate strategies at the
time, as well as differences in the speed or certainty of access among
market centers, were believed to be contributing to the increase in the
frequency of locked markets.\188\ The Commission believed that the
practice of displaying quotations that lock or cross previously
displayed quotations was inconsistent with fair and orderly markets and
detracted from market efficiency.\189\ Moreover, the Commission
believed that reducing the instance of locked and crossed quotations
would promote capital formation by providing market participants a
clear picture of the true trading interest in a stock.\190\
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\187\ See NMS Proposing Release at 11154-56. In establishing the
NMS, Congress stated that ``market fragmentation becomes of
increasing concern in the absence of mechanisms designed to assure
that public investors are able to obtain the best price for
securities regardless of the type or physical locations of the
market upon which his transaction may be executed.'' NMS Adopting
Release at 37499, n.13 and accompanying text (citing H.R. Rep. 94-
123, 94th Cong., 1st Sess. 50 (1975).
\188\ NMS Proposing Release at 11154-56. It was thought, for
example, that market participants' unwillingness to pay the fee on
the locked market, and preference to instead wait to receive the
maker rebate, was a contributor to locked markets. See id. at 11156-
57. Additionally, some believed that electronic communications
network (``ECN'') access fees exacerbated locked markets and that
certain ECNs programmed their systems to lock the quote of other
market participants automatically instead of routing to the other
quote to force the contra-party to be a liquidity taker and thereby
collect the associated access fee rebate for themselves. See id. at
11158.
\189\ NMS Adopting Release at 37547. In particular, the
Commission stated that ``an automated quotation is entitled to
protection from locking or crossing quotations'' and that ``[w]hen
two market participants are willing to trade at the same quoted
price, giving priority to the first-displayed automated quotation
will encourage posting of quotations and contribute to fair and
orderly markets.'' Id.
\190\ NMS Adopting Release at 37596. For example, prior to the
prohibition there could be an offer to sell at a certain price
displayed on one market at the same price as an offer to buy on
another market, but the orders could not meet because the two
markets were not linked. As a result, some market centers at the
time would perceive the quotes to be stale. See NMS Proposing
Release at 11155.
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B. Proposed Rescission of Rule 610(e)
The Commission proposes to rescind Rule 610(e) in its entirety.
Based on its assessment of the national market system,\191\ the
Commission believes that the rescission of Rule 610(e) could benefit
market participants by allowing for narrower spreads and improving
price discovery.\192\ Furthermore, rescinding Rule 610(e) should reduce
the prevalence of certain order types designed to automatically avoid
displaying orders that lock or cross quotations thereby reducing market
complexity, as well as burdensome compliance costs. Additionally, the
concerns the Commission sought to address in 2005 with the adoption of
Rule 610(e), namely concerns about the level of automation and
interconnectivity in the marketplace at that time, as well as the
potential for investor confusion when markets become locked or crossed,
are no longer prevalent in today's trading environment. As such,
rescission of Rule 610(e) would appear to be in the public interest and
appropriate for the protection of investors and the maintenance of fair
and orderly markets in that removing the prohibitions on locked and
crossed markets may allow for more economically efficient executions of
securities transactions, remove impediments to competition, and improve
the quality and availability of information with respect to trading
interest.\193\ Rescission of Rule 610(e) would also facilitate the
benefits of rescinding Rule 611, due to the connection between the two
and the concept of ``protected quotations.'' \194\
---------------------------------------------------------------------------
\191\ See supra note 46 and accompanying text.
\192\ See infra section VI.C.2.a. (discussing the potential for
narrower spreads for some stocks, including the possibility of a
quoted spread of zero, which may, for some stocks, be closer to
economic fundamentals).
\193\ See supra note 2 (discussing section 11A); infra sections
III.B.1., B.2. and B.3. (discussing, among other things, the
potential for more efficient price discovery and opportunities for
competition if Rule 610(e) is rescinded).
\194\ Some market participants expressed a similar view about
the interconnectedness of the rules. See, e.g., MEMX Letter at 17
(stating that the prohibition on locked and crossed markets is
directly tied to trade-through protections); Nasdaq Letter I at 2-3
(stating that the prohibition against locked and crossed markets
would be impacted by rescinding Rule 611); First TTR Roundtable
Transcript at 43-44 (Chris Isaacson, Cboe Global Markets, Inc.), at
129-130 (Jonathan Kellner, MEMX), at 144 (Chris Nagy, Healthy
Markets Association). See also First TTR Roundtable Transcript at
166 (Adam Nunes, Hudson River) (stating that Rule 611 and 610(e) are
effectively the same rule ``from an implementation and compliance
standpoint''). Others stated that removing the prohibitions on
locked and crossed markets was necessary to get the full benefit of
rescinding the trade-through rule. See, e.g., Second TTR Roundtable
Transcript, at 55-56 (Brett Redfearn, Panorama Financial Markets
Advisory) (stating, that if eliminating Rule 611, it does make sense
to eliminate the locked and crossed market provisions), at 58-59
(Oliver Sung, Cboe Global Markets) (stating that it seems logical to
remove the locked and crossed prohibition to get the full benefit of
611 removal).
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1. Evolution of Market Structure and Investor Sophistication
Since the adoption of Regulation NMS, equity market structure has
changed due, in part, to the many technological advancements that have
altered the speed and nature of trading.\195\ Computer-assisted trading
tools are common and include smart order routing systems that are
designed to deal with the large number of trading centers in the
fragmented U.S. equity
[[Page 36671]]
market structure. These tools also include trading systems with
automated functionalities that enable orders to be submitted to the
marketplace in ways that are far beyond the manual capacities of a
human trader.\196\ As the Commission has previously recognized, the
U.S. securities markets have become almost entirely electronic and
highly dependent on sophisticated trading and other technology,
including complex and interconnected routing, market data, regulatory,
surveillance and other systems.\197\ At the same time, retail investor
participation in the equity markets has significantly increased,\198\
as has investor access to market data and execution quality
information.\199\ When the Commission proposed Rule 610(e), it
recognized that, as automated executions become more prevalent, there
may be less reason to lock a displayed quote.\200\ Given the evolution
of the U.S. equity markets since 2005, Rule 610(e) may be no longer
necessary and the concerns it sought to address in 2005 may be no
longer relevant. For example, increases in market fragmentation at that
time, and a lack of interconnectivity, resulted in a reduction in the
interaction between orders displayed in competing market centers; and
there were greater differences in speed among market centers than exist
currently (i.e., there were more markets that relied heavily on human
traders to quote and trade, and which may not have adjusted their
quotations as quickly as automated markets).\201\ These kinds of
inefficiencies are no longer prevalent.\202\ While the equity markets
continue to be highly fragmented, with the greater automation and
interconnectivity in today's equity market structure, and increased
access to market data and execution quality information, market
participants now have the tools necessary to better navigate them.
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\195\ Securities Exchange Act Release No. 99679 (Mar. 6, 2024),
89 FR 26428, 26429 (Apr. 15, 2024) (``Rule 605 Amendments Adopting
Release'') (citing Securities Exchange Act Release No. 96493 (Dec.
14, 2022), 88 FR 3786 (Jan. 20, 2023) (Rule 605 Amendments Proposing
Release) at 3787-88 (Jan. 20, 2023)).
\196\ ``Equity Market Structure Literature Review Part II: High
Frequency Trading Staff of the SEC Division of Trading and
Markets,'' SEC, Mar. 14, 2014, available at https://www.sec.gov/marketstructure/research/hft_lit_review_march_2014.pdf.
\197\ Securities Exchange Act Release No. 73639 (Nov. 19, 2024),
79 FR 72252 (Dec. 5, 2014) (``Regulation SCI Adopting Release'') at
72254. See also supra notes 146 and 150 and accompanying text
(discussing technological developments since the adoption of
Regulation NMS).
\198\ See, e.g., Caitlin McCabe, ``New Army of Individual
Investors Flexes Its Muscle,'' The Wall Street Journal (Dec. 30,
2020), available at https://www.wsj.com/articles/new-army-of-individual-investors-flexes-its-muscle-11609329600.
\199\ See, e.g., Rule 605 Amendments Adopting Release at section
IX.C. (discussing the availability of certain information to, and
how that information is used by, various types of market
participants); Charles M. Jones, Understanding the Market for U.S.
Equity Market Data (Aug. 31, 2018), available at https://www.sec.gov/comments/4-729/4729-4545881-176154.pdf at 3-8
(discussing available equity market data products and their uses).
See also Robinhood Letter at 7 (stating that ``[u]nlike any other
moment in history, retail investors today have easy access to tools
and platforms, educational resources, real-time market data and
investment analytics'').
\200\ NMS Proposing Release at 11159.
\201\ See, e.g., id. at 11159.
\202\ See, e.g., infra section VI.B.4.b. (discussing, among
other things, the speed at which market participants are able to
react in today's equity markets).
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In addition, the potential for investor confusion that could result
from removing the locked and crossed market prohibitions would be
limited and, to the extent that it does occur initially, would diminish
over time as market participants adjust their behavior in response to
the new trading environment.\203\ Today's investors have significantly
greater access to market data, execution quality information, and
trading technologies,\204\ giving them the tools and market information
necessary to navigate the equity markets even when they are locked.
Also, any confusion from crossed markets should be mitigated by today's
routing technology, speed of execution, and the resulting rate at which
crossed markets are resolved.\205\
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\203\ See infra note 241 and accompanying text; section
VI.C.2.b. (discussing investor confusion as a potential cost
associated with rescission of Rule 610(e)). Some commenters also
stated that rescission of the crossed markets prohibition could lead
to investor confusion. See, e.g., Second TTR Roundtable Transcript
at 64-65 (Dmitry Bulkin, Bernstein) (stating that retail brokers may
need to take some time to educate their clients), at 65 (Mehmet
Kinak, T. Rowe Price) (stating that self-directed or retail
investors may not be confused by a locked market, but that crossed
markets could lead to some investor confusion). Other commenters did
not think that rescission would lead to investor confusion. See,
e.g., First TTR Roundtable Transcript at 145-147 (Adam Nunes, Hudson
River).
\204\ See supra note 199 and accompanying text.
\205\ See, e.g., Phil Mackintosh and Eugenio Piazza, Locked,
Crossed and Barrel (Dec. 11, 2025) (analyzing the significance of
locked and crossed markets to investors), available at https://www.nasdaq.com/articles/locked-crossed-and-barrel; Second TTR
Roundtable at 57 (Mehmet Kinak, T. Rowe Price), at 59 (Oliver Sung,
Cboe Global Markets) (stating that in a crossed market arbitrage
opportunities would clear out crosses quickly).
---------------------------------------------------------------------------
Additionally, eliminating restrictions on trading through protected
quotations and displaying orders that lock or cross quotations would
provide broker-dealers greater freedom when determining how to handle
their customers' orders, including where to route those orders to
achieve best execution.\206\ Among other things, if the Commission were
to rescind the locked and crossed market prohibitions, and to the
extent permitted by SRO rules,\207\ market participants would have more
flexibility to post their trading interest on trading centers that have
a consistently higher volume of order flow, more reliable speed of
execution, or lower adverse selection costs, if they are not
constrained by requirements to first route to execute against any
locking contra-side interest. In turn, trading centers would have more
flexibility to compete for order flow.
---------------------------------------------------------------------------
\206\ See supra section II.B.3.b.
\207\ Under Rule 610(e), the Commission requires exchanges to
have rules that prohibit locked and crossed markets. As a result, if
the Commission rescinds Rule 610(e), the exchanges would still have
those rules and would need to decide whether to eliminate them. See
also infra note 224.
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2. Potential for Improved Price Discovery and Competition
Rescission of Rule 610(e) could also lead to improved price
discovery and tighter spreads and foster competition among trading
venues, which could benefit investors. Specifically, allowing locked
markets could strengthen public price formation to the extent that
locked markets are a natural consequence of competitive quoting, and
that disallowing locked markets (as is the case currently) may
arbitrarily widen spreads.\208\ Locked markets may be indicative of
fair and efficient markets, and allowing them could lead to more
advantageous pricing and cost savings for some investors.\209\
Additionally, a quotation that would qualify as a locking quotation for
purposes of the prohibition may in fact not be a locking quotation if
one were to consider the price with fees.\210\ In this regard, the
[[Page 36672]]
prohibition on display of locked quotations may be preventing the
display of trading interest that would not be considered locking
interest based on the net price (e.g., if the exchange fees associated
with taking the locking offer would cause the order's effective price
to be higher than its displayed price).
---------------------------------------------------------------------------
\208\ See, e.g., Cboe Letter I at 4-5. (stating that locked
markets are a natural consequence of competitive quoting, provide
optimal pricing for investors, and contribute to fair markets and
that allowing locked markets would narrow or, in some cases,
eliminate spreads to the benefit of investors); Second TTR
Roundtable Transcript at 56-57 (Mehmet Kinak, T. Rowe Price)
(stating that trading at the market is true price discovery and has
benefits: there is no spread, no adverse selection, no information
leakage).
\209\ See infra section VI.C.2.a. (discussing the potential
benefits of rescinding Rule 610(e), including the potential for more
advantageous pricing and a reduction in transaction costs for some
stocks). See also Cboe Letter II at 6. This commenter stated that
that locked markets occur naturally when quoting is competitive, are
indicative of fair and efficient markets, and allowing them would
lead to optimal pricing and cost savings to investors. This
commenter also stated that the artificially wide spreads resulting
from the prohibition on locked markets creates an opportunity for
off-exchange venues to execute orders at better prices between such
spreads that would not otherwise exist. Id.
\210\ See NMS Proposing Release at 11159 (stating, at the time
Rule 610(e) was proposed, that in addition to accidental locks,
which are often resolved quickly, quotes also may lock because one
or both quotes have an access fee attached, which increases the net
price of trading with that quote, and creates an undisclosed
spread). Some market participants make a similar observation. See,
e.g., Second TTR Roundtable Transcript at 56-57 (Oliver Sung, Cboe
Global Markets). See also FIA PTG Paper at 6 (stating that ``[w]hile
we are likely to see more locked markets in the absence of a
prohibition, these prices represent the true state of supply and
demand, accounting for the cost of access and other potential market
frictions.'').
---------------------------------------------------------------------------
Moreover, allowing locked markets could foster competition between
exchanges and other trading centers.\211\ A significant portion of
trading in NMS stocks has migrated off exchange in recent years.\212\
The structure of the OTC market that permits the execution of orders
more readily in finer increments has been a factor that contributes to
this result.\213\ Allowing locked markets means that the NBBO spread
may, in some cases, be tightened to zero. Competition may drive OTC
market makers to provide even better prices in the event of locked
markets than they otherwise would currently. Allowing locked markets
could also remove an impediment to competition in that market
participants would have fewer restrictions on their selection of
trading centers that best meet their trading objectives and trading
centers could better compete for order flow based more fully on the
merits of their system.
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\211\ See infra sections VI.D.2.c. (discussing that rescission
of Rule 610(e) may improve liquidity on exchanges for some stocks)
and VI.D.2.e. (discussing that improved efficiency and liquidity on
exchanges could, in turn, allow exchanges to better compete with
off-exchange market makers for order flow).
\212\ See supra notes 39-41 and accompanying text.
\213\ See 2024 Regulation NMS Amendments at 81643. See also
Securities Exchange Act Release No. 96494 (Dec. 14, 2022), 87 FR
80266 (Dec. 29, 2022) (proposing release for the 2024 Regulation NMS
Amendments) at 80273-74 (describing how the combination of the
requirements of Rule 612 and differences in the underlying
regulatory framework for exchanges, ATSs, and OTC market makers
gives OTC market makers the ability to more readily trade in finer
increments than exchanges and ATSs). In the 2024 Regulation NMS
Amendments, the Commission stated that under Rule 612 as amended,
the OTC Markets would continue to be able to trade more readily in
comparatively smaller increments than exchanges and ATSs. As stated
by one commenter, ``the current prohibition on locked markets
artificially widens spreads, creating an opportunity for off-
exchange venues to execute orders at better prices between an
artificially wide spread that would otherwise not exist.'' Cboe
Letter II at 6.
---------------------------------------------------------------------------
In fact, when the Commission originally proposed Rule 610(e), the
Commission requested comment on the extent of the concerns arising from
locked markets in particular, recognizing that some market participants
stated that locked quotes convey useful price information, and that the
ability to lock quotes enables markets to efficiently communicate their
trading interest.\214\ In addition, the Commission stated that the
problem of apparent locked markets resulting from quotes with access
fees attached may be reduced by the adoption of other access provisions
of Regulation NMS.\215\ For example, the Commission stated that if
quoting market centers and quoting market participants have fair access
to each other's quotations, and access fees are limited to de minimis
levels, the economic incentives that currently encourage locked markets
may diminish.\216\ The Commission also recognized that as automated
executions become more prevalent, there may be less reason to lock a
displayed quote,\217\ and specifically requested comment on the
necessity of adopting restrictions on locked markets in the light of
its proposed provisions governing intermarket access and access
fees.\218\ As discussed, the equity markets have become more automated
and interconnected, diminishing the need for Rule 610(e).
---------------------------------------------------------------------------
\214\ See NMS Proposing Release at 11159.
\215\ Id.
\216\ Id.
\217\ Id.
\218\ Id.
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Locked markets may occur naturally when quoting is competitive, and
may represent greater price transparency, fairer competition, and more
efficient markets that provide optimal pricing for investors.\219\
Currently, even with the requirements of Rule 610(e), the NBBO may
appear locked or crossed for part of each trading day; however, such
occurrences are rare.\220\ If locked markets were allowed, the
Commission believes that spreads could narrow to zero for some
securities, which could result in cost savings to investors.\221\
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\219\ See infra section VI.C.2.a. (discussing that locked
markets can be a natural consequence of competitive quoting and that
in certain circumstances the potential reduction in transaction
costs from allowing locked markets could be significant).
\220\ See infra section VI.B.3. See also Mackintosh and Piazza,
supra note 205 (reporting that while the NBBO may appear locked or
crossed for part of each trading day, such occurrences are rare and
more commonly involve the appearance of a locked market, and
providing data that shows the appearance of locked and crossed
markets happens much more frequently in lower-priced, tick-
constrained stocks, and that locks and crosses resolve quickly). Id.
This data includes an analysis of S&P 500 stocks and shows that on
average, each stock is locked for around 2.5 seconds each day, and
that markets are crossed far less--with an average of just 4.2
milliseconds each day. According to this market participant, the
current rules mostly make the NBBO unlock ``much faster than a human
can blink'' and they have evidence that market makers and
arbitrageurs act very quickly to uncross markets. Their data also
shows that latency in both time to report and dissemination of SIP
data appearing to be major contributing factors. Id.
\221\ See infra section VI.C.2.a. See also supra note 209 and
accompanying text.
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3. Reduction in Complexity and Compliance Costs
Rescinding Rule 610(e) could reduce both unnecessary complexity in
the marketplace and compliance costs. Notably, Rule 610(e) does not
itself prohibit locked and crossed markets. Rather, the rule requires
SROs to establish, maintain, and enforce rules for their members that
require the avoidance of such behavior and the reconciliation of locked
and crossed quotations, and all 20 of the exchanges approved to trade
NMS stocks and FINRA have adopted such rules.\222\ These rules
generally require members to avoid entering orders that would create a
locked or crossed market and, in some cases, mandate specific handling
procedures for such orders, as discussed further below.\223\
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\222\ See supra note 207.
\223\ See, e.g., NYSE Rule 7.37 (requiring, with certain
exceptions, the exchange and its members to reasonably avoid
displaying, and prohibiting the exchange and its members from
engaging in a pattern or practice of displaying, any quotations that
lock or cross the protected best bid or protected best offer);
Nasdaq Rules 4702 and 4703 (providing order types and order
attributes designed to prevent the locking or crossing of protected
quotations, as well as orders on the Nasdaq book); FINRA Rule 6240
(requiring FINRA members, with certain exceptions, to reasonably
avoid displaying, and not engage in a pattern or practice of
displaying, any quotations that lock or cross a protected quotation,
and any manual quotations that lock or cross a quotation previously
disseminated pursuant to an effective NMS Plan); Cboe BYX Rule
11.20(b) (the BYX system shall not make available for dissemination,
and BYX users shall reasonably avoid displaying, and shall not
engage in a pattern or practice of displaying, any quotations that
lock or cross a protected quotation, and any manual quotations that
lock or cross a quotation previously disseminated pursuant to an
effective national market system plan).
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The Commission believes that the requirements of Rule 610(e) have
contributed to the proliferation of order types and attributes that
cause the orders to be repriced, displayed at a price that does not
represent the market participants' true trading interest, or that
otherwise prohibit the acceptance of such orders, and which introduce
complexity in the equity markets.\224\
[[Page 36673]]
Some of these order types and attributes include re-pricing features
that automatically adjust the order's displayed price to avoid locking
or crossing quotations, such as ``price-to-comply'' and other re-
pricing order types, and provide market participants with the ability
to execute only on that market, and in some instances only against
later arriving interest in order to ensure that the market participant
entering such order will be the provider of liquidity.\225\ These
repricing features may mask a market participant's true trading
interests by, among other things, resulting in the display of the
market participant's order at a price lower (for a buy order) or higher
(for a sell order) than the price at which the market participant is
willing to trade, primarily to avoid locking or crossing the market.
For these reasons, the Commission believes that rescission of Rule
610(e) could allow more unconstrained competition among trading centers
and among orders, could provide greater price transparency, and would
provide more freedom to market participants to make trading and order
handling decisions based on the unique characteristics of their order
flow.\226\
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\224\ Some market participants expressed a similar view. See,
e.g., FIA PTG Paper at 4, 6 (citing the prohibition on locked and
crossed markets as a factor in the proliferation of complex order
types, such as price-to-comply orders); First TTR Roundtable at 166-
69 (Adam Nunes, Hudson River Trading; Matt Mackenzie, Optiver)
(discussing that a lot of the order types designed for compliance
are related to the lock-cross prohibitions), at 168-69 (Matt
Mackenzie, Optiver) (stating that their firm uses approximately 50
complex order types and that the firm has to develop strategies to
use such orders); Second TTR Roundtable at 59-60 (Oliver Sung, Cboe
Global Markets) (stating that currently it is necessary to have
order types to hide and price slide orders that would otherwise lock
the market and discussing, as an exchange operator, the number of
order types and mechanisms created to, for example, prevent locking
the market), at 60 (Kevin Tyrrell, New York Stock Exchange) (stating
that it, an exchange operator, would be able to get rid of a lot of
the order types that lead to investor confusion if Rule 610(e) were
eliminated). See also infra sections VI.B.3. (discussing the
development of specialized order types to comply with the
prohibition on locked and crossed markets) and VI.C.2.a. (discussing
potential benefits that could flow from elimination of such order
types).
\225\ See, e.g., Cboe BYX Rule 11.9(g)(1) Display-Price Sliding
(allowing an order that, at the time of entry, would create a
violation of Rule 610 by locking or crossing a protected quotation
of an external market, to be ranked at the locking price in the BYX
book and displayed at one minimum price variation below the current
NBB (for bids) or to one minimum price variation above the current
NBO (for offers)); Nasdaq Texas Rules 4702 (b)(1)(A), (2)(B), and
(4)(A) (describing the characteristics of the exchange's Price to
Comply Order, Price to Display Order, and Post-Only Order types,
respectively, and their design for compliance with Rule 610's locked
and crossed market prohibitions). See also Rosenblatt Order Type
Report at 10-36 (discussing various pricing mechanisms, including
those that re-price to prevent locking or crossing the market and to
keep interest on an exchange's order book). This report also states
that the behavior of order types like the Post Only order type
creates actionable information that ``isn't inherently nefarious,
but [that] a sophisticated trader can use to make a meal out of an
investor who doesn't have the time, money or inclination to achieve
an equal level of sophistication''). Id.
\226\ As discussed above in the context of the proposed
rescission of Rule 611, market participants should be more free to
compete on merit, and not based on their ability to maneuver around
regulatory strictures. See supra section II.B.1. See also infra
section VI.B.4.f. (discussing potential impact on market
participants' routing strategies and interference costs resulting
from Rule 610(e)) and section VI.C.2.a (discussing how reduced
complexity could reduce costs to broker-dealers associated with
their order routing logic).
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Importantly, rescission of Rule 610(e) would not create a
requirement that SROs rescind their rules designed to comply with Rule
610(e)'s current prohibitions. Rather, market forces and consistency
with the Exchange Act would dictate which rules and practices, if any,
SROs and, as applicable, other trading centers, would seek to rescind
or modify.\227\ The Commission anticipates, however, that most, if not
all, SROs would seek to amend rules originally designed for compliance
with Rule 610(e). Recognizing that some of these rules are reliant upon
defined terms that the Commission is proposing to rescind from
Regulation NMS (e.g., ``protected quotation''),\228\ however, the
Commission is requesting comment on whether such defined terms should
be retained or modified, even if Rules 611 and 610(e) are rescinded, as
proposed.\229\
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\227\ SROs would be required to file any proposed changes to
their rules with the Commission pursuant to 15 U.S.C. 78s(b)
(section 19(b) of the Exchange Act) and the rules and regulations
thereunder, and such changes would be subject to public notice and
comment, and, if applicable, Commission approval. NMS Stock ATSs
would be required to comply with the requirements of 17 CFR 242.304
(Rule 304 of Regulation ATS) for any changes to their practices and
amend their publicly available disclosures on Form ATS-N, as
applicable.
\228\ See, e.g., Nasdaq Rulebook, Equity 2, section 5(e)(2)(A)
(defining ``protected quotation'' as having the meaning set forth in
Rule 600(b) of Regulation NMS); Cboe BYX Rulebook, Chapter 1, Rule
1.5(t) (defining ``protected bid,'' ``protected offer,'' and
``protected quotation'' to mirror the definitions in Rule 600(b)(81)
of Regulation NMS); see also infra note 258.
\229\ See infra section IV.C.
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Additionally, the Commission believes that rescission of Rule
610(e) should eliminate certain compliance costs associated with
monitoring and preventing locked and crossed markets.\230\ Depending on
whether SROs modify their own rules to eliminate prohibitions on locked
and crossed markets, market participants may also be able to reduce
their costs associated with maintaining routing logic designed to avoid
locking and crossing. Consistent with section 11A of the Exchange Act,
removing unnecessary complexity and compliance costs could help to
remove impediments to competition and foster efficiency. The level of
any reduction in complexity or compliance costs would, however, be
impacted by whether and how SROs determine to modify their own rules.
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\230\ See sections VI.B. and VI.C.2.a. (discussing,
respectively, the costs of, and potential benefits of rescinding,
Rule 610(e), including the potential to reduce operating costs to
exchanges related to compliance). See also FIA PTG Paper at 6
(stating that rescinding Rule 610(e) would eliminate elaborate
systems designed to capture quote snapshots and satisfying
intermarket sweep orders solely to demonstrate that a quote was not
locked, crossed or traded through); First TTR Roundtable Transcript
at 171-173 (Adam Nunes, Hudson River Trading) (discussing systems
necessary to demonstrate compliance).
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4. Crossed Markets
The Commission recognizes that elimination of the crossed markets
prohibition could raise concerns over intentional crossing and market
distortion in the absence of access fee caps \231\ or net pricing,
concerns that more illiquid symbols could remain crossed for
significant periods of time, and concerns regarding the calculation of
execution quality and price improvement in a crossed market.\232\
[[Page 36674]]
However, arbitrage opportunities associated with crossed markets would
likely cause them to be cleared quickly by market participants.\233\
Additionally, the Commission believes access fee caps are significant
in helping to maintain the economic incentive for such arbitrage
opportunities.\234\
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\231\ Rule 610(c) provides an access fee cap that applies to
protected quotations for NMS stocks and also applies to any other
quotation of a trading center that is the best bid or offer of a
national securities exchange or national securities association.
Rule 610(c); 17 CFR 242.610(c). As discussed above, the rule was
designed to promote fair and non-discriminatory access to quotations
displayed in the national market system, ensure the fairness and
accuracy of displayed quotations by establishing an outer limit on
the cost of accessing such quotations, and preclude trading centers
that posted protected quotations from raising their fees in an
attempt to take improper advantage of the trade-through protections.
See supra note 76 (citing 2024 Regulation NMS Amendments at 81643-
44). Specifically, Rule 610(c) was designed to address the potential
distortions caused by substantial, disparate fees, and was not
intended to reduce access fees; rather, the fee limitation was
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, a purpose of the fee
limitation was to address ``outlier'' trading centers that otherwise
might charge high fees and pass most of the fees through as rebates
to attract liquidity providers. It also was designed to preclude a
trading center from charging high fees selectively to competitors.
NMS Adopting Release at 37544-45; see also supra notes 31 and 76
(discussing amendments to Rule 610(c) adopted by the Commission in
2024, as well as the status of such amendments). As discussed below,
while the Commission is not proposing to rescind Rule 610(c), the
Commission is proposing to amend the rule to remove the reference to
``protected quotations'' given the proposed rescission of Rule 611
and related defined terms. See infra section IV.B.
\232\ A number of commenters expressed greater concern about
removing the crossed market prohibition as compared to the locked
market prohibition and the increase in crossed markets that could
result. See, e.g., Second TTR Roundtable Transcript at 57-59 (Mehmet
Kinak, T. Rowe Price; Oliver Sung, Cboe Global Markets). One
commenter stated that if the crossed market restriction were
removed, a net pricing model would be needed so that people are not
crossing the market intentionally. See Second TTR Roundtable
Transcript at 57-58 (Mehmet Kinak, T. Rowe Price). Under a ``net
pricing model,'' the displayed quote would reflect the ``all-in'' or
ultimate execution price per share to the buyer or seller, inclusive
of applicable exchange fees and rebates. This commenter expressed
concern that without access fee caps or net pricing, the market
would be distorted, which would cause market participants to be
interested in crossing the market. Id. Another commenter stated that
without the crossed market prohibition, more illiquid symbols could
remain crossed all day because they are not traded much and no one
is paying attention to them. See Second TTR Roundtable Transcript at
58-59 (Oliver Sung, Cboe Global Markets). One commenter raised
concerns regarding the implications for market quality and stated
that measuring quality of execution and price improvement is clear
for locked quotes but needs to be thought through for crossed
quotes. Second TTR Roundtable Transcript at 64-65 (Dmitry Bulkin,
Bernstein) (questioning how to measure quality of execution for
retail in the case of crossed quotes but stating that it is easy to
measure price improvement in the case of locked quotes).
\233\ See infra section VI.B.3. (discussing the temporary profit
opportunities from locked and crossed markets). Commenters also
stated that in a crossed market, arbitrage opportunities would clear
out crosses quickly. See Second TTR Roundtable at 57 (Mehmet Kinak,
T. Rowe Price), and 59 (Oliver Sung, Cboe Global Markets). See also
First TTR Roundtable Transcript at 145 (Adam Nunes, Hudson River);
supra note 220.
\234\ Some commenters expressed consistent views. See, e.g.,
Second TTR Roundtable at 55-56 (Brett Redfearn, Panorama Financial
Markets Advisory) (supporting rescission of Rule 611 and 610(e), but
stating that without the access fee caps there would be too many
locked and crossed markets and the NBBO would be further degraded),
and at 57 (Mehmet Kinak, T. Rowe Price) (stating support for
eliminating locked markets but expressing concern that if there were
no access fee caps, and no net pricing, the true market could become
distorted, which may cause market participants to intentionally
cross the market). As discussed herein, while the Commission is not
proposing to eliminate or modify Rule 610(c) at this time, the
Commission welcomes comment on this topic, including specifically in
the context of the interplay between the access fee caps and the
proposed recession of Rules 611 and 610(e).
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In adopting Rule 610(e) the Commission recognized not only that
markets occasionally lock or cross, but that locked and crossed markets
may reflect market inefficiencies.\235\ Locked markets, however, may
also reflect the existence of a market participant that is not truly
willing to trade at the displayed locking price, but instead chooses to
post interest at the locking price to receive a liquidity rebate.\236\
And the access fee caps were designed, in part, to address the
potential distortions caused by substantial, disparate fees.\237\ With
the access fee caps, there is a natural market incentive to resolve a
crossed market in the form of the arbitrage opportunity for the
liquidity taker, in that a liquidity taker could buy (sell) at the
lower offer (higher bid) and sell (buy) at the higher bid (lower
offer), locking in a risk-free profit. Without such caps, fees and
rebates could become so large as to negate the arbitrage opportunity,
which would disincentivize market participants from clearing a crossed
market.\238\
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\235\ NMS Adopting Release at 37547. The Commission has also
stated that ``[w]hen the NBBO is crossed for a significant period of
time, it raises serious questions regarding whether the quotes
continue to provide a reliable benchmark for the statistical
measures included in Rule 605.'' Securities Exchange Act Release No.
105136 (Apr. 1, 2026), 91 FR 17313, at 17317 (Apr. 6, 2026) (Order
Granting Limited Exemption Pursuant to Rule 605(b) of Regulation NMS
Under the Securities Exchange Act of 1934 from Rule 605 and
Modifying and Rescinding Certain Exemptions Granted Pursuant to Rule
605 of Regulation NMS) (``2026 Rule 605(b) Exemption''). The
Commission has also outlined procedures for reporting entities to
follow during locked and crossed markets, including when orders
should be excluded entirely in the event of a persistent crossed
market. See 2026 Rule 605(b) Exemption at 17317. See also Frequently
Asked Questions: Rule 605 of Regulation NMS (Apr. 1, 2026) available
at https://www.sec.gov/rules-regulations/staff-guidance/trading-markets-frequently-asked-questions/frequently-asked-questions-rule-605-regulation-nms (``Rule 605 FAQs''). The new Rule 605 FAQs will
become effective on August 1, 2026, and the responses therein will
supersede and replace the previous staff guidance regarding then
Rule 11Ac1-5 and Rule 605. See id. Similar to the prior guidance,
A19 of the new Rule 605 FAQs recognizes that if the NBBO is crossed
for a significant period of time, it raises serious questions
whether the quotes continue to provide a reliable benchmark for the
statistical measures in Rule 605, and the Commission has therefore
exempted all orders from the Rule that would require reference to an
NBBO that has been crossed for 30 seconds or more (citing the 2026
Rule 605(b) Exemption at section II.A.). A19 also provides
procedures for market centers, brokers, or dealers to follow under
such circumstances and in light of the exemption. The responses to
questions, and any other Commission staff statements, represent the
views of the staff. They are not a rule, regulation, or statement of
the Commission. Furthermore, the Commission has neither approved nor
disapproved their content. These staff statements, like all staff
statements, have no legal force or effect: they do not alter or
amend applicable law; and they create no new or additional
obligations for any person.
\236\ NMS Adopting Release at 37547.
\237\ See supra note 231.
\238\ Commenters also identified this potential risk. See, e.g.,
Second TTR Roundtable Transcript at 55-59 (discussion of access fees
in the context of crossed markets).
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The Commission believes that the access fee caps should serve to
mitigate the risk that fees and rebates could become so large as to
negate the arbitrage opportunity, and that the potential overall
reductions in costs and complexity in the marketplace from rescinding
Rule 610(e) would mitigate any negative impacts of allowing crossed
markets. Specifically, the access fee caps should create an opportunity
for arbitrage in a crossed market. Given the minimum pricing increments
for NMS stocks \239\ and the caps on the level of access fees,\240\
there would be potential net profit from rapidly resolving the cross
(i.e., the fees could never exceed the difference between the crossed
bid and ask prices); and the Commission believes that the speed of
trading technology in today's equity markets and the economic
incentives for arbitrage when a market is crossed will help to ensure
that crossed markets will continue to be infrequent and quickly
resolved.
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\239\ See Rule 612 (establishing the minimum pricing increment
for NMS stocks); supra note 31.
\240\ See Rule 610(c) (providing limitations on the fees to
access certain quotations); supra note 31. See also infra section
IV.B.2. (discussing proposed conforming amendments to Rule 610(c)).
---------------------------------------------------------------------------
The Commission also believes that to the extent crossed markets do
occur and resolve quickly due to market forces, the potential for
investor confusion is minimal and would be mitigated by the changes in
technology, access to market data and investor sophistication discussed
above in section III.B.1., and that the potential for investor
confusion among less sophisticated investors would likely diminish over
time as market participants adjust to the new trading environment and
adapt their behaviors accordingly.\241\ Additionally, SROs would have
the flexibility to determine whether to retain their own rules
originally designed to comply with the requirements of Rule 610(e)
relating to the avoidance of crossed markets.
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\241\ See infra section VI.C.2.b. (discussing investor confusion
as a potential cost associated with rescission of Rule 610(e)).
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C. Request for Comment
The Commission generally requests comment from the public on the
proposed rescission of Rule 610(e), including its relation to the
proposed rescission of Rule 611. More specific requests for comment are
set forth below. Responses supported by empirical data are particularly
helpful.
14. Is Rule 610(e) necessary in today's equity markets? Are any of
the concerns the Commission identified when adopting Rule 610(e) still
relevant? Should the Commission maintain any of the requirements of
Rule 610(e) rather than rescind the entire rule? For example, should
prohibitions on the display of crossed markets be maintained? Why or
why not? Are there different concerns for liquid and illiquid
securities that the Commission should
[[Page 36675]]
consider? Should SROs continue to be required to have rules designed to
assure the reconciliation of locked or crossed quotations in an NMS
stock? Why or why not?
15. Would the availability of liquidity and the quality of the NBBO
be impacted by the rescission of Rule 610(e)? If so, how, and how might
any such impact be mitigated?
16. Would the rescission of Rule 610(e) lead to investor confusion
regarding the status of displayed quotations or whether displayed
quotations accurately represent available trading interest? Why or why
not? Would the possibility of crossed markets result in the potential
for investor confusion? Why or why not, and if yes, how could the
potential for such confusion be mitigated? Do investors have access to
the tools and market information necessary to understand and navigate
equity markets when they are locked or crossed? Why or why not?
17. If Rule 610(e) is rescinded, would there be an increase in
frequency or duration of locked or crossed markets? Would locked or
crossed markets, when they do occur, resolve quickly? Why or why not?
Are there particular concerns associated with crossed markets for
symbols that have certain characteristics, such as more illiquid
symbols? Why or why not, and if yes, how could such concerns be
mitigated?
18. How would the rescission of Rule 610(e) impact execution
quality metrics? For example, do commenters have particular concerns
regarding the potential impact on their average execution performance
statistics, or concerns regarding how to calculate certain metrics for
purposes of Rule 605 Reports that are not addressed by Commission staff
responses to Frequently Asked Questions or related exemption?\242\ If
so, what are the concerns and why? How could these concerns be
addressed?
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\242\ See infra note 235.
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19. What are the benefits to allowing the display of locked
markets? Would allowing the display of locked markets lead to zero
spreads and lower transaction costs for some stocks? Would it otherwise
allow market participants to more accurately display their trading
interests? If so, how? If not, why not? Are there additional impacts on
the quality of markets that would result from the display of locked
markets? For example, how would competition between trading centers be
impacted? Would rescission of Rule 610(e) impact competition between
exchanges and other trading centers, such as ATSs? If so, how?
20. How might a broker-dealer's processes to fulfill its best
execution obligations be affected by the rescission of Rule 610(e)?
21. Would rescinding Rule 610(e) reduce complexity? Why or why not?
If so, how? Have the requirements of Rule 610(e) contributed to the
proliferation of order types? Are such order types useful in the
absence of Rule 610(e)? Why or why not? Do such order types obscure
market participant's true trading interests? If so. How?
22. If trading centers were to eliminate order types and modifiers
that are currently designed to facilitate compliance with Rule 610(e),
would other complexities emerge? If so, what kinds of complexities and
why? How would they impact market structure and investors?
23. Would rescission of Rule 610(e) reduce costs for market
participants? If so, what costs would be reduced and by how much?
24. Would rescission of Rule 610(e), when taken together with the
rescission of Rule 611, result in more displayed liquidity, or instead
more non-displayed liquidity? Why or why not?
25. Because SROs would not be required to rescind rules relating to
locked and crossed market prohibitions, would SROs continue to provide
existing orders and modifiers, as well as other rules to prevent the
locking and crossing of quotations internally or more broadly? Why or
why not? Are there certain related rules that SROs would retain? If so,
which ones and why?
26. Are there any implementation concerns if the Commission were to
rescind Rule 610(e)? For example, if Rule 610(e) is rescinded how far
out from the date of rescission should the implementation date be?
Should implementation be done in phases or tranches (and if yes, please
be specific to describe what should be phased and when)? Should the
timing for implementation be tied to the timing for implementation
rescission of Rule 611, if applicable? If so, in what way?
27. Are there any NMS Plan amendments that would be needed if Rule
610(e) is rescinded? If so, which ones, why, and in what way?
28. Would rescission of Rule 610(e)'s prohibitions result in
improved price transparency and/or tighter spreads? Why or why not?
Would market participants' ability to pursue their unique trading
interests and strategies be improved? Why or why not? If so, how? Would
rescission of Rule 610(e)'s prohibitions permit greater competition
among orders and/or trading venues? Why or why not? If so, how?
IV. Conforming Amendments to Regulation NMS Definitions and Related
Rules
A. Description
Rule 600(b) sets forth the defined terms used in Regulation NMS.
Some of the defined terms in Rule 600(b) outline the scope of
obligations under, and exceptions to, Rules 611 and 610(e) and do not
relate to any other provision of Regulation NMS. Such terms would no
longer be necessary to maintain in Rule 600(b) if Rules 611 and 610(e)
are rescinded as proposed.
In addition, certain Regulation NMS rules and other Commission
rules cross-reference Rule 611 or Rule 610(e) and/or use terms defined
in Rule 600(b) that solely relate to Rules 611 and 610(e). Such other
Commission rules must be amended if Rules 611, 610(e), and related
definitions in Rule 600(b) are rescinded.
B. Proposed Rescissions and Amendments to Related Rules
1. Proposed Rescission of Related Defined Terms in Rule 600(b) of
Regulation NMS
In conjunction with the recommended rescission of Rules 611 and
610(e), the Commission proposes to rescind certain defined terms in
Rule 600(b) that relate to Rules 611 and 610(e) and would no longer be
necessary to maintain in Regulation NMS if such rules are
rescinded.\243\ First, the Commission proposes to rescind Rule
600(b)(105), which defines the term ``trade-through.'' \244\ This
defined term identifies the scope of the activity that is restricted
pursuant to Rule 611.\245\ If Rule 611 is rescinded, this definition is
no longer necessary to retain in Regulation NMS.\246\
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\243\ Several commenters indicated changes to Rule 611 should be
accompanied by consideration of appropriate changes to defined
terms. See, e.g., Second TTR Roundtable at 78-82 (Valerie Bogard,
Rosenblatt Securities; Jeff Brown, Texas Stock Exchange; Bill Harts,
Long Term Stock Exchange).
\244\ See supra note 85 and accompanying text.
\245\ See supra section II.A.
\246\ The term ``trade-through'' is also used in Rule
600(b)(89), which defines the term ``regulatory data.'' The
Commission is proposing to amend the definition of ``regulatory
data'' to eliminate references to ``trade-through.'' See infra notes
261-266 and accompanying text.
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Next, the Commission proposes to rescind Rule 600(b)(81), which
defines the term ``protected bid or protected offer,'' and Rule
600(b)(82), which defines the term ``protected quotation.'' \247\ These
terms identify the
[[Page 36676]]
scope of quotations that are protected by Rule 611 and set forth a
category of quotations that are subject to the locked and crossed
market prohibitions pursuant to Rule 610(e).\248\ If Rules 611 and
610(e) are rescinded, these definitions are no longer necessary to
retain in Regulation NMS.\249\
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\247\ See supra note 82.
\248\ See supra sections II.A. and III.A. These terms are also
currently used in the definitions of ``trade-through'' and
``intermarket sweep order,'' which definitions are being proposed to
be rescinded. See supra note 244 and infra note 255 and accompanying
text.
\249\ The term ``protected quotation'' is also currently used in
Rule 610(c), which sets forth a cap on access fees imposed by
trading centers. The terms ``protected bid'' and ``protected offer''
are also currently used in Rules 600(b)(26) and 600(b)(72), which
define the terms ``core data'' and ``order size benchmark,''
respectively. The Commission is proposing to amend such rules to
eliminate references to the terms ``protected quotation,''
``protected bid,'' and ``protected offer.'' See infra section
IV.B.2.
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The Commission proposes to rescind Rule 600(b)(54), which defines
the term ``manual quotations.'' \250\ This term is used in Rule 610(e)
to set forth the scope of certain locking and crossing behavior
prohibited by the rule.\251\ If Rule 610(e) is rescinded, this
definition is no longer necessary to retain in Regulation NMS.\252\
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\250\ See supra note 182 and accompanying text.
\251\ See supra section III.A.
\252\ The term ``manual quotation'' is also currently used to
define the term ``automated trading center'' in Rule 600(b)(7). This
term is being proposed to be rescinded. See infra note 253 and
accompanying text.
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The Commission also proposes to rescind Rules 600(b)(6) and (7),
which define the terms ``automated quotation'' and ``automated trading
center,'' respectively.\253\ These terms are themselves used in Rule
600(b) to define the terms ``manual quotation,'' ``protected bid,'' and
``protected offer.'' The Commission is proposing to rescind the defined
terms ``manual quotation,'' ``protected bid,'' and ``protected offer.''
\254\ As a result, the definitions of ``automated quotation'' and
``automated trading center'' are no longer necessary to retain in
Regulation NMS.
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\253\ See supra notes 87-88.
\254\ See supra notes 247 and 252 and accompanying text.
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Finally, the Commission proposes to rescind Rule 600(b)(47), which
defines the term ``intermarket sweep order.'' \255\ This term is used
to provide an exception to the requirements of Rule 611.\256\ If Rule
611 is rescinded, this defined term is no longer necessary to retain in
Regulation NMS.\257\
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\255\ See supra note 93.
\256\ See supra section II.A.2. This term also is used by
exchanges and national securities associations (i.e., FINRA) to
provide an exception to their prohibitions against locked and
crossed markets. See, e.g., FINRA Rule 6240 and NYSE Rule 7.37,
which each provide an exception to the locking and crossing
prohibition if the member displaying the locking or crossing
quotation simultaneously routed an intermarket sweep order to
execute against the full displayed size of the locked or crossed
quotation. As discussed below, the Commission believes that, if Rule
610(e) is rescinded, most, if not all, SROs would seek to amend
their rules originally designed for compliance with Rule 610(e). See
infra notes 258-259 and accompanying text.
\257\ In order to avoid unnecessary confusion throughout the
remainder of Regulation NMS, the Commission proposes to insert the
word ``Reserved'' in the place of all defined terms proposed to be
rescinded.
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Some of the terms proposed to be rescinded in Regulation NMS,
including ``protected quotation,'' ``automated quotation,'' ``manual
quotation,'' and ``intermarket sweep order,'' are used in exchange and
FINRA rules that were adopted pursuant to the requirements of Rules 611
and 610(e).\258\ The Commission believes that, if Rules 611 and 610(e)
are rescinded, most, if not all, SROs would seek to amend their rules
originally designed for compliance with Rules 611 and 610(e), including
related defined terms. However, the Commission is requesting comment on
whether there is a reason that such defined terms should be retained or
modified, even if Rules 611 and 610(e) are rescinded, as proposed.\259\
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\258\ See, e.g., NYSE Rule 1.1(v) (defining ``protected bid,''
``protected offer'', and protected quotation''); NYSE Rule 7.37(a)
(Order Execution and Routing); NYSE Rule 7.31(e)(3) (Orders and
Modifiers); Nasdaq Rule Equity 1, section 1(a)(12) (defining
``protected bid'', ``protected offer'', ``protected quotation'', and
``intermarket sweep order''); Nasdaq Rule Equity 2, section 5(e)
(Locked and Crossed Markets). These terms are also used in certain
FINRA Rules. See, e.g., FINRA Rules 6282 (Transactions Reported by
Members to ADF); 6380A (Transaction Reporting). See also supra note
228.
\259\ See infra section IV.C.
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2. Proposed Conforming Amendments to Other Rules in Regulation NMS
In conjunction with the proposed rescission of Rules 611 and 610(e)
and related defined terms in Rule 600(b), the Commission proposes to
amend certain other rules in Regulation NMS that reference the defined
terms being proposed to be rescinded. First, Rule 610(c) of Regulation
NMS, which sets forth a cap on the highest permitted level of fees a
trading center may charge for access to the best quotations of a
trading center, currently provides that such access fee cap is
applicable to the execution of orders against a ``protected quotation''
and against any other quotation of a trading center that is the best
bid or offer of a national securities exchange or national securities
association.\260\ The Commission proposes to amend Rule 610(c) to
eliminate the reference to ``protected quotation.'' As a result, Rule
610(c), as proposed to be amended, would apply to fees for the
execution of an order against any quotation of the trading center that
is the best bid or best offer of an exchange or association in an NMS
stock.
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\260\ See supra note 76 and accompanying text for a description
of Rule 610(c).
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Next, Regulation NMS includes provisions relating to the collection
and dissemination of consolidated market data.\261\ The definition of
``consolidated market data'' \262\ includes, among other things, ``core
data'' \263\ and ``regulatory data.'' \264\ The term ``core data'' is
defined to include, among other things, ``protected bids and protected
offers,'' \265\ and the term ``regulatory data'' is defined to include,
among other things, ``regulatory messages including. . .trade-through
exempt indicators.'' \266\ The Commission proposes to amend the
definition of ``core data'' in Rule 600(b)(26) to eliminate the
reference to ``protected bid and protected offer'' and to amend the
definition of ``regulatory data'' in Rule 600(b)(89) to eliminate the
reference to ``trade-through exempt indicators.''
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\261\ See Rule 603(b); 17 CFR 242.603(b). See also Rule 614; 17
CFR 242.614.
\262\ See Rule 600(b)(24); 17 CFR 242.600(b)(24).
\263\ See Rule 600(b)(26); 17 CFR 242.600(b)(26).
\264\ See Rule 600(b)(89); 17 CFR 242.600(b)(89).
\265\ See Rule 600(b)(26)(i)(E); 17 CFR 242.600(b)(26)(i)(E).
\266\ See Rule 600(b)(89)(ii)(B); 17 CFR 242.600(b)(89)(ii)(B).
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Finally, Rule 605 of Regulation NMS requires market centers,
brokers, and dealers to make available standardized, monthly reports of
statistical information concerning their order executions in NMS
stocks.\267\ Such reports must include, among other things, information
relating to the cumulative number of shares of the order size
benchmark, which is a size improvement benchmark metric.\268\ The term
``order size benchmark'' is defined in Rule 600(b)(72) in relevant part
as ``the number of shares of the full displayed size of all protected
bids at the same price as the national best bid at the time of order
receipt, in the case of a market or limit order to sell, or the full
displayed size of all protected offers at the same price as the
national best offer at the time of order receipt, in the case of a
market or limit order to buy.'' \269\ The Commission proposes to revise
the definition of ``order size benchmark'' to remove the concept of
``protected bids'' and ``protected offers,'' consistent with the
proposed rescission of Rule 611 and related definitions. The
[[Page 36677]]
Commission proposes to replace such references with references to bids
and offers disseminated pursuant to an effective national market system
plan. As discussed above, a key element of the definition of
``protected quotation'' is that it is disseminated pursuant to an
effective national market system plan.\270\ The Commission believes it
is important to Rule 605 that the bids and offers used to calculate the
order size benchmark are disseminated on the SIPs and readily
accessible to reporting entities. \271\ As a result, the Commission
proposes to retain this element in the definition of ``order size
benchmark'' so that ``order size benchmark'' is defined in terms of the
number of shares of the full displayed size of all bids or offers
disseminated pursuant to an effective national market system plan at
the same price as the NBBO, as applicable, at the time of order
receipt.
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\267\ See Rule 605; 17 CFR 242.605.
\268\ See Rule 605(a)(1)(ii)(R); 17 CFR 242.605(a)(1)(ii)(R).
\269\ See Rule 600(b)(72); 17 CFR 242.600(b)(72).
\270\ See supra section II.A.1.
\271\ See Rule 605 Amendments Adopting Release at 26478 (Apr.
15, 2024) (``Reporting entities will be able to capture information
about these shares without relying on proprietary depth-of-book
feeds because the SIP includes all protected bids and offers.'').
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Except as otherwise set forth herein, all other provisions of
Regulation NMS would be retained and are not being proposed to be
amended at this time.
3. Proposed Conforming Amendments to Rules Outside of Regulation NMS
In conjunction with the proposed rescission of Rules 611 and 610(e)
and related definitions in Rule 600(b), the Commission proposes to
amend certain Commission rules outside of Regulation NMS that reference
the Regulation NMS rules and related definitions being proposed to be
rescinded.
First, Rule 15c3-5 under the Exchange Act sets forth risk
management controls for brokers or dealers with market access.\272\ The
rule sets forth an exception from most of its requirements where a
broker-dealer ``routes orders on behalf of an exchange or [ATS] for the
purpose of accessing other trading centers with protected quotations in
compliance with Rule 611 of Regulation NMS for NMS stocks, or in
compliance with a national market system plan for listed options.''
\273\ The Commission proposes to amend this rule to remove the language
excepting a broker-dealer routing orders for the purpose of accessing
other trading centers with protected quotations in compliance with Rule
611 from the requirements of the rule. As a result, the exception set
forth in Rule 15c3-5(b) would apply only to broker-dealers routing
orders on behalf of an exchange or ATS for the purpose of accessing
other trading centers in compliance with an NMS Plan for listed options
(i.e., the Options Order Protection and Locked/Crossed Markets
Plan).\274\
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\272\ 17 CFR 240.15c3-5. Specifically, the rule requires brokers
or dealers with access to trading securities directly on an exchange
or ATS, including those providing sponsored or direct market access
to customers or other persons, and broker-dealer operators of an ATS
that provide access to trading securities directly on their ATS to a
person other than a broker or dealer, to establish, document, and
maintain a system of risk management controls and supervisory
procedures reasonably designed to manage the financial, regulatory,
and other risks of this business activity. See Rule 15c3-5(b) under
the Exchange Act.
\273\ See id. See also Securities Exchange Act Release No. 63241
(Nov. 3, 2010), 75 FR 69792, 69800 (Nov. 15, 2010) (File No. S7-03-
10) (Final Rule adopting Risk Management Controls for Brokers or
Dealers with Market Access).
\274\ The Options Order Protection and Locked/Crossed Markets
Plan is a Commission-approved NMS Plan that contains trade-through
provisions for listed options. See Securities Exchange Act Release
No. 60405 (July 30, 2009), 74 FR 39362 (Aug. 6, 2009) (Order
Approving the National Market System Plan Relating to Options Order
Protection and Locked/Crossed Markets Submitted by the Chicago Board
Options Exchange, Incorporated, International Securities Exchange,
LLC, The NASDAQ Stock Market LLC, NASDAQ OMX BX, Inc., NASDAQ OMX
PHLX, Inc., NYSE Amex LLC, and NYSE Arca, Inc.) (``Options Order
Protection and Locked/Crossed Markets Plan''). See also supra note
83.
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Next, Rule 15b9-1 under the Exchange Act sets forth a limited
exemption for certain exchange members from the requirements of section
15(b)(8) of the Exchange Act \275\ to become a member of a registered
national securities association.\276\ The rule provides an exemption
from the requirements of section 15(b)(8) for Commission-registered
broker-dealers that effect off-member-exchange securities transactions
where the broker or dealer does not carry customer accounts, is a
member of at least one exchange, and effects off-member-exchange
securities transactions that: (1) result solely from orders that are
routed by an exchange of which the broker or dealer is a member in
order to comply with Rule 611 of Regulation NMS or the Options Order
Protection and Locked/Crossed Market Plan; \277\ or (2) are solely for
the purpose of executing the stock leg of a stock-option order.\278\
The Commission proposes to amend Rule 15b9-1 to remove the exemption
for broker-dealers that effect off-member-exchange securities
transactions that result from orders that are routed by an exchange in
order to comply with Rule 611. As a result, the exemption from section
15(b)(8) set forth in Rule 15b9-1 would apply only to a broker-dealer
that does not carry customer accounts, is a member of at least one
exchange, and effects off-member-exchange securities transactions that:
(1) result solely from orders that are routed by an exchange of which
the broker or dealer is a member in order to comply with the Options
Order Protection and Locked/Crossed Market Plan; or (2) are solely for
the purpose of executing the stock leg of a stock-option order.
---------------------------------------------------------------------------
\275\ 15 U.S.C. 78o(b)(8).
\276\ 17 CFR 240.15b9-1.
\277\ See supra note 274.
\278\ See Rule 15b9-1 under the Exchange Act.
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C. Request for Comment
The Commission generally requests comment from the public on the
proposed rescission of certain defined terms in Rule 600(b) and the
proposed modification of other Commission rules in connection with the
proposed rescission of Rules 611 and 610(e). More specific requests for
comment are set forth below. Responses supported by empirical data are
particularly helpful.
29. Are the proposed rescissions of the defined terms in Rule
600(b) appropriate? Why or why not? Are there other defined terms set
forth in Rule 600(b) that should be rescinded or modified? Are there
any terms the Commission proposes to rescind that should be retained or
modified? If so, why? For example, should the Commission retain or
modify defined terms that are currently used in SRO rules?
30. Are the proposed amendments to other provisions of Regulation
NMS to remove references to the rescinded defined terms appropriate?
Why or why not? Are there any other amendments to Regulation NMS that
are necessary or appropriate if the proposed rescissions of the defined
terms in Rule 600(b) are adopted?
31. Are the proposed amendments described above to Commission rules
outside of Regulation NMS that reference Rule 611, Rule 610(e), and
related definitions appropriate? Why or why not? Are there any other
Commission rules outside of Regulation NMS that the Commission should
modify if Rule 611, Rule 610(e), and related defined terms are
rescinded?
32. If the proposed amendments to Regulation NMS are adopted,
should the Commission allow the SROs to determine whether any NMS Plans
should be changed to reflect such amendments? Alternatively, should the
Commission itself change any NMS Plans pursuant to Rule 608 of
Regulation NMS to reflect the proposed amendments to Regulation NMS,
should they be adopted? Why or why not?
[[Page 36678]]
V. Paperwork Reduction Act
A. Rescission of Rule 611
Rule 611 currently contains one collection of information. The
title for this existing collection of information is Order Protection
Rule--Rule 611 of Regulation NMS. OMB approved this collection of
information and assigned it OMB Control No. 3235-0600. Specifically,
Rule 611 requires a trading center \279\ to establish, maintain, and
enforce written policies and procedures reasonably designed to prevent
trade-throughs on that trading center of protected quotations in NMS
stocks, unless a valid exception applies, and, if relying on such an
exception, that are reasonably designed to assure compliance with the
terms of the exception. The nature and extent of the policies and
procedures that a trading center is required to establish to comply
with this requirement depends upon the type, size, and nature of the
trading center. The purpose of the collection of information has been
to help ensure that ``trading centers'' and their customers,
subscribers, members, and employees, as applicable, generally avoid
trade-throughs, unless a valid exception is applicable.
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\279\ See supra note 81.
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Rescission of Rule 611 would eliminate this collection of
information and, therefore, would eliminate the associated compliance
burdens for trading centers.
If the rescission of Rule 611 is approved, upon publication of the
final rule in the Federal Register, the Commission will submit a
request to OMB to discontinue OMB Control Number 3235-0600.\280\
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\280\ The Commission estimates that there are currently 305
trading centers subject to Rule 611. This estimate includes 20
exchanges (17 exchanges that trade NMS stocks + three exchanges that
are approved but not yet operating) and 33 ATSs that trade NMS
stocks. Based on data from CAT for January 2026, the estimate also
includes 96 exchange market makers and 225 broker-dealers acting as
OTC market maker or executing orders internally by trading as
principal or crossing orders as agent. 69 broker-dealers are both
exchange market makers and an OTC market maker or broker-dealer
internalizing orders. 20 + 33 + 96 + 225 - 69 = 305 trading centers.
---------------------------------------------------------------------------
B. Request for Comment
33. The Commission believes that this proposal would not impose any
new collection of information requirement as defined by the Paperwork
Reduction Act of 1995, as amended (``PRA''). The Commission requests
comment on (a) whether the proposed rescission of Rules 611 and 610(e),
and the related amendments to Regulation NMS definitions and related
rules, would create any new, or revise any existing, collection of
information pursuant to the PRA and (b) to evaluate the accuracy of the
Commission's assessment that the proposed rescission of Rule 611 would
eliminate the collection of information and its associated compliance
burdens for respondents.
Persons submitting comments on the collection of information
requirements should direct them to the OMB Desk Officer for the
Securities and Exchange Commission,
[email protected], and should also send a copy
of their comments to Secretary, Securities and Exchange Commission,
using any of the methods in the ADDRESSES section, with reference to
File Number S7-2026-20. Requests for materials submitted to OMB by the
Commission with regard to this collection of information should be in
writing, with reference to File Number S7-2026-20 and be submitted to
the Securities and Exchange Commission, Office of FOIA/PA Services, 100
F Street NE, Washington, DC 20549-2736. As OMB is required to make a
decision concerning the collection of information between 30 and 60
days after publication, a comment to OMB is best assured of having its
full effect if OMB receives it within 30 days of publication.
VI. Economic Analysis
A. Introduction
The Commission is mindful of the economic effects, including the
benefits and costs, of the proposed amendments.\281\ The Commission has
considered the economic effects of the proposed amendments and,
wherever possible, the Commission has quantified the likely economic
effects. The Commission is providing both a qualitative assessment and
quantified estimates of the potential economic effects of the proposed
amendments where feasible. The Commission has incorporated data and
other information to assist it in the analysis of the economic effects
of the proposed amendments. However, as explained in more detail below,
the Commission is unable to quantify certain economic effects because
the Commission does not have, and in certain cases does not believe it
can reasonably obtain, data that may inform the Commission on certain
economic effects. Further, even in cases where the Commission has data,
it is not practicable to quantify certain economic effects due to the
number and type of assumptions necessary, which render any such
quantification unreliable. Our inability to quantify certain costs,
benefits, and effects does not imply that such costs, benefits, or
effects are less significant.
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\281\ Section 3(f) of the Exchange Act requires the Commission,
whenever it engages in rulemaking and is required to consider or
determine whether an action is necessary or appropriate in the
public interest, to consider, in addition to the protection of
investors, whether the action will promote efficiency, competition,
and capital formation. Additionally, section 23(a)(2) of the
Exchange Act requires the Commission, when making rules under the
Exchange Act, to consider the impact such rules will have on
competition. Section 23(a)(2) of the Exchange Act 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.
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In the years since Rules 611 and 610(e) of Regulation NMS were
adopted, the structure of the U.S. equity markets has evolved
dramatically. Additionally, these rules have contributed to a number of
economic consequences for market participants, including regulatory
compliance costs, market structure complexity, limitations on order
handling and execution choices, exchange proliferation, and
fragmentation of liquidity on equity exchanges. Furthermore, the
Commission expects that in today's markets the negative impact on
investor execution quality from removing these rules would be
minimal.\282\ For these reasons, which are discussed further
below,\283\ the Commission is proposing to rescind Rules 611 and
610(e).
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\282\ See infra section VI.C.1.b, discussing these minimal
impacts.
\283\ See infra sections VI.B.2., VI.B.3., and VI.B.4.,
discussing current costs of these rules, and section VI.C.1.b.,
discussing the impact of rescinding Rule 611 on execution quality.
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B. Economic Baseline
The baseline against which the costs, benefits, and the effects on
efficiency, competition, and capital formation of the proposed
amendments are measured consists of the current state of the market;
the current practices of national securities exchanges, other trading
centers, and registered broker-dealers; and the current regulatory
framework.\284\
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\284\ See, e.g., Nasdaq v. SEC, 34 F.4th 1105, 1111-14 (D.C.
Cir. 2022). This baseline approach also follows Commission staff
guidance on economic analysis for rulemaking. See SEC, Current
Guidance on Economic Analysis in SEC Rulemaking 6 (Mar. 16, 2012),
available at https://www.sec.gov/divisions/riskfin/rsfi_guidance_econ_analy_secrulemaking.pdf (``The economic
consequences of proposed rules (potential costs and benefits
including effects on efficiency, competition, and capital formation)
should be measured against a baseline, which is the best assessment
of how the world would look in the absence of the proposed
action.''); id. at 7 (``The baseline includes both the economic
attributes of the relevant market and the existing regulatory
structure.'').
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[[Page 36679]]
1. Regulatory Baseline
a. Trading Center and Broker-Dealer Practices for Complying With Rule
611
In the years since the adoption of Rule 611, market participants
have developed various practices to comply with its requirements,
including practices for determining the best bid and offer on a given
exchange, methods for ensuring execution systems comply with Rule 611's
prohibitions, and practices for surveillance in accordance with Rule
611(a)(2).\285\
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\285\ The requirements of Rule 611 of Regulation NMS, which
generally prohibit trading centers from executing orders that trade-
through protected quotations, are described above (see supra section
II.A.). In addition to these restrictions on execution, Rule
611(a)(2) requires a trading center to regularly surveil to
ascertain the effectiveness of the policies and procedures to
prevent trade-throughs and take prompt action to remedy any
deficiencies.
---------------------------------------------------------------------------
Exchanges have promulgated their own rules to comply with Rule 611,
and put in place compliance processes.\286\ Each exchange has a
methodology for determining its best bid and offer in each NMS stock
that takes into account the availability of odd-lot quotes on their
exchanges.\287\ Specifically, each exchange aggregates all displayed
odd-lot quotes, starting with the best priced odd-lot, across multiple
prices, until their combined size is equal to or greater than a round
lot. Then the exchange disseminates the least aggressive price (i.e.,
lowest priced bid and highest priced offer) of the aggregated odd-lot
quotes, with their aggregated size (rounded down to the nearest round
lot) to the SIPs. The SIPs use this information to determine the
National Best Bid (``NBB'') and National Best Offer (``NBO'') for each
NMS stock by selecting the highest priced bid and lowest priced offer
from among the best bid and offer quotes across all exchanges.\288\ The
SIPs then disseminate information on the NBB and NBO and each
exchange's best bid and offer, including whether the best bid and offer
qualify as a protected quote under Rule 611.
---------------------------------------------------------------------------
\286\ See, e.g., Nasdaq Rule 4702(a) (``All Order Types and
Order Attributes operate in a manner that is reasonably designed to
comply with the requirements of Rules 610 and 611 under Regulation
NMS''), Nasdaq Rule 4758(a)(1) (``All routing of orders shall comply
with Rule 611 of Regulation NMS under the Exchange Act''), available
at https://listingcenter.nasdaq.com/rulebook/nasdaq/rules/Nasdaq%20Equity%204.
\287\ Because only round-lot-sized quotes have the potential to
be protected, Rule 611 does not cover odd-lot-sized quotes on the
automated trading center that might nevertheless be displayed at
better prices (i.e., a higher bid price or lower ask price) than the
best bid and offer.
\288\ If multiple exchanges have the same best bid or offer
price, then the SIPs select the exchange with the largest size at
that price as the NBB or NBO. If multiple exchanges also tie for the
largest size, then the SIPs select the quote they received from
these exchanges first as the NBB or NBO. See Rule 600(b)(60).
---------------------------------------------------------------------------
The Commission understands that, in order to ensure compliance with
Rule 611, automated features to prevent trade-throughs are usually
incorporated directly into a trading center's matching engine or order
execution system. Such features would require a view of prevailing
quotations in the market to function. Trading centers may use exchange
proprietary market data feeds, the SIPs, or a combination of both, for
this purpose.\289\ If a trading center receives an order that would
(based on its view of the market) result in the trade-though of a
protected quote on another trading center, then the order may be routed
to the other trading center to execute against the protected quote.
Alternatively, it may cancel the order.\290\ Trading centers may charge
a fee if they route an order and it executes on another trading
center.\291\
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\289\ Some more sophisticated trading centers may subscribe to
and aggregate the exchange direct feeds themselves, while other
trading centers may pay a third-party market data aggregator to
aggregate the exchange direct feeds and provide them with a
consolidated view of the market. See infra section VI.B.4.c.
\290\ The action the trading center takes could be based on
either its own policies and procedures or customer order
instructions. For example, trading centers that do route orders to
other venues may give their customers the option, often through an
order type or modifier, to specify that their order should not be
routed and instead be canceled if it cannot be executed on the
trading center. See, e.g., Sida Li et al., Refusing the Best Price?
147 J. FIN. ECON. 317 (2023) (discussing use of non-routable
orders). For larger orders, a trading center may also send out ISOs
to execute against the protected quotes on other venues and then
execute the rest of the order, per the exception in Rule 611(b)(6).
See, e.g., BIDS ATS Form ATS-N Part III, Item 9 (as of 11/25/2025),
available at https://www.sec.gov/Archives/edgar/data/1368727/000110465925115861/xslATS-N_X01/primary_doc.xml (discussing the ATS
use of ISO orders for executions outside the NBBO).
\291\ See, e.g., N.Y. Stock Exch., Price List 2026, at 11-12
(2026), available at https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_Price_List.pdf; Nasdaq Equity Rule 7, section 118,
available at https://listingcenter.nasdaq.com/rulebook/nasdaq/rules/Nasdaq%20Equity%207.
---------------------------------------------------------------------------
Exchanges have also promulgated rules for when broker-dealers use
the ISO exception to Rule 611.\292\ The Commission understands that
broker-dealers will generally incorporate automated features to prevent
trade-throughs into their smart order router (``SOR''). Similar to
trading centers, broker-dealers operating SORs also may use exchange
proprietary market data feeds, the SIPs, or a combination of both to
obtain the real-time market data necessary to route orders and identify
protected quotes.\293\
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\292\ See, e.g., Nasdaq Rule 4703(j) (``In connection with the
trading of securities governed by Regulation NMS, Intermarket Sweep
Orders shall be executed exclusively within the System and the
entering Participant shall be responsible for compliance with Rules
610 and 611 under Regulation NMS with respect to order protection
and locked and crossed markets with respect to such Orders. Orders
eligible for execution outside the System shall be processed in
compliance with Regulation NMS, including accessing Protected
Quotations and resolving locked and crossed markets, as
instructed''), available at https://listingcenter.nasdaq.com/rulebook/nasdaq/rules/Nasdaq%20Equity%204.
\293\ See supra note 289 and accompanying text.
---------------------------------------------------------------------------
The Commission understands that some broker-dealers may also send
orders marked as ISO even if they are not attempting to sweep through
multiple price levels. On the timescales on which market participants
react to market changes, it can frequently happen that, at a given
instant, different market participants have a different view as to what
the NBBO is.\294\ It is therefore possible that a broker-dealer's view
of the NBBO differs from that of an exchange due to latency in that
exchange's reaction to market changes. To prevent this latency from
interfering with routing outcomes, the broker-dealer may mark its order
as ISO to indicate to the exchange that, by its own view of the market,
this order doea not trade through protected quotations. Marketing an
order as ISO allows the exchange that receives the order to execute the
order immediately without regard to protected quotations in other
markets.
---------------------------------------------------------------------------
\294\ See infra note 450 and accompanying text, discussing
different sources of latency.
---------------------------------------------------------------------------
In addition to requiring policies and procedures reasonably
designed to prevent trade-throughs, Rule 611 also requires trading
centers to regularly surveil to ascertain the effectiveness of the
policies and procedures. The Commission understands that the
sophistication of these surveillance programs may vary based on the
size and expertise of the trading center. Larger, more sophisticated
entities may have developed internal processes that use historical or
real-time market data to monitor for compliance with Commission rules,
including Rule 611,\295\ and related FINRA rules, including Rule
5310.\296\ These firms may match either all or a subset of their order
and trade records with historical market data feeds to detect if any
trade-throughs occurred.\297\ As the data analysis and tools required
to perform these checks would be similar to what
[[Page 36680]]
would be required to surveil for a large range of issues, the
Commission understands that these firms may perform this analysis as
part of a batch process that also examines for other compliance
violations, rather than as a standalone process.
---------------------------------------------------------------------------
\295\ Trading centers may also use this real-time monitoring
process to detect problems with their matching engine or market data
feeds.
\296\ See infra section VI.B.1.c.
\297\ These trading centers may compare their trades to market
data quotes up to one second before the trade occurred in order to
check if a trade-through occurred. See supra section II.A.2.,
discussing the ``one second window'' exception to Rule 611.
---------------------------------------------------------------------------
Smaller trading centers or smaller broker-dealers routing orders
may be more likely to use a third-party service to surveil for their
compliance with Commission rules, including Rule 611, and related FINRA
rules, including Rule 5310. These firms usually send their order and
trade records to a third-party that specializes in compliance
monitoring or transaction cost analysis (``TCA'') and may offer the
examination of trade-through compliance as part of a package of
services. The third party then matches the trade and order records with
historical market data and examines for compliance with and violations
of trading rules, including trade-throughs.
The smallest trading centers and broker-dealers routing orders may
manually monitor for compliance with Rule 611 for a small sample of
their orders. The Commission understands that these firms do not
usually compare their order and trade records to historical market
data. Instead, these firms tend to take manual snapshots of what the
market looks like for a few of their orders and then review these
snapshots for compliance with Rule 611 and other trading rules.
b. Trading Center and Broker-Dealer Practices for Complying With Rule
610(e)
FINRA \298\ and the exchanges \299\ have promulgated rules for
complying with Rule 610(e). Market participants, likewise, have put in
place practices to comply with the SRO rules promulgated to implement
with the requirements of Rule 610(e), including rules for ranking and
displaying orders, operational practices to ensure that locked or
crossed markets are avoided, and operational procedures to address the
broader implications of these prohibitions.\300\
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\298\ FINRA has implemented Rule 6240 which requires, with
certain exceptions, that FINRA members ``shall reasonably avoid
displaying, and shall not engage in a pattern or practice of
displaying, any quotations that lock or cross a protected
quotation.'' See FINRA Rule 6240(b). This rule largely prevents
locked and crossed markets on ATSs in NMS stocks. FINRA also has a
similar Rule 6437 which applies to OTC equity securities.
\299\ See NYSE Rule 7.37(f)(2) (``the Exchange and members of
the Exchange shall reasonably avoid displaying, and shall not engage
in a pattern or practice of displaying, any quotations that lock or
cross the PBBO''), available at https://nyseguide.srorules.com; see
also supra note 286 (citing Nasdaq Rules 4702(a), 4758(a)(1)).
\300\ The requirements of Rule 610(e) of Regulation NMS, which
generally prohibit market centers from posting a displayed round-lot
order that would lock or cross a protected quote, are described
above (see supra section III.A.). The SRO rules which implement
these prohibitions include exceptions pursuant to current staff
guidance. (see https://www.sec.gov/divisions/marketreg/nmsfaq610-11.htm#sec5 at section 5: SRO Lock/Cross Rules.) The ISO exception
permits market participants to ``ship-and-post'' via ISO orders.
They can post an order on one side of the market that would lock or
cross the market, so long as they execute the quotes on the other
side of the market that they are locking/crossing via an intermarket
sweep order. For example, if a trader wants to post a bid at $10.00,
but there are offers at $9.99 and $10.00, normally the trader would
be prohibited from posting the bid at $10.00 because it would cross
the $9.99 offer quote and lock the $10.00 offer quote. However,
using this exception, the trader could post the bid at $10.00 while
using an ISO order to execute against the offers at $9.99 and
$10.00, which effectively unlocks/uncrosses the market. The self-
help exception applies to 610(e) in the same manner as the self-help
exception of Rule 611.
---------------------------------------------------------------------------
The Commission understands that, in practice, exchanges will
display odd-lot and round- lot orders that lock or cross a resting odd-
lot quote on another exchange, but will not display an odd-lot order
that locks or crosses a resting round-lot quote on another exchange,
even though such display would not violate the requirements of Rule
610(e), because Rule 610(e) only applies to the display of quotations
of round-lot size.\301\ Exchanges and national securities associations
are allowed to display odd-lot-sized orders that lock or cross another
odd-lot or round-lot-sized quotation. In effect, the practice of not
displaying an odd-lot quote that locks or crosses a round-lot quote
reflects an industry convention to preserve the prominence of resting
round-lot quotations.
---------------------------------------------------------------------------
\301\ See supra note 181.
---------------------------------------------------------------------------
The Commission understands that, in order to ensure compliance with
Rule 610(e), automated features to avoid posting quotes that would lock
or cross the market are usually incorporated directly into a trading
center's matching engine. When a trading center receives a limit order
to display, it compares the price of the limit order to the NBBO that
it calculates from real-time market data it obtains from the SIPs or
proprietary feeds. If the order would lock or cross the best opposite
side quote offered by other trading centers (the NBO for a buy limit
order and the NBB for a sell limit order), then the trading center may
take one of several actions. If the limit order is routable \302\ and
able to take liquidity,\303\ then the trading center may route the
order to execute against the NBB or NBO. Alternatively, the trading
center may display it at a price one tick away from the locking price.
Finally, the exchange may cancel the order. Exchanges typically permit
the broker-dealer routing the order to select the treatment it prefers
in the event that the order would lock or cross the market. These
automated processes help ensure compliance while providing members
flexibility in how their orders are handled.
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\302\ An order is ``routable'' if the order type selected by the
market participant who sent the order to the exchange is not an
order type for which the exchange has indicated that it will not re-
route the order to another trading center.
\303\ An order would be unable to take liquidity if the order
type selected by the market participant who sent the order to the
exchange is an order type which indicates that the order is not to
be executed if it would be the aggressive order of the trade. An
example of an order that is not able to take liquidity would be a
``Post-Only'' order. Typically, a Post-Only order with a marketable
limit price will either be displayed one tick away from the price
that would lock the market, or canceled, depending on the broker-
dealer's instructions. (See, e.g., Nasdaq, Post-Only Order (2026),
available at https://nasdaqtrader.com/content/ProductsServices/Trading/postonly_factsheet.pdf, describing the Post-Only order type
for Nasdaq).
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For example, one exchange has both Price-to-Comply and Price-to-
Display order types, which are designed to comply with Rule 610(e) in
different ways.\304\ If the limit price on a Price-to-Comply Order
would lock or cross a protected quote, then the order will be displayed
one tick lower than the current best offer (for buy orders) or one
increment higher than the current best bid (for sell orders). However,
the Price-to-Comply Order would also be ranked in the matching engine
with a non-displayed price equal to the current best offer (for buy
orders) or current best bid (for sell orders). In contrast, for a
Price-to-Display order, both the displayed price and the price the
order is ranked at in the matching engine would be one tick away from
the locked or crossed best bid (for sell orders) or best offer (for buy
orders). For Price-to-Comply orders, this exchange also offers a range
of options for what will happen to the order once the market unlocks.
The order may: (1) remain on the book with its non-displayed price and
time priority, but continue to be displayed one tick away from this
price (i.e., it would be displayed at the price assigned by the price-
slide mechanism before the market unlocked); (2) be canceled back to
the member; or (3) be automatically displayed at the order's
[[Page 36681]]
original limit price, but with a new time stamp.
---------------------------------------------------------------------------
\304\ For additional information on Price-to-Comply and Price-
to-Display Orders, see Nasdaq Texas Rules 4702(b)(1) and 4702(b)(2),
available at https://listingcenter.nasdaq.com/rulebook/nasdaqtx/rules/Nasdaq%20Texas%20Equity%204. These rules describe further
details about the behavior of Price-to-Comply and Price-to-Display
order types.
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Some exchanges, NMS Stock ATSs, and SDPs have special rules for
handling orders and executions when the NBBO is locked or crossed. The
Commission understands that most NMS Stock ATSs and SDPs have policies
that prevent orders from executing when the NBB and NBO are
crossed.\305\ Some NMS Stock ATSs and SDPs also have policies to not
execute orders when the NBB and NBO are locked.\306\ Exchanges and NMS
Stock ATSs may also have special rules for handling pegged \307\ orders
if the NBB and NBO become locked or crossed.\308\
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\305\ See Rosenblatt's 2025 US Equity Trading Guide, available
at https://www.rblt.com/market-structure-reports/rosenblatts-2025-us-equity-trading-guide (accessed through Market Structure Analysis
dataset).
\306\ Some NMS Stock ATSs or SDPs may execute orders during a
locked market or have policies that allow their subscribers the
option to specify whether or not their orders will execute during a
locked market. See id.
\307\ Exchanges and NMS Stock ATSs offer a number of order types
that are pegged to the NBB, NBO, or NBBO midpoint. For example, a
midpoint peg order might permit a non-displayed order to rest on the
limit order book with a limit price equal to the midpoint of the
NBBO. These orders automatically adjust their prices as the NBB and
NBO change. Market participants can also specify these pegged orders
to have an offset. For example, a market participant can submit a
primary peg buy order with an offset of 1 tick, which would result
in the order always being priced 1 tick more aggressively than the
NBB.
\308\ For example, some market centers may remove these orders
from the limit order book or cancel them while others may not
reprice them if the NBB and NBO become locked or crossed. See, e.g.,
Nasdaq Rule 4702 (Order Types) https://listingcenter.nasdaq.com/rulebook/nasdaq/rules/Nasdaq%20Equity%204; NYSE ARCA Rule 7.31-E
(Orders and Modifiers) https://nysearcaguide.srorules.com/rules/b44a1e347ccd1000af3290b11c2ac4f10258.
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Rule 605 requires trading centers and broker-dealers to classify
orders and compute statistics based on the NBB and NBO. However, a
crossed NBB and NBO may interfere with order classifications and with
the computing of certain statistics. When the NBBO is crossed for a
significant period of time, it raises serious questions whether the
quotes continue to provide a reliable benchmark for the statistical
measures included in the Rule. Therefore, the Commission has exempted
all orders from being included in Rule 605 reports if they reference a
NBBO that has been crossed for 30 seconds or more.\309\ For NBBOs that
are crossed for less than 30 seconds, staff guidance recommends that
the next-in-time uncrossed NBBO be used in place of the crossed NBBO
for computing Rule 605 reports.\310\
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\309\ See Letter from Annette L. Nazareth, Director, Division,
SEC, to Stuart J. Kaswell, Senior Vice President and General
Counsel, Securities Industry Association, dated March 12, 2001
(``SIA Exemption Letter''); see also 2026 Rule 605(b) Exemption,
supra note 235.
\310\ See Sec. & Exch. Comm'n, Div. of Mkt. Regul., Staff Legal
Bull. No. 12R (Revised), Frequently Asked Questions About Rule
11Ac1-5, Q. 7 (2001), available at: https://www.sec.gov/rules-regulations/staff-guidance/staff-legal-bulletins/slb-12r. The
guidance document's reference to the ``Consolidated BBO'' applies to
the NBBO. This guidance will be superseded on August 1, 2026. See
Rule 605 FAQs, supra note 235.
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c. Best Execution
Broker-dealers are subject to a duty of best execution, which
requires them to execute customers' trades at the most favorable terms
reasonably available under the circumstances. The best execution
obligation is independent from the requirements under Rule 611. A
broker's duty of best execution derives from common law agency
principles and fiduciary obligations, and is incorporated implicitly,
through judicial and Commission decisions, in the antifraud provisions
of the Federal securities laws.\311\ The duty of best execution
requires a broker-dealer to execute customers' (either retail or
institutional investors) trades at the best reasonably available price,
considering a non-exhaustive list of factors that may be relevant to
broker-dealers' best execution analysis.\312\ These factors may include
execution price, the size of the order, speed of execution, the trading
characteristics of the security involved, the availability of accurate
information affecting choices as to the most favorable market center
for execution and the availability of technological aids to process
such information, and the operational costs and difficulty associated
with achieving an execution in a particular market center.\313\ The
importance of each factor may differ depending on whether the order is
retail or institutional and also due to market conditions and order
characteristics.
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\311\ See Order Execution Obligations Adopting release at 48322.
The Commission has not adopted its own rule governing a broker-
dealer's legal duty of best execution.
\312\ See Newton v. Merrill, Lynch, Pierce, Fenner & Smith,
Inc., 135 F.3d 266, 270 (3d Cir. 1998); see also Kurz v. Fidelity
Mgmt. & Rsch. Co., 556 F.3d 639, 640 (7th Cir. 2009).
\313\ See Order Execution and Routing Practice Release at 75418;
NMS Adopting Release at 37538 & n. 341. The factors that are
important to the best execution decision may vary based on the type
of customer, market conditions, and order characteristics. For
example, execution price may be an important factor for a marketable
retail order but may not be as important for a large, institutional
order. See, e.g., First TTR Roundtable Transcript at 236 (Mehmet
Kinak, T. Rowe Price) (discussing best execution for institutional
orders).
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FINRA's best execution rule (FINRA Rule 5310) requires that a
member (i.e., a registered broker-dealer) and persons associated with a
member use reasonable diligence to ascertain the best market for the
subject security and buy or sell in such market so that the resultant
price to the customer is as favorable as possible under prevailing
market conditions in any transaction for or with a customer or customer
of another broker-dealer (e.g., wholesalers handling retail
orders).\314\ FINRA Rule 5310 applies when the member acts as agent for
the account of its customer as well as when it executes a transaction
as a principal.\315\ FINRA's rule lists a set of non-exclusive factors
that will be considered in determining whether a member has used
reasonable diligence: (i) the character of the market for the security
(e.g., price, volatility, relative liquidity, and pressure on available
communications); (ii) the size and type of transaction; (iii) the
number of markets checked; (iv) accessibility of the quotation; and (v)
the terms and conditions of the order which result in the transaction,
as communicated to the member and persons associated with the
member.\316\
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\314\ See FINRA Rule 5310(a)(1).
\315\ See FINRA Rule 5310(e). FINRA Rule 5310 also addresses two
situations where a member's best execution obligation is modified or
no longer applicable: (i) if a broker-dealer ``receives an
unsolicited instruction from a customer to route that customer's
order to a particular market for execution, the member is not
required to make a best execution determination beyond the
customer's specific instruction'' and (ii) ``when another broker-
dealer is simply executing a customer order against the member's
quote.'' FINRA Rules 5310.08, 5310.04.
\316\ See FINRA Rule 5310(a)(1).
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FINRA's best execution rule and guidance addresses issues
associated with payment for order flow. Some retail brokers maintain
arrangements involving payment for order flow from wholesalers.
Wholesalers internalize a significant portion of retail orders
purchased via payment for order flow. FINRA's best execution guidance
states that firms that provide payment for order flow for the
opportunity to internalize customer orders cannot allow such payments
to interfere with their best execution obligations.\317\ For example,
inducements such as payment for order flow and internalization may not
be taken into account in analyzing market quality or determining where
to route a customer order.\318\
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\317\ See FINRA Regul. Notice No. 21-23, Best Execution &
Payment for Order Flow 4 (2023), https://www.finra.org/rules-guidance/notices/21-23.
\318\ Id. FINRA's guidance stated that ``the possibility of
obtaining price improvement is a heightened consideration when a
broker-dealer receives payment for order flow.'' Id. at 3-4.
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FINRA Rule 5310 requires broker-dealers to conduct at least
quarterly reviews of the quality of execution they obtain.\319\
Introducing brokers perform
[[Page 36682]]
best execution reviews by evaluating the execution quality achieved by
executing brokers to which they route their customers' orders.
Introducing brokers may rely on the best execution review processes of
their executing brokers and use these to evaluate the execution quality
of orders by comparing execution statistics of executing brokers with
which the introducing broker has a relationship.\320\ Executing brokers
review execution quality by comparing execution statistics of
executions received given particular execution methods, e.g., routing
to a particular market center or internalization. Some brokers utilize
independent third-party TCA providers to produce quantitative
execution-quality statistics to supplement their execution-quality
reviews.
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\319\ See FINRA Rule 5310.09(a).
\320\ Broker-dealers (including introducing brokers) that route
to clearing or executing brokers on an agency basis may rely on the
best execution review of their clearing firm or executing broker-
dealers. See FINRA Rule 5310.09(c). The clearing firm or executing
broker-dealer must fully disclose the statistical results and
rationale of the review, and the routing broker-dealer must
periodically review how the review is conducted and the results of
the review.
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d. Other Relevant Commission Rulemakings
The Commission has adopted new rules that will impact market
practices in the baseline for the proposed amendments. However, as
discussed in more detail below, some provisions of these rules have not
been fully implemented, and so they have not yet affected market
practices. As a result, the data used to measure the baseline for the
proposed amendments reflect the regulatory structure in place prior to
the implementation of some provisions of these rules. This section will
discuss the status of the implementation of these rules and provide an
assessment of the potential effects that the implementation can have on
the baseline estimations.
We discuss three rules with such partial implementations. First, in
2020, the Commission adopted a new rule and amended existing rules to
establish a new infrastructure for consolidated market data (``MDI
Rules'').\321\ Second, in 2024 the Commission adopted amendments to the
disclosure requirements of Rule 605 of Regulation NMS.\322\ Third, in
2024 the Commission adopted amendments to certain rules under
Regulation NMS to add an additional minimum pricing increment for the
quoting of certain NMS stocks, reduce the access fee caps for protected
quotations of trading centers, increase the transparency of exchange
fees and rebates, and accelerate the implementation of rules that will
make information about the market's best priced, smaller-sized orders
publicly available.\323\ Because key components of these rulemakings
are not yet operative, their full effects are not reflected in the
current baseline.
---------------------------------------------------------------------------
\321\ See Market Data Infrastructure Adopting Release.
\322\ See Rule 605 Amendments Adopting Release.
\323\ See 2024 Regulation NMS Amendments.
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i. Market Data Infrastructure Rules
Consolidated market data are made widely available to investors
through the national market system, a system set forth by Congress in
section 11A of the Exchange Act \324\ and facilitated by the Commission
in Regulation NMS.\325\ Market data are collected by exclusive
SIPs,\326\ which consolidate that information and disseminate an NBBO
and last sale information. For quotation information, only the 17
national securities exchanges that currently trade NMS stocks provide
quotation information to the SIPs for dissemination in consolidated
market data.\327\ FINRA has the only SRO display-only facility (the
ADF).\328\ No broker-dealer, however, currently uses it to display
quotations in NMS stocks in consolidated market data.\329\ Disseminated
quotation information includes each exchange's current highest bid and
lowest offer and the shares available at those prices, as well as the
NBBO. For transaction information, currently all national securities
exchanges that trade NMS stocks, as well as FINRA, provide real-time
transaction information to the SIPs for dissemination in consolidated
market data. Such information includes the symbol, price, size, and
exchange of the transaction, and it includes odd-lot transactions.
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\324\ See 15 U.S.C. 78k-1.
\325\ 17 CFR 242.600 through 242.614.
\326\ See Market Data Infrastructure Adopting Release, 86 FR at
18598-99 (describing that the exclusive SIPs, among other things,
disseminate core data, which currently consist of: (1) the price,
size, and exchange of the last sale; (2) each exchange's current
highest bid and lowest offer and the shares available at those
prices; and (3) the NBBO). A securities information processor
(``SIP'') is defined in section 3(a)(22)(A) of the Exchange Act. See
15 U.S.C. 78c(a)(22)(A). Further, an ``exclusive processor'' (also
known as an exclusive SIP) is defined in section 3(a)(22)(B) of the
Exchange Act. See 15 U.S.C. 78c(a)(22)(B).
\327\ See supra note 36.
\328\ See supra note 26.
\329\ See supra note 90.
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Currently, information on all odd-lot orders inside the NBBO and
information about quotes that are outside of an exchange's best bid and
best offer (i.e., depth of book information) are available only to
investors who subscribe to the proprietary data feeds of all
exchanges.\330\ The same is true for comprehensive odd-lot and depth of
book information. Among other things, the MDI Rules update and expand
the content of consolidated market data to include: (1) certain odd-lot
information; \331\ (2) information about certain orders that are
outside of an exchange's best bid and best offer (i.e., certain depth
of book data); \332\ and (3) information about orders that are
participating in opening, closing, and other auctions.\333\
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\330\ The exclusive SIPs currently disseminate information on
the best odd-lot order to buy and the best odd-lot order to sell
(``BOLO''). The best odd-lot order to buy means the highest priced
odd-lot order to buy that is priced higher than the national best
bid, and the best odd-lot order to sell means the lowest priced odd-
lot order to sell that is priced lower than the national best offer.
The 2024 Regulation NMS Amendments adopted a requirement for the
exclusive SIPs to disseminate information on the BOLO starting in
May 2026. See 2024 Regulation NMS Amendments at 81676-81. The
exclusive SIPs began disseminating BOLO information on April 27,
2026. See UTP Vendor Alert #2026--5: UTP Data Service (UQDF) Updated
Specs Related to Dissemination of Odd-Lot data, NasdaqTrader (Feb.
2, 2026), https://www.nasdaqtrader.com/TraderNews.aspx?id=UTP2026-05. The 2024 Regulation NMS Amendments also adopted a requirement
for the exclusive SIPs to disseminate odd-lot information as defined
under the MDI Rules starting in May 2026. See 2024 Regulation NMS
Amendments at 81674-76, 81681. However, on Jan. 15, 2026, the
Commission granted an exemptive relief request delaying the
requirement for the exclusive SIPs to begin disseminating odd-lot
information until May 2028. See Securities Exchange Act Release No.
104612 (Jan. 15, 2026), 91 FR 12577 (Jan. 21, 2026).
\331\ See 17 CFR 242.600(b)(69); Market Data Infrastructure
Adopting Release at 18613.
\332\ See Market Data Infrastructure Adopting Release at 18602.
\333\ See id. at 18630.
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The MDI Rules also introduce a decentralized consolidation model
under which competing consolidators, rather than the existing exclusive
SIPs, will collect, consolidate, and disseminate certain NMS
information.\334\ These competing consolidators are not required to
offer a product containing all elements of consolidated market data,
but are able to develop the consolidated market data products that
their subscribers demand.\335\ This model is intended to promote
competition in how consolidated market data products are created and
delivered.
---------------------------------------------------------------------------
\334\ See id. at 18637.
\335\ See id. at 18603-4, 18671-72.
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The MDI Rules also introduced a four-tiered definition of round lot
that is tied to a stock's average closing price during the Evaluation
Period.\336\ For stocks
[[Page 36683]]
with prices greater than $250, a round lot is defined as consisting of
between 1 and 40 shares, depending on the specific price tier.\337\ The
MDI round-lot rules were implemented on November 3, 2025.\338\ The
compliance date for the SIPs to collect, consolidate, and disseminate
the odd-lot information required by the MDI Rules is May 1, 2028.\339\
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\336\ Round lots will be updated every six months, with the
round lot determined by the stock's average price with a one-month
lag--i.e., a stock's round lot is updated in May of every year using
its average stock price in March, and the round lot is updated again
in November using its average stock price in September. See 2024
Regulation NMS Amendments at 81699-700; 17 CFR 242.600(b)(93)(iv).
\337\ See Market Data Infrastructure Adopting Release at 18602.
The Commission adopted a four-tiered definition of round lot: 100
shares for stocks priced $250.00 or less per share and for new NMS
stocks, 40 shares for stocks priced $250.01 to $1,000.00 per share,
10 shares for stocks priced $1,000.01 to $10,000.00 per share, and 1
share for stocks priced $10,000.01 or more per share. See 17 CFR
242.600(b)(93)(i) through (ii).
\338\ See 2024 Regulation NMS Amendments at 81681.
\339\ See supra note 330.
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In the Market Data Infrastructure Adopting Release, the Commission
established a transition period for implementing the remaining
requirements of the MDI Rules.\340\ The starting point will be the
Commission's approval of the plan amendment(s) required by Rule 614(e)
(``MDI Plan Amendments'').\341\ After approval, the next step will be a
180-day development period, during which competing consolidators can
register with the Commission.\342\ Based on the times provided in the
transition plan for implementation of the MDI Rules, the Commission
estimated that the full implementation of the MDI Rules will occur at
least two years after the Commission's approval of the MDI Plan
Amendments.\343\
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\340\ See Market Data Infrastructure Adopting Release at 18699-
18701.
\341\ See id. at 18699.
\342\ See id. at 18699-18700.
\343\ See id. at 18700-18701.
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The Operating Committees of the CTA/CQ Plan and UTP Plan filed the
MDI Plan Amendments on November 5, 2021.\344\ The Commission
disapproved the proposed amendments on September 21, 2022.\345\ As a
result, the participants in the effective national market system
plan(s) will need to develop and file new proposed amendments, as
required by Rule 614(e), before the implementation period prescribed by
the phased transition plan can commence. Because the implementation of
the MDI Rules has been delayed, the end date of the implementation
period cannot be estimated with greater certainty.
---------------------------------------------------------------------------
\344\ The Operating Committees of CTA Plan and UTP Plan filed
proposed amendments on Nov. 5, 2021, which were published for
comment in the Federal Register. See Securities Exchange Act Release
Nos. 93615 (Nov. 19, 2021), 86 FR 67800 (Nov. 29, 2021); 93625 (Nov.
19, 2021), 86 FR 67517 (Nov. 26, 2021); 93620 (Nov. 19, 2021), 86 FR
67541 (Nov. 26, 2021); 93618 (Nov. 19, 2021), 86 FR 67562 (Nov. 26,
2021).
\345\ See Securities Exchange Act Release Nos. 95848 (Sept. 21,
2022), 87 FR 58544 (Sept. 27, 2022); 95849 (Sept. 21, 2022), 87 FR
58592 (Sept. 27, 2022); 95850 (Sept. 21, 2022), 87 FR 58560 (Sept.
27, 2022); 95851 (Sept. 21, 2022), 87 FR 58613 (Sept. 27, 2022).
---------------------------------------------------------------------------
Given that some provisions of the MDI Rules have not yet been
implemented, they have not affected market practice and therefore data
that would be required for a quantitative analysis of a baseline that
includes the effects of the MDI Rules are not available. It is possible
that the baseline (and therefore the economic effects relative to the
baseline) could be different once the MDI Rules are implemented. The
following discussion reflects the Commission's assessment of the
anticipated economic effects of the unimplemented MDI Rules described
in the Market Data Infrastructure Adopting Release as they relate to
the baseline for the adoption of these amendments.\346\
---------------------------------------------------------------------------
\346\ See Market Data Infrastructure Adopting Release at 18741-
18799.
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The MDI Rules may result in a higher number of odd-lot trades, as
the inclusion of odd-lot quotes that may be priced better than the
current NBBO in consolidated market data may attract more trading
interest from market participants that did not have access to this
information prior to the MDI Rules.\347\ However, the magnitude of this
effect depends on the extent to which market participants who rely
solely on SIP data and lack information on odd-lot quotes choose to
receive the odd-lot information and trade based on it. The Commission
states in the Market Data Infrastructure Adopting Release that it
believes it is not possible to observe this willingness to trade with
existing market data.\348\
---------------------------------------------------------------------------
\347\ See id. at 18754.
\348\ See id.
---------------------------------------------------------------------------
The MDI Rules may have implications for broker-dealers' order
routing practices. For those market participants that rely solely on
SIP data for their routing decisions and that choose to receive the
expanded set of consolidated market data, the Commission anticipated
that the additional information contained in consolidated market data
would allow them to make more informed order routing decisions.\349\
This in turn would help facilitate best execution, which would increase
execution quality.\350\ Broker-dealers may choose to receive market
data from competing consolidators, who may offer different consolidated
market data products at different prices or at different latencies, or
with different amounts of data content.\351\ Competing consolidators
will be required to disclose information about their consolidated
market data products, including the services they will offer, the
prices for such services, and performance metrics, which will assist
broker-dealers in selecting an appropriate competing consolidator.\352\
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\349\ The Commission states in the Market Data Infrastructure
Adopting Release that it believes that competition among
consolidators will support high quality consolidated market data
(see id. at 18661). Furthermore, while competing consolidators are
not required to offer a product containing all elements of
consolidated market data, the Commission states that it believes
that one or more competing consolidators will be incentivized to
offer a consolidated market product containing all data elements
(see id. at 18752).
\350\ See id. at 18725.
\351\ See id. at 18606.
\352\ See id.
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The option to receive consolidated market data from a competing
consolidator, or produce consolidated market data as a self-
aggregator,\353\ is expected to form a reasonable alternative to the
use of exchange proprietary data feeds, with potentially lower
costs.\354\ When this happens, the Commission believes that exchanges
may respond by lowering their fees for connectivity and proprietary
data feeds.\355\
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\353\ Under the MDI Rules, a ``self-aggregator'' is a ``broker-
dealer, exchange, national securities association, or investment
adviser registered with the Commission'' that will obtain data
necessary to construct consolidated market data from exchanges and
aggregate it into consolidated market data only for its own use (see
id. at 18604).
\354\ See id., section V.C.4.a.
\355\ Id.
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The MDI Rules may also result in differences in the baseline
competitive standing among different trading venues for several
reasons. First, the Commission anticipated that adding information on
odd-lot quotes priced at or better than the NBBO to expanded core data
may cause changes to order flow as market participants take advantage
of newly visible quotes.\356\ However, the Commission stated that it
was uncertain about the magnitude of this effect.\357\ To the extent
that it occurs, a change in the flow of orders across trading venues
may result in differences in the competitive baseline in the market for
trading services.
---------------------------------------------------------------------------
\356\ See id. at 18596, 18754.
\357\ See id. at 18754.
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Where implementation of the above-described MDI Rules may affect
certain baseline figures, the description of the baseline below notes
those effects.
[[Page 36684]]
ii. Amendments to Rule 605
The Commission amended Rule 605 on March 6, 2024, and the
requirements of that rule are part of the baseline considered
here.\358\ With certain exceptions, the amendments to Rule 605 have a
compliance date of August 1, 2026.\359\ The following discussion
reflects the Commission's assessment of the anticipated economic
effects of the amendments to Rule 605 described in the Rule 605
Amendments, as they relate to the baseline for these proposed
amendments. Specific interactions between the expected economic effects
of the amendments to Rule 605 and those of rules proposed herein will
be discussed in detail in a later section.\360\
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\358\ See Rule 605 Amendments Adopting Release.
\359\ See Securities Exchange Act Release No. 104147 (Sept. 30,
2025), 90 FR 47552 (Oct. 2, 2025) (``Rule 605 Amendments
Extension''). On August 1, 2026, market centers, brokers, and
dealers subject to Rule 605 will need to begin collecting the
information for the execution quality reports required under the
Rule 605 Amendments. Reporting entities will then need to make their
detailed and summary reports covering data from August 2026 publicly
available by the end of September 2026. See 17 CFR 242.605(a)(6). As
an exception, after odd-lot order information sufficient to
calculate best available displayed price is made available pursuant
to an effective NMS plan, market centers, brokers and dealers will
have six months to begin including price improvement statistics
relative to best available displayed price in their Rule 605
reports. See Rule 605 Amendments Adopting Release at 26497. The 2024
Regulation NMS Amendments set the compliance date for every national
securities exchange on which an NMS stock is traded and national
securities association to make available to the exclusive SIPs all
data necessary to generate odd-lot information, and for the SIPs to
collect, consolidate, and disseminate odd-lot information, including
the BOLO, to the first business day of May 2026. See 2024 Regulation
NMS Amendments, 89 FR at 81681. Although the dissemination of odd-
lot information was delayed until May 2028, the SIPs began
disseminating the BOLO on Apr 27, 2026. See supra note 330.
Therefore, the compliance date for including price improvement
statistics relative to the best available displayed price in Rule
605 reports remains six months after the first business day in May
2026 (i.e., in November 2026).
\360\ See infra section VI.C.1.b.
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Rule 605 requires disclosures about execution quality for order
executions in NMS stocks.\361\ The Rule 605 amendments modified
disclosure requirements in several ways. The amendments expanded the
scope of reporting entities subject to the rule to include larger
broker-dealers,\362\ in addition to market centers.\363\ The amendments
also enhanced the accessibility of the reported execution quality
statistics by requiring all reporting entities to make a summary report
available.\364\
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\361\ 17 CFR 242.605.
\362\ The term ``larger broker-dealer'' refers to a broker-
dealer that meets or exceeds the ``customer account threshold,'' as
defined in Rule 605(a)(7). A larger broker-dealer introduces or
carries 100,000 or more customer accounts through which transactions
are effected for the purchase or sale of NMS stocks. See 17 CFR
242.605(a)(7).
\363\ Regulation NMS defines the term ``market center'' to mean
any exchange market maker, OTC market maker, ATS, national
securities exchange, or national securities association. See 17 CFR
242.600(b)(55).
\364\ See Rule 605 Amendments Adopting Release at 26428.
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The Rule 605 Amendments also included amendments to the information
required to be reported under Rule 605. Among other requirements, the
amendments to Rule 605 added requirements related to the reporting of
price improvement statistics relative to the best available displayed
price, which incorporates information about the best-priced odd-lot
orders.\365\ These price improvement statistics will not be required to
be reported until six months after odd-lot order information needed to
calculate the best available displayed price is made available pursuant
to an effective national market system plan.\366\
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\365\ See 17 CFR 242.600(b)(14) (defining the ``best available
displayed price'' as, with respect to an order to buy, the lower of:
the national best offer at the time of order receipt or the price of
the best odd-lot order to sell at the time of order receipt as
disseminated pursuant to an effective transaction reporting plan or
effective national market system plan; and, with respect to an order
to sell, the higher of: the national best bid at the time of order
receipt or the price of the best odd-lot order to buy at the time of
order receipt as disseminated pursuant to an effective transaction
reporting plan or effective national market system plan. With
respect to a midpoint-or-better limit order, the best available
displayed price shall be determined at the time such order becomes
executable rather than the time of order receipt) and 17 CFR
242.605(a)(1)(ii)(M)-(Q).
\366\ The compliance date for including price improvement
statistics relative to the best available displayed price in Rule
605 reports is November 2026. See supra note 359.
---------------------------------------------------------------------------
Additionally, the amendments to Rule 605 require the separate
reporting of non-marketable limit orders that are priced at the
midpoint of the NBBO or better (``midpoint-or-better NMLOs''), and
additionally require the reporting of information about the effective
spread and the price improvement offered to these orders.\367\ An
analysis by the Commission in the Rule 605 Amendments indicates that a
high percentage of midpoint-or-better NMLO share volume is submitted
with IOC designations as compared to other NMLOs. This confirms that
many of these orders are submitted by traders with the intention of
executing immediately against hidden or odd-lot inside-the-quote
liquidity, and that these orders tend to have different execution
characteristics than other types of NMLOs.\368\ Therefore, the
Commission stated that market participants will benefit from an
increase in transparency by the separate reporting of these orders,
along with the required reporting of certain execution quality
statistics that measure the cost of executing immediately, such as
effective spreads.\369\
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\367\ See 17 CFR 242.600(b)(57) (defining ``midpoint-or-better
limit orders'') and 17 CFR 242.605(a)(1)(ii).
\368\ See Rule 605 Amendments Adopting Release at 26528.
\369\ See Rule 605 Amendments Adopting Release at 26556-26557,
26568.
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Furthermore, the amendments to Rule 605 require the reporting of
information regarding the extent to which orders were executed at
prices at or better than the quote for share quantities greater than
the displayed size at the quote, i.e., ``size improvement.'' This
information includes (1) a benchmark metric that measures the displayed
size at the time of order receipt, which can then be compared to the
number of submitted shares to determine the extent to which a market
center or broker-dealer handled orders that exceeded available
displayed depth,\370\ and (2) for orders that are larger than available
displayed depth, the number of shares that received size
improvement.\371\
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\370\ See 17 CFR 242.600(b)(72) (defining the ``order size
benchmark'') and 17 CFR 242.605(a)(1)(ii)(R).
\371\ See 17 CFR 242.605(a)(1)(ii)(S), requiring the reporting
of ``the sum of, for each execution of a covered order, the greater
of: the total number of shares executed with price improvement plus
the total number of shares executed at the quote minus the order
size benchmark, or zero.'' The ``total number of shares executed
with price improvement plus the total number of shares executed at
the quote minus the order size benchmark'' (``net size
improvement'') will only be a strictly positive number for those
orders that are both eligible to receive size improvement and
actually receive size improvement, and thus is equivalent to a
measure of shares that are eligible to and that received size
improvement. See Rule 605 Amendments Adopting Release at 26428
n.1544.
---------------------------------------------------------------------------
The amendments to Rule 605 also modified the definition of order
size categories. Previously, order size categories were based on
numbers of shares, with orders less than 100 shares excluded. Under the
amendments order size categories are now based on a notional dollar
value range, along with an indication of whether the category reflects
orders that were for an odd-lot, at least a round lot, or less than a
share.\372\
---------------------------------------------------------------------------
\372\ See 17 CFR 242.600(b)(18).
---------------------------------------------------------------------------
In the Rule 605 Amendments, the Commission stated that the
amendments to Rule 605 will promote increased transparency of order
execution quality, particularly for larger broker-dealers who were not
required to disclose execution quality information under preexisting
Rule 605, but also for market centers, whose execution quality
information will be more relevant and
[[Page 36685]]
easier to access because of improvements to existing Rule 605
disclosure requirements.\373\ The Commission stated in the Rule 605
Amendments Adopting Release that this increase in transparency is
expected to increase the extent to which market centers and broker-
dealers compete on the basis of execution quality, and produce
improvements in execution quality.\374\ The Commission also stated that
the amendments to Rule 605 will result in initial and ongoing
compliance costs, the majority of which will be related to expanding
the scope of reporting entities to include larger broker-dealers, but a
significant portion of which will result from the need for market
centers to update their systems to process and store the data necessary
to prepare the amended reports.\375\
---------------------------------------------------------------------------
\373\ See Rule 605 Amendments Adopting Release at 26543.
\374\ See id. at 26543-26544.
\375\ See id. at 26579-26580.
---------------------------------------------------------------------------
Where implementation of the above-described Rule 605 Amendments may
affect certain numbers in the baseline, the description of the baseline
below notes those effects.
iii. Changes to Regulation NMS Tick Sizes, Access Fees, and
Transparency of Better Priced Orders
In December 2024, the Commission adopted amendments to Regulation
NMS Rule 612 affecting minimum pricing increments, or tick sizes, and
to Rule 610 which affects the maximum access fee that exchanges can
charge to access protected quotations.\376\ The Commission also
accelerated elements of the MDI rules to accelerate the dissemination
of odd-lot information in the SIP data.\377\ While not yet implemented,
some of the effects associated with these amendments could interact
with the analysis of elements of this proposal. The effects of these
rules potentially interact with the analysis of the proposed rescission
of Rules 611 and 610(e).
---------------------------------------------------------------------------
\376\ Implementation of the reduction in the tick size and
access fee cap has been delayed until November 2026. See supra note
76.
\377\ The dissemination of MDI odd-lot information in the SIP
data has been delayed until May 2028. However, the SIPs began
disseminating information on the BOLO on Apr 27, 2026. See supra
note 330.
---------------------------------------------------------------------------
The amendments to Rule 612 reduce the minimum pricing increment, or
tick size, from $0.01 to $0.005 for some stocks with consistently
narrow quoted spreads. They also reduce the access fee cap, i.e., the
fee which exchanges charge to access protected quotes, from $0.003 per
share to $0.001 per share. Combined, the primary anticipated effect of
these rule changes is to reduce transaction costs, via lower quoted and
effective spreads. Additionally, it was anticipated that these rules
could potentially reduce transaction costs for orders internalized by
wholesalers off exchange by improving the baseline reference point that
wholesalers provide price improvement against as they compete for order
flow. These amendments also effectively make existing Rule 611 stricter
by narrowing the price range of permissible execution prices.
The amendments adopted in December 2024 also provide for the
release of information about odd-lot orders in SIP data. Specifically,
the amendments accelerate the implementation of provisions of the MDI
Rules that provide for odd-lot information to be disseminated with SIP
data.\378\ They also require that the SIPs disseminate information on
the BOLO, which was implemented on April 27, 2026. The primary economic
effect of this aspect of the December 2024 amendments was to provide
investors an additional standard benchmark to gauge execution quality,
particularly for smaller or odd-lot orders.
---------------------------------------------------------------------------
\378\ See id and accompanying text.
---------------------------------------------------------------------------
These amendments have not yet been fully implemented, and their
implementation could affect the baseline analysis in a number of ways.
First, the reduction in the minimum pricing increment will create a
finer grid of allowable price points and thereby increase the
opportunities for markets to lock or cross. Thus, the analysis
presented here may understate the prevalence of locked and crossed
markets in a world where these amendments are fully implemented.
Second, the reduction in the access fee cap will put upward pressure on
quoted spreads (because the access fee funds rebates for liquidity
provision, and a reduction in the rebate may require liquidity
suppliers to quote wider spreads in order to cover their costs) which
will reduce the likelihood that markets lock or cross. Additionally,
dissemination of odd-lot information in the SIPs may reduce trade-
throughs by making market participants more aware of better-priced-odd-
lot quotes. Thus, the baseline herein may overstate the prevalence of
trade-throughs relative to what might occur once odd-lot information is
disseminated in the SIPs.\379\
---------------------------------------------------------------------------
\379\ Although the BOLO was implemented on April 27, 2026, the
analysis in this release uses data from before the implementation.
Therefore, it may overstate the prevalence of trade-through rates
relative to what occurred after the implementation of the BOLO, when
market participants would be more aware of the best-priced-odd-lot
quotes included in the SIPs. The inclusion of odd-lot information in
the SIP beginning in May 2028 may result in a further reduction in
odd-lot trade-throughs because market participants would be more
aware of odd-lot quotes priced between the BOLO and the NBBO.
---------------------------------------------------------------------------
2. Economic Effects of Current Rule 611
Rule 611 affects how orders are handled and executed in today's
equity markets. This section discusses the main economic effects of
current Rule 611, including its effects on institutional and retail
order handling and execution, liquidity provision, and other major
economic effects of the Rule.
a. Effects on Institutional Orders
Rule 611 can affect how the orders of institutional investors are
handled and executed. Institutional investors typically trade in sizes
that exceed immediately available liquidity, so their larger ``parent''
orders are purposefully split into smaller ``child'' orders and traded
gradually to mitigate slippage--the adverse movement in prices that
occurs while the residual balance is being executed. In practice,
brokers employ algorithms that stage these child orders across venues
and time intervals, with the goal of minimizing the total transaction
cost for the parent order rather than trying to obtain the best
available price for every single child order.\380\ Brokers and clients
evaluate transaction costs for institutional order outcomes at the
parent order or portfolio level rather than the child order level.\381\
Rule 611 may increase information leakage and the slippage faced by
institutional investor parent orders because routing constraints under
Rule611 may reveal trading intentions more quickly or broadly than
institutional investors would prefer, thereby affecting the overall
execution quality for large orders.
---------------------------------------------------------------------------
\380\ See, e.g. Tyler Beason & Sunil Wahal, The Anatomy of
Trading Algorithms (working paper Sept. 27, 2020) available at
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3497001
(retrieved from SSRN Elsevier database).
\381\ See, e.g., Andrea Frazzini, et al., Trading Costs (working
paper Apr. 7, 2018) available at https://ssrn.com/abstract=3229719
(retrieved from SSRN Elsevier database).
---------------------------------------------------------------------------
Institutional child orders must execute at, or at prices better
than, the protected quotes, or fit within one of Rule 611's exceptions.
Price protection provided by Rule 611 may contribute to the increased
slippage of institutional orders because of the requirement for child
orders to execute against the protected quotes across many exchanges
before accessing deeper liquidity in the order book. These child order
executions may help alert liquidity providers to the presence of a
larger parent order that is in the process of
[[Page 36686]]
being ``worked'' by the broker-dealer (i.e., broken up by the broker-
dealer into smaller child orders for execution). This may allow
liquidity providers to withdraw or revise their quotes before the
larger parent order has finished executing, which can increase the
execution costs for the remaining unexecuted portion of the parent
order.\382\ In summary, the requirements of Rule 611 may force
institutional orders to interact with small, dispersed displayed sizes
prior to reaching larger liquidity pools, thereby increasing the
cumulative execution costs for the parent order.
---------------------------------------------------------------------------
\382\ The movement of quotes in an adverse direction after a
trade occurs (up for buy orders and down for sell orders) is often
referred to as ``price impact'', which is measured as the difference
between the midpoint of the NBBO at the time of the trade and the
midpoint of the NBBO at a specified time (e.g., one minute or five
minutes) after the time of the trade.
---------------------------------------------------------------------------
Rule 611 may also limit the options of institutional investors
seeking block crosses at prices outside the NBBO.\383\ The displayed
liquidity at the NBBO is often insufficient to fully execute the size
of the block order. A block cross cannot occur at a price outside of
the protected quotes unless an exception to Rule 611 applies. In such
cases, trading venues may cancel or decline crosses at prices outside
protected quotes, or an executing broker may initiate an ISO sweep to
remove protected quotes and then complete the block at the desired
price. If a trading venue cannot execute a block cross, it may result
in a large block order having to either ``walk the book'' on multiple
exchanges to access sufficient depth to execute the order, or, as
discussed above, be executed over a longer period of time through a
series of child orders, both of which can increase transaction costs,
adverse selection risk, and slippage.
---------------------------------------------------------------------------
\383\ Rule 611 does not impact block crosses at prices at or
inside the NBBO, such as the NBBO midpoint. However, a counterparty
may not always be willing to execute a block cross at prices inside
the NBBO and instead may require a price concession to execute a
large trade, resulting in an execution price outside the NBBO. The
price concession to execute the block cross may be less than the
cost of executing the trade against the liquidity available on
exchanges (if sufficient liquidity is available). See e.g., Donald
B. Keim & Ananth Madhavan, The Upstairs Market for Large-Block
Transactions: Analysis and Measurement of Price Effects, 9 Rev. Fin.
Stud. 1 (Jan. 1996); see also First TTR Roundtable Transcript at 207
(Debbie Toennies, J.P. Morgan), at 255 (Vlad Khandros, OneChronos)
(discussing Rule 611 and block trades).
---------------------------------------------------------------------------
However, Rule 611 contains exceptions that aid in the execution of
institutional orders, including a benchmark-priced exception.\384\ This
exception allows institutions to execute orders at prices outside of
the protected quotes if the execution price was not based, directly or
indirectly, on the quoted price of an NMS stock at the time of
execution and if the material terms were not reasonably determinable at
the time the commitment to execute the order was made.\385\ This allows
institutional investors to execute large block trades that are based on
benchmark prices, such as the time-weighted average price (``TWAP'') or
VWAP of previous trades, even if these derived prices fall outside the
protected quote.
---------------------------------------------------------------------------
\384\ See supra section II.A.2. for further discussions on the
exceptions to Rule 611.
\385\ For further discussions on the benchmark-priced exception
for Rule 611 see NMS Adopting Release at 37536, and Division of
Trading and Markets: Responses to Frequently Asked Questions
Concerning Rule 611 and Rule 610 of Regulation NMS questions 3.07
and 3.08 (available at https://www.sec.gov/divisions/marketreg/nmsfaq610-11.htm).
---------------------------------------------------------------------------
The ISO order exception to Rule 611 also aids in the execution of
institutional orders. It enables a broker to use multiple child orders
to simultaneously sweep protected quotes across venues and immediately
``walk the book'' to execute more size at the target venue at prices
outside the protected quotes.\386\ While ISOs can facilitate access to
deeper book liquidity, clusters of ISO child orders may also
potentially increase the immediate price impact and slippage for the
parent order, which may raise the execution costs compared to if the
whole parent order (or a larger portion of it) were able to be executed
outside the NBBO.\387\
---------------------------------------------------------------------------
\386\ See supra section II.A.2. for further discussions.
\387\ See Sugato Chakravarty, et al., Clean Sweep: Informed
Trading Through Intermarket Sweep Orders, 47 J. Fin. & Quantitative
Analysis 415 (2012). See also Jane Street Letter at 2 (stating that
trade-through protection ``is impactful for larger-sized equities
orders where sweep requirements may result in executions across
multiple venues with varying fee structures and latencies,
potentially leading to worse overall execution quality than
alternative approaches'').
---------------------------------------------------------------------------
As discussed in detail below, Rule 611 may be one of the factors
contributing to the proliferation of exchanges and the heightened
fragmentation of displayed liquidity.\388\ This may indirectly affect
the execution of institutional orders because, as the fragmentation of
displayed liquidity increases, institutional child orders face more
venues with small top-of-book sizes, which raises the complexity and
cost of routing to meet the requirements of Rule 611. This greater
dispersion across venues can make institutional trading intentions
easier to detect, which can increase slippage and hurt the overall
execution quality of the parent order.
---------------------------------------------------------------------------
\388\ See infra section VI.B.4.g. for further discussion on the
fragmentation of displayed liquidity.
---------------------------------------------------------------------------
Additionally, as discussed in detail below, Rule 611 may be one of
the factors contributing to brokers connecting and purchasing market
data from exchanges they would otherwise eschew, thereby raising fixed
costs for market-data subscriptions, connectivity, and compliance
tools.\389\ Ultimately, these costs may be indirectly passed through to
institutional investors and contribute to higher commission rates or
reduced services.
---------------------------------------------------------------------------
\389\ See infra section VI.B.4.f.
---------------------------------------------------------------------------
b. Effects on Retail Orders
As a consequence of Rule 611, firms who fill retail orders in a
principal capacity cannot do so at a price worse than the NBBO.\390\ As
discussed below, in today's trading environment, the Commission
observes that the vast majority of retail marketable orders are
executed inside the NBBO, rather than at the NBBO. Therefore, it seems
that there are additional incentives in the current market for NMS
stocks besides Rule 611 that are promoting execution quality for retail
orders.
---------------------------------------------------------------------------
\390\ In adopting Rule 611, the Commission observed that the
great majority of internalized trades are the small trades of
individual investors, and that, in 2003, nearly 1 out of every 30 of
these trades, of which there were millions, appears to have been
executed at a price inferior to an automated and accessible
quotation. See NMS Adopting Release at 37508.
---------------------------------------------------------------------------
Retail brokers route most of their customers' marketable orders to
off-exchange wholesalers, who usually internalize the order (i.e.,
execute the order in a principal capacity). As a consequence, most
marketable retail orders do not directly interact with protected quotes
and are instead internalized off exchange.\391\ Wholesalers usually do
not charge retail brokers for this service and often pay them to
receive the retail orders, a practice that is commonly referred to as
payment for order flow (``PFOF'').\392\
---------------------------------------------------------------------------
\391\ See, e.g., Robert Battalio & Robert Jennings, Wholesaler
Execution Quality, Mgmt. Sci. (articles in advance ed. 2025)
(``Battalio & Jennings (2025)'') (showing that wholesalers fully
internalize 87% (58%) of retail orders (shares) and partially
internalize (i.e., execute a portion of the retail order in a
principal capacity, as well as executing a portion of the order
using liquidity they source from other trading centers) 2% (23%) of
retail orders (shares) they receive); Lewis Letter attached to
letter from Douglas A. Cifu, Chief Executive Officer, Virtu
Financial, Inc., dated Mar. 30, 2023 (``Lewis Letter'') at 44-45
(showing that Virtu fully internalized 86% of retail orders they
received in December 2020); and Securities Exchange Act Release No.
96495 (Dec. 14, 2022), 88 FR 128 (Jan. 3, 2023) (``OCR Proposing
Release'') at 192, Table 7 (showing that for individual investor
marketable retail orders under $200K, wholesalers execute 90% of the
dollar volume in a principal capacity).
\392\ See, e.g., Thomas Ernst & Chester Spatt, Payment for Order
Flow and the Retail Trading Experience (Wharton Initiative on Fin.
Pol'y & Regul., White Paper 2023), available at https://wifpr.wharton.upenn.edu/wp-content/uploads/2023/09/Payment-for-Order-Flow-final.pdf
---------------------------------------------------------------------------
[[Page 36687]]
In practice, wholesalers typically execute the marketable orders of
retail investors at better prices than these orders would have received
if they were routed to an exchange.\393\ Even the majority of those
retail marketable orders whose size exceeds the displayed size at the
NBBO are likely to be executed by wholesalers at or inside the NBBO.
This is in contrast to ``walking the book'' on exchanges and trading at
prices outside the NBBO.\394\ Wholesalers may execute a portion of the
very largest retail orders at prices outside the NBBO, but research has
shown that the wholesaler is usually still executing the order at a
better price when compared with the price it would have received if it
had executed the order against the aggregate displayed liquidity across
all exchanges sufficient to fill the order.\395\
---------------------------------------------------------------------------
\393\ See, e.g., Battalio & Jennings (2025) (showing wholesalers
execute 84% of the marketable retail order trades they fully
internalize (i.e., fill the order completely from the wholesaler's
inventory) at prices better than the NBBO); Anne Haubo Dyhrberg et
al., The Retail Execution Quality Landscape, 168 J. Fin. Econ.
104051 (2025) (``Dyhrberg et al. (2025)'') (showing that wholesalers
provide price improvement to 82% of the shares they execute and
execute 95% of shares at the NBBO or better (based on dollar-volume
weighting across stocks)); Lewis Letter at 46 (showing in December
2020 that Virtu executed 78% of the marketable retail orders inside
the NBBO and 20% at the NBBO); and OCR Proposing Release at 192,
Table 7 (showing that for retail orders under $200,000, wholesalers
execute 90% of shares with price improvement).
\394\ See Battalio & Jennings (2025). They estimate the ``size
improvement'' wholesalers provide to marketable retail orders whose
size exceeds the aggregate displayed size at the NBBO. For
marketable retail orders whose size is greater than the aggregate
displayed size at the NBBO, they calculate the percentage of trades
that occurred at prices better than the NBBO. They find that
wholesalers have a size improvement rate of 80% for orders that they
fully internalize (i.e., the order is filled completely from the
wholesaler's inventory) and 45% for orders they fully externalize
(i.e., the order is filled completely with liquidity sourced from
external venues). They note that wholesalers often provide
supplemental price improvement to orders they externalize (i.e., the
wholesaler adjusts the price of the shares they source externally to
provide better prices to the customer at the expense of the
wholesaler). They compare the average execution price of the retail
order with the VWAP price it would have received if it had
``successfully accessed all of the displayed liquidity on each
exchange's order book depth, including odd-lots, top of book and
depth of book quotes.'' They find that, on average, wholesalers
provide 1.75 cents per share of price improvement relative to this
benchmark on orders they fully internalize and 0.17 cents per share
on orders they fully externalize. See also OCR Proposing Release at
192, Table 7 (showing that wholesalers only execute 1.7% of the
shares in marketable retail orders at prices outside the NBBO);
Dyhrberg et al. (2025) (showing wholesalers execute 95% of the
shares in marketable retail orders at the NBBO or better (based on
dollar-volume weighting across stocks)).
\395\ See Battalio & Jennings (2025). For larger orders (the
average executed value is $408,000 and 5,450 shares) that the
wholesaler partially internalizes (i.e., the order is partially
filled from the wholesaler's inventory and partially with liquidity
sourced from external venues), they find that the average price
improvement measured against the NBBO is negative, indicating the
majority of shares executed outside the NBBO. However, they also
found that wholesalers provided these orders with price improvement
of 4.17 cents per share compared to the VWAP benchmark price if they
had ``walked the book'' and executed against the aggregate exchange
displayed liquidity. This indicates that the wholesalers executed
these larger orders at better prices then those displayed on
exchanges, often providing supplemental price improvement to the
portion of shares they sourced externally.
---------------------------------------------------------------------------
This practice of executing retail orders at prices better than the
NBBO reflects at least two forces in the market for retail order
executions. First, it is a consequence of the lower risk of trading
against retail order flow. An important element of the wholesaler
business model is the unique risk profile of retail order flow, which
typically has lower adverse selection risk than other types of order
flow.\396\ Because of this, wholesalers can afford to execute these
orders at a narrower spread compared to other sources of order flow,
such as the order flow faced by a market maker posting quotes on an
exchange.
---------------------------------------------------------------------------
\396\ Wholesalers and other liquidity providers face adverse
selection risk when they accumulate inventory (for example, by
providing liquidity to more informed traders) because of the risk of
market prices moving away from them before they are able to unwind
their positions. Wholesalers and other market makers are usually not
privy to the motives or information of the investors with whom they
are trading. As such, should the liquidity provider trade with an
investor who possesses short-lived price information about the
security, it is exposing its inventory to adverse selection risk.
Hence, liquidity providers normally choose their trading strategies
to minimize their interaction with order flow that has high adverse
selection risk. When trading with order flow that has higher adverse
selection risk, liquidity providers will charge a higher spread to
compensate themselves for taking on this risk.
---------------------------------------------------------------------------
Second, the execution of retail orders by wholesalers at prices
better than the NBBO likely reflects some amount of competition among
wholesalers providing these execution services to retail brokers. A
typical retail broker usually maintains relationships with multiple
wholesalers, divides its order flow among them, and then evaluates
those wholesalers based on the average aggregate execution quality they
provide. The percentage of order flow sent to each of these wholesalers
is typically determined by the prior performance of the wholesaler as
measured by its average execution quality.\397\ Those wholesalers with
inferior performance may see their percentage of order flow adjusted
lower.\398\ This competitive structure may incentivize wholesalers to
maximize the average price improvement relative to the NBBO offered to
retail marketable orders, which provides an incentive to execute the
orders at prices better than the NBBO.\399\
---------------------------------------------------------------------------
\397\ See Thomas Ernst et al., What Does Best Execution Look
Like? (working paper Nov. 30, 2023) available at https://microstructure.exchange/papers/BrokerRouting.pdf (``Ernst, Malenko,
Spatt and Sun (2023)''). They show that retail brokers use the
average effective over quoted ratio (i.e., the average effective
spread divided by the average NBBO quoted spread) as one of the main
measures to evaluate wholesaler performance and that retail brokers
allocate more future order flow to wholesalers that provide better
average historical execution quality. They also show that retail
brokers vary in how they evaluate wholesaler aggregate execution
quality. Some retail brokers evaluate aggregate execution on an
individual symbol basis, while others look at aggregate execution
quality across all stocks, or groups of stocks. Additionally, retail
brokers vary in the length of the historical time period they use to
calculate aggregate execution quality, with some firms in their
sample using a 30-day historical average and others using a 90-day
historical average. Furthermore, retail brokers vary in the
frequency at which they reallocate order flow among wholesalers.
They show some retail brokers reallocate order flow among
wholesalers on a daily basis, while others do so on a monthly basis.
\398\ See id. (discussing how retail brokers adjust their order
flow based on wholesaler execution quality).
\399\ See id. They examine how wholesalers adjust the price
improvement they offer as they approach the time period when the
retail broker reallocates order flow among wholesalers. They find
that wholesalers offer greater price improvement when they are
further behind the nearest higher ranked competitor (i.e., they are
lower in the execution quality ranking compared to another
wholesaler the retail broker routes orders to), but offer less
improvement when they are further ahead of their closest worse
competitor (i.e., they are further ahead of other wholesalers in the
competitive execution quality rankings). Additionally, they examine
the effects when a retail broker establishes a relationship with a
new wholesaler and find that other wholesalers increase the amount
of price improvement they offer when the new wholesaler enters the
market. These results indicate that wholesalers respond to
competitive pressures by increasing the amount of price improvement
they offer in order to attract more retail order flow.
---------------------------------------------------------------------------
While Rule 611 generally restricts retail trades from being
executed at prices inferior to the prevailing NBBO, in practice this
restriction does not appear to be of significant consequence. The most
Rule 611 can do for a retail order is to require that its execution
price be at the prevailing NBBO at the time of trade. Therefore, a
retail order being executed at a price better than the NBBO implies the
presence of additional incentives, likely unrelated to Rule 611, that
led to that superior price for that order. Given the evidence discussed
above \400\ regarding the frequency of retail executions being priced
better than the prevailing NBBO,
[[Page 36688]]
two such forces currently present in the retail execution market are
lower adverse selection risk and the presence of some degree of
competition among wholesalers.
---------------------------------------------------------------------------
\400\ See supra note 393 and accompanying text.
---------------------------------------------------------------------------
However, while retail executions inside the NBBO are common,\401\
it is not always the case that a retail order receives meaningful price
improvement.\402\ When this happens, it could be the case that, but for
Rule 611, that retail order would have received a worse execution
price. The empirical analysis in Table 7 below shows that, for high-
priced stocks, when displayed, unprotected odd-lot quotes are available
at better prices inside the NBBO, wholesalers trade-through these odd-
lot quotes between 15%-18% of the time. As a result, they internalize
the retail order at a worse price than it would have received if it had
traded against the odd-lot quotes.\403\ This analysis supports the
argument that, in some cases when a retail order does not receive price
improvement relative to the NBBO, Rule 611 may prevent wholesalers from
executing the order at a price worse than the NBBO and contribute to
the execution quality received by these retail trades.
---------------------------------------------------------------------------
\401\ See id.
\402\ See, e.g., Battalio & Jennings (2025) (showing that 16% of
the marketable retail order trades wholesalers fully internalize
(i.e., the order is filled completely from the wholesaler's
inventory) do not receive price improvement); Lewis Letter at 46
(showing in December 2020 that Virtu executed 21% of the marketable
retail orders it fully internalized without price improvement); and
OCR Proposing Release at 192, Table 7 (showing that for marketable
retail orders under $200,000, wholesalers executed 10% of shares
without price improvement and that they executed 18.6% of shares
with less than 0.1 cents of price improvement).
\403\ See infra section VI.C.1.c.i, Table 7 and accompanying
text. This analysis shows that, for off-exchange retail trade sizes
between 5 and 40 shares in high-priced stocks, when odd-lot quotes
with sufficient size to fill a retail trade are available at prices
inside the NBBO, wholesalers trade-through these better priced odd-
lot quotes between 15% to 17% of the time, with the trade-through
rate declining as the trade size increases.
---------------------------------------------------------------------------
In addition, because wholesalers are evaluated based on average
execution quality, they may cross-subsidize the price improvement they
offer to marketable retail orders. The wholesaler may provide greater
price improvement on some individual retail orders while providing less
price improvement on other retail orders, in such a way that the
wholesaler's overall profit is increased. The manner in which
wholesalers cross-subsidize may vary across retail brokers based on how
the individual retail broker evaluates aggregate wholesaler execution
quality.\404\ Given how retail brokers allocate order flow, wholesalers
have incentives to earn higher profits and offer less price improvement
on retail trades that have less impact on the average aggregate
execution quality metrics that retail brokers use to evaluate
wholesaler performance. Thus, while Rule 611 may not have an impact on
the majority of wholesaler trades, there may be select cases in which
Rule 611 does result in a better execution price than would otherwise
have been given.\405\ This, in turn, may place limits on wholesalers'
ability to cross-subsidize and offer additional price improvement to
other retail orders.
---------------------------------------------------------------------------
\404\ The method of cross-subsidization could vary both across
stocks and types of orders or order sizes. For example, Ernst,
Malenko, Spatt and Sun (2023) find that wholesalers increase the
price improvement they offer to odd-lot sized orders when a retail
broker began placing more emphasis on these types of orders in its
wholesaler evaluation criteria. At the same time, the wholesalers
decreased the amount of price improvement they offered to large
orders. This indicates the wholesalers might have switched to cross-
subsidizing improved execution quality in odd-lot orders at the
expense of larger orders. See also Thomas Ernst et al., Would Order-
By-Order Auctions Be Competitive?. 80 J. Fin. 1879 (2025) (showing
in an extension of their model that wholesalers incur losses when
trading small, high-cost stocks, which they compensate with larger
profits from trading large, low-cost stocks); and Dyhrberg et al.
(2025) (showing that after accounting for inventory costs,
wholesalers earn lower profits internalizing smaller stocks compared
to S&P 500 stocks; indicating wholesalers may cross-subsidize less
liquid stocks). Additionally, based on staff experience, the
Commission understands that retail brokers may sometimes direct
wholesalers how (e.g. in which symbols or order sizes) to focus
their price improvement.
\405\ These cases would coincide with those trades where no
meaningful price improvement is offered.
---------------------------------------------------------------------------
In contrast to marketable retail orders, the Commission understands
that the majority of retail non-marketable limit orders are either
directly or indirectly displayed on an exchange and may qualify as a
protected quote.\406\ Although Rule 611 may potentially benefit these
retail orders because trade-through protection may increase their
chance of executing, the Commission believes that this benefit may be
limited and may not significantly affect the execution rates of retail
non-marketable limit orders.\407\
---------------------------------------------------------------------------
\406\ Retail brokers may first route retail non-marketable limit
orders to wholesalers, who then may post their own representative
limit order at the same price on an exchange and execute the retail
limit order on a riskless principal basis if their representative
order executes. See Amber Anand, et al., Retail Limit Orders, 30
Rev. Fin. 459 (2026). Wholesalers maintain connectivity with many
exchanges and also have sophisticated SORs. Retail brokers often
outsource their order handling to wholesalers, who bundle their
market access services with their execution services.
\407\ See First TTR Roundtable Transcript, at 147 (Jeff Starr,
Schwab) (stating that Schwab's retail limit orders execute 97% of
the time when an execution occurs at the limit price or worse, and
that this rate doesn't change if the limit order is a round-lot size
or an odd-lot size). See also infra section VI.B.2.c for further
discussions on the effects of Rule 611 on liquidity supply and the
trade-through of limit orders.
---------------------------------------------------------------------------
c. Effects on Liquidity Provision
Rule 611 can impact how liquidity is supplied in a number of ways.
Rule 611 can help prevent trade-throughs of round-lot sized quotes,
which can help incentivize the posting of displayed limit orders,
although its overall effects on displayed liquidity are likely limited.
Rule 611 may also be one of the factors that contributes to the
fragmentation of displayed liquidity, which helps HFTs engage in
certain trading strategies, such as latency arbitrage, that may
increase trading costs for other market participants. Additionally,
Rule 611 may be one of the factors that affects how exchanges set their
access fees.
Rule 611 appears to limit trade-throughs, although the magnitude of
its effect is uncertain. An analysis by Commission staff compared the
trade-through rate during normal market hours with the trade-through
rate during the pre-market and after-hours sessions, when Rule 611 does
not apply.\408\ This analysis found that trade-through rates increased
slightly outside of normal trading hours. In a separate analysis
discussed below,\409\ Commission staff examined the rate at which
displayed, unprotected odd-lot quotes on exchanges were traded through.
For high-priced stocks, these odd-lot quotes represent substantial
notional liquidity yet can be traded-through without violating Rule
611.\410\ This analysis
[[Page 36689]]
found higher trade-through rates for odd-lot quotes than other studies
have found for round-lot quotes that were subject to trade-through
protection, but also found that odd-lot trade-through rates decreased
as the size of the transaction increased, suggesting that trade-through
rates of unprotected round lots would be lower than the estimates in
the analysis.\411\
---------------------------------------------------------------------------
\408\ See OAR Roundtable Analysis, supra note 121. The analysis
found the average trade-through rates for corporate stocks and ETPs
during regular trading hours were 0.3% and 0.1%, respectively, when
a one-second look back was included (see supra section II.A.2.,
discussing the one second exception to Rule 611). The analysis found
that the average trade-through rates increased slightly to 0.5%
(corporate stocks) and 0.5% (ETPs) during the pre-market session and
0.4% (corporate stocks) and 0.6% (ETPs) during the after-hours
session, when Rule 611 does not apply. However, one limitation of
this analysis is that the comparison of trade-through rates in the
regular market session to the pre-market and after-hours sessions
may not shed light onto how trade-through rates would change if Rule
611 is rescinded. It is possible that some market participants and
trading centers do not change their behavior and operate as if Rule
611 is still in effect during the pre-market and after-hours
sessions. See, e.g., First TTR Roundtable Transcript at 108 (Joe
Mecane, Citadel) (discussing how his firm operates as if Rule 611
was in effect during the pre-market and after-hours sessions).
\409\ See infra section VI.C.1.c (discussing Commission staff
analysis of trade-through rates of unprotected odd-lot quotes.)
\410\ As high-priced stocks have become more common and
represent a greater share of volume, the amount of order flow
covered by Rule 611 has fallen. This is because odd-lot orders and
hidden liquidity are particularly prevalent for high-priced stocks.
See Robert P. Bartlett et al., The Market Inside the Market: Odd-Lot
Quotes, 38 Rev. Fin. Stud. 661 (2025) (discussing displayed odd-lot
liquidity on exchanges) and Robert Bartlett & Maureen O'Hara,
Navigating the Murky World of Hidden Liquidity (Stanford L. & Econ.
Olin Working Paper No. 594, Nov. 7, 2024), available at: https://ssrn.com/abstract=4988855 (retrieved from SSRN Elsevier Database)
(discussing hidden liquidity on exchanges).
\411\ See infra section VI.C.1.c.i. For trades of size 5 to 40
shares, the analysis finds trade-through rates of 1-4% for trades
that occur on exchange, and 11-19% for trades off-exchange; the
notional value of the trade-throughs--measured by the amount of
dollar volume that executed outside the best quote--is 0.03-0.07
basis points for on-exchange trades, and 0.32-0.84 basis points for
off-exchange trades. As trade size increases, the estimated trade-
through statistics fall, suggesting that the effect of Rule 611 on
round lots will be lower than these estimates. When extrapolating
these results to round lots in the absence of Rule 611, the primary
limitation is that round lots are both protected and set the NBBO;
to the extent market participants do not want to trade-through the
NBBO even in the absence of Rule 611, the trade-through rates of
unprotected round lots will be lower than the rate estimated from
unprotected odd-lots.
---------------------------------------------------------------------------
To the extent Rule 611 prevents trade-throughs of exchanges' best
round-lot sized bids and offers, it may potentially increase the
execution probability of a displayed limit order of round-lot size,
which in turn could increase the incentive for liquidity suppliers to
display a limit order of round-lot size at or inside the NBBO. However,
the Commission believes that this effect is likely to be limited.
Market participants often display unprotected odd-lot orders inside the
NBBO, indicating that order protection may not be a significant factor
in the size of, or decision to display their order.\412\ Additionally,
Commission staff analysis below shows that trade-through rates of
unprotected quotes fall as trade size increases, indicating that Rule
611 may not significantly affect the trade-through rates of round-lot
orders.\413\ Therefore, while the results of these analyses suggest
that Rule 611 may provide some protection for round-lot liquidity, its
overall effect on liquidity provision and displayed liquidity may be
limited (particularly given the increasing prevalence of odd-lot
trading and unprotected odd-lot quotes inside the NBBO).\414\
---------------------------------------------------------------------------
\412\ See Robert P. Bartlett et al., The Market Inside the
Market: Odd-Lot Quotes, 38 Rev. Fin. Stud. 661 (2025).
\413\ See supra note 411 and infra section VI.C.1.c.i.
\414\ See Robert P. Bartlett et al., supra note 412.
---------------------------------------------------------------------------
As discussed in detail below, Rule 611 may also be one of the
factors contributing to the fragmentation of displayed liquidity.\415\
This fragmentation disperses displayed liquidity across numerous order
books, increasing routing complexity and potentially thinning size at
the inside, even if aggregate depth is ample. As discussed further
below, Rule 611 also helps HFTs engage in certain trading strategies
that lead to the ``gaming'' of displayed protected quotes and
potentially increase trading costs for other market participants, such
as by posting fleeting orders as protected quotes designed to attract
the routing of marketable orders or engaging in certain latency
arbitrage strategies.\416\ This fragmentation has also created latency
arbitrage opportunities for HFTs due to price differentials across
trading venues combined with differences in latency between the SIPs
and exchange direct feeds, which has contributed to the speed ``arms
race'' discussed below.\417\ However, exchanges have also innovated
around protected quotes and developed speed bumps and specific order
types to counteract the effects of faster traders' speed
advantage.\418\
---------------------------------------------------------------------------
\415\ See infra section VI.B.4.g.
\416\ See infra section VI.B.4.b. (discussing latency, HFTs and
the speed ``arms race''), section VI.B.4.g. (discussing the
fragmentation of displayed liquidity), and section VI.B.3.
(discussing latency arbitrage).
\417\ See infra section VI.B.4.b.
\418\ See infra section VI.C.4.b. See also First TTR Roundtable
Transcript at 72-73 (Dave Lauer, Urvin Finance and We the Investors)
(discussing fragmentation and latency arbitrage). See infra section
VI.B.4.g. (discussing exchange innovation around protected quotes).
---------------------------------------------------------------------------
Rule 611 also interacts with exchanges' incentives for setting
access fees. Maker-taker exchanges \419\ often calibrate rebates and
access fees near the access fee cap,\420\ so that being at the inside
(and therefore having a protected quote) becomes economically
attractive for liquidity suppliers. However, exchanges have reasons
other than Rule 611 to set their access fees near the cap. For example,
half of SIP revenue is allocated to exchanges based on percentage of
time they are quoting at the NBBO.\421\
---------------------------------------------------------------------------
\419\ The predominant exchange fee structure is maker-taker, in
which an exchange charges a fee to liquidity takers and pays a
rebate to liquidity providers, and the rebate is typically funded
through the access fee. See infra section VI.B.3 (for details on the
maker-taker fee structure).
\420\ Rule 610's access-fee cap limits what venues can charge
for accessing the best displayed bid and offer on an exchange.
\421\ See infra section VI.B.4.d.
---------------------------------------------------------------------------
d. Other Effects
Rule 611 has a number of additional effects beyond its impact on
order handling, execution, and liquidity provision. Rule 611 imposes
cost burdens on trading centers and broker-dealers, contributes to
market complexity, and limits innovation in trading protocols.
Rule 611 imposes additional costs on trading centers and broker-
dealers that operate SORs. Rule 611 requires trading centers to incur
ongoing costs to maintain their policies and procedures and to surveil
for trade-through violations. The Commission estimates that the current
annual ongoing cost for each trading center of maintaining up-to-date
policies and procedures related to Rule 611 is $30,996.\422\ Similarly,
Rule 611 requires broker-dealers that operate SORs to incur ongoing
costs to maintain logic to prevent trade-throughs or to utilize one of
the exceptions to Rule 611. The Commission estimates that the current
annual ongoing cost for each broker-dealer operating a SOR to maintain
this logic is $13,140.\423\
---------------------------------------------------------------------------
\422\ See infra note 577 and accompanying text.
\423\ See infra note 581 and accompanying text.
---------------------------------------------------------------------------
The requirements of Rule 611 and Rule 610(e) also make it more
complicated and costly for trading centers and broker-dealers to
routinely maintain and update the systems for their matching engines
and SORs. For example, it might take staff longer to adjust routing
algorithms for a new order type, because they may need to write
additional code for how the order type will avoid trading through
protected quotes on multiple venues. As discussed in further detail
below, the Commission estimates that the annual cost of this additional
maintenance is between $319,000 and $637,000 for each exchange, between
$159,000 and $319,000 for each ATS, between $16,000 and $32,000 for
each OTC market maker, and between $16,000 and $319,000 for broker-
dealers that operate a SOR (broker-dealers that connect to more
exchanges would have higher costs).\424\
---------------------------------------------------------------------------
\424\ See infra section VI.C.3.a. for further discussions on
these costs.
---------------------------------------------------------------------------
Rule 611 contributes to the current level of market complexity.
Rule 611 has led to the creation of additional order types and
modifiers, such as ISO orders, to help manage compliance with Rule 611
order routing.\425\ This has increased the complexity of order routing
and execution. Additionally, as discussed in detail below, Rule 611 is
one of the factors that has contributed to the fragmentation of
displayed liquidity, which also increases market complexity by making
it more difficult to route orders and monitor the
[[Page 36690]]
market.\426\ However, overall equity market complexity has been
increasing for unrelated reasons as well, including changes in
technology, other market structure rules, and economic incentives (such
as SIP revenue allocations).
---------------------------------------------------------------------------
\425\ See supra section II.B.2.a. See also infra section VI.B.3
(discussing how Rule 610(e) has also led the creation of additional
order types).
\426\ See infra section VI.B.4.g.
---------------------------------------------------------------------------
As discussed in detail below, Rule 611 is one of the factors that
limits innovation in exchange and ATS trading protocols.\427\ It limits
these venues to having trading protocols that execute at prices inside
or at the protected quotes, unless they fall within one of the
exceptions to Rule 611. However, other factors besides Rule 611 (e.g.
fair access requirements and limitations on segmentation) may play a
larger role in limiting exchange innovation.\428\
---------------------------------------------------------------------------
\427\ See infra section VI.B.4.g.
\428\ See infra section VI.B.5.a. (comparing rules for exchanges
and ATSs).
---------------------------------------------------------------------------
3. Economic Effects of Current Rule 610(e)
Current Rule 610(e) prevents markets that lock and cross the NBBO.
Academic research into NBBO locked and crossed markets indicates that
truly locked and crossed markets occur very seldom and when they do,
they are corrected very quickly.\429\ Most instances of locked and
crossed markets reported in SIP data are due to latency artifacts
associated with the geographical distances between the various data
centers and the SIP. The SIP must compile data from geographically
separate data centers which, due to limitations on transmission speeds
and varying geographical distances, arrive at the SIP with different
latencies.\430\ Thus, a locked or crossed market posted by the SIP
usually reflects stale information, and after correcting for this
latency, truly locked or crossed markets are rare occurrences. This
rarity of locked and crossed markets reflects the effectiveness of
exchange protocols to prevent displaying orders that would lock or
cross markets.
---------------------------------------------------------------------------
\429\ See Robert H. Battalio et al., Latency and the Look-Ahead
Bias in Trade and Quote Data (working paper Dec. 11, 2025),
available at https://ssrn.com/abstract=5907665 (retrieved from SSRN
Elsevier Database). See also analysis in infra section VI.C.2.c.
\430\ See Phil Mackintosh, Time is Relativity: What Physics Has
to Say About Market Infrastructure, Nasdaq (Mar. 20, 2026, 11:09AM),
https://www.nasdaq.com/articles/time-is-relativity-what-physics-has-to-say-about-market-infrastructure-2020-04-09. See also infra
section VI.B.4.b. (discussing the role of latency).
---------------------------------------------------------------------------
Staff analysis of locked and crossed markets confirms this finding.
This analysis finds that for a sample of high-priced stocks, these
stocks spend almost no time with locked or crossed markets. On average,
a stock-day in our sample spends 0.3% of the trading day locked, and
0.3% crossed.\431\ Locked markets, however, are substantially more
prevalent among stocks with tighter spreads, and markets that lock or
cross odd-lot quotes inside the NBBO, which are not prohibited by
610(e), are also somewhat more common.\432\
---------------------------------------------------------------------------
\431\ A stock-day is the unique pair of a stock symbol and a
date. For example, one observation in the sample is TSLA on October
1, 2025; a second observation is COST on October 2, etc.
\432\ See analysis in infra section VI.C.2.c.
---------------------------------------------------------------------------
Even without a rule prohibiting locked and crossed markets, locked
and crossed markets should be rare because they create temporary profit
opportunities that will be acted upon very quickly. For instance, if
market prices move and a liquidity provider fails to update its quotes
quickly enough, then this can result in a locked or crossed market.
This situation sets off a race between opportunistic arbitrageurs--who
see an opportunity for profit--and the liquidity provider, who will
lose money if its stale quote is transacted against at a price that is
disadvantageous to it. This race means that locked and crossed markets
will likely disappear very quickly as both arbitrageurs and liquidity
providers are on alert for such situations. Accordingly, most locked
and crossed markets that occur in the SIP data are the results of
geographic latencies.\433\
---------------------------------------------------------------------------
\433\ See supra note 450.
---------------------------------------------------------------------------
Prohibiting locked or crossed markets has a number of baseline
economic effects. First, it leads to wider spreads for some stocks.
Prohibiting locked and crossed markets means that the narrowest spread
that a stock can quote at is the minimum pricing increment. However,
some stocks may have economic fundamentals justifying a narrower spread
than the minimum pricing increment. In these cases, a stock could trade
efficiently with a zero quoted spread due to the existence of rebates.
In the predominant maker-taker system, liquidity demanders pay a fee
which is then partially rebated to liquidity providers. Consequently,
even in an environment where quoted spreads are zero, the liquidity
provider will still earn the rebate. For stocks where this rebate is
sufficient compensation for providing liquidity, a zero quoted spread
could be the competitive outcome. However, by prohibiting locked
markets, these stocks trade at a quoted spread equal to the minimum
pricing increment, which increases transaction costs.
Another economic effect is that prohibiting locked and crossed
markets adds to market complexity as market participants must manage
orders sent and orders received to ensure that they do not lock or
cross markets. Trading centers have developed specialized order types
to comply with the prohibition on locked and crossed markets.\434\
These order types add to market complexity and may provide an advantage
to more sophisticated market participants, such as high tech
algorithmic traders with expansive data and processing capacities, who
are more capable of managing increased complexity.
---------------------------------------------------------------------------
\434\ See supra section VI.B.1.b. (describing the functionality
of some of these order types).
---------------------------------------------------------------------------
Prohibiting locked and crossed markets may also help prevent some
investor confusion.\435\ It is possible that some market participants,
particularly those without direct data feeds to the exchanges, could be
confused about the current state of the market if a stock is displaying
locked or crossed quotations. Therefore, prohibiting locked and crossed
markets could reduce the likelihood of confusion among these investors,
which could result in better order routing by these market participants
and lower transaction costs. However, there is significant uncertainty
regarding the extent to which locked and crossed markets result in
investor confusion.
---------------------------------------------------------------------------
\435\ See, e.g., Second TTR Roundtable Transcript at 64 (Dmitry
Bulkin, Bernstein) (``However, I would say that I can easily imagine
a rising number of calls for retail brokers asking questions [in
response to increased locked or crossed markets]. So it's going to
take time--take some effort on behalf of retail brokers to educate
their clients.'') and at 65 (Mehmet Kinak, T. Rowe Price) (``I do
think crossed markets could obviously lead to some investor
confusion.'').
---------------------------------------------------------------------------
The prohibition on locked and crossed markets also helps facilitate
straightforward computation of various Rule 605 statistics that require
referencing the NBBO. For example, in the presence of crossed markets,
computing the percentage of trades receiving price improvement
(relative to the NBBO) would be difficult. This is because crossed
markets can indicate that markets are temporarily out of equilibrium.
Prior to the prohibition on locked and crossed markets, the Commission
posted FAQ guidance on how to handle such instances of locked and
crossed markets.\436\ By prohibiting locked and crossed markets, Rule
605 statistics are easier to interpret.
---------------------------------------------------------------------------
\436\ See Staff Legal Bull. No. 12R, supra note 310.
---------------------------------------------------------------------------
4. Current Exchange Competition, Revenue, Market Data, and Connectivity
Services
In the years since Rules 611 and 610(e) were adopted, the NMS stock
market has seen a proliferation of new exchanges. Large executing
broker-dealers have generally become active on
[[Page 36691]]
each new exchange as it comes online, often with significant cost. A
number of market conditions may contribute to the proliferation of
exchanges and fragmentation. These include the SIP revenue allocations,
the market power that can come from offering significant liquidity, and
the effects of Rule 611 and 610(e). Rules 610(e), and especially Rule
611, impact the transaction costs of different order routing
strategies, which may incentivize broker-dealers to connect to more
exchanges and submit orders even to small exchanges to which they are
connected. Rules 611 and 610(e), along with other factors, may limit
exchange innovation because they incentivize the adoption of certain
exchange models.
a. Change in the Number and Ownership of Exchanges
The number of exchanges has more than doubled since the adoption of
Regulation NMS. Exchange ownership structures have also changed over
time, with three exchange families now operating twelve exchanges, as
well as many independent exchanges. As the number of exchanges has
increased, so has the fragmentation of displayed liquidity.\437\
Overall market fragmentation has also increased, as trading is now
spread across more on- and off-exchange venues.
---------------------------------------------------------------------------
\437\ See infra section VI.B.4.g. (describing fragmentation of
displayed liquidity and market fragmentation).
---------------------------------------------------------------------------
At the time of the adoption of Regulation NMS, there were eight
exchanges and one national securities association that traded NMS
stocks.\438\ Six of these exchanges are still present today. Two were
absorbed during mergers, and the trading platform that was a national
securities association has since become an exchange.\439\
---------------------------------------------------------------------------
\438\ See NMS Adopting Release at 37576 at n. 730. The eight
exchanges were Amex, BSE, CBOE, CHX, NSX, NYSE, Phlx, and PCX, and
the national securities association was NASD.
\439\ See infra note 440. The two exchanges that were absorbed
during mergers are PCX and CBOE. PCX merged with NYSE and Arca,
while CBOE's parent company still exists and currently operates four
exchanges after mergers with BATS and Direct Edge: BYX, BZX, EDGA,
EDGX.
---------------------------------------------------------------------------
Currently, there are 17 exchanges that trade NMS stocks and three
that are approved but not yet operating.\440\ This suggests there has
been a significant incentive for new entrants since Regulation NMS was
adopted. However, approximately half of the 10 new and currently
operating exchanges were ATSs or ECNs at the time Reg NMS was adopted
but became exchanges as a consequence of other incentives.\441\
Nevertheless, it is possible that these ATSs converted to exchanges in
response to new incentives created after Regulation NMS was adopted.
---------------------------------------------------------------------------
\440\ See supra note 36. Ownership has changed since the
adoption of Regulation NMS. Amex was acquired by NYSE (Euronext) in
2008 and later rebranded to NYSE American. See James Chen, American
Stock Exchange History: From AMEX to NYSE American, Investopedia
(Sept.11, 2025), https://www.investopedia.com/terms/a/amex.asp. BSE
was acquired by Nasdaq in 2007 and later rebranded to Nasdaq BX and
now Nasdaq Texas. See Boston Stock Exchange, Nasdaq, https://www.nasdaq.com/glossary/b/boston-stock-exchange (last accessed Mar.
24, 2026) and Data News #2026--2 Nasdaq Announces BX Name Change to
Nasdaq Texas, NasdaqTrader, (Feb. 12, 2026), https://www.nasdaqtrader.com/TraderNews.aspx?id=DN2026-2. CHX was acquired
by NYSE's parent company in 2018 and later rebranded to NYSE Chicago
and now NYSE Texas. See Jesse Pound, The New York Stock Exchange is
Launching an Exchange in Texas, CNBC (Feb .12, 2025, at 9:37 a.m.
EST), https://www.cnbc.com/2025/02/12/the-new-york-stock-exchange-is-launching-an-exchange-in-texas.html?msockid=13f443750938674a18ca56bd08b86613. NSX was
acquired by NYSE's parent company in 2017 and later rebranded to
NYSE National. See Press Release, ICE Investors, NYSE Finalizes
Acquisition of National Stock Exchange (Jan. 31, 2017), available at
https://ir.theice.com/press/news-details/2017/NYSE-Finalizes-Acquisition-of-National-Stock-Exchange/default.aspx. Phlx was
acquired by Nasdaq in 2007 and later renamed to Nasdaq PSX. See
Press Release, Nasdaq Investor Relations, NASDAQ to Acquire
Philadelphia Stock Exchange (Nov. 7, 2007), available at https://www.nasdaq.com (from main web page, navigate to investor relations
page). PCX was acquired by NYSE in 2006 along with Arca. See The
History of NYSE, NYSE, https://www.nyse.com/history-of-nyse (last
visited Mar. 2, 2026). Cboe acquired BATS in 2016, yielding BYX,
BZX, EDGA, and EDGX. See Press Release, CBOE Holdings Agrees to
Acquire Bats Global Markets (Sept. 26, 2016), available at https://ir.cboe.com/news/news-details/2016/CBOE-Holdings-Agrees-to-Acquire-Bats-Global-Markets-09-26-2016/default.aspx. BATS had previously
acquired Direct Edge in 2013. See Michael J. De La Merced &
Nathaniel Popper, BATS and Direct Edge to Merge, Taking on Older
Rivals, N.Y. Times (Aug. 26, 2013) (retrieved from Factiva
database).
\441\ The five exchanges are NYSE Arca, Cboe BYX, Cboe BZX, Cboe
EDGA, and Cboe EDGX. Archipelago was an ECN, which later became NYSE
Arca. See Adam Hayes, Archipelago: What It Is, How It Works,
Investopedia (Oct. 17, 2022), https://www.investopedia.com/terms/a/archipelago.asp. BATS was an ATS, which later became BYX and BZX.
See Will Kenton, BATS Global Markets: Definition, History, and Cboe
Acquisition, Investopedia, (Nov. 16, 2025), https://www.investopedia.com/terms/b/better-alternative-trading-system-bats.asp. Direct Edge was an ECN, which later became EDGA and EDGX.
See Phil Wahba, Direct Edge Set to Become 4th U.S. Stock Exchange,
Reuters (Mar. 12, 2010), https://www.interactivebrokers.ca/en/general/education/directedgeExchange.php.
---------------------------------------------------------------------------
The fragmentation of displayed liquidity has increased as more
exchanges have entered the market and the share of dollar volume traded
is now spread across a greater number of exchanges. In the month of
January 2026, just over 50% of total dollar volume was traded on
exchanges.\442\ The three exchanges with the largest dollar volume
represent over 30% of all dollar volume.\443\ Of the remaining 14
exchanges, 10 have a market share of less than 1%. At the time of
adoption of Reg NMS, one exchange had a market share of approximately
80% in NYSE-listed stocks.\444\
---------------------------------------------------------------------------
\442\ January 2026 is chosen as a recent month for consistency
with analysis conducted using CAT. The market share is consistent
with other recent months. See U.S. Equities Market Volume Summary,
Cboe, https://www.cboe.com/us/equities/market_share/ (last visited
Apr. 16, 2026).
\443\ See U.S. Equities Market Volume Summary, supra note 442.
\444\ See EMSAC Market Structure Memo at 11.
---------------------------------------------------------------------------
Another source of the increased market fragmentation is the fact
that approximately half of total dollar volume is now executed off
exchange.\445\ There are currently 33 ATSs trading NMS stocks,\446\ and
in the month of January 2026, the three ATSs with the largest trade
counts represented over 40% of ATS trade count.\447\ Of the remaining
ATSs, 4 had a share above 5% of ATS trade count, and 17 had a share
below 1%.
---------------------------------------------------------------------------
\445\ See 2026 Data Update of the 2015 EMSAC Market Structure
Memo, supra note 39, at Table 4.
\446\ See Form ATS-N Filings and Information, SEC, available at
https://www.sec.gov/about/divisions-offices/division-trading-markets/alternative-trading-systems/form-ats-n-filings-information
(last accessed Apr. 28, 2026).
\447\ See 10k+ Share Report, FINRA https://otctransparency.finra.org/otctransparency/AtsIssueData (last visited
Mar. 13, 2026).
---------------------------------------------------------------------------
b. The Role of Latency
The speed at which a market participant can react to and take
action on a trading center in response to changes in the state of the
market is important in today's NMS stock market, and this importance
has increased dramatically since Regulation NMS was first adopted. This
increase in speed was facilitated in part by greater automation in NMS
stock trading. Now, latency is measured in single-digit microseconds,
and sometimes even in units of hundreds of nanoseconds. These
developments have influenced market structure in significant ways,
affecting both exchange products and market participant routing
strategies.
If one's competitors can observe and react to information first,
this can be costly.\448\ For example, market
[[Page 36692]]
participants may use market data to anticipate price movements and
place limit orders in advance to benefit from such movements. If other
market participants do the same, those who react faster will be able to
place their quotes on the book first. This results in these earlier
quotes being first in the limit order book queue, as most exchange
limit order books in the US equity markets are based on a price-
displayed-time priority model (i.e., displayed limit orders at the same
price are queued in order of time priority).\449\ Being last in these
queues can expose a limit order to greater risk of adverse selection,
making this position undesirable. The only fix for a market participant
who consistently loses such races would be to respond more quickly, so
that its orders to the exchange matching engine faster than other
market participants. The incentives created by these costs of losing
such races and the resulting behavior undertaken by market participants
to improve their response times are sometimes referred to as the speed
``arms race.''
---------------------------------------------------------------------------
\448\ There is academic literature on the effect of trading
speed on revenue, adverse selection, and liquidity. See, e.g.,
Matthew Baron et al., Risk and Return in High-Frequency Trading, 54
J. Fin. & Quantitative Analysis 993 (2019) (showing that relative
latency matters and that ``HFT firms exhibit large, persistent
cross-sectional differences in performance, with trading revenues
disproportionally accumulating to a few firms''). Furthermore, when
HFT firms use their relative latency advantages to trade on news to
create short term arbitrage opportunities, they generate adverse
selection on slower traders. See Bruno Biais et al., Equilibrium
Fast Trading, 116 J. Fin. Econ. 292 (2015) (arguing that fast
trading technology ``provides advance access to value-relevant
information, which creates adverse selection, lowering welfare,''
and ``generates a negative externality''); Thierry Foucault et al.,
Toxic Arbitrage, 30 Rev. Fin. Stud. 1053 (2017) (providing evidence
that ``[a]rbitrage opportunities due to asynchronicities in the
adjustment of prices to news are toxic because they expose dealers
to the risk of trading with arbitrageurs at stale quotes''). The
authors then claim that these arbitrage opportunities associated
with higher trading speed impair market liquidity.
\449\ Displayed limit orders have priority over hidden limit
orders (i.e., limit orders that are not displayed to other market
participants) at the same price.
---------------------------------------------------------------------------
To mitigate the risk of losing speed races, market participants
must manage the latency in their systems' responses to market events.
Latency can be introduced through the processing time of a market
participant's system, or the transmission time between systems,
especially between exchange matching engines and the participant's SOR
systems. The main source of transmission latency in the NMS stock
market is the geographically diverse locations of the various equity
exchanges. Equity exchanges are located at three data centers in
Mahwah, Carteret, and Secaucus, New Jersey.\450\
---------------------------------------------------------------------------
\450\ See Market Data Infrastructure Adopting Release, at
section V.B.2.b. This geographic diversity in data centers is
understood by the Commission to be the most significant source of
latency for market participants. See also Phil Mackintosh, How
Trades Speed Between Venues, Nasdaq (May 23, 2024, at 5:40 p.m.
EDT), https://www.nasdaq.com (from main web page, navigate to Market
Makers Newsletter page) describing geographic latency with fiber
transmission to be on the order of 143-304 microseconds. These
various forms of latency have the effect of generating discrepancies
in beliefs about the state of the market among various market
participants at a single instant in time. See Market Data
Infrastructure Adopting Release, section V.B.2.f., discussing the
nature and causes of these discrepancies and current market practice
for dealing with them.
---------------------------------------------------------------------------
c. Exchange and SIP Products
Exchanges charge for access to the liquidity on their limit order
books via fees for connections and colocation, as well as per-
transaction access fees. In addition, exchanges offer proprietary data
products that provide a real-time view of activity on the exchange. The
SIP also offers real-time market data, and is utilized by most market
participants, but competitive broker-dealers may find that SIP data are
generally not substitutable for the exchanges' proprietary data
products when it comes to order execution.
To trade on an exchange or receive market data from an exchange, a
market participant must arrange for connections to the exchange's
system. As a practical matter, these connections are established in
several parts, including the physical connection, logical connection
and other colocation services, each of which may incur separate
charges. Exchanges offer a variety of types of physical connections to
cater to subscribers' varying requirements for latency and
bandwidth.\451\ Exchanges also offer different types of logical
connections, which may differ in purpose, such as order entry \452\ or
market data.\453\ If an exchange offers colocation services, these
might include cabinet space and other hardware.\454\ Some exchange
members with a direct connection to an exchange may also offer direct
market access or sponsored market access to another market
participant.\455\ Market participants may also hire third parties to
manage their connections.\456\
---------------------------------------------------------------------------
\451\ For example, MIAX Pearl Equities exchange offers 1 Gb
ultra-low latency (ULL) and 10 Gb ULL physical connections. It
recommends a 10 Gb connection if consuming its proprietary TOB or
DOB data. See, e.g., MIAX, Express Network Interconnect Connectivity
Guide (2024), https://www.miaxglobal.com/miax_connectivity_guide.pdf. Nasdaq offers their proprietary
TotalView DOB feed with an option for hardware-based delivery on a
field-programmable gate array (FPGA) for latency-sensitive market
participants. See, e.g., Nasdaq, Nasdaq TotalView-ITCH 5.0, https://www.nasdaqtrader.com/content/technicalsupport/specifications/dataproducts/NQTVITCHspecification.pdf (last visited Jan. 28, 2026).
\452\ See, e.g., Nasdaq, Protocol Quick Reference (2025),
available at https://www.nasdaqtrader.com/content/ProductsServices/TRADING/Protocols_quickref.pdf. Drop copy ports are used by market
participants for real-time monitoring of their trading activity.
See, e.g., CME Group, FAQ: Drop Copy (2025), available at https://www.cmegroup.com/solutions/market-access/globex/trade-on-globex/faq-drop-copy.html#title-one (last accessed Jan. 16, 2026).
\453\ See, e.g., Cboe, Cboe Titanium US Equities/Options
Multicast Depth of Book (PITCH) Specification, Version 2.41.65
(2026) https://cdn.cboe.com/resources/membership/US_EQUITIES_OPTIONS_MULTICAST_PITCH_SPECIFICATION.pdf (last accessed
Jan. 28, 2026); Nasdaq TotalView-ITCH 5.0, supra note 451.
\454\ See Nasdaq Rule General 8 https://listingcenter.nasdaq.com/rulebook/nasdaq/rules/Nasdaq%20General%208.
\455\ Generally, direct market access refers to an arrangement
whereby a member permits a customer to use the member's trading
systems to send orders directly to a trading center, and sponsored
access refers to an arrangement whereby a member permits a customer
to send orders directly to an exchange while bypassing the member's
trading system. See Securities Exchange Act Release No. 63241 (Nov.
3, 2010), 75 FR 69792 at 69793 (Nov. 15, 2010) (``Rule 15c3-5
Adopting Release'') at 69793.
\456\ Co-location services may be offered by third parties at
third party data centers. These third parties may effectively host
the market participant and handle connections, including ports and
cross-connects in colocation. See, e.g., Cboe, Cboe Titanium U.S.
Equities/Options Connectivity Manual Version 10.4.26 (2026), at 3
(describing ways to connect), 39 (listing extranet providers)
https://cdn.cboe.com/resources/membership/US_Equities_Options_Connectivity_Manual.pdf.
---------------------------------------------------------------------------
Modern order routing strategies require a low-latency view of the
state of the market across all exchanges so that updates are received
as quickly as possible in response to new market events.\457\ This need
is especially acute for exchanges where a market participant expects to
trade frequently. To meet this requirement, exchanges sell a variety of
real-time proprietary market data feeds. These feeds differ in their
content and latency, and therefore in their use cases. The data in top-
of-book (``TOB'') products is generally limited to the highest bid and
lowest offer and last sale price.\458\ The data in depth-of-book
(``DOB'') products provide more content, such as odd-lot quotations,
orders at prices above and below the best prices to varying levels of
depth, and information about auctions.\459\ There are also third-party
vendors that provide market data
[[Page 36693]]
derived from exchange data feeds which may be consolidated.\460\
---------------------------------------------------------------------------
\457\ See supra section VI.B.4.b (describing the need for low
latency data).
\458\ Examples of proprietary TOB products include NYSE BBO (see
https://www.nyse.com/market-data/real-time/bbo), NASDAQ Basic (see
https://www.nasdaq.com/solutions/data/equities/nasdaq-basic), and
Cboe One Feed (see https://markets.cboe.com/us/equities/market_data_services/cboe_one).
\459\ Examples of proprietary DOB products include CBOE One
Premium (see https://www.cboe.com/market_data_services/us/equities/cboe_one/), which includes five levels of aggregated depth, NYSE
Integrated (see https://www.nyse.com/data-products/catalog/integrated-feed), Nasdaq Total View (see https://www.nasdaq.com/solutions/data/equities/nasdaq-totalview), and CBOE Depth (see
https://www.cboe.com/market_data_services/us/equities/) which
include complete depth of book.
\460\ See, e.g., The World's Top Vendors Provide Cboe Market
Data, Cboe, https://www.cboe.com/market_data_services/vendors/ (last
visited Jan. 29, 2026) and Market Data Vendors, Nasdaq, https://www.nasdaq.com (subpage https://data.nasdaq.com/market-data-vendors)
(last visited Jan. 29, 2026). Note that market participants still
pay the associated market data fees to the exchanges.
---------------------------------------------------------------------------
Sophisticated market participants consider DOB data necessary for
competitive order routing strategies.\461\ The added information and
potential latency advantages of such data may create a meaningful
improvement in the performance of order routing algorithms that are
able to use this sort of view of the market.
---------------------------------------------------------------------------
\461\ See, e.g., Market Data Infrastructure Adopting Release,
section V.B.2.c.
---------------------------------------------------------------------------
The cost of proprietary DOB data and connectivity can vary by
exchange and can sometimes be substantial. For example, the monthly
non-display fee charged by one exchange for its proprietary DOB data is
$22,400.\462\ Another exchange charges a monthly non-display fee of
$2,000 for its proprietary DOB data.\463\ The monthly non-display fees
are just one component of most exchanges' market data fee schedule, and
do not include the fees for connectivity. Connectivity fees can also be
quite substantial. For example, the monthly fee charged by one exchange
for a 10 Gb connection is $18,500.\464\
---------------------------------------------------------------------------
\462\ See NYSE, NYSE Proprietary Market Data Pricing Guide
(2025), available at https://www.nyse.com/publicdocs/nyse/data/NYSE_Market_Data_Pricing.pdf.
\463\ See Cboe, Cboe U.S. Equities Fee Schedules, EDGX Equities
(2026) https://www.cboe.com/us/equities/membership/fee_schedule/edgx/. Currently, only one exchange, NYSE Texas makes proprietary
data available but does not charge for it. See, e.g., Fee Schedule
of NYSE Texas, Inc. (2026), available at https://www.nyse.com/publicdocs/nyse/markets/nyse-texas/NYSE_Texas_Fee_Schedule.pdf.
\464\ Some exchange connectivity fees have an initial fee and an
ongoing monthly fee. The initial cost of a fiber connection at
Nasdaq is $1,650 for a ULL connection or $1,100 for a regular
connection and the monthly ongoing cost for a 10 Gb ULL connection
is $18,500. See Nasdaq Rule General 8, supra note 454. The initial
cost of a dedicated cabinet at NYSE is $5,000 and a monthly fee of
$1,200 would be charged per the first 8 kilowatts (kW). See NYSE,
Connectivity Fee Schedule (2026), available at https://www.nyse.com/publicdocs/nyse/Wireless_Connectivity_Fees_and_Charges.pdf.
---------------------------------------------------------------------------
The Commission estimates that the total annual cost to purchase DOB
market data from all exchanges is about $1.6 million.\465\ The
Commission estimates that the total annual cost to purchase a
connection to all exchanges is about $2.6 million.\466\ It is the
Commission's understanding that broker-dealers that connect to all (or
almost all) exchanges would likely have two use cases for proprietary
data feeds and thus would pay data fees for each use case. Thus, we
estimate that a broker-dealer that connects to all exchanges spends
approximately $5.7 million on market data and connectivity fees per
year.\467\
---------------------------------------------------------------------------
\465\ In 2019, IEX estimated that consuming market data from the
Nasdaq, NYSE, and Cboe exchange families costs approximately
$1,151,772 per year. See Letter from Brad Katsuyama, CEO, Investors
Exchange LLC, to Brent J. Fields, Secretary, Commission (Jan. 29,
2019) (``Letter from IEX 2019''). We updated this analysis. First,
we, added the yearly market data fees of $255,480 charged by the
exchanges that have entered since 2019: IEX, MEMX, MIAX Pearl, LTSE,
and 24X. Second, since 2019, the Nasdaq, NYSE, and Cboe exchange
families have had some fee increases. We estimate the cost of
consuming market data from the Nasdaq, NYSE, and Cboe exchange
families is approximately $1,333,248 per year. Thus, ($255,480) +
($1,333,248) = $1,588,728.
\466\ In 2019, IEX estimated that purchasing physical and
logical connections from the Nasdaq, NYSE, and Cboe exchange
families' costs approximately $1,230,000 per year. See Letter from
IEX 2019. We updated this analysis. First, we, added the yearly
connectivity fees of $1,025,400 charged by the exchanges that have
entered since 2019, IEX, MEMX, MIAX Pearl, LTSE, and 24X. Second,
since 2019, the Nasdaq, NYSE, and Cboe exchange families have had
some fee increases. We estimate the cost of purchasing connectivity
to the Nasdaq, NYSE, and Cboe exchange families is approximately
$1,546,944 per year. Thus, ($1,025,400) + ($1,546,944) = $2,572,344.
\467\ See supra notes 465 and 466. The total cost is thus (cost
of market data x 2) + (cost of connectivity). For the new exchanges,
we have ($255,480 x 2) + ($1,025,400) = $1,536,360. For the existing
exchanges, we have ($1,333,248 x 2) + ($1,546,944) = $4,213,440.
Thus, ($1,536,360) + ($4,213,440) = $5,749,800.
---------------------------------------------------------------------------
Another source of real-time market data is the SIP, which sells
market data that contains the top of book of each exchange, and last
sale information, as well as administrative and market status messages.
The Commission understands that most market participants who execute
orders purchase a non-display subscription to the SIP. The SIP's
administrative and market status messages are important to market
participants, and the SIP can also serve as a backup in the event that
a market participant's exchange proprietary feed goes down. The SIP
might also serve as a sufficient view of the activity on small
exchanges where a market participant does not expect to trade
frequently.
However, the Commission understands that sophisticated market
participants typically do not regard the SIP as a substitute for
purchasing DOB data from the vast majority of exchanges. The lack of
odd-lot, depth and auction information may make the SIP insufficient
for the needs of sophisticated order routing strategies.\468\ In
addition, proprietary DOB feeds generally have significantly lower
latency (i.e., are faster) than the SIP.\469\
---------------------------------------------------------------------------
\468\ See, e.g., Market Data Infrastructure Adopting Release,
section V.B.2.c.
\469\ See, e.g., Real Time Data, NYSE, https://www.nyse.com/market-data/real-time (last visited Jan. 22, 2026) (describing
order-by-order feed, NYSE Integrated, as a ``high-performance''
product). Consolidated market data feeds sold by market data
aggregators also tend to be lower latency than the SIP. This is due
to both faster aggregation times and the unique geographic latency
profile of SIP data. See Equity Market Structure Roundtables, Oct.
25-26, 2018: Roundtable on Market Data and Market Access, SEC,
available at https://www.sec.gov/spotlight/equity-market-structure-roundtables (``Market Data Roundtable''), Day One Transcript at 126-
29 (Mark Skalabrin, Redline Trading Solutions).
---------------------------------------------------------------------------
The SIP is less expensive than purchasing proprietary market data
from all exchanges by a substantial amount. For example, the monthly
non-display fee for data charged by the CTA/CQ SIP, is $2,000 for
Network A and $1,000 for Network B.\470\
---------------------------------------------------------------------------
\470\ See CTA Plan, Schedule of Market Data Charges (Jan. 1,
2015), available at https://www.ctaplan.com/publicdocs/ctaplan/notifications/trader-update/Schedule%20Of%20Market%20Data%20Charges%20-%20January%201,%202015.pdf.
---------------------------------------------------------------------------
In the fourth quarter of 2025, there were approximately 4-6 million
non-professional subscribers and 300,000 professional subscribers
across the UTP and CTA/CQ SIPS.\471\ There were also approximately 400
non-display vendors.
---------------------------------------------------------------------------
\471\ See UTP Q4 2025, available at https://www.utpplan.com/DOC/UTP_2025_Q4_Stats_with_Processor_Stats.pdf; CTA Q4 2025, available
at https://www.ctaplan.com/publicdocs/ctaplan/Q4_2025_CTA_Subscribers_Metrics_Report.pdf. It is the Commission's
understanding that there is an overlap in subscribers across the
exclusive SIPs.
---------------------------------------------------------------------------
[[Page 36694]]
Market participants have estimated the total costs to onboard a new
exchange at $1 million on the execution side and $500,000 on the
clearing side.\472\ Additionally, market participants have estimated
the ongoing maintenance costs to be about $200,000 a year.\473\ The
Commission estimated that the total annual cost to connect to and
intake market data from all exchanges is approximately $5.7 million per
broker-dealer.\474\ The cost to connect to an exchange may be lower for
some market participants if they utilize a third-party vendor, but the
cost to intake market data from an exchange may not necessarily be
lower if they utilize a third-party vendor because the structure of
fees is such that the original market data fees are passed
through.\475\ The cost to connect to and intake market data from an
exchange may also be higher for other market participants if they
utilize co-location services offered by the exchanges, or if they
require more connections or market data use cases than estimated.
---------------------------------------------------------------------------
\472\ See First TTR Roundtable Transcript at 68-69 (Pankil
Patel, Bank of America) (This market participant said these costs
include ``third party sourcing, procurement, technology, testing,
hardware, CAD integration, [and] billing'').
\473\ See First TTR Roundtable Transcript at 68-69 (Pankil
Patel, Bank of America).
\474\ See supra note 467. See also FIA PTG Paper at 1 (stating
that ``major firms [spend] millions annually just on market data and
connectivity fees'').
\475\ See also First TTR Roundtable Transcript at 158 (Allison
Bishop, Proof Trading).
---------------------------------------------------------------------------
Some market participants who are not particularly sensitive to
latency, such as retail or non-professional investors and wealth
managers who access market data in a displayed format, may use
proprietary TOB data or the SIP.\476\ To satisfy obligations under Rule
603 (i.e., the ``Vendor Display Rule''), which requires broker-dealers
to show a consolidated display of market data in a context in which a
trading or order routing decision can be made, broker-dealers rely on
SIP data for this purpose.\477\ Many retail investors use SIP data for
trading decisions.
---------------------------------------------------------------------------
\476\ See Letter from Matthew J. Billings, Managing Director,
Market Data Strategy, TD Ameritrade, (Oct. 24, 2018) (``TD
Ameritrade Letter 2018''), available at https://www.sec.gov/comments/4-729/4729-4560068-176205.pdf at 5-8.
\477\ See Vendor Display Rule, Rule 603 of Regulation NMS. See
also TD Ameritrade Letter 2018 at 4-8.
---------------------------------------------------------------------------
d. SIP Revenue Allocation
Currently, part of the SIP data revenue is used to pay for the cost
of maintenance and administration of the SIP and the remainder is
distributed to SRO members based on trading and quoting activity.\478\
The trade and quote revenue distributed to exchanges from the exclusive
SIP revenues totaled more than $300 million in 2024.\479\ For some
smaller exchanges, this can be a substantial revenue source.\480\
Obtaining a share of the SIP revenue may represent a meaningful
incentive for new entrants to start an exchange.\481\ This incentive
may contribute both to the rate of new entries in the equity exchange
market and to new exchanges adopting fee schedules that encourage
posting liquidity.
---------------------------------------------------------------------------
\478\ See Notice of Filing of a National Market System Plan
Regarding Consolidated Equity Market Data, Securities Exchange Act
Release No. 90096 (Oct. 6, 2020), 85 FR 64565 (Oct. 13, 2020) at
Exhibit D.
\479\ See CTA 2024-Q4, available at https://www.ctaplan.com/publicdocs/ctaplan/Q4_2024_CTA_Quarterly_Revenue_Disclosure.pdf; UTP
Plan Admin., Revenue Earned by Fee Type, 2024-Q4, available at
https://www.utpplan.com/DOC/UTP_Revenue_Disclosure_Q42024.pdf (last
accessed Mar. 12, 2026).
\480\ For example, SIP revenue accounted for close to 60% of
LTSE's total revenue in 2024. See LTSE Form 1, available at https://www.sec.gov/Archives/edgar/vprr/2500/25000224.pdf (last accessed
Mar. 3, 2026). On the other hand, SIP revenue only accounted for
just over 3% of MEMX's total revenue in 2024. Market data and
connectivity accounted for about 4% and 5%, respectively. Note that
the vast majority of the market data revenue is from SIP revenue.
See MEMX Form 1, available at https://www.sec.gov/Archives/edgar/vprr/2500/25000228.pdf (last accessed Mar. 3, 2026). See also CTA
Quarterly Revenue Disclosure and UTP Quarterly Revenue Disclosure,
supra note 479.
\481\ See, e.g., Cboe Letter II at 3.
---------------------------------------------------------------------------
e. The Value of Access To Exchange Liquidity
Despite the large and increasing number of exchanges for trading
NMS stocks, the Commission believes there are signs that exchanges,
especially large ones, possess some market power over their data and
connectivity products. It is likely that this ability to obtain revenue
from proprietary data and connectivity sales, even with modest market
share, has contributed to exchange proliferation since the adoption of
Regulation NMS.\482\
---------------------------------------------------------------------------
\482\ See infra section VI.B.4.f (discussing the role of
Regulation NMS itself in this trend).
---------------------------------------------------------------------------
Many broker-dealers view proprietary data and connectivity services
as necessary to be a competitive executing broker-dealer. As a result,
they purchase these services from many, if not all, exchanges. This
pattern of establishing connections to most exchanges has increased
over time. The Commission has released data from a sample period
consisting of the week of December 5, 2016. During that week, broker-
dealers that connected to at least all but two exchanges accounted for
76.6% of exchange-directed message volume, and broker-dealers that
connected to at least all but three exchanges accounted for 91.6%.\483\
At that time, the Commission characterized the demand for connectivity
services of exchanges as ``less elastic,'' and said this was consistent
``. . . with the stated view that in order to avoid a competitive
disadvantage, market participants have little choice but to purchase
direct connectivity services from multiple SROs.'' \484\
---------------------------------------------------------------------------
\483\ See Market Data Infrastructure Adopting Release, at 18740,
n.1794.
\484\ See Market Data Infrastructure Adopting Release at 18740.
---------------------------------------------------------------------------
Currently, the percentage of exchange-directed message volume
accounted for by broker-dealers who connected to at least all but two
exchanges is 66%, and the percentage of exchange-directed message
volume accounted for by broker-dealers connected to at least all but
three exchanges is 93.4%.\485\ However, today's numbers are based on
the current number of active exchanges, which stands at 17. At the time
of the 2016 study, there were only 13 exchanges. To hold the number of
exchanges constant, one should look at the percentage of exchange-
directed message volume handled by broker-dealers connected to at least
11 exchanges and at least 10 exchanges. Currently, those percentages
are 95.1% and 95.4%, respectively.\486\
---------------------------------------------------------------------------
\485\ This analysis was completed using CAT data for the month
of January 2026. A broker-dealer is defined by its firm Central
Registration Depository numeric identifier (CRD). A broker-dealer
that submits the order to the exchange is the executing broker-
dealer. An executing connection is where a broker-dealer submitted
an order directly to an exchange. The number of connections may be
larger to the extent that there are market participants with a
connection that do not have any orders or trades during the sample
period. Certain CRDs may be affiliates.
\486\ This analysis was completed using CAT data for the month
of January 2026.
---------------------------------------------------------------------------
Executed dollar volume is a better measure than message volume
because message volume includes cancellation and other messages.\487\
The percentage of exchange-directed executed dollar volume from broker-
dealers connected to at least all but two exchanges is 78.4%, and the
percentage of exchange-directed executed dollar volume handled by
broker-dealers connected to at least all but three exchanges is
92.3%.\488\ Holding the number of exchanges constant since 2016, the
percentage of exchange-directed executed dollar volume handled by
[[Page 36695]]
broker-dealers connected to at least 11 exchanges is 95.6%.\489\
---------------------------------------------------------------------------
\487\ Cancellation messages may be a substantial proportion of
total message volume. See Market Structure Data Downloads,
Conditional Cancel and Trade Distributions, available at https://www.sec.gov/data-research/market-structure-data.
\488\ This analysis was completed using CAT data for the month
of January 2026.
\489\ This analysis was completed using CAT data for the month
of January 2026.
---------------------------------------------------------------------------
This appears to reflect a trend in which the vast bulk of activity
in the NMS stock market is handled by broker-dealers who determine it
is necessary to connect to most if not all equity exchanges, suggesting
that the competitive pressure on broker-dealers to connect to most
exchanges, as identified by the Commission in 2020, remains persistent,
and may be increasing.
Table 1--Executing Dollar Volume by Number of Broker Connections to Exchanges
--------------------------------------------------------------------------------------------------------------------------------------------------------
All Customer only
-----------------------------------------------------------------------------------------------
Number of exchange connections Number of % Shares % Dollar Number of % Shares % Dollar
brokers traded volume brokers traded volume
--------------------------------------------------------------------------------------------------------------------------------------------------------
17...................................................... 18 65.6 59.3 17 68 62.7
16...................................................... 5 10.7 13 5 13 19.1
15...................................................... 6 5.6 6 3 7.2 8.6
14...................................................... 7 9.1 13.9 2 0.7 1.4
11-13................................................... 8 3.8 3.4 8 6.8 5.9
3 to 10................................................. 57 4.2 2.7 41 3.6 2
2....................................................... 28 0.3 0.2 25 0.5 0.1
1....................................................... 84 0.6 1.5 72 0.2 0.2
0....................................................... 858 0 0 822 0 0
--------------------------------------------------------------------------------------------------------------------------------------------------------
This table uses CAT data from January 2026 to show information on the number of exchanges different broker-dealers connect to (infra Table 3 shows
information on the number of ATSs these broker-dealers connect to). It also shows the percentages of exchange executed dollar and share volume that
these broker-dealers accounted for. The ``All'' category reflects exchange trading volume from orders that originate from either a customer or
proprietary account and the ``Customer Only'' category only reflects exchange trading volume from orders that originate from a customer account. The
sample for the ``All'' category consists of 1,071 broker-dealers that either originated or executed an order from a proprietary or customer account on
an exchange or ATS in January 2026 (both exchanges and ATSs are included in constructing the sample of broker-dealers to make this table and infra
Table 3 comparable). The sample for the ``Customer Only'' category consists of 995 broker-dealers that either originated or executed an order from a
customer account on an exchange or ATS in January 2026.
Broker-dealers are categorized by the number of executing connections found. A broker-dealer is defined by its firm Central Registration Depository
numeric identifier (``CRD''). An executing connection is where a broker-dealer submitted an order directly to an exchange. The number of connections
may be understated if some market participants maintain connections but do not have any orders or trades during the sample period. The potential for
undercounting connections may be larger on exchanges with lower volume.
Originating broker-dealer clients are categorized as customer accounts (individual, institutional, foreign, or agency average price accounts) or
proprietary accounts (market making, employee, error, or other proprietary accounts). The category ``All'' reflects orders originating from all
account types, whereas ``Customer Only'' reflects orders from customer accounts only.
For the ``All'' sample, in January 2026, 213 broker-dealer CRDs submitted an order to an exchange, 186 submitted an order to an ATS, and 277 submitted
an order to either an exchange or an ATS. Each order is traced to its origin where an originating broker-dealer received the order from a client.
1,041 broker-dealer CRDs originated an order that went to an exchange, 1,031 originated an order that went to an ATS, and 1,060 originated an order
that went to either an exchange or an ATS. The originating broker-dealer may be the same or different from the executing broker-dealer. The executing
broker-dealer submits the order to the exchange or ATS. 1,050 broker-dealer CRDs either originated or executed an order that went to an exchange,
1,037 broker-dealer CRDs either originated or executed an order that went to an ATS, and 1,071 broker-dealer CRDs either originated or executed an
order that went to an exchange or ATS.
For the ``Customer Only'' sample, in January 2026, 173 broker-dealers submitted a customer order to an exchange, 151 submitted a customer order to an
ATS, and 229 submitted a customer order to an exchange or ATS; 959 broker-dealer CRDs originated a customer order that went to an exchange, 957
originated a customer order to an ATS, and 978 originated a customer order to either an exchange or an ATS. In total, 974 broker-dealers either
originated or executed a customer order that went to an exchange, 967 broker-dealers either originated or executed a customer order that went to an
ATS, and 995 broker-dealers either originated or executed a customer order that went to an exchange or ATS.
Table 2--Executing Volume by Number of Broker Connections and Memberships to Exchanges
--------------------------------------------------------------------------------------------------------------------------------------------------------
All Customer
Number of -----------------------------------------------------------------------------------------------
Number of exchange memberships exchange Number of % Shares % Dollar Number of % Shares % Dollar
connections brokers traded volume brokers traded volume
--------------------------------------------------------------------------------------------------------------------------------------------------------
17...................................... 17 18 65.6 59.3 17 68 62.7
17...................................... 15 or 16 5 10.7 12.9 5 13 18.9
15 or 16................................ 15 or 16 6 5.6 6.1 3 7.2 8.7
14 to 16................................ 14 or fewer 11 11.6 16.4 7 2.9 4.8
1 to 13................................. 1 to 13 173 6.5 5.2 141 8.9 4.9
1 or more............................... 0 136 0 0 176 0 0
0....................................... 0 746 0 0 716 0 0
--------------------------------------------------------------------------------------------------------------------------------------------------------
This table uses CAT data from January 2026 to show information on the number of exchanges different broker-dealers are members of and how many of these
exchanges they connect to. It also shows the percentages of exchange executed dollar and share volume that these broker-dealers accounted for. The
``All'' category reflects exchange trading volume from orders that originate from either a customer or proprietary account and the ``Customer Only''
category only reflects exchange trading volume from orders that originate from a customer account. The sample for the ``All'' category consists of
1,095 broker-dealers that were members of an exchange and/or originated or executed an order from a proprietary or customer account on an exchange or
ATS in January 2026 (i.e., it includes the 1,071 broker-dealers in the sample in supra Table 1 plus 24 broker-dealers that are members of an exchange
but did not originate or execute an order on an exchange or ATS). The sample for the ``Customer Only'' category consists of 1,065 broker-dealers that
were members of an exchange and/or originated or executed an order from a customer account on an exchange or ATS in January 2026 (i.e., it includes
the 995 broker-dealers in the sample in supra Table 1 plus 70 broker-dealers that are members of an exchange but did not originate or execute a
customer order on an exchange or ATS).
[[Page 36696]]
This table uses the same methodology as described above in supra Table 1 (discussing originating broker-dealers, executing broker-dealers, customer
account types, and the number of broker-dealer connections observed broken down by venue, broker-dealer, and account types). A broker-dealer is
defined by its firm CRD. Broker-dealers are categorized by their number of executing connections to exchanges. Broker-dealers are also categorized by
the number of exchanges where they maintained a membership in January 2026 according to CAT industry member reference data.
Broker-dealers with fewer connections also tend to outsource more
of their exchange-directed order flow to other broker-dealers for
execution. For example, broker-dealers connecting to all exchanges
outsourced only 2.9% of their exchange dollar volume, compared to
broker-dealers connecting to 15 exchanges who outsourced 9.4% and
broker-dealers connecting to two exchanges who outsourced 91.1%.\490\
This shows that broker-dealers who connect to only two exchanges do not
use those connections for routing a significant number of their orders,
and instead rely heavily on outsourcing to get orders executed.
---------------------------------------------------------------------------
\490\ For customer exchange-directed order flow, the numbers are
5.5%, 2.5%, and 94.7%, respectively. Outsourcing percentages are
measured at order origination. Broker-dealers that do not originate
orders, such as exchange routing brokers, are not included in these
percentages. This analysis was conducted using CAT data from January
2026. Each order is traced to its origin where an originating
broker-dealer received the order from a client. The originating
broker-dealer may be the same or different from the executing
broker-dealer. Originating broker-dealer clients are categorized as
customer accounts (individual, institutional, foreign, or agency
average price accounts) or proprietary accounts (market making,
employee, error, or other proprietary accounts) based on their
account type. For the Consolidated Audit Trail, account type
definitions are available in Appendix G to the CAT Reporting
Technical Specifications for Industry Members (https://catnmsplan.com), for the field name ``accountHolderType.'' Account
types represent the beneficial owner of the account for which an
order was received or originated, or to which the shares or
contracts are allocated. Possible types are: Institutional Customer,
Employee, Foreign, Individual Customer, Market Making, Firm Agency
Average Price, Other Proprietary, and Error. An Institutional
Customer account is defined by FINRA Rule 4512(c) as a bank,
investment adviser, or any other person with total assets of at
least $50 million. An Individual Customer account means an account
that does not meet the definition of an ``institution'' and is also
not a proprietary account. Therefore, the CAT account type
``Individual Customer'' includes natural persons as well as
corporate entities that do not meet the definitions for other
account types.
---------------------------------------------------------------------------
In addition to this evidence, the market for exchange data \491\
and connections has experienced repeated fee increases, even as new
entrants entered the market.\492\ This is consistent with exchanges
possessing pricing power. More recently, the market has seen a number
of new exchanges start charging fees for connections and data.\493\ A
new exchange is observed to gain a sizeable number of members in the
first month of operation.\494\ While not all members may have a
connection to an exchange,\495\ this is suggestive of broker-dealers'
incentives to immediately connect to new exchanges. As Table 1 shows,
exchange-directed order flow is routed by largely the same group of
broker-dealers that connect to all or almost all exchanges, so these
fees represent an increase in overall connectivity and data expense for
these broker-dealers. This may demonstrate a further ability of
suppliers in the market to raise prices on this customer group. These
fee increases, or new fees, have come over a period of time in which
there have been new entrants in the market, suggesting that the
presence of additional exchanges has not lowered demand for these
connections and data.
---------------------------------------------------------------------------
\491\ The data presented in Table 1 reflects evidence of a
connection between the broker-dealer and the exchange but does not
characterize the type or number of connections purchased. It is not
necessary that a broker-dealer purchase market data of any type in
order to produce a record of order entry such as the records used to
produce Table 1, but the Commission believes it is typical for a
broker-dealer to purchase message-by-message market data from all
exchanges on which it trades.
\492\ See supra section VI.B.4.a (discussing new entrants to the
exchange market). See Market Data Infrastructure Adopting Release at
18738 (discussing commenter calculations of fee increases and
revenue increases). See also Eric Budish, et al., A Theory of Stock
Exchange Competition and Innovation: Will the Market Fix the
Market?, 132 J. Pol. Econ. 1065 (2024) (estimating that in 2015
exchanges earned $555.4-$623.0M in market data revenue and $436.8-
$484.8M in connectivity revenue). See also infra note 511.
\493\ See supra section VI.B.4.c (estimating exchange fees).
Some new exchanges may not charge fees for market data or
connectivity at first. See First TTR Roundtable Transcript at 86-87
(Chris Solgan, MIAX Exchange Group) (describing initial waivers of
data and connectivity fees for new exchanges).
\494\ In analysis completed using CAT data for the month of
October 2025, the new exchange was observed to have 25 members.
\495\ See supra Table 2.
---------------------------------------------------------------------------
Taken together, this evidence suggests that access to one
exchange's limit order book is not a strong substitute for access to
another exchange's limit order book. There may be several reasons for
this.
Most fundamentally, access to two different exchanges does not give
access to the same thing. The limit order against which broker-dealers
hope to fill the orders of their customers are unique to the exchange
on which they are posted, and execution cannot be conditioned on the
events of a different exchange.\496\ For example, suppose there are 100
shares available to buy on Exchange A and 100 shares available to buy
on Exchange B and no other liquidity available. A broker-dealer who
wishes to buy 200 shares cannot substitute access to the shares on
Exchange A with access to the shares on Exchange B. At that point in
time, each exchange is only capable of giving it 100 shares, and to
fill a 200 share order, the broker-dealer must possess connections to
both, which effectively means purchasing connectivity and data services
to both.\497\
---------------------------------------------------------------------------
\496\ There are certain order types, such as midpoint peg
orders, in which the price that the order executes at depends on the
NBBO, which may be set by another exchange.
\497\ In practice, market participants may use a third-party
broker-dealer to route orders to exchanges to which they do not
possess connections. Such third-party broker-dealers can include
brokage services offered by the exchanges, which will route orders
to the protected quote if the exchange does not have the protected
quote. A commission of some kind would typically be paid for such
services. Since this practice effectively amounts to outsourcing
part of the order routing function, broker-dealers who wish to offer
order routing services may find it difficult to add value to their
customers while relying on such services.
---------------------------------------------------------------------------
This distinction ends up being of substantial practical
significance, because the parent orders that a broker-dealer is likely
to receive from an institutional customer are typically much larger
than even the total number of shares available at the top of every
exchange in the market combined. Therefore, it is highly unlikely that
an institutional broker-dealer can fill a single order by taking shares
from only a single exchange. Instead, a broker-dealer will have to
combine the liquidity available on all exchanges, often multiple times
over, to fill a single parent order. This effectively means that the
broker-dealer cannot substitute one exchange for another; it will
generally need access to all relevant exchanges to be competitive.\498\
---------------------------------------------------------------------------
\498\ Evaluations by broker-dealers regarding the appropriate
venues to be connected to may also be part of their review of
compliance with requirements of best execution obligations.
---------------------------------------------------------------------------
Market makers and other proprietary traders face a similar
phenomenon. Market makers offer to fill orders by sourcing shares at a
discount to the price at which they sell them. Throughout the trading
day, a quote on any exchange might become cheap relative to changing
market conditions. Market makers who can rapidly hit this quote will
have a cheaper source of liquidity than market makers who are
constrained to a subset of the exchanges, and will have no choice but
to post wider, and therefore less competitive, quotes.
[[Page 36697]]
While exchanges might not face close substitutes for data and
connectivity products, conditional on a market participant being
connected to the exchanges, the exchanges are potentially close
substitutes for order routing. If a broker-dealer has paid the
subscription costs for data and connections, it faces notable
similarities in the functioning of exchange limit order books across
different exchanges, particularly with a given fee model type (e.g.,
maker-taker, inverted,\499\ etc.). The competition among exchanges that
this substitutability induces may be reflected in the fees typically
charged to a market participant who has already paid for connections
and chooses to route a limit order to a particular exchange. These fees
are in fact, typically negative; that is, the exchange pays a rebate to
the poster of a limit order that is traded against by a marketable
order.
---------------------------------------------------------------------------
\499\ In an ``inverted'' pricing model, the exchange charges a
fee to the provider of liquidity and pays a rebate to the taker of
liquidity.
---------------------------------------------------------------------------
The fact that exchanges face more competition for attracting limit
orders than they do for data and connections is consistent with
academic research on markets with multi-sided platforms. A multi-sided
platform is a firm which sells two or more methods of accessing a
network, in which participation on one side or the other creates cross-
network externalities.\500\ Exchanges serve as two-sided platforms,
with trading activity on one side and data and connections on the
other.\501\ The lack of substitutability and the need to obtain access
to liquidity on every exchange induces behavior known in the platform
theory literature as ``multi-homing,'' which refers to a market where
the consumers acquire access to every platform.\502\ On the other hand,
since a limit order can only be posted to one exchange at a time,
participation on the trading side of the exchange platform exhibits
``single-homing,'' that is, participation at the point of posting a
limit order is constrained to only one venue at a time.\503\
---------------------------------------------------------------------------
\500\ See Marc Rysman, The Economics of Two-Sided Markets, 23 J.
Econ. Perspectives 125, 127 n.2 (2009) (``Rysman (2009)'') (citing
disagreement about whether cross-network externalities are a
necessary part of the definition of a platform). Rochet and Tirole
(2006) define a platform as ``one in which the volume of
transactions between end-users depends on the structure and not only
on the overall level of the fees.'' See Jean-Charles Rochet & Jean
Tirole, Two-Sided Markets: A Progress Report, 37 RAND J. Econ. 645,
646 (2006). This would include markets with a fixed membership fee
and a membership externality. The fixed nature of the fee means
there would be no network externality, as the decision to be a
member happens before the size of the platform (i.e., the number of
members on each side) is known. There may also be disagreement about
specific markets being platforms. See Rysman (2009) at 126, n.1
(citing contrasting views about whether a specific market--grocery
stores--is a platform). See also Mark Armstrong, Competition in Two-
Sided Markets, 37 RAND J. Econ. 668 (2006) (``Armstrong (2006)'')).
Platforms exhibit cross-network externalities when a user's utility
depends on the number of users on the other side. Cross-network
externalities can also be referred to as cross-group or indirect
network effects, also called cross- or indirect network
externalities. See Rysman (2009) at 127.
\501\ There is evidence for positive and negative externalities
between trading and proprietary market data. One academic paper
finds evidence for a positive network externality from more data to
trading: not only do users that subscribe to data on a given
exchange trade more on that exchange, but also more trading by these
users leads to more trading by users who don't subscribe to data on
that exchange. See Terrence Hendershott et al., Stock Exchanges as
Platforms for Data and Trading, 75 J. Fin. Mkt. 100986 (2025)
(``Hendershott, Rysman, and Schwabe (2025)''). Another academic
paper finds a decrease in an exchange's share of trading volume
following an increase in the exchange's data fees, which is also
consistent with a positive externality. See Jonathan Brogaard et
al., Competition and Exchange Data Fees (working paper Oct. 10,
2024) available at https://papers.ssrn.com/abstract_id=3703431
(retrieved from SSRN Elsevier database) (``Brogaard, Brugler, and
R[ouml]sch (2024)''). However, the traders who purchase data can
also exert negative externalities on traders who do not purchase
data as the data can help traders to be more informed. See Brogaard,
Brugler, and R[ouml]sch (2024) (citing David Easley et al.,
Differential Access to Price Information in Financial Markets, 51 J.
Fin. Quantitative Analysis 1071 (2016). See also Vincent Glode et
al., Arms Sales in Financial Markets (Jacobs Levy Equity Mgmt. Ctr.
Quantitative Fin. Rsch. Paper May 30, 2025), available at https://ssrn.com/abstract=4146808 (retrieved from SSRN Elsevier database);
Konstantin Sokolov, et al., Who Benefits from Securities Exchange
Innovation? (working paper May 15, 2024) available at https://papers.ssrn.com/abstract_id=4260872 (retrieved from SSRN Elsevier
database). The positive externalities are likely to be larger,
because few traders do not purchase data. Other elements of the
exchange business, such as listings, can also fit into this platform
model, but are not relevant to this discussion.
\502\ See Armstrong (2006) at 669.
\503\ See Armstrong (2006) at 669.
---------------------------------------------------------------------------
A platform with multi-homing participants on one side and single
homing participants on the other is called a ``competitive bottleneck''
platform. The platforms in a competitive bottleneck market control
access to the participants on the single homing side (limit orders) by
charging fees to the multi homing side (the connections and data).
Economic theory has shown that in such markets, platforms compete to
attract users on the single homing side and exert monopoly power on the
multi homing side in the form of high prices.\504\
---------------------------------------------------------------------------
\504\ See Armstrong (2006). In platform markets, and especially
in platform markets with competitive bottleneck configurations, ``it
does not make sense to speak of the competitiveness of `the market'.
There are two markets.'' See Armstrong (2006) at 689.
---------------------------------------------------------------------------
f. The Role of Rules 611 and 610(e) in the Value of Access To Exchange
Liquidity
The Commission discusses above how, in the current equity market,
exchanges possess some market power in the sale of data and
connectivity services, and that this may have contributed to the
proliferation of exchanges over years since Regulation NMS was
implemented.\505\ The Commission believes that Rules 611 and 610(e)
also play a role in creating this market power.\506\
---------------------------------------------------------------------------
\505\ See supra section VI.B.4.e.
\506\ Some commenters stated that Rule 611 has led to exchange
proliferation. See, e.g., J. Angel Letter at 1, 16; Robinhood Letter
at 2-5. Some commenters also stated that Rule 611 requires broker-
dealers to connect to all exchanges. See, e.g., Robinhood Letter at
2, 5; First TTR Roundtable Transcript at 68-69 (Pankil Patel, Bank
of America).
---------------------------------------------------------------------------
Rule 611 creates an ``interference cost'' for not connecting to
every trading center which may have a protected quote. To see this,
suppose that a broker-dealer is connected to all exchanges, and a new
exchange enters the market. If the broker-dealer chooses not to connect
to this exchange, then every time this new exchange has the protected
quote, the broker-dealer must either utilize another broker-dealer who
is connected to that exchange to hit this quote,\507\ or wait until
this quote disappears before resuming trading. When this happens, it
slows down trading and increases the risk of missed liquidity
opportunities, thus raising transaction costs. The Commission believes
that, while these interruptions triggered by this new exchange having
the protected quote will be infrequent throughout the trading day, they
will be meaningful enough to raise transaction costs to a measurable
degree. This meaningful interruption creates an interference cost for
not connecting to the new exchange, and this cost could be larger than
the cost of connecting.\508\ The Commission observes that the broker-
dealers that account for the majority of executed dollar volume appear
to connect to all exchanges, consistent with this interference cost
being a cost they are unwilling to bear. In addition, the Commission
believes
[[Page 36698]]
that as a new exchange gains more market share, this interference cost
increases, because the exchange has the best quote more often and thus
interferes with broker-dealers' routing more often. This may increase
the percentage of exchange-directed dollar volume routed by broker-
dealers connecting to all exchanges.\509\
---------------------------------------------------------------------------
\507\ The routing services offered by broker-dealer exchanges
might be used for this purpose. The Commission believes that
utilizing a broker-dealer to handle such routing may not result in
performance that matches the performance of a SOR that handles all
routes itself, because the technology and response of the third-
party broker-dealer is not integrated and coordinated with the
decisions being made by the SOR as well as it might be if it were
all handled by a single system.
\508\ See supra section VI.B.4.c. (discussing the startup costs
incurred by broker-dealers to integrate a new exchange into its
routing system, including data and connection fees).
\509\ If broker-dealers choose to not connect to a new exchange,
they may choose to use an executing broker-dealer in order to reach
the quotes on the new exchange.
---------------------------------------------------------------------------
Rule 610(e) is likely also creating an interference cost, though it
is likely smaller than the interference cost associated with Rule 611.
If a market participant wishes to post a quote that will lock the
market, and it is not connected to the exchange which has the quote it
will lock, it will have to wait until someone else either cancels or
trades against that quotation. Alternatively, the participant can
submit the order, in which case the exchange will either route the
order to the exchange with the best quote or post the order but
``slide'' the order's price so that it does not lock the market.\510\
This may interfere with the market participant's routing strategy,
leading to increased transaction costs.
---------------------------------------------------------------------------
\510\ A ``hide not slide'' order type allows an order that would
lock the market to be hidden while it would lock the markets, rather
than sliding the price. Then, the order becomes visible once it
would no longer lock the market. See supra section VI.B.1.b
(discussing exchange order types to avoid locking and crossing
markets).
---------------------------------------------------------------------------
This interference cost from Rules 611 and 610(e) contributes to the
incentive to connect to as many exchanges as possible. In addition,
even if a broker-dealer chooses not to connect to an exchange, it will
still need to either subscribe to the exchange's market data or to the
SIP and update its SOR to comply with Rule 611 and 610(e) (e.g., for
routing ISOs). Because the interference cost has the effect of reducing
the elasticity of demand for exchange connections, it may also enable
exchanges to charge higher prices for data and connections, creating an
``interference premium'' in prices.\511\
---------------------------------------------------------------------------
\511\ While new exchanges may not initially charge fees for
market data and connectivity (see infra note 729), they often begin
charging fees after gaining a small market share. For example, one
exchange had a market share of 0.1% in February 2026 and charges
market data fees. See U.S. Equities Market Volume Summary, supra
note 443; see also 24X, 24X Market Data Fees (2026), available at
https://equities.24exchange.com/api/media/file/24X%20Market%20Data%20Fees-2.pdf.
---------------------------------------------------------------------------
There are reasons to believe that the demand for ATS connections is
more elastic than the demand for exchange connections. One reason is
that ATSs represent a market for trading services that do not command
an interference cost, as no ATS currently has a protected quote.\512\
Another reason is that most ATSs are not subject to the fair access
requirements and may thus have more flexibility in determining their
business models.\513\ It may be that some broker-dealers regularly
disconnect from ATSs \514\ and take longer to connect to a new ATS or
do not connect at all.\515\
---------------------------------------------------------------------------
\512\ One ATS currently has a proposal to gain trade-through
protection for its quotes. See IntelligentCross Letter at 1.
\513\ See First TTR Roundtable Transcript at 249-253 (Andrew
Smith, Virtu Financial) (stating that ATSs have ``lower barriers and
more flexibility than exchanges'').
\514\ See First TTR Roundtable Transcript at 253-256 (Vlad
Khandros, OneChronos).
\515\ See First TTR Roundtable Transcript at 216-218 (Vlad
Khandros, OneChronos). This commenter also states that it may take
longer for market participants to connect to a new ATS because they
first need to connect to a new exchange.
---------------------------------------------------------------------------
The Commission observes a corresponding difference in the pattern
of broker-dealer trading by the number of connections to ATSs compared
to the pattern of broker-dealer trading by the number of connections to
exchanges. As shown in Table 3, the majority of the ATS-directed dollar
volume is from broker-dealers that connect to approximately half of
ATSs, compared to the majority of the exchange-directed dollar volume
being from broker-dealers that connect to all or almost all
exchanges.\516\ Also, while broker-dealers with fewer ATS connections
do tend to outsource more of their ATS-directed order flow to other
broker-dealers for execution, they do so less than broker-dealers with
fewer exchange connections.\517\
---------------------------------------------------------------------------
\516\ See infra Table 3. There are 33 ATSs, but the maximum
number of connections observed is 25. Some ATSs do not permit
broker-dealers to trade on them at all and instead restricts
participation to investors or requires use of a particular executing
broker-dealer. See supra Table 1 (showing the pattern of broker-
dealer exchange-directed executing dollar volume by number of
exchange connections).
\517\ For example, broker-dealers connecting to over 20 ATSs
outsourced only 10.8% of their ATS-directed dollar volume, broker-
dealers connecting to 15 to 19 ATSs outsourced 4.2%, broker-dealers
connecting to 10 to 14 ATSs outsourced 8.5%, and broker-dealers
connecting to 1 to 9 ATSs outsourced 41.4%. This analysis was
conducted using CAT data from January 2026. See supra note 490 and
corresponding text (discussing the pattern of broker-dealer
outsourcing by number of exchange connections).
---------------------------------------------------------------------------
This comparison to the ATS market is imperfect for a number of
reasons. ATSs typically offer a different trading experience from the
experience available on a national securities exchange. ATSs typically
do not offer displayed quotations, which limits the information leakage
in both posting a quote and in trading against quotes on an ATS. It may
also be the case that market participants expect to find various pegged
orders, such as midpoint quotes, available on an ATS with a frequency
that differs from their expectations for exchange trading. ATS quotes
may also be segmented, with the goal of reducing the adverse selection
risk of posting a quote on the ATS compared to posting a quote on an
exchange. Most ATSs are not subject to fair access restrictions and can
potentially limit their subscribers.\518\
---------------------------------------------------------------------------
\518\ See infra note 516.
---------------------------------------------------------------------------
Nevertheless, the comparison is informative in considering the
impact of Rules 611 and 610(e) on the market. Rather than the majority
of ATS-directed order flow being executed by a few broker-dealers that
connect to all or almost all ATSs, which is the case for exchange-
directed order flow, ATS-directed order flow is more evenly dispersed
as broker-dealers do not tend to connect to all ATSs and handle more of
their own order flow.
Table 3--Executing Volume by Number of Broker Connections to ATSs
----------------------------------------------------------------------------------------------------------------
All Customer
-----------------------------------------------------------------------------
Number of ATS connections Number of % Shares % Dollar Number of % Shares % Dollar
brokers traded volume brokers traded volume
----------------------------------------------------------------------------------------------------------------
20 or more........................ 6 28 24.2 4 17.3 14.5
15 to 19.......................... 25 57.5 57.3 21 58.9 62.8
10 to 14.......................... 12 7.4 11.3 10 14.7 14.7
1 to 9............................ 143 7.2 7.1 116 9.2 7.9
[[Page 36699]]
0................................. 885 0 0 844 0 0
----------------------------------------------------------------------------------------------------------------
This table uses CAT data from January 2026 to show information on the number of ATSs different broker-dealers
connect to (supra Table 1 shows information on the number of exchanges these broker-dealers connect to). It
also shows the percentages of ATS executed dollar and share volume that these broker-dealers accounted for.
The ``All'' category reflects ATS trading volume from orders that originate from either a customer or
proprietary account and the ``Customer Only'' category only reflects ATS trading volume from orders that
originate from a customer account. The sample for the ``All'' category consists of 1,071 broker-dealers that
either originated or executed an order from a proprietary or customer account on an exchange or ATS in January
2026 (both exchanges and ATSs are included in constructing the sample of broker-dealers to make this table and
supra Table 1 comparable). The sample for the ``Customer Only'' category consists of 995 broker-dealers that
either originated or executed an order from a customer account on an exchange or ATS in January 2026.
This table uses the same methodology as described above in supra Table 1 (discussing originating broker-dealers,
executing broker-dealers, customer account types, and the number broker-dealer connections observed broken
down by venue, broker-dealer , and account types). A broker-dealer is defined by its firm CRD. Broker-dealers
are categorized by their number of executing connections to ATSs, which is where a broker-dealer submitted an
order directly to an ATS. The number of connections may be understated if some market participants maintain
connections but do not have any orders or trades during the sample period. The potential for undercounting
connections may be larger on ATSs with lower volume.
g. Fragmentation of Displayed Liquidity, Market Fragmentation, and
Innovation
Market fragmentation was a concern when Regulation NMS was
adopted.\519\ At the time, market fragmentation was primarily due to a
lack of electronic trading and interlinkages between trading venues,
which have changed since the adoption of Regulation NMS.\520\
Fragmentation now, both among displayed liquidity and the entire market
(including off-exchange trading), is primarily due to a proliferation
of trading venues as well as the share of trading being more split
among venues. Rule 611 and 610(e) played a role in both types of
fragmentation via exchange proliferation.\521\ This section outlines
the additional factors besides the proliferation of trading venues that
contribute to each type of fragmentation. This section also discusses
how Rule 611 may have contributed to less innovation, particularly in
trading protocols.
---------------------------------------------------------------------------
\519\ See supra note 145.
\520\ See supra section II.B.3.a.
\521\ See supra section VI.B.4.f. (discussing how Rule 611 and
610(e) contributed to exchange proliferation).
---------------------------------------------------------------------------
One potential way to capture fragmentation is using the Herfindahl-
Hirschman Index (``HHI'').\522\ For example, suppose there are five
exchanges with the following market shares: 80%, 5%, 5%, 5%, and 5%.
The HHI in this case would be 0.35.\523\ If the five exchanges instead
each have a market share of 20%, the HHI would be 0.8.\524\ Displayed
liquidity is more fragmented in the second scenario than the first
scenario because the HHI is larger in the second scenario. Staff of the
Office of Analytics and Research, Division of Trading and Markets
calculated the HHI for Nasdaq- and NYSE-listed stocks in January
2026,\525\ which allows for comparison to previous HHIs calculated for
February 2005 and February 2014.\526\ Compared to February 2005, the
January 2026 HHI is higher for Nasdaq- and NYSE-listed stocks, meaning
that market fragmentation has increased.\527\ However, compared to
February 2014, the January 2026 HHI for NYSE-listed stocks is
lower.\528\ Since 2014, there have been several new exchanges.\529\
---------------------------------------------------------------------------
\522\ The HHI is widely used to measure market concentration.
The HHI for displayed liquidity fragmentation can be calculated as
``1 minus the sum of the squared market shares of lit venues. Under
this metric, a fully centralized market would have a fragmentation
level of 0 and the maximum level of fragmentation would be just less
than 1.'' See EMSAC Memo at 9, n. 18.
\523\ 1-(0.8[supcaret]2 + 0.05[supcaret]2 + 0.05[supcaret]2 +
0.05[supcaret]2 + 0.05[supcaret]2) = 0.35.
\524\ 1-(0.2[supcaret]2 + 0.2[supcaret]2 + 0.2[supcaret]2 +
0.2[supcaret]2 + 0.2[supcaret]2) = 0.8078.
\525\ See 2026 Data Update of the 2015 EMSAC Market Structure
Memo, supra note 39, at Table 3.
\526\ See EMSAC Memo at 11.
\527\ See 2026 Data Update of the 2015 EMSAC Market Structure
Memo, supra note 39, at Table 3. The HHI for Nasdaq-listed stocks is
higher by (HHI in January 2026)-(HHI in February 2005) = (0.766)-
(0.718) = 0.048. The HHI for NYSE-listed stocks is higher by
(0.750)-(0.176) = 0.574.
\528\ See 2026 Data Update of the 2015 EMSAC Market Structure
Memo, supra note 39, at Table 3. The change in the HHI for Nasdaq-
listed stocks is (HHI in January 2026)-(HHI in February 2014) =
(0.766)-(0.754) = 0.012 and the change in the HHI for NYSE-listed
stocks is (0.750)-(0.816) = -0.066.
\529\ See supra section VI.B.4.a and see EMSAC Memo at 10-11.
---------------------------------------------------------------------------
One concern when using the HHI to measure displayed liquidity
fragmentation is that the changes to the HHI from new exchanges with
small market share can be minimal. Revisiting the second scenario
discussed above where the five exchanges each have a market share of
20%, now assume there are two new exchanges for a total of seven with
the market shares now as follows: 20%, 20%, 20%, 19%, 19%, 1%, and 1%.
In this case, the HHI would be 0.81.\530\ Compared to the initial HHI
of 0.80 without these two new exchanges, liquidity is more fragmented,
but the change in HHI is relatively small. Thus, while it is useful to
examine the HHI,\531\ it is important to also note the number of venues
to which a broker-dealer must connect.
---------------------------------------------------------------------------
\530\ 1-(0.2[supcaret]2 + 0.2[supcaret]2 + 0.2[supcaret]2 +
0.19[supcaret]2 + 0.19[supcaret]2 + 0.1[supcaret]2 + 0.1[supcaret]2)
= 0.81.
\531\ See 2026 Data Update of the 2015 EMSAC Market Structure
Memo, supra note 39, at Table 3.
---------------------------------------------------------------------------
Rule 611 and other features of Regulation NMS such as the SIP
revenue allocation formula that incentivized displayed liquidity have
also contributed to the increased fragmentation in displayed liquidity.
Rule 611 strengthened the primacy of displayed prices and incentivized
liquidity suppliers to post displayed orders on all exchanges that they
are connected to.\532\ Because most of the dollar volume on exchanges
is executed by broker-dealers that are connected to many, if not all
exchanges,\533\ this increases the probability that a limit order is
posted and executed on a small exchange, increasing fragmentation of
displayed liquidity. Other features of Regulation NMS that incentivize
displayed liquidity, particularly the SIP revenue allocation formula,
have also played a role. For example, most new exchanges have adopted
fee schedules that directly incentivize liquidity posting by liquidity
makers. Such a fee schedule may be beneficial for a new, small exchange
to gain revenue because of the SIP revenue allocation formula,
[[Page 36700]]
which rewards quoting as well as trading.\534\ The SIP revenue
allocation formula may also contribute to exchange families continuing
to operate multiple exchanges with similar liquidity posting
incentives.
---------------------------------------------------------------------------
\532\ This includes inverted exchanges, where liquidity posting
is not directly incentivized through rebates as on a maker-taker
exchange. Posting quotes on inverted exchanges may be important to
the order routing strategies for certain market participants and for
certain types of orders.
\533\ See supra section VI.B.4.f.
\534\ This fee schedule may allow a new, small exchange to gain
a larger share of dollar volume quicker as broker-dealers who
connect initially are directly incentivized to submit orders. This
may incentivize more broker-dealers to connect, due to the
increasing ``interference cost'', who are also incentivized to
submit orders. See supra section VI.B.4.f.
---------------------------------------------------------------------------
Factors that have contributed to both types of fragmentation, in
addition to trading venue proliferation, include advances in
technology, the electronification of trading, and lower transaction
costs. Advances in technology and the electronification of trading have
made it easier to connect to and route orders to many trading venues.
Lower transaction costs may have also contributed to both types of
fragmentation because they increase the profitability of trading
strategies that utilize latency arbitrage between trading venues.\535\
---------------------------------------------------------------------------
\535\ See supra section VI.B.4.b. (discussing the role of
latency).
---------------------------------------------------------------------------
Other factors that may have contributed to market fragmentation
include the segmentation of order flow and business model
competition.\536\ For example, the majority of retail investor order
flow is internalized by wholesalers, meaning that it is executed off
exchange.\537\ Also, ATSs offer alternatives to the traditional
matching priority, which is based on price and time, and have recently
been gaining market share.\538\ Business model competition may also
contribute to displayed liquidity fragmentation.\539\
---------------------------------------------------------------------------
\536\ See also infra section VI.B.5.a (discussing the ability of
ATSs to segment order flow).
\537\ See supra section VI.B.2.b. See also supra section VI.
B.2.a.
\538\ See Rosenblatt's 2025 Us Equity Trading Guide, supra note
305.
\539\ While segmentation of order flow may contribute to the
fragmentation of displayed liquidity, the effect is likely small due
to the limited ability of exchanges to segment order flow. See infra
section VI.B.5.a (discussing the limited ability of exchanges to
segment order flow).
---------------------------------------------------------------------------
While there have been some innovations to counteract the increased
adverse selection risk from faster traders, such as speed bumps,\540\
and order types such as midpoint peg orders and hidden orders, there
has otherwise been minimal differentiation between exchanges.\541\ As
previously mentioned,\542\ market participants face notable
similarities in the functioning of exchange limit order books across
different exchanges, particularly with a given fee model type. Rules
611 and 610(e), along with other effects, created an incentive for the
proliferation of new exchanges with particular styles and thus may have
limited innovation.
---------------------------------------------------------------------------
\540\ See supra section VI.B.4.b (discussing the role of
latency). A speed bump intentionally slows down the time it takes an
order to reach the exchange. See The SEC Approves The Investors
Exchange Speed Bump, Mark D Schorr, The Hedge Fund Journal, Issue
116, available at https://thehedgefundjournal.com/the-sec-approves-the-investors-exchange-speed-bump/. See supra sections VI.B.2.a and
VI.B.2.c (describing the effects of faster traders).
\541\ See infra section VI.B.5.a (comparing rules for exchanges
and ATSs).
\542\ See supra section VI.B.4.e.
---------------------------------------------------------------------------
Other factors that may have limited exchange innovation are their
fair access requirements and limitations on their ability to segment
order flow.\543\ In contrast to exchanges, most ATSs do not meet the
volume threshold for fair access requirements to apply.\544\
Additionally, most ATSs have one or more methods of segmenting customer
order flow.\545\ It is possible that the lack of limitations on
segmenting orders and the lack of costs associated with evaluating new
matching mechanisms against fair access requirements have contributed
to lower innovation costs for ATSs when compared with exchanges.
---------------------------------------------------------------------------
\543\ See 15 U.S.C. 78f(b)(5), which states that the rules of
the exchange are not designed to permit unfair discrimination
between customers, issuers, brokers, or dealers, or to regulate by
virtue of any authority conferred by this chapter matters not
related to the purposes of this chapter or the administration of the
exchange. See also infra section VI.B.5.a (discussing differences
between exchanges and ATSs).
\544\ See 17 CFR 242.301(b)(5).
\545\ Differences in how they segment customer order flow is one
way in which ATSs innovate and differentiate themselves from other
trading centers.
---------------------------------------------------------------------------
5. Competition in the Market for Trading Services and Broker Execution
Services
a. Trading Services
National securities exchanges and off-exchange market centers
(e.g., ATSs,\546\ FINRA members, and OTC market makers (including
wholesalers and SDPs)) compete in the market for NMS stock trading
services. National securities exchanges and off-exchange market centers
are subject to different regulatory requirements.
---------------------------------------------------------------------------
\546\ The operators of ATSs are required to register as broker-
dealers under the requirements of Regulation ATS.
---------------------------------------------------------------------------
National securities exchanges fall within the definition of an
exchange in section 3(a)(1) of the Exchange Act and are required to
register under section 6 of the Exchange Act. As SROs, national
securities exchanges set standards of conduct for their members,
administer examinations for compliance with these standards, coordinate
with other SROs with respect to the dissemination of consolidated
market data, and generally take responsibility for enforcing their own
rules and the provisions of the Exchange Act and the rules and
regulations thereunder. The Exchange Act requires that national
securities exchanges establish rules that generally: (1) are designed
to prevent fraud and manipulation, promote just and equitable
principles of trade, and protect investors and the public interest;
\547\ (2) provide for the equitable allocation of reasonable dues,
fees, and other charges; \548\ (3) do not permit unfair discrimination;
\549\ (4) do not impose any burden on competition that is not necessary
or appropriate in furtherance of the purposes of the Act; \550\ and
(5), with limited exceptions, allow any broker-dealer to become a
member.\551\ National securities exchanges must file proposed rule
changes with the Commission under section 19(b) of the Exchange Act,
which are made available for public comment,\552\ and are subject to
Commission approval.\553\ Rule 610 of Regulation NMS prohibits national
securities exchanges from imposing unfairly discriminatory terms on
non-members in obtaining access to exchange quotations through the
services of an exchange member.\554\ National securities exchanges are
limited in their ability to segment order flow.\555\ All national
securities exchanges are ``lit'' market centers, meaning they publicly
display quotations for NMS stocks in consolidated market data. The
highest-priced bids and lowest-priced offers for round lots on national
securities exchanges are included in the consolidated market data feeds
disseminated by centralized SIPs.
---------------------------------------------------------------------------
\547\ Section 6(b)(5) of the Exchange Act.
\548\ Section 6(b)(4) of the Exchange Act.
\549\ Section 6(b)(5) of the Exchange Act.
\550\ Section 6(b)(8) of the Exchange Act.
\551\ Section 6(b)(2) of the Exchange Act.
\552\ See 15 U.S.C. 78s(b)(1).
\553\ See 15 U.S.C. 78s(b)
\554\ See 17 CFR 242.610(a).
\555\ Retail liquidity programs (RLPs) provide an on-exchange
means of order segmentation. The RLPs offered by many exchanges are
specifically set up to segment the marketable order flow of
individual investors, allowing liquidity suppliers to interact with
this order flow without the risk that their orders will trade
against the marketable orders of other market participants that may
impose greater adverse selection risk.
---------------------------------------------------------------------------
NMS Stock ATSs fall within the definition of an exchange under
section 3(a)(1) of the Exchange Act but are exempted from registering
as an exchange if they meet the definition of an ATS,\556\ register as
broker-dealers,\557\
[[Page 36701]]
and otherwise comply with Regulation ATS under the Exchange Act. NMS
Stock ATSs are also required to file and publicly disclose Form ATS-
N.\558\ The majority of NMS Stock ATSs segment trading interest into
categories, classifications, tiers, or levels and some allow
subscribers to designate their trading interest to interact or not
interact with certain trading interest in the NMS Stock ATS (e.g.,
private rooms). Rule 301(b)(3) of Regulation ATS requires an NMS Stock
ATS that displays orders to any person and has 5% or more of the
aggregate average daily share volume reported in an NMS stock during
four of the preceding six calendar months to comply with certain order
display and execution access obligations.\559\ No NMS Stock ATS
currently displays quotations in NMS stocks in consolidated market
data.\560\ The market centers that do not display quotations are known
as ``dark'' trading centers or ``dark pools.''
---------------------------------------------------------------------------
\556\ See 17 CFR 242.300(a).
\557\ See 17 CFR 242.301(b)(1).
\558\ See 17 CFR 242.304. The Commission reviews initial Form
ATS-N filings and must declare them effective before an NMS Stock
ATS can begin operating. When an NMS Stocks ATS wants to make a
material change to its operations, it is required to file a material
amendment at least 30 days prior to the date of implementation.
Material amendments to Form ATS-N are also subject to a Commission
review period and can be declared ineffective. An NMS Stock ATS must
have an effective Form ATS-N on file with the Commission to operate.
\559\ See 17 CFR 242.301(b)(3). An ATS that meets these criteria
must comply with Rule 301(b)(3)(ii), which requires the ATS to
provide to a national securities exchange or national securities
association (each an SRO), for inclusion in the quotation data made
available by the SRO to vendors, the prices and sizes of its orders
at the highest buy price and lowest sell price for that NMS stock
that are displayed to more than one subscriber. See 17 CFR
242.301(b)(3)(ii). An ATS that meets the volume threshold also is
required to comply with Rule 301(b)(3)(iii), which sets forth
certain access standards regarding the orders that the ATS is
required to provide to an SRO pursuant to Rule 301(b)(3)(ii). See 17
CFR 242.301(b)(3)(iii). Under Rule 301(b)(4), an ATS must not charge
any fee to broker-dealers that access the ATS through a national
securities exchange or national securities association that is
inconsistent with the equivalent access to the ATS that is required
under Rule 301(b)(3)(iii). See 17 CFR 242.301(b)(4). In addition, if
the national securities exchange or national securities association
to which an ATS provides the prices and sizes of orders under Rules
301(b)(3)(ii) and 301(b)(3)(iii) establishes rules designed to
assure consistency with standards for access to quotations displayed
on such national securities exchange, or the market operated by such
national securities association, the ATS shall not charge any fee to
members that is contrary to, that is not disclosed in the manner
required by, or that is inconsistent with any standard of equivalent
access established by such rules. See id.
\560\ Some ATSs display quotations to their subscribers or make
their quotes available through market data vendors.
---------------------------------------------------------------------------
Under Rule 301(b)(5) of Regulation ATS, an NMS Stock ATS is
required to provide fair access to its services if it has 5% or more of
the average daily volume with respect to an NMS stock during four of
the preceding six calendar months. As of November 30, 2025, one NMS
Stock ATS discloses on its Form ATS-N that it is subject to these fair
access requirements for securities that are available for trading on
its platform.
OTC market makers, which also include wholesalers and SDPs, are
dealers that hold themselves out as being willing to buy and sell an
NMS Stock to market participants for its own account on a regular or
continuous basis, other than on a national securities exchange.\561\ A
wholesaler commonly refers to an OTC market maker that seeks to attract
orders from broker-dealers (often called retail brokers) who service
individual investors, and wholesalers internalize the majority of
marketable orders from these individual investors. Some OTC market
makers, such as wholesalers, operate SDPs through which they execute
marketable institutional orders in NMS stocks against their own
inventory. Broker-dealers that do not display quotations in
consolidated market data and that trade outside of an ATS, such as
wholesalers, are not subject to any fair access requirements under the
Exchange Act or Commission rules (i.e., wholesalers do not display or
otherwise reveal the prices at which they are willing to execute
individual investor orders internally). While they are subject to
Commission and SRO requirements as broker-dealers, wholesalers are not
prohibited from restricting access to their trading mechanisms or to
the investor orders they internalize.
---------------------------------------------------------------------------
\561\ See 17 CFR 242.600(b)(75).
---------------------------------------------------------------------------
Trading services for NMS stocks are highly fragmented among
different types of market centers. In January 2026, NMS stocks were
traded on 17 national securities exchanges and on off-exchange market
centers, including 33 NMS Stock ATSs and other FINRA members.\562\ In
January 2026, a total of over 388 billion shares (over $20 trillion
notional) were traded in NMS stocks.\563\ National securities exchanges
executed approximately 50.1% of total share volume in NMS stocks (and
55.5% of total notional volume), while off-exchange market centers,
including ATSs and wholesalers, executed approximately 49.9% of total
share volume (and 44.5% of total notional volume).\564\
---------------------------------------------------------------------------
\562\ Other FINRA members include wholesalers that internalize
the majority of individual investor marketable orders.
\563\ This estimate is based on January 2026. See U.S. Equities
Market Volume Summary, supra note 442.
\564\ This estimate is based on January 2026. See U.S. Equities
Market Volume Summary, supra note 442.
---------------------------------------------------------------------------
b. Broker Execution Services
As of Q4 of 2025, there were 3,277 registered broker-dealers based
on FOCUS Report Form X-17A-5 Schedule II, representing a decline of
approximately 25% compared to 2015, when there were 4,450 registered
broker-dealers.\565\ This reflects increased concentration in the
broker-dealer industry over the last decade. These broker-dealers
service individual and/or institutional investors in the market for NMS
stocks, and include both carrying broker-dealers that maintain custody
of customer funds and securities and introducing broker-dealers that
accept customer orders and introduce their customers to a carrying
broker-dealer that will hold the customers' securities and cash. The
Commission estimates that there are approximately 164 broker-dealers
that carry at least one customer account trading in NMS stocks, and
1,092 broker-dealers that introduce at least one customer trading in
NMS stocks.
---------------------------------------------------------------------------
\565\ See U.S. Securities and Exchange Commission Fiscal Year
2015 Congressional Budget Justification, available at https://www.sec.gov/about/reports/secfy15congbudgjust.pdf. See also Norges
Bank comment letter ``Re: Notice of Proposed Rule on Market Data
Infrastructure, Securities Exchange Act Release No. 88216 (Feb. 14,
2020) (File No. S7-03-20)'', dated July 15, 2020, at 3, available at
https://www.sec.gov/comments/s7-03-20/s70320-7422691-219826.pdf and
First TTR Transcript at 74-5 (Dave Lauer, Urvin Finance and We the
Investors).
---------------------------------------------------------------------------
The Commission understands that the structure of the market for
brokerage services can be broadly separated into two distinct markets:
brokerage services for individual investors and brokerage services for
institutional investors. In January 2026, there were approximately 806
registered broker-dealers that originated orders on behalf of
individual investors in the market for NMS stocks.\566\ Unlike
institutional investors, individual investors generally use a single
broker to handle their orders. Retail brokers can be broadly divided
into ``discount'' and ``full-service''
[[Page 36702]]
brokers. Competition among discount brokers, in particular, has
recently resulted in many new entrants and a decline in commissions to
zero or near zero. Instead of earning commissions on transactions,
these discount brokers earn revenue through other means, including,
among other products and services, interest on margin accounts and from
lending securities, and broker-wholesaler arrangements involving PFOF
paid by the wholesaler to the retail broker. Discount broker-dealers
can distinguish themselves by the accessibility and functionality of
their trading platform, which can be geared towards less experienced or
more sophisticated retail investors, and by providing more extensive
customer service as well as tools for research and education on
financial markets.
---------------------------------------------------------------------------
\566\ This analysis was completed using CAT data for the month
of January 2026. A registered broker-dealer is defined by its firm
Central Registration Depository numeric identifier (CRD). Brokers
counted are those that reported at least one order identified as
account type ``Individual Customer''. This includes individual
investors and accounts that do not meet the definition of
``institution'' in FINRA Rule 4512(c) and not a proprietary account.
See CAT Reporting Technical Specifications for Plan Participants: 7/
29/2022 Version 4.1.0 r15, available at https://catnmsplan.com/sites/default/files/2022-07/07.29.2022-CAT-Reporting-Technical-Specifications-for-Participants-4.1.0-r15.pdf (``CAT Reporting
Version 4.1.0 r15'').
---------------------------------------------------------------------------
In January 2026, there were approximately 595 registered broker-
dealers that originated institutional orders in the market for NMS
stocks.\567\ A distinguishing feature of institutional brokerage
services is that a significant portion of institutional investor orders
are generally ``not held'' orders. For not held orders, broker-dealers
have time and price discretion in executing the order, which
institutional investors rely on to minimize price impact and for other
reasons. Due to the large size of institutional trading interests,
broker-dealers often split these orders, frequently using SORs.
Specifically, a broker-dealer or its SOR will split a ``parent'' order
into multiple ``child'' orders, with the goal of executing the child
orders in a way that achieves the best execution for the parent order.
The Commission understands that some investors, particularly some
institutional investors, are likely to use multiple broker-dealers.
---------------------------------------------------------------------------
\567\ This analysis was completed using CAT data for the month
of January 2026. A registered broker-dealer is defined by its firm
Central Registration Depository numeric identifier (CRD). Brokers
counted are those that reported at least one order identified as
account type ``Institutional Customer'' as defined by FINRA Rule
4512(c). See CAT Reporting Version 4.1.0 r15.
---------------------------------------------------------------------------
Broker-dealers compete on many dimensions, including the execution
quality. They may seek to improve their competitive position by, for
example, adding connections and subscriptions to exchanges and ATSs,
and by investing in the speed and quality of their routing
technology.\568\ The majority of trading on ATSs and exchanges comes
from the trades where the executing broker and originating broker are
the same.\569\ In January 2026, 82.2% of ATS dollar volume and 82.0% of
exchange dollar volume came from trades for which the executing broker
and originating broker were the same. Furthermore, a relatively small
number of brokers originate and execute orders, while a larger number
originate orders but do not execute. In January 2026, of the 1,060
broker-dealers that originated orders to an exchange or ATS, 275 of
them both originated and executed orders, whereas 785 only originated
orders and did not execute.\570\
---------------------------------------------------------------------------
\568\ When making routing decisions, some broker-dealers may
face conflicts of interest that arise when their interests are not
aligned with their customers' interest in receiving better execution
quality. These conflicts of interest could result, for example, from
broker-dealer affiliations with market centers. Similarly, the
presence of liquidity fees and rebates at some market centers may
incentivize broker-dealers to make routing decisions based on where
they can receive the highest rebate (or pay the lowest fee), rather
than where they can receive better execution quality on behalf of
their customer. Another potential conflict of interest, particularly
regarding individual investor order flow, includes the receipt of
PFOF, which may incentivize broker-dealers to route orders to
wholesalers as a result of the terms of the PFOF arrangements.
\569\ This analysis was completed using CAT data for the month
of January 2026. A connection is found when an order is identified
that was sent from a broker-dealer firm to an ATS or exchange. A
broker is defined by its firm Central Registration Depository
numeric identifier (CRD). A broker that submits the order to the ATS
or exchange is the executing broker. Each order is traced to its
origin where an originating broker received the order from a client.
For each order, the originating broker may be the same or different
from the executing broker.
\570\ See supra Table 1 (discussing CAT analysis of the number
of broker-dealers that originate and execute orders on exchanges and
ATSs).
---------------------------------------------------------------------------
There are several factors that have potentially contributed to the
increased concentration in the executing broker-dealer industry in
particular. One factor is that data and connectivity costs, which can
be significant, have risen as new exchanges begin charging data and
connectivity fees and existing exchanges increase their data and
connectivity fees.\571\ This contributes to the high fixed costs for
broker-dealers.\572\ Another factor is that other sources of revenue
for broker-dealers, such as commissions, have declined. Finally, as
broker-dealers compete in other dimensions, such as execution quality
or by offering additional services bundled with execution, high-volume
broker-dealers may be better positioned competitively compared to
smaller broker-dealers. This is because high-volume broker-dealers tend
to connect to all or almost all exchanges and invest in the most
sophisticated technology that allows them to minimize transaction costs
and execution quality.\573\
---------------------------------------------------------------------------
\571\ See infra section VI.B.4.c.
\572\ See supra section VI.C.4.b.i. (describing broker-dealer
fixed costs). See also First TTR Transcript at 172-3 (Adam Nunes,
Hudson River Trading).
\573\ High-volume broker-dealers may also be able to take
advantage of lower transaction pricing because exchanges offer
volume-based discounts. See Securities Exchange Act Release No.
98766 (Oct. 18, 2023), 88 FR 76282 (Nov. 6, 2023) (``Volume-Based
Exchange Transaction Pricing for NMS Stocks'') at 76313.
---------------------------------------------------------------------------
C. Benefits and Costs
This section separately discusses the benefits and costs of
rescinding Rule 611 and Rule 610(e), as well as additional economic
effects from rescinding both rules together.
1. Rescinding Rule 611
a. Benefits
As explained in detail below, rescinding Rule 611 \574\ is expected
to reduce market complexity, which will result in cost savings for
trading centers and broker dealers by reducing compliance costs and
ongoing maintenance associated with maintaining order execution systems
and SORs. It may also lower the market data and connectivity costs of
some market participants, although the magnitude of this effect is
uncertain. Rescinding Rule 611 is also expected to result in
improvements in the execution quality of larger institutional orders.
Furthermore, rescinding Rule 611 may also reduce displayed
fragmentation and potentially increase innovation in trading protocols
for both exchanges and ATSs.
---------------------------------------------------------------------------
\574\ In order for these effects to be realized, a majority of
national securities exchanges for NMS stocks will have to rescind
their own rules to prevent trade-throughs. The Commission expects
this to happen because doing so will relieve the exchange of costly
maintenance requirements described in this section. In addition, not
rescinding these rules may put them at a competitive disadvantage
compared to other exchanges that do.
---------------------------------------------------------------------------
Rescinding Rule 611 is expected to lower ongoing compliance and
surveillance costs for trading centers related to maintaining policies
and procedures associated with Rule 611.\575\ Rule 611 requires trading
centers to support ISO logic, and a thick layer of exception handling
to avoid trade-throughs, each of which cascades into surveillance
alerting, exception review, and supervisory controls.\576\ Rescinding
Rule 611 would allow firms to retire ISO order types and simplify
surveillance programs. The Commission estimates that each trading
center currently incurs $30,996 in annual ongoing compliance
[[Page 36703]]
costs related to maintaining policies and procedures to comply with
Rule 611.\577\ Rescinding Rule 611 would result in trading centers
saving an estimated aggregate total of $9.45 million dollars in annual
compliance costs.\578\ In addition to these annual compliance cost
savings, trading centers are also expected to experience additional
cost savings from the rescission of Rule 611 and 610(e) related to
reductions in the burdens associated with regularly maintaining and
updating their execution systems. These additional cost savings are
discussed below in section VI.D.3.a.
---------------------------------------------------------------------------
\575\ See supra section VI.B.2.d (discussing compliance costs
related to Rule 611).
\576\ See, e.g., Robinhood Letter at 5; J. Angel Letter; First
TTR Roundtable Transcript at 90 (Julie Andress, Securities Traders
Association and KeyBanc Capital Markets) (discussing trade-through
compliance).
\577\ The Commission, in its most recent PRA renewal, estimated
that each respondent (i.e., trading center) would require an average
of approximately 60 hours annually to ensure that the policies and
procedures established are up-to-date and remain in compliance with
the Commission's rule: two hours per month of internal legal time
and three hours per month of internal compliance time (2 hours x 12
month + 3 hours x 12 months = 60 hours annually). See Extension
Without Change of a Currently Approved Collection: Order Protection
Rule-Rule 611 of Regulation NMS; ICR Reference No. 202005-3235-016;
OMB Control No. 3235-0600 (Aug, 22, 2023), available at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202304-3235-011. The
estimated monetized annual hour burden is as follows: ($744 for an
attorney x 2 hours x 12 months) + ($365 for a financial examiner
(i.e., compliance) x 3 hours x 12 months) = $30,996. To calculate
the occupational hourly rates used in this release, the Commission
uses occupational mean hourly wage data from the Occupational
Employment and Wage Statistics (OEWS) program of the Bureau of Labor
Statistics (BLS) for ``Securities, Commodity Contracts, and Other
Financial Investments and Related Activities'' (NAICS 523). See
Occupational Employment and Wage Statistics, U.S. Bureau of Labor
Statistics, https://www.bls.gov/oes/; see also Standard Occupational
Classification, U.S. Bureau of Labor Statistics, https://www.bls.gov/soc/ (describing occupational classification system used
by BLS); Exec. Off. of the President, Off. of Mgmt. & Budget, North
American Industry Classification System (2022), available at https://www.census.gov/naics/reference_files_tools/2022_NAICS_Manual.pdf
(describing the industry classification system used by BLS and other
agencies). The mean hourly wage for each occupation is adjusted for
changes in the seasonally adjusted employment cost index for private
wages and salaries between the data reference period and when the
data are released by BLS. See Employment Cost Index, U.S. Bureau of
Labor Statistics, https://www.bls.gov/eci/. The adjusted mean hourly
wage is then multiplied by a factor that accounts for nonwage costs
borne by employers, such as bonuses, benefits, and overhead. This
factor is calculated as an average over the 10 most recently
available years of data of the ratio of the Bureau of Economic
Analysis's annual gross output data for NAICS 523 to total annual
wages across all occupations for NAICS 523 in the OEWS data. See
Gross Output by Industry, U.S. Bureau of Economic Analysis, https://www.bea.gov/data/industries/gross-output-by-industry; Occupational
Employment and Wage Statistics, U.S. Bureau of Labor Statistics,
supra. The final product is the occupational hourly rate. See
generally Updated Methodology for Calculating Occupational Hourly
Rates (Dec. 19, 2025), available at https://www.sec.gov/files/method-occupational-hourly-rates.pdf.
\578\ The Commission estimates that there are currently 305
trading centers subject to Rule 611. This estimate includes 20
exchanges (17 exchanges that trade NMS stocks + three exchanges that
are approved but not yet operating) and 33 ATSs that trade NMS
stocks. Based on data from the consolidated audit trail for January
2026, the estimate also includes 96 exchange market makers and 225
broker-dealers acting as OTC market maker or executing orders
internally by trading as principal or crossing orders as agent. 69
broker-dealers are both exchange market makers and an OTC market
maker or broker-dealer internalizing orders. Accordingly, the
Commission estimates that rescission of Rule 611 would eliminate 305
trading centers x 60 hours annually = 18,300 annual burden hours
that would be associated with complying with Rule 611. The total
estimated monetized annual hour burden is 305 trading centers x
$30,996 = $9,453,780.
---------------------------------------------------------------------------
Broker-dealers that run SORs would also experience compliance cost
savings from rescinding Rule 611.\579\ Broker-dealers would no longer
need to maintain logic to prevent trade-throughs, utilize exceptions to
Rule 611 (such as conducting an ISO sweep of protected quotes), or
maintain policies and procedures to detect and surveil for trade-
throughs in their order handling. For example, some firms may no longer
need to collect snapshot information of protected quotes at the time
they submit an order to demonstrate compliance with the usage of ISO
orders for Rule 611 exceptions.\580\ Each broker-dealer that runs an
SOR is estimated to save $13,140 annually by no longer maintaining
policies and procedures related to Rule 611.\581\ Rescinding Rule 611
would result in broker-dealers operating SORs saving an estimated
aggregate total of $2.8 million in annual compliance costs.\582\ In
addition to these annual compliance cost savings, broker-dealers that
operate SORs are also expected to experience additional cost savings
from the rescission of Rule 611 and 610(e) related to reductions in the
burdens associated with regularly maintaining and updating their order
routing systems. These additional cost savings are discussed below in
section VI.C.3.a.
---------------------------------------------------------------------------
\579\ See supra section VI.B.2.d (discussing compliance costs
related to Rule 611).
\580\ See, e.g., First TTR Roundtable Transcript at 171-173
(Adam Nunes, Hudson River Trading) (discussing that systems
necessary to demonstrate compliance with Rule 611 are associated
with a lot of overhead); First TTR Roundtable Transcript at 232
(Daniel Gerhardstein, FIA Principal Traders Group and Jump Trading
Group) (stating that industry participants and exchanges operate and
maintain elaborate systems solely for trade-through compliance).
\581\ The Commission estimates that each broker-dealer with an
SOR currently requires an average of approximately 36 hours annually
to ensure that the policies and procedures established are up-to-
date and remain in compliance with the Commission's rule: three
hours per month of internal compliance time (3 hours x 12 months =
36 hours annually). The estimated monetized annual hour burden is as
follows: ($365 for a financial examiner (i.e., compliance) x 3 hours
x 12 months) = $13,140. See supra note 577 for discussion on how the
hourly burden are monetized.
\582\ The Commission estimates that there are 213 broker-dealers
that operate a SOR. This number is estimated by counting the number
of unique CRDs that submitted an order directly to an exchange in
January 2026. See Table 1 for additional information. Accordingly,
the Commission estimates that rescission of Rule 611 would eliminate
213 broker-dealers x 36 hours annually = 7,668 annual burden hours
that would be associated with broker-dealers complying with Rule
611. The total estimated monetized annual hour burden is 213 broker-
dealers with SORs x $13,140 = $2,798,820. There will be overlap
between the broker-dealers that operate a SOR and the broker-dealers
that are an exchange market maker or OTC market maker (estimated in
supra note 578). For these broker-dealers, the Commission believes
that the cost savings from no longer updating their policies and
procedures that are related to being a trading center and their cost
savings from no longer updating their policies and procedures that
are related to operating a SOR will be additive (i.e., they will
save on both costs).
---------------------------------------------------------------------------
However, the compliance cost savings for trading centers and
broker-dealers that are discussed above may be limited to the extent
that the certain costs related to Rule 611 overlap with the costs
related to other Commission or SRO Rules. For example, some firms may
collect quote snapshots or other market surveillance data for
compliance with multiple rules. They may still collect this information
for other compliance or evaluation purposes if Rule 611 is rescinded.
Additionally, some broker-dealers may outsource their compliance
procedures and surveillance to third party vendors. To the extent that
Rule 611 is integrated into the same systems that the vendor uses to
evaluate for compliance with other rules, the rescission of Rule 611
may not result in the vendor reducing their prices or cost savings for
these broker-dealers.
Rescinding Rule 611 could result in institutional investors
experiencing improved execution quality for their large orders.\583\
Without trade-through restrictions, trading venues could better
facilitate block crosses at economically efficient prices. Rescinding
Rule 611 would also allow institutional investors more flexibility to
route child orders, allowing them to avoid trading at exchanges that
may increase their information leakage. This would allow institutional
brokers to work parent orders with fewer compliance-driven routes,
thereby reducing slippage. Clusters of ISO child orders used to clear
protected quotes may result in greater price impact. Rescinding Rule
611 would therefore give brokers more
[[Page 36704]]
flexibility to stage child orders to minimize the parent order's total
cost consistent with institutional benchmarks, such as the VWAP or
TWAP. This would likely lead to an increase in the trade-through rates
of displayed quotes, because institutional investors would be better
able to select which quotes they want to interact with to reduce their
price impact. The Commission is unable to estimate the magnitude of
improvements in institutional execution quality or the increase in
institutional trade-through rates if Rule 611 is rescinded, because it
would depend on the latent demand for institutional investors to
execute at prices outside the protected quotes, which the Commission is
unable to estimate.
---------------------------------------------------------------------------
\583\ See supra section VI.B.2.a (discussing how Rule 611
affects institutional order handling and executions). Any
improvements in the execution quality of institutional orders would
represent a transfer from the market participants that currently
benefit from the increased slippage caused by trade-through
restrictions (e.g. liquidity providers that are alerted to the
execution of a large parent order) to the institutional investors
that place the orders.
---------------------------------------------------------------------------
As explained in detail below, rescinding Rule 611 may allow some
broker-dealers to access and maintain connectivity to fewer exchanges,
which could result in reduced market data and connectivity expenditures
for some broker-dealers.\584\ However, this effect may be limited.
---------------------------------------------------------------------------
\584\ See infra section VI.C.3.c.i. for further discussion on
broker-dealers disconnecting from exchanges if Rules 611 and Rule
610(e) are rescinded. See also supra section VI.B.4.f (discussing
how Rule 611 and Rule 610(e) increase broker-dealer connectivity and
market data costs).
---------------------------------------------------------------------------
As discussed in detail below, rescinding Rule 611 (along with Rule
610(e)) may also reduce market complexity by eliminating certain orders
types (e.g., ISO orders) and simplifying algorithmic routing and
trading strategies, because trading centers and broker-dealers will no
longer need to check if they are trading through protected quotes.\585\
This reduction in market complexity is expected to result in ongoing
cost savings for trading centers and broker-dealers that operate SORs
by simplifying the maintenance and updates to their execution and SOR
systems. These ongoing cost savings, together with those from
rescinding Rule 610(e), are described below in section VI.C.3.a.
---------------------------------------------------------------------------
\585\ See infra section VI.C.3.a for further discussion on how
rescinding Rule 611 and Rule 610(e) will reduce market complexity.
See also supra section II.B.2.a. and VI.B.2.d for further
discussions on how Rule 611 potentially contributes to increased
market complexity.
---------------------------------------------------------------------------
As discussed in detail below, rescinding Rule 611 (and Rule 610(e))
could increase competition among executing brokers, which may result in
improved services (e.g., faster connections, improved algorithms) or
reduced costs for the introducing brokers and market participants that
utilize their services.\586\ However this effect could be limited by
economies of scale in the executing broker-dealer industry.
---------------------------------------------------------------------------
\586\ See infra section VI.D.2.d (discussing how rescinding Rule
611 and Rule 610(e) will increase competition between execution
brokers). See also supra section VI.B.5.b (describing how executing
brokers currently compete).
---------------------------------------------------------------------------
Rescinding Rule 611 could lessen exchange fragmentation. As
discussed in detail below,\587\ rescinding Rule 611 would eliminate the
``interference cost'' broker-dealers face when not connecting to an
exchange. Therefore, a broker-dealer may disconnect from an exchange or
not connect to a new exchange if the cost of disconnecting is less than
or the cost of connecting is greater than the benefits of the
additional execution quality that connecting to the exchange provides.
This may reduce displayed fragmentation as broker-dealers concentrate
their orders on more liquid venues with better execution quality.\588\
---------------------------------------------------------------------------
\587\ See infra section VI.C.3.c.i. (discussing broker-dealers
disconnect from exchanges).
\588\ See infra section VI.C.3.c.i. (discussing broker-dealers
routing to exchanges with better execution quality).
---------------------------------------------------------------------------
Rescinding Rule 611 could foster innovation in trading protocols
and venue design--for both exchanges and ATSs. Currently, Rule 611's
restrictions on the trade-through of protected quotes may limit the
trading protocols that exchanges and ATSs can offer. Rescinding Rule
611 would allow exchanges and ATSs more flexibility to experiment and
try new mechanisms, such as alternative matching, priority, and auction
constructs. These innovations may deliver better outcomes for specific
trading needs (e.g., institutional block mechanisms or time-staged
response markets). However, innovation in exchange trading protocols
may still be limited by other constraints, such as fair access
restrictions and restrictions on order segmentation, which may not
apply to most ATSs.\589\
---------------------------------------------------------------------------
\589\ See supra section VI.B.5.a (discussing differences between
how exchanges and ATS are regulated).
---------------------------------------------------------------------------
b. Costs
This section discusses the costs associated with rescinding Rule
611. Rescinding Rule 611 is likely to impose one-time implementation
costs on trading centers and broker-dealers that operate SORs to update
their systems and remove policies and procedures designed to prevent
trade-throughs and ensure compliance with Rule 611 exceptions. It could
also result in more order flow being routed off exchange, potentially
reducing exchange revenues and displayed liquidity, although the
magnitude of this effect is likely to be limited. Based on data
regarding wholesaler price improvement practices, the Commission does
not expect significant changes in retail order execution quality if
Rule 611 is rescinded.
The one-time implementation costs associated with rescinding Rule
611 include expenses related to legal personnel updating policies and
procedures as well as software engineering and IT costs for updating
and configuring systems related to trade execution, order handling and
surveillance. These updates will be made in combination with changes
related to the rescission of Rule 610(e), and these combined
implementation costs are discussed below in section VI.C.3.b.
Additionally, some broker-dealers may choose to incur additional
costs to update their best execution policies and procedures to account
for the rescission of Rule 611.\590\ To the extent Rule 611 provided a
best execution backstop, if rescinded, some broker-dealers may
determine they need to update their best execution policies and
procedures relating to order routing choices and attain the ``most
favorable terms reasonably available'' when liquidity is fragmented
across multiple venues and it is possible to execute orders at prices
inferior to some displayed prices.\591\ For a broker-dealer that does
choose to update its internal policies and procedures, the Commission
estimates that it would incur a one-time cost of approximately
$40,100.\592\ Due to the diversity of broker-dealer business models and
operations, it is difficult for the Commission to reasonably estimate
how many broker-dealers would choose to update their best execution
policies and procedures if Rule 611 is rescinded. However, the
Commission believes that the number of broker-dealers that will choose
to update their best execution
[[Page 36705]]
policies and procedures is likely to be less than the total number of
broker-dealers that submitted customer orders to an exchange (i.e.,
less than 173) simply because, given the diversity of execution
strategies, some broker-dealers may view it as optimal to not change
their routing strategies.\593\ If all broker-dealers that submitted
customer orders to an exchange chose to update their best execution
policies and procedures, the Commission estimates that the total one-
time cost would be approximately $6.94 million.\594\
---------------------------------------------------------------------------
\590\ See supra section VI.B.1.c. (discussing best execution
rules). See also supra section II.B.3 (discussing the evolution of
U.S. equity markets and the effect of Rule 611 as best execution
backstop).
\591\ It is possible that these broker-dealers might update
their best execution review process as part of updating their
policies and procedures.
\592\ The Commission estimates that each broker-dealer that
chooses to update its best execution policies and procedures would,
on average, need 54 hours to do so: 48 hours of legal time and 6
hours of review by a Chief Compliance Officer. The estimated
monetized one-time burden is as follows: ($744 for an attorney x 48
hours) + ($731 for a financial manager (i.e., Chief Compliance
Officer) x 6 hours) = $40,098. See supra note 577 for details on how
hourly rates are calculated. If a broker-dealer also made changes to
their SOR as a result of the rescission of Rule 611, those costs
would be included in the implementation costs discussed in infra
section VI.C.3.b.
\593\ The Commission estimates that there are 173 broker-dealers
that submitted a customer order to an exchange. This number is
estimated by counting the number of unique CRDs that submitted a
customer order directly to an exchange in January 2026. See Table 1
for additional information.
\594\ The Commission estimates rescinding Rule 611 would result
in a total one-time burden of 173 broker-dealers x 54 hours = 9,342
hours for broker-dealers to update their best execution policies and
procedure. The total estimated one-time monetized hour burden is 173
broker-dealers x $40,100 = $6,937,300. However, the Commission
acknowledges uncertainty regarding this estimate and has requested
comment on it.
---------------------------------------------------------------------------
Rescinding Rule 611 could cause more order flow to be executed off
exchange, which could reduce exchange revenue and may also reduce
displayed liquidity. If there is no trade-through protection, then
there would be no obligation to interact with displayed exchange quotes
before executing at inferior prices in dark venues. The loss of this
obligation combined with the potential flexibility for executing orders
at off-exchange venues (e.g., reduced adverse selection from the
segmentation of order flow and better control of counter-party risk),
may cause more broker-dealers to route orders to off-exchange
venues.\595\ This could, in turn, increase the trade-through of
displayed quotes on exchanges.\596\ If more orders are routed off
exchange, exchange transaction volume, and related revenue from
transaction fees and the SIP, could decline.\597\ Additionally, more
marketable orders routed off exchange may reduce the incentive to post
limit orders on exchanges, decreasing overall displayed liquidity.
However, as discussed in detail below, any reduction in displayed
liquidity is likely to be limited.\598\
---------------------------------------------------------------------------
\595\ In particular, broker-dealers may be more likely to route
a larger portion of institutional investor orders off exchange if
Rule 611 is rescinded in order to reduce the overall slippage of
some parent orders. See supra section VI.C.1.a discussing on the
effect of rescinding Rule 611 on institutional orders).
\596\ Commission analysis shows that trade-through rates of
unprotected odd-lot quotes are higher for off-exchange transactions
than for similar sized transactions occurring on exchange. See infra
section VI.C.1.c.
\597\ It may also reduce the revenue some smaller and new
exchanges receive from connectivity and market data. See infra
section VI.C.3.ii (discussing how exchange market data and
connectivity is affected by rescinding Rule 611 and Rule 610(e)).
\598\ See infra note 600 and related text.
---------------------------------------------------------------------------
The Commission is unable to reasonably estimate the magnitude of
order flow that could move off exchange if Rule 611 is rescinded
because it would depend on the latent demand to execute at prices
outside the protected quotes, which the Commission is unable to
estimate. However, there are a number of reasons why the amount of
order flow that migrates off exchange may be limited. First, most
marketable retail orders are already executed off exchange, so this
order flow would not migrate. Second, broker-dealers would still have a
commercial incentive to maximize execution quality, which may
incentivize them not to trade off exchange if there are better-priced
quotes displayed on exchanges. Therefore, to the extent that there is
not a significant reduction in displayed liquidity, there might not be
a significant reduction in the share of marketable orders that are
routed to exchanges for execution. Third, the implementation of the MDI
displayed odd-lot information in the SIP may improve the visibility of
better priced quotes on exchanges and help offset any marketable order
flow that might have migrated off exchange. Finally, to the extent that
the rescission of Rule 611 helps improve innovation in exchange trading
protocols, such innovation might help partially counteract the
potential migration of order flow off exchange.\599\
---------------------------------------------------------------------------
\599\ See supra section VI.C.1.a (discussing potential for
increase in exchange innovation).
---------------------------------------------------------------------------
Rescinding Rule 611 could reduce the total amount of displayed
liquidity on exchanges. However, any such effects are not expected to
be significant.\600\ If rescinding Rule 611 leads to more order flow
being routed off exchange, trade-through rates of displayed round-lot
quotes on exchanges could increase. Higher trade-through rates could
lower the expected probability of execution for displayed limit orders,
reducing the incentive to post and update best-priced displayed orders
on exchanges. In theory, this may prompt liquidity providers to quote
less aggressively, reduce the displayed size of their order, or even
hide their order or move their trading interest off exchange. This
could widen NBBO quoted spreads and thin displayed depth--raising
transaction costs for liquidity takers (i.e., higher effective spreads)
and opportunity costs for non-marketable limit order posters whose
orders no longer enjoy trade-through protection.\601\
---------------------------------------------------------------------------
\600\ See also supra section VI.B.2.c (discussing how Rule 611
affects displayed liquidity).
\601\ To the extent it occurs, any reduction in displayed depth
is likely to vary across stocks, with larger reductions in smaller-
cap, lower-volume stocks. A widening of the NBBO or a reduction in
displayed depth could also increase volatility and reduce price
efficiency, since pre-trade transparency from displayed quotes plays
a significant role in the price discovery process. See Amy Edwards
et al., The Effect of Hidden Liquidity: Evidence from an Exogenous
Shock (working paper Dec. 19, 2024), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5064340 (retrieved from
SSRN Elsevier database).
---------------------------------------------------------------------------
However, to the extent it does occur, the Commission does not
expect any decline in the aggregate amount of displayed liquidity to be
significant, for several reasons. First, as discussed above, the
migration of order flow off exchange may be limited. Second, market
participants often display unprotected odd-lot orders inside the NBBO,
indicating that order protection does not have a significant impact on
the price or size at which they display their order.\602\ Third, the
Commission analysis below shows that trade-through rates of unprotected
quotes fall as trade size increases--a large trade benefits more from
executing at the best price per share--implying that rescinding Rule
611 may not have a significant impact on lit liquidity for orders that
are equal to or greater than the round-lot size.\603\ Additionally, a
separate analysis shows that trade-through rates in the pre-market and
after-hours sessions--when quotes are not protected--are estimated to
be similar to trade-through rates of protected quotes during the
regular trading session.\604\ These analyses indicate that the removal
of order protection may not significantly decrease the probability that
a displayed round-lot sized quote at the NBBO is traded through, which
would result in little change in the incentives to display the order.
Finally, the implementation of the MDI rule to display odd-lot orders
inside the NBBO in the SIP may increase the incentives to display limit
orders at or inside the NBBO. These orders would not have been
protected under Rule 611 and the increased transparency from including
them in the SIP may increase their probability of execution, which
would increase the incentives to display aggressively-priced orders.
However, this effect may be limited because a majority of the trading
[[Page 36706]]
volume on exchanges may come from broker-dealers that use exchange
proprietary DOB feeds that already have access to this odd-lot
information.\605\
---------------------------------------------------------------------------
\602\ See Robert P. Bartlett et al., The Market Inside the
Market: Odd-Lot Quotes, 38 Rev. Fin. Stud. 661 (2025).
\603\ See infra Table 5 and surrounding discussion. That
analysis shows that off-exchange trade-through rates decline from
19.1% for trades of five shares to 11.5% for trades of 40 shares.
\604\ See supra note 408 and surrounding discussion (also see
footnote discussion of potential limitations of the analysis).
\605\ See supra section VI.B.4.c (discussing SIP and proprietary
data feeds) and section VI.B.1.d.i. (discussing the MDI amendments).
---------------------------------------------------------------------------
Rescinding Rule 611 may have minor impacts on stocks that will
receive a smaller tick size.\606\ First, rescinding the trade-through
prohibition could reduce the anticipated benefit of lower transaction
costs from narrower spreads due to the reduction in the tick size. This
is because a narrower spread can restrict the prices at which market
participants transact. Thus, without the trade-through prohibition,
more trade-throughs of the narrower spreads could occur, leading to
less favorable trading terms for investors. However, this effect is
expected to be limited as broker-dealers would still be subject to best
execution obligations, which would not disappear with the rescission of
Rule 611.
---------------------------------------------------------------------------
\606\ See supra section VI.B.1.iii (discussing the anticipated
economic effects when the amendments to Rule 612 adopted in the 2024
Regulation NMS Amendment are implemented).
---------------------------------------------------------------------------
Rescinding Rule 611 is not expected to significantly impact average
execution quality for marketable retail orders, although some
individual orders may receive worse prices.\607\ As discussed above,
retail brokers typically evaluate wholesalers based on average
execution quality relative to the NBBO, and allocate more order flow to
those with higher average execution quality.\608\ Because wholesalers
often internalize marketable retail orders at prices significantly
better than the NBBO, their average execution quality is not
constrained by the protected quote.\609\ Therefore, competition among
wholesalers makes it unlikely that the average execution quality of
retail marketable orders would significantly change if Rule 611 is
rescinded.\610\
---------------------------------------------------------------------------
\607\ In turn, some marketable retail orders may experience
better prices if there is an increase in cross-subsidization by
wholesalers. For additional discussions, see infra note 615 and
accompanying discussion.
\608\ See supra section VI.B.2.b.
\609\ See id.
\610\ In addition, when the new Rule 605 reports are
implemented, they may increase competition among retail brokers
based on average execution quality, because retail investors will be
better able to compare the execution quality across brokers. See
Rule 605 Amendments Adopting Release at 26544. This, in turn, may
cause retail brokers to require better average execution quality
from wholesalers to receive their retail orders, which would further
enhance the competitive incentives for wholesalers to not reduce the
average execution quality they provide if Rule 611 is rescinded.
---------------------------------------------------------------------------
However, Commission staff analysis also shows that when wholesalers
internalize marketable retail orders, they sometimes trade through
displayed odd-lot quotes available at better prices and in sufficient
quantity to fill the order, resulting in higher transaction costs for
these orders.\611\ If Rule 611 is rescinded, wholesalers may begin to
trade through displayed round-lot quotes that were previously protected
and are of sufficient size to fill the order, resulting in worse prices
for these orders.\612\
---------------------------------------------------------------------------
\611\ See infra section VI.C.1.c. (discussing off-exchange
trade-throughs of odd-lot quotes).
\612\ Separately, it is also possible that wholesalers may
sometimes start to trade through round-lot quotes when the retail
order is larger than the displayed size, but it may not result in
higher transactions costs for the order. As discussed above, for
larger retail orders, wholesalers currently may execute the order
outside the NBBO but provide price improvement compared to if the
order had walked up the book against the aggregated displayed
liquidity available on exchanges. When this occurs, the wholesaler
may submit an order in a principal capacity to execute against the
protected quotes on exchanges, to comply with Rule 611. If Rule 611
is rescinded, it is possible that wholesalers may no longer submit
these principal orders to execute against the exchange quotes, which
would result in an increase in trade-throughs, but may not result in
increased transaction costs for the marketable retail orders. It is
also possible that wholesalers may still choose to execute against
the exchange quotes in these circumstances to help manage their
inventory. See supra section VI.B.2.b (discussing size improvement
wholesalers provide to larger retail orders).
---------------------------------------------------------------------------
However, there are several reasons why this effect may be limited.
First, wholesalers may be less likely to trade through a round-lot
quote that sets the NBBO compared to a smaller odd-lot quote.\613\
Because retail brokers often benchmark wholesalers by their average
execution quality measured against the NBBO, this creates competitive
pressure that may make wholesalers less likely to trade through a
round-lot quote that sets the NBBO. Second, wholesalers usually execute
larger retail orders with price improvement relative to the prices they
would have received if the order had executed against the aggregated
displayed liquidity across all exchange order books; i.e., they provide
a better price compared to if the limit order had ``walked-the-book''
on exchanges.\614\ This indicates that the displayed size at the
protected quotes is not usually a binding constraint on the execution
quality that wholesalers provide (i.e., they tend to also provide price
improvement relative to unprotected displayed quotes they could have
traded through).
---------------------------------------------------------------------------
\613\ The analysis in Table 5 below shows that the off-exchange
trade-through rate decreases as the trade size increases. Therefore,
off-exchange trade-through rates for unprotected 100 share round-lot
quotes may be lower than the trade-through rates for 40 share trades
observed in the table. See infra section VI.C.1.c.
\614\ See supra section VI.B.2.b. Additionally, some retail
brokers may produce exception reports if a wholesaler executes an
order at a price outside of the VWAP price the order would have
received if it had walked the consolidated displayed limit order
book. See Ernst, Malenko, Spatt and Sun (2023).
---------------------------------------------------------------------------
Third, when the new Rule 605 reports are implemented, they will
include statistics on the size improvement relative to aggregated depth
at the NBBO, as well as the percentage of shares of marketable orders
that a retail broker executes outside the NBBO. If retail investors
value these additional dimensions of execution quality, competition
among retail brokers may lead them to evaluate wholesalers on these
metrics as well, which could limit the extent to which wholesalers
execute large retail orders at prices worse than the NBBO.
If wholesalers begin trading through round-lot quotes after Rule
611 is rescinded, some larger marketable retail orders may receive
worse prices.\615\ This would transfer value from the retail investors
to the wholesalers, who would earn higher profits.
---------------------------------------------------------------------------
\615\ The magnitude of any increase in transaction costs
resulting from trade-throughs of round-lot quotes may not be large.
For example, the analysis in Table 5 below shows that off-exchange
trade-throughs of 40 share odd-lot quotes increases transactions
costs by 0.32 bps (or 5.0% of the 6.34 bps effective spread). The
increase in transaction costs declines with the trade size, which
indicates the increased transaction costs for trading through a 100
share round-lot quote may be lower. See infra section VI.C.1.c.
---------------------------------------------------------------------------
Wholesalers may pass some of these increased profits to other
retail investors by cross-subsidizing additional price improvement to
smaller orders. Wholesalers may do this because they would still face
competitive pressure to maintain average execution quality measured
against the NBBO to attract retail order flow. To offset the worse
execution quality associated with trade-throughs of round-lot quotes,
the wholesaler would have to provide additional price improvement to
other retail orders. However, if the retail broker benchmark does not
perfectly reflect wholesaler profits, wholesalers may still retain some
of the increased transaction costs from larger marketable retail orders
as profit, even if their average execution benchmark remains unchanged.
Rescinding Rule 611 may also increase the likelihood that retail
non-marketable limit orders are traded through, although the Commission
does not expect this effect to be significant. As discussed above,\616\
most retail non-marketable limit orders are indirectly displayed on an
exchange, where they may currently qualify as protected quotes. If
rescinding Rule 611 increases trade-through rates of displayed orders
on exchanges, it would also increase
[[Page 36707]]
trade-through rates for nonmarketable retail orders. However, as
discussed above, there are reasons to believe that trade-through rates
for displayed limit orders may not significantly increase if Rule 611
is rescinded. Therefore, rescinding Rule 611 may not significantly
increase trade-through rates for displayed retail non-marketable limit
orders.
---------------------------------------------------------------------------
\616\ See supra section VI.B.2.b.
---------------------------------------------------------------------------
If there is an increase in retail marketable orders executed
outside the NBBO or retail non-marketable limit orders traded through,
it could lead to investor confusion. This could create additional costs
for retail brokers to respond to more customer complaints, increase
investor education, or update their systems. For example, retail
brokers may incur higher costs for call centers, chat support, and
content development to explain trade-throughs, reconcile price
discrepancies, and adjust user interfaces.
c. Empirical Analysis
i. Odd-Lot Quote Trade-Through Analysis
This section presents the Commission's empirical analysis of the
prevalence and economic determinants of trade-throughs. A primary
challenge in empirically evaluating the effect of the amendments is
that Rule 611 requires trading centers to have policies and procedures
to prevent trade-throughs. This trade-through prohibition causes
observed trade-throughs to be less frequent than they would be under
market forces alone. Further, trade-throughs that violate Rule 611
(e.g., by mistake) are likely to differ systematically from intentional
trade-throughs that would occur without Rule 611. An empirical analysis
therefore requires a setting where Rule 611 does not prohibit trade-
throughs; behavior in this setting can serve as a counterfactual for
broader market behavior if Rule 611 is rescinded.
The Commission therefore focuses on trade-throughs of odd-lot
quotes inside the NBBO for high-priced stocks. This setting is a useful
laboratory for multiple reasons. First, Rule 611 only applies to round-
lot quotes; odd-lot quotes inside the NBBO are not protected and market
participants are free to trade through them. Second, odd-lot trades are
prevalent, comprising over half of trades since 2021; \617\ this allows
for a large sample of trades that can be benchmarked against the
prevailing odd-lot quotes to determine if the trade could have been
executed at a better price. Third, odd-lot quotes can represent
substantial notional liquidity for high-priced stocks and can emulate
the liquidity of round lots for less expensive stocks.\618\ Fourth,
odd-lot quotes and trades occur during the core trading session when
conditions are the same as with round-lot quotes and trades. This
setting therefore provides a relatively clean laboratory for market
behavior in the absence of Rule 611.
---------------------------------------------------------------------------
\617\ See Bartlett et al., supra note 412.
\618\ See id; See also First TTR Roundtable Transcript at 77-78
(Maureen O'Hara, Cornell, SC Johnson Graduate School of Management).
A high price per share offsets the fact that odd-lots represent
fewer shares; to illustrate, a 30-share odd-lot quote for a stock
priced at $100 per share represents as much notional liquidity as a
protected quote for a stock priced at $30 per share.
---------------------------------------------------------------------------
The results of the Commission's analysis are summarized here. The
analysis finds that 1-5% of trades on an exchange trade through a
better-priced quote on another exchange. The cost of these trade-
throughs, measured as the fraction of notional executed outside the
best quote, ranges from 0.03 to 0.13 basis points.\619\ This cost is
small relative to effective spreads--which are over 6 basis points--and
suggests that market participants trading on an exchange generally
execute at the best available prices, even without an explicit
requirement. Trade-through rates are higher for off-exchange
executions, ranging from 11-19% for trades of 5 to 40 shares, with
costs ranging from 0.32 to 0.84 basis points. This suggests that there
is demand for trade-throughs off exchange, and this demand may extend
to round lots if Rule 611 is rescinded. The analysis also finds that
trade-through rates decline with trade size. Therefore, to the extent
that off-exchange trade-throughs reduce the incentive to provide lit
liquidity, this effect is expected to be small for limit orders of
meaningful size, such as those that set the NBBO. Finally, the analysis
finds similar trade-through rates for retail trades executed by
wholesalers and trades executed on ATSs, alleviating concerns that
retail execution quality will be particularly sensitive to the
rescission of Rule 611.
---------------------------------------------------------------------------
\619\ More specifically, the cost of a trade-through is
calculated using the difference between the execution price and the
price of the best odd-lot quote of sufficient size to cover the
trade. This cost is bounded by the protected quote--that is, when an
odd-lot quote inside the NBBO is traded through, the execution price
will generally not be outside of the NBBO.
---------------------------------------------------------------------------
There is a fundamental limit in extrapolating these results to
round lots if Rule 611 is rescinded: round lots are protected and set
the NBBO, while odd-lot quotes are neither protected nor set the NBBO.
If market participants avoid trading through the NBBO even without Rule
611, the observed trade-through rates of odd-lot quotes may overstate
those for round lots if Rule 611 is rescinded. For example, off-
exchange trading protocols are often benchmarked to protected quotes
and ignore odd-lot quotes, which may contribute to the observed off-
exchange trade-through rates. Additionally, these empirical results are
based on a subset of high-priced stocks with spreads wide enough to
allow odd-lot quotes inside the NBBO.\620\ The behavior of these stocks
may differ systematically from that of stocks with low prices and tight
spreads. These caveats indicate that the estimated trade-through rates
should be interpreted with caution, as they may differ from those for
round lots if Rule 611 is rescinded. Nevertheless, the Commission
believes that analyzing trade-throughs of odd-lot quotes inside the
NBBO for high priced stocks provides an economically meaningful
environment to study market behavior without a trade-through
prohibition.
---------------------------------------------------------------------------
\620\ The subsample used in the analysis is economically
significant. For October of 2025, this subsample includes
approximately 880 stocks per day (out of a total of approximately
11,600 traded stocks). Many of the high-priced stocks in this
subsample are among the most active of all stocks, with the
subsample typically comprising 30-40% of total daily dollar volume
for regular-way trades. The economic significance of the subsample
indicates that market participants are accustomed to trading in
environments where the best quote is often unprotected.
---------------------------------------------------------------------------
A detailed discussion of the methodology and results of the
Commission's analysis is below.
The analysis starts by constructing a sample of stock-days with
room inside the NBBO for odd-lot quotes of meaningful liquidity.\621\
The sample construction has the following steps. First, all stock-days
for the fourth quarter of 2025 are collected from the TAQ Masterfile.
Second, stock-days are excluded if their VWAP is less than $100,\622\
their round lot is less than 100,\623\ or their time-weighted average
NBBO quoted spread (``NBBO TWAQS'') is less than $0.04 during
October.\624\ Third, to avoid data errors
[[Page 36708]]
in exchange proprietary feeds, December 16th is excluded, as are 34
stock-days with a negative time-weighted quoted spread of the best
displayed prices (``BDP TWAQS'').\625\ The result is a sample of 45,647
stock-days.
---------------------------------------------------------------------------
\621\ See supra note 431 for the definition of a stock-day.
\622\ The VWAP is the volume-weighted average price for the
stock-day. It is computed using regular-way trades from the SIP by
dividing the notional value of the trades (i.e., trade price
multiplied by trade size) by the total number of shares that
transacted.
\623\ As a result of the round-lot amendments that took effect
on November 3, this filter implies that stocks with prices typically
over $250 per share are only in the sample during October. The new
round lots for these stocks resulted in tighter NBBO spreads, thus
reducing the space for odd-lot quotes inside the NBBO.
\624\ In order for there to be odd-lot quotes inside both sides
of the NBBO, the NBBO spread needs to be at least $0.03. The time-
weighted average quoted spread is calculated from the SIP quotes.
The data in this analysis precedes the implementation of the 2024
Regulation NMS Amendments. Once implemented, stocks that generally
maintain an NBBO TWAQS less than $0.015 will trade with a reduced
minimum pricing increment; because this analysis conditions on an
NBBO TWAQS greater than $0.04, the results of this analysis are
unlikely to be affected by the reduction in the minimum pricing
increment. Additionally, once implemented, the 2024 Regulation NMS
Amendments reduce the access fee cap for all stocks; because the
change in the access fee cap affects all quotations, it is unlikely
to affect the incentives to trade through a particular quote and is
therefore unlikely to affect the results of this analysis. The data
in this analysis also precedes the dissemination of top-of-book odd-
lot quotations by the SIPs, which was implemented on Monday, April
27, 2026. Market participants may be less likely to trade through
odd-lot quotes once it is easier and cheaper to see the top-of-book
odd-lot quotations; to the extent that most trades are executed by
market participants who see odd-lot quotations in the proprietary
feeds, the dissemination of odd-lot quotations by the SIPs is
unlikely to have a large impact on the results of this analysis.
\625\ December 16th is dropped due to a data quality issue with
an exchange proprietary feed, which resulted in missing quotes for
half of the day. The best displayed prices are the lowest lit offer
and the highest lit bid across all 16 proprietary feeds, regardless
of the size of the quote. The BDP TWAQS is the time-weighted value
of the spread between these best displayed prices; if this is
negative, then it is likely due to an error on one of the feeds.
---------------------------------------------------------------------------
Summary statistics are presented in Table 4. The sample captures a
wide range of trading activity: stock-days at the 5th percentile have
less than 100 trades, while the 95th percentile has over 88,000 trades.
Similarly, the first ventile has a dollar volume under $0.5 million,
while the twentieth ventile is above $850 million. The sample covers
over $11 trillion in notional volume for the quarter.\626\
---------------------------------------------------------------------------
\626\ The total notional is computed by multiplying the average
notional by the number of stock-days in the sample: $249.2 million x
45,647.
---------------------------------------------------------------------------
Turning toward quoted spreads, the sample contains NBBO TWAQS
ranging from $0.05 to over $2, with a median of $0.316 and a mean of
$0.661. Importantly, the distribution of the BDP TWAQS is substantially
lower than the distribution of the NBBO TWAQS. That is, at each
percentile, the BDP TWAQS is lower than the NBBO TWAQS, indicating that
there are often odd-lots inside the NBBO. At the 5th percentile, the
BDP TWAQS is about 25% lower than the NBBO TWAQS, while at the 95th
percentile the BDP TWAQS is less than half of the NBBO TWAQS. The depth
at the BDP exhibits a similar pattern: the time-weighted depth at the
bid and offer is less than 100 at the median of the distribution, which
implies that the typical stock-day in the sample spends most of the day
with less than one round lot at the BDP. Finally, trade-weighted
effective spreads--a measure of trading costs--range from $0.023 to
$0.707 per share from the 5th to 95th percentiles; in percentage terms,
the effective spread averages 11.7 basis points relative to the
midpoint of the trade.\627\
---------------------------------------------------------------------------
\627\ The effective spread is measured as twice the absolute
difference between the trade execution price and the midpoint of the
NBBO at the time of the trade. For each stock-day, this measure is
averaged across trades; equally weighting trades (as opposed to
weighting by shares or the notional value of the trade) gives
relatively more weight to small trades and therefore makes the
measure more reflective of the trading cost of small odd-lots.
Table 4--Summary Statistics for Analysis of Trade-Through Rates
--------------------------------------------------------------------------------------------------------------------------------------------------------
Variable Stock- days Mean P5 P25 P50 P75 P95
--------------------------------------------------------------------------------------------------------------------------------------------------------
VWAP......................................................... 45,647 $195 $103 $122 $153 $204 $397
Number of trades............................................. 45,647 26,522 84 3,426 12,074 27,261 88,176
Dollar-volume (millions)..................................... 45,647 $249.2 $0.5 $14.1 $62.4 $186.0 $851.8
Market Cap. (millions)....................................... 45,640 $53,074 $182 $2,372 $8,410 $28,676 $179,947
NBBO TWAQS................................................... 45,647 $0.661 $0.056 $0.152 $0.316 $0.698 $2.193
BDP TWAQS.................................................... 45,647 $0.338 $0.041 $0.103 $0.199 $0.377 $0.990
BDP TW depth at bid.......................................... 45,647 154 28 54 87 155 511
BDP TW depth at offer........................................ 45,647 171 26 51 85 160 620
Effective spread............................................. 45,647 $0.228 $0.023 $0.059 $0.113 $0.222 $0.707
Effective spread (%)......................................... 45,647 0.117% 0.016% 0.039% 0.069% 0.127% 0.330%
--------------------------------------------------------------------------------------------------------------------------------------------------------
This table displays summary statistics for the sample constructed for the analysis of trade-throughs. The sample consists of all stock-days (unique
stock-date pairs) in the TAQ Masterfile for the fourth quarter of 2025, subject to the following filters: (1) stock-days with a volume-weighted
average price (``VWAP'') under $100 are excluded to focus on odd-lots; (2) stock-days are excluded if the round-lot is less than $0.04 during October
to allow for room inside the NBBO; (3) December 16th is excluded due to a data quality issue with an exchange proprietary feed; (4) 34 stock-days with
a negative ``BDP TWAQS'' are excluded due to likely data errors; and (5) stock-days without any trades are excluded.
Trade data is from the SIP and include regular-way trades (i.e., trades with a sale condition of ``Regular Trade,'' ``Intermarket Sweep Order'', or
``Odd Lot Trade''). Market capitalization is calculated as shares outstanding (from the TAQ Masterfile) multiplied by VWAP. The NBBO TWAQS is the time-
weighted average quoted spread during market hours using the SIP round-lot quotes. BDP TWAQS is the time-weighted average quoted spread during market
hours using the best-priced bid and ask, regardless of quote size, constructed from 16 exchange proprietary feeds. BDW TW depth at bid (offer) is the
time-weighted average depth at the best priced bid (offer), measured in shares; when multiple venues quote at the best price, the maximum quote size
is used. Effective spread is computed as twice the absolute difference between the trade price and the NBBO midpoint at the time of the trade,
averaged equally across regular trades for each stock-day. The effective spread is measured both in dollars and as a percent of the NBBO midpoint.
For each variable, the table reports the number of stock-days with non-missing values, the mean, and the 5th, 25th, 50th, 75th, and 95th percentiles.
Conceptually, a trade-through occurs when a liquidity demander
leaves money on the table by not sending the order to a venue with a
better-priced quote. To operationalize this concept, an empirical
analysis of trade-throughs must specify the conditions under which the
liquidity demander could have reasonably executed at the better price.
The following analysis sets two conditions. First, the trade quantity
must be no larger than the size of the better-priced quote. Second, the
better-priced quote must be sufficiently persistent that the liquidity
demander could have seen it and executed against it. If these
conditions hold, then a liquidity demander could have received--even if
only after the fact--a better price by sending the order to a different
venue.
Regarding the first condition, if the trade size is larger than the
better-priced quote, then the liquidity demander would not have been
able to execute the entire order at the better-priced quote. Instead,
they would either incur the cost
[[Page 36709]]
of a partially filled order or execute the remaining shares at a
potentially worse price elsewhere. Commenters have noted that execution
quality should be benchmarked to the size of the order.\628\
Accordingly, this analysis benchmarks trades against quotes that are
large enough to fully accommodate the trade.
---------------------------------------------------------------------------
\628\ In the context of best execution for retail orders, one
commenter stated, ``since the odd lots don't show up in the NBBO,
measuring [best execution] against the NBBO really doesn't make
sense. What we really ought to do is measure [best execution]
against the actual displayed liquidity that is in the lit markets.''
See First TTR Roundtable Transcript at 188 (Jim Angel, Georgetown
University). In the context of institutional best execution, one
commenter stated that, ``wholesalers are being held accountable to
the order receipt time depth of book quote.'' See First TTR
Roundtable Transcript at 275 (Robert Battalio, University of Notre
Dame).
---------------------------------------------------------------------------
To implement this first condition, the analysis takes the following
approach. First, the analysis focuses on trades of a range of sizes: 1,
5, 10, 20, 40, and 100. Trades of these sizes are relatively
frequent.\629\ For each trade size, quotes are drawn from the
proprietary order book data covering the sixteen exchanges that
operated throughout the fourth quarter of 2025.\630\ The order book
data provides, for each exchange, the number of shares offered at each
of ten price levels on both the buy and sell sides (i.e., ten levels of
buy orders, and ten of sell orders).\631\ For each size and venue, the
analysis constructs BBO-like quotes--analogous to the best bid and
offer for a round-lot quote--by identifying the lowest price at which a
market sell order of that size would execute (for bids) and the highest
price at which a market buy order would execute (for offers), assuming
the order walks the book and does not interact with hidden liquidity.
For example, a 10-share bid on an exchange is the lowest price that a
10-share market sell order would execute against (assuming the sell
order walks the book and does not interact with hidden liquidity);
similarly, the 10-share offer is the highest price that a 10-share
market buy order would execute against. This procedure creates BBO-like
quotes for each trade size; trade execution prices are then compared to
the correspondingly sized quote to determine if the trade could have
executed at a better price at another venue.\632\
---------------------------------------------------------------------------
\629\ See Michael Coccia et al., Is Smaller Better? Examining
the Decrease in Trade Sizes in Financial Markets 30-31 (working
paper July 16, 2025), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5358460 (retrieved from SSRN Elsevier
Database).
\630\ The analysis excludes quotes from 24X National Exchange,
LLC, on which trading commenced on October 14th, 2025. Volume on
this exchange--whether measured by shares, trades, or notional--
generally accounted for less than 0.1% of aggregate volume on the
days it operated during 2025. See US Equities Historical Market
Volume Data, CBOE, https://www.cboe.com/us/equities/market_statistics/historical_market_volume/ (last visited April 16,
2026). To the extent that better-priced odd-lot quotes persist on
this exchange, the analysis may understate trade-through rates.
\631\ A price level is a price with a resting order. A price
without a resting order does not count toward the ten level limit--
e.g. if an exchange has an offer to sell a share at $100.01 and the
next offer to sell is at $100.10, then those offers would constitute
only two levels instead of ten.
\632\ The analysis excludes trades that occur when the best
correspondingly sized quotes cross each other. For example, a 10-
share trade is excluded when the best 10-share offer is lower than
the best 10-share bid. When the market is crossed, every execution
price is either below the best bid or above the best offer; it is
therefore unclear how to evaluate the execution quality of such a
trade. See supra note 235.
---------------------------------------------------------------------------
Turning to the second condition, if the relevant (correspondingly
sized) quote is not sufficiently persistent, then it will not be used
to determine whether there was a trade-through. It might not be
feasible, for example, for a liquidity demander to execute against a
quote that ``flickers.'' The trade-through analysis considers the
following factors when determining whether it is feasible for a
liquidity demander to execute against a quote.
First, the quote needs to persist long enough for the message to
travel from the exchange to the liquidity demander. For example, if a
broker is in Secaucus, NJ, and an exchange is in Mahwah, NJ, a quote
message traveling at the speed of light would take approximately 113
microseconds to arrive after it was released from the exchange's
matching engine--setting a lower bound on travel time.\633\
---------------------------------------------------------------------------
\633\ The locations are approximately 21 miles apart, and the
speed of light is 186,000 miles per second. Light therefore requires
0.000113 seconds (21 miles/186,000(miles/second)) to traverse the
distance.
---------------------------------------------------------------------------
Second, after receiving the quote message, the broker needs time to
process and act on it, and then the broker's response must travel back
to the exchange.
Third, there are limits to how closely market participants can
synchronize their clocks, which means messages from different venues
might be reported out of order. For example, a trade might be reported
on one venue before a quote update is reported on another venue, even
though the quote update occurred first. Exchanges employ a methodology
to ensure that their timestamps are accurate within 100
microseconds.\634\
---------------------------------------------------------------------------
\634\ See, e.g., the definition of ``Participant Timestamp'' in
UTP Data Feed Services Specification Version 3.0c (2026), available
at https://utpplan.com/DOC/UtpBinaryOutputSpec.pdf.
---------------------------------------------------------------------------
Fourth, a broker may send marketable orders to multiple venues
simultaneously, but differences in transit times (e.g., between Mahwah
and Carteret, NJ) can create the appearance of a trade-through. For
example, if venue A has a worse quoted price than venue B but the
broker's order reaches venue A first, it may appear as if the trade on
venue A traded through a better-priced quote on venue B, even though
both quotes were accessed nearly simultaneously.
Fifth, from the perspective of the liquidity supplier, if a quote
is traded-through but then canceled or subsequently executed by another
order, the supplier is not worse off because of the trade-through.\635\
---------------------------------------------------------------------------
\635\ One commenter discussed measuring, ``. . . the cost to the
limit order that is allegedly traded through'' by examining whether
the order was subsequently filled. See First TTR Roundtable
Transcript at 160-161 (Jim Angel, Georgetown University).
---------------------------------------------------------------------------
In sum, these five factors necessitate that a better-priced quote
persist for a window of time around the execution in order for the
trade to be classified as a trade-through: the first two factors
require that the quote exist before the trade, while the latter three
require it to exist after the reported time of execution.
To implement this condition of quote persistence, the analysis
takes the following approach. First, each trading day is divided into
non-overlapping intervals of 1.2 milliseconds. Quotes are mapped to
every interval during which they are in effect, using the participant
timestamp that records when the exchange's matching engine published
the message.\636\ Second, for each interval and venue, the analysis
identifies the highest offer and lowest bid at which a market order of
a given size could have executed. These are considered the persistent
quotes--quotes that do not persist for the full interval are excluded,
as a liquidity demander could not have reliably traded against them.
Third, the analysis summarizes the persistent quotes across all venues
to determine the best persistent bid and offer for each interval. This
produces NBBO-like bids and offers for every 1.2 millisecond interval
and for each trade size threshold.
---------------------------------------------------------------------------
\636\ See supra note 634.
---------------------------------------------------------------------------
Correspondingly, trades are assigned to one of the 1.2 millisecond
intervals using the trade's participant timestamp,\637\ and then trades
are
[[Page 36710]]
merged to the best persistent quotes in the same interval. Only trades
with timestamps between the 800th and 1,000th microsecond of each
interval are retained in the sample. This sampling procedure keeps
approximately one-sixth of trades (those in the 200 microsecond window
of each 1.2 millisecond interval) and matches them to the best quotes
that persisted from at least 800 microseconds before execution to at
least 200 microseconds after execution. This approach ensures that the
analysis accounts for the factors previously discussed: 800
microseconds are allotted for a message to travel from the exchange to
the liquidity demander and back, and 200 microseconds are allotted for
clock synchronization and simultaneous execution issues.\638\
---------------------------------------------------------------------------
\637\ For trades that occur on an exchange, this timestamp
reflects the time that the message is published by the exchange's
matching engine. For trades that occur off exchange, the timestamp
reflects the execution time of the trade reported by the FINRA
member. By matching trades to quotes using the participant
timestamp, the quotes reflect--as close as is possible--the state of
the order book at the time of trade execution. See supra note 634.
\638\ To the extent these allowances are too short, then the
estimated trade-through rates will be too high (and vice versa if
the allowances are too long). Additionally, to the extent some off-
exchange venues report execution times rounded down to the nearest
millisecond, then those trades will be evaluated against quotes that
are older by the length of the rounding, potentially increasing
measured trade-through rates.
---------------------------------------------------------------------------
The sample of trades is shown in Table 5. Panel A shows trades that
are executed on an exchange, and Panel B shows trades that are executed
off exchange. The first column shows the size of the trade, and the
second column shows the number of trades. There is a total of 91
million trades, each of which is matched to the best persistent quotes
of various sizes.
To examine the effect of rescinding Rule 611, the analysis focuses
on situations where market participants are not prohibited from trading
through better-priced quotes. Specifically, the analysis includes only
those trades where the best persistent quotes for the trade's size are
inside the best persistent quotes for a 100-share order. For example, a
20 share trade is included in the trade-through analysis only if the
best persistent bid and ask for a 20-share order are inside the best
persistent bid and ask for a 100-share order.\639\ This approach avoids
the direct effect of Rule 611 in preventing trade-throughs.
---------------------------------------------------------------------------
\639\ As discussed previously, every stock in this sample has a
round lot of 100 shares.
---------------------------------------------------------------------------
These trades are denoted ``Candidate trades,'' and are shown in the
third column of Table 5. The fourth column reports the percentage of
all trades that are ``Candidate trades.'' Approximately 30% of 10-share
trades are ``Candidate trades.'' The fraction of ``Candidate trades''
decreases with trade size because larger trades are more likely to
exhaust all of the available odd-lot liquidity on a venue and thereby
reach the protected quote.
The analysis next calculates trade-throughs for the ``Candidate
trades.'' A trade-through occurs when the trade's execution price
occurs outside of the best persistent bid and ask prices. Column five
shows the fraction of ``Candidate trades'' that are trade-throughs. For
each trade-through, the analysis calculates the notional value of the
trade-through by multiplying the number of shares in the trade by the
difference between the execution price and the best quote (i.e., for a
trade-through executed below the best bid, the execution price is
subtracted from the best bid; for an execution above the best offer,
the best offer is subtracted from the execution price). The summed
notional value of all trade-throughs is then divided by the notional
value of all the ``Candidate trades'' to calculate the fraction of
notional that is outside the best quote--this is presented in the sixth
column as ``Notional amount outside of best quote (basis points).'' The
last column shows the typical effective spread for stock-days in the
sample, weighted by the stock-days' notional value of ``Candidate
trades'' in each row.
Panel A shows trade-through rates of 1.6 to 5.5% for on-exchange
odd-lot trades. Smaller trades generally have higher trade-through
rates, with one-share trades exhibiting the highest trade-through
rate--possibly because these are often exploratory or used to ``ping''
for hidden liquidity rather than being price sensitive.\640\ Similarly,
smaller trades have a higher notional amount that is outside of the
best quotes, ranging from 0.03 to 0.13 basis points. However, the
notional value of these trade-throughs is small compared to typical
trading costs: effective spreads range from 6 to 9.12 basis points,
implying that liquidity demanders on exchange do not leave much money
on the table by passing over better-priced quotes. To provide a
benchmark, the last row of the panel shows results for trades of size
100 that occur on exchange, which are evaluated against the best 100-
share quotes (i.e., the protected NBBO). The trade-through rate for
these trades is 0.3%, with the notional amount outside of the best
quotes estimated to be 0.01 basis points.\641\
---------------------------------------------------------------------------
\640\ See, e.g., Ryan L. Davis et al., 1-Share Orders and
Trades, 75 J. Banking & Fin. 109 (2017).
\641\ The estimated trade-through rate of 0.3% is similar to the
round-lot trade-through rates calculated in the OAR Roundtable
Analysis--see supra note 121. That analysis found a 0.06% trade-
through rate for round-lot trades in corporate securities and a
0.08% trade-through rate for round-lot trades in ETP securities,
both using a one-second lookback window.
---------------------------------------------------------------------------
Panel B shows results for off-exchange trades, where trade-through
rates are substantially higher than on-exchange trades. Trade-through
rates off exchange range from 11.5 to 35.6% for odd-lots.\642\ As with
on-exchange trades, smaller trades have higher trade-through rates,
particularly for one-share trades A possibility for the high trade-
through rates for one-share trades is that some of them are the result
of fractional trades. During this time period, trades for retail orders
smaller than one share are reported as 1-share trades in the SIPs.\643\
If a trade involves a whole share component and a fractional share
component (e.g. a trade for 10.4 shares), then the broker may execute
the whole share component on an agency basis and the fractional share
component on a principal basis. This trade would result in two prints
to the SIP: one for 10 shares, and one for 1 share.\644\ Therefore, 1-
share trades off exchange might be part of a trade that is larger than
1 share, and the 1-share quotes--which serve as the benchmark for the
execution price of 1-share trades in this analysis--might be too
stringent of a benchmark. Separately, probing for hidden liquidity with
1-share orders might be particularly valuable off exchange because
these trades are only visible to other market participants when they
are published by the SIP, which entails a delay relative to the
reporting of on-exchange trades published by exchange proprietary
feeds.\645\
---------------------------------------------------------------------------
\642\ One study found off-exchange odd-lot trade-through rates
of 31-46%. This study looked at a relatively small sample of trades
on one day and for two stocks. These trade-through rates were
computed without the requirement that the better-priced odd-lots
have sufficient depth to cover the trade size; this difference in
methodology may explain part of the difference in the trade-through
rate from Table 5. See Robert P. Bartlett, Modernizing Odd Lot
Trading, COLUM. BUS. L. REV. 101 (2021).
\643\ On February 23, 2006, the SIPs began reporting information
on fractional share trade quantities. See UTP Vendor Alert #2025--6:
UPDATE New Release Date: SIP Fractional Share Trade Reporting
Enhancements, NasdaqTrader (Mar. 28, 2025), https://www.nasdaqtrader.com/TraderNews.aspx?id=UTP2025-06.
\644\ See Robert P. Bartlett et al., Tiny Trades, Big Questions:
Fractional Shares, 157 J. Fin. Econ. 1 (2024). Table 6 therein shows
that one broker executes most of their fractional trades at either
the NBB or the NBO, which would necessarily trade through any odd-
lots inside the NBBO.
\645\ See Thomas Ernst et al., The Value of Off-Exchange Data
(working paper July 31, 2021), available at https://microstructure.exchange/papers/12859989807_TRF_July_1b.pdf.
---------------------------------------------------------------------------
The notional value of the odd-lot trade-throughs off exchange
ranges from 0.32 to 1.44 basis points--roughly ten times higher than on
exchange. A
[[Page 36711]]
possibility for the high trade-through rates off exchange is that
orders off exchange are often pegged to the NBBO in various ways and
thereby ignore odd-lot quotes by design. A midpoint order, for example,
might execute outside of the best odd-lot quotes.\646\ Tracking odd-lot
quotes can also be costly, both technically and financially (e.g.,
purchasing the requisite data feeds and connections), so executing at a
better price might be less profitable than simply pegging to the
NBBO.\647\ The last row of the panel shows the trade-through rate for
100-share trades (evaluated against the NBBO) that execute off
exchange; the rate is 0.1% with a notional value under 0.01 basis
points, and is similar to the estimates for on-exchange trades.
---------------------------------------------------------------------------
\646\ See figure 2 of Bartlett et. al. (2025), supra note 617,
for an example.
\647\ The Best Odd-Lot Order started to be disseminated by the
SIPs on April 27, 2026. To the extent this allows market
participants to more cheaply track odd-lot quotes, these quotes will
experience lower trade-through rates than observed in this analysis.
---------------------------------------------------------------------------
The Commission understands that liquidity suppliers may be less
willing to post aggressively-priced quotes if they expect their quotes
to be traded through by uninformed liquidity demanders. If rescinding
Rule 611 causes more uninformed traders to execute off exchange, the
pool of on-exchange liquidity demanders may skew toward informed
traders,\648\ prompting liquidity suppliers to widen spreads to
compensate for increased adverse selection. The ``notional amount
outside of the best quote'' in Panel B of Table 5 provides one way to
gauge the economic magnitude of this effect--it measures traders'
willingness to forgo better-priced quotes when trading off exchange.
For trades of five shares, off-exchange traders appear willing to forgo
approximately 11% of the effective spread; \649\ this drops to
approximately 5.5% for trades of twenty shares. This suggests that
rescinding Rule 611 may have a smaller impact on lit liquidity
provisions for large trades--where the gains from executing at the best
price are multiplied by a high number of shares--than for small trades.
Therefore, to the extent that the NBBO represents, by design, an order
of meaningful size,\650\ the rescission of Rule 611 might have a small
effect on it.
---------------------------------------------------------------------------
\648\ See section VI.D.2.c. for a discussion of the amendments'
effects on competition between exchanges and other venues.
\649\ The notional amount outside of the best quote is 0.84
basis points, while the typical effective spread is 7.52 basis
points. The ratio is therefore 11% (0.84/7.52).
\650\ See Market Data Infrastructure Adopting Release, supra
note 15, at 18618 n.274.
Table 5--Aggregate Trade-Through Rates by Location and Trade Size
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notional Typical
Candidate Candidate Trade-through amount outside effective
Trade size Total trades trades trades (%) rate (%) of best quote spread (basis
(basis points) points)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Panel A: On-exchange trades
--------------------------------------------------------------------------------------------------------------------------------------------------------
1....................................................... 16,754,409 7,619,267 45.5 5.5 0.13 9.12
5....................................................... 5,810,260 2,219,607 38.2 3.5 0.07 7.60
10...................................................... 6,908,856 2,122,907 30.7 2.9 0.05 6.86
20...................................................... 2,975,260 662,803 22.3 2.4 0.05 7.06
40...................................................... 1,354,922 140,189 10.3 1.6 0.03 6.04
100..................................................... 15,293,576 n/a n/a 0.3 0.01 4.87
--------------------------------------------------------------------------------------------------------------------------------------------------------
Panel B: Off-exchange trades
--------------------------------------------------------------------------------------------------------------------------------------------------------
1....................................................... 21,296,491 9,375,566 44.0 35.6 1.44 6.45
5....................................................... 3,818,979 1,441,830 37.8 19.1 0.84 7.52
10...................................................... 3,476,438 1,064,874 30.6 16.4 0.64 6.52
20...................................................... 2,124,338 496,508 23.4 13.1 0.42 7.65
40...................................................... 899,180 86,278 9.6 11.5 0.32 6.34
100..................................................... 10,417,251 n/a n/a 0.1 0.00 5.06
--------------------------------------------------------------------------------------------------------------------------------------------------------
This table displays trade-through rates for the sample of stock-days described in Table 4. Panel A shows rates for trades that occur on an exchange, and
Panel B shows rates for trades that occur off exchange. The ``Trade size'' column indicates the number of shares that transacted in the trade.
To calculate trade-throughs for a given stock-day, the following procedure is followed. First, the day is divided into 1.2 millisecond intervals with
trades and quotes assigned to the interval by their participant timestamp, and with trades occurring between the 800th and 1000th microsecond of the
interval. This procedure samples approximately one-sixth of all regular trades for the stock-day. Quotes come from the proprietary feeds of the
sixteen exchanges that operated during the entirety of the fourth quarter of 2025. For a given trade size during the 1.2 millisecond interval, each
venue's quotes are aggregated to determine the persistent quote that could have traded against a market order of the specified size. E.g., if the
trade size is 1 share, then a venue's persistent quote is the worst displayed price at the top of the venue's book during the interval; if the trade
size is 10 shares, then the persistent quote is the worst displayed quote with which a 10-share market order would have interacted. The best
persistent bid is the highest persistent bid across the sixteen venues; the best persistent offer is the lowest persistent offer across the sixteen
venues.
A ``Candidate trade'' is a trade that occurs when both the best persistent bid and offer quotes (for a given size) do not cross and are strictly inside
the best persistent bid and offer quotes for a round-lot (100-share) trade. An odd-lot trade-through occurs if the candidate trade's execution price
is below the best persistent bid or above the best persistent offer. The concept of a ``Candidate trade'' does not apply to 100-share trades, so these
trades are classified as a trade-through if the execution price is below the best persistent 100-share bid or above the best persistent 100-share
offer. When a trade-through occurs, the difference between the execution price and the best quote is multiplied by the size of the trade to determine
the notional amount outside of the best quote.
[[Page 36712]]
The results of the above procedure are collected for 481,928 stock-day-size-location tetrads. Of these tetrads, 33 are dropped because, when there is a
trade-through in the tetrad, the average distance from the best quote is larger than ten times the stock-day's NBBO TWAQS and are therefore likely a
data error. The remaining tetrads are aggregated by the size-location pairs shown in the table. For each size-location pair: ``Total trades'' is the
number of regular trades in the sample; ``Candidate trades'' is the number of candidate trades; the fourth column is the percent of total trades that
are candidate trades; ``Trade-through rate'' is the number of trade-throughs divided by the number of candidate trades; ``Notional amount outside of
best quote'' is the difference between the execution price and the best quote for trade-throughs, multiplied by the number of shares in the trade-
through and divided by the notional value of the candidate trades. The final column, ``Typical effective spread'' is a weighted average effective
spread for the relevant stock-days. This weighted average effective spread is computed in two steps: first, the trade-weighted effective spread is
calculated for each stock-day as described in Table 4; second, the effective spreads of the stock-days are averaged using the stock-days' notional
value of candidate trades as weights.
To further explore the interaction of Rule 611 and liquidity, Table
6 tabulates trade-through rates by notional volume quartiles. The
sample of stock-days is split into four quartiles using the cutoffs for
``dollar-volume'' presented in Table 4; the ``Notional quartile''
column of Table 6 shows the quartile from which the statistics are
derived (with ``Q1'' being the quartile with the smallest notional, and
``Q4'' being the quartile with the highest). Otherwise, the methodology
and calculations are identical to Table 5.
Broadly speaking, trade-through rates are similar across notional
quartiles, once conditioning on the trade size and the location of the
trade. The largest outlier is the row of one-share trades off exchange
for the most active quartile (``Q4''), which shows a trade-through rate
of 40.1% compared to rates near 20% for the other quartiles. This may
reflect the importance of probing for hidden liquidity in these stocks,
or a higher share of fractional trades.\651\
---------------------------------------------------------------------------
\651\ See supra notes 644 and 640.
---------------------------------------------------------------------------
The notional amount outside of the best quote generally declines as
notional volume increases. For example, for 20-share trades off
exchange, the notional amount outside of the best quote descends
monotonically from 1.54 basis points to 0.34 basis points as the
notional quartile goes from Q1 to Q4. However, effective spreads also
decline as the notional quartile goes from Q1 to Q4, and the notional
amount outside of the best quote as a fraction of the effective spread
is fairly constant at approximately 5% for these rows.\652\ These
results suggests that rescinding Rule 611 may not have a differential
impact on stocks with varying levels of trading activity.
---------------------------------------------------------------------------
\652\ E.g., for a trade size of 20 off exchange, the Q1 quartile
has a notional outside of the best quote equal to 1.54 basis points,
with an effective spread of 27.79 basis points, for a ratio of 5.5%.
The numbers for the Q4 quartile are 0.34 and 6.14, for a ratio of
5.5%.
Table 6--Aggregate Trade-Through Rates by Notional Volume Quartiles
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notional Typical
Notional Candidate Trade-through amount outside effective
Trade size quartile Total trades trades (%) rate (%) of best quote spread (basis
(basis points) points)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Panel A: On-exchange trades
--------------------------------------------------------------------------------------------------------------------------------------------------------
1....................................... Q1 405,801 262,300 64.6 9.7 0.76 36.66
1....................................... Q2 1,865,312 1,114,612 59.8 7.0 0.33 20.00
1....................................... Q3 3,257,542 1,626,278 49.9 5.4 0.15 11.51
1....................................... Q4 11,225,754 4,616,077 41.1 5.0 0.08 6.51
10...................................... Q1 63,997 22,547 35.2 2.2 0.14 30.09
10...................................... Q2 567,947 234,621 41.3 2.5 0.09 16.34
10...................................... Q3 1,082,768 377,555 34.9 2.7 0.07 11.00
10...................................... Q4 5,194,144 1,488,184 28.7 3.0 0.05 5.01
20...................................... Q1 23,946 6,012 25.1 2.0 0.13 30.81
20...................................... Q2 242,688 70,733 29.1 2.2 0.07 14.99
20...................................... Q3 580,476 142,961 24.6 2.2 0.05 10.19
20...................................... Q4 2,128,150 443,097 20.8 2.5 0.04 5.46
--------------------------------------------------------------------------------------------------------------------------------------------------------
Panel B: Off-exchange trades
--------------------------------------------------------------------------------------------------------------------------------------------------------
1....................................... Q1 312,158 119,163 38.2 20.9 2.99 29.05
1....................................... Q2 1,610,017 828,485 51.5 21.9 1.98 15.49
1....................................... Q3 3,149,907 1,494,542 47.4 23.7 1.61 9.96
1....................................... Q4 16,224,409 6,933,376 42.7 40.1 1.38 5.40
10...................................... Q1 31,092 9,054 29.1 17.5 1.92 28.63
10...................................... Q2 230,863 89,896 38.9 18.5 1.39 15.11
10...................................... Q3 545,041 180,733 33.2 17.3 1.00 10.12
10...................................... Q4 2,669,442 785,191 29.4 15.9 0.54 5.33
20...................................... Q1 23,478 5,325 22.7 15.4 1.54 27.79
20...................................... Q2 207,377 59,475 28.7 13.1 0.81 15.23
20...................................... Q3 430,347 107,795 25.0 12.4 0.58 11.03
20...................................... Q4 1,463,136 323,913 22.1 13.3 0.34 6.14
--------------------------------------------------------------------------------------------------------------------------------------------------------
This table displays trade-through rates for the sample of stock-days described in Table 4. The procedure for calculating trade-throughs is described in
Table 5. In Table 5, the statistics were aggregated at the location-size pair; in this table, the statistics are aggregated at the location-size-
quartile triple, where the quartile is determined by the stock-day's notional trading volume. The quartile cutoffs are shown in Table 4; ``Q1''
indicates the quartile of stock-days with the lowest notional volume, and ``Q4'' indicates the quartile with the highest notional volume.
[[Page 36713]]
The analysis next examines retail trade-throughs. Retail trades
make up a large percentage of smaller off-exchange trades, and retail
brokers benchmark wholesaler execution quality and price improvement
based on the NBBO.\653\ If the observed off-exchange odd-lot trade-
throughs are due to wholesalers executing marketable retail orders,
this would suggest that wholesalers are not always taking advantage of
better-priced displayed odd-lot liquidity on exchanges at the time of
execution.\654\ If these retail orders could have executed against
better-priced odd-lot quotes, their transaction costs would have been
lower. If wholesalers knowingly trade-through these better-priced odd-
lot quotes, it suggests they may also trade through the NBBO for some
retail trades if Rule 611 is rescinded. In that case, retail
transaction costs could increase for some trades that previously would
have executed against protected quotes. However, even if costs rise for
some trades, the increase may not be large: Table 5 shows that for 40-
share trades, the notional amount traded outside the best quote is 0.32
basis points, compared to under 0.01 basis points for a round-lot
trade.
---------------------------------------------------------------------------
\653\ See, e.g., Battalio & Jennings (2025) (showing that the
average marketable retail order size in their sample is $709) and
Ernst, Malenko, Spatt and Sun (2023) (showing that retail brokers
use the average effective over quoted ratio, the average effective
spread divided by the average NBBO quoted spread, as one of the main
measures to evaluate wholesaler performance).
\654\ As discussed above, wholesalers generally compete on
average execution quality measured relative to the NBBO to attract
order flow from retail brokers. Since this competition is based on
average execution quality, rather than at the individual order
level, it may result in wholesalers executing some retail orders at
prices worse than the displayed odd-lot quotes. However, wholesalers
may also off-set this by cross-subsidizing additional price
improvement for other orders in order to maintain their average
execution quality. See Thomas Ernst et al., supra note 404.
---------------------------------------------------------------------------
Even if wholesalers begin trading through round-lot quotes,
rescinding Rule 611 is unlikely to significantly affect average retail
execution quality. As discussed above, competition among wholesalers--
measured by average execution quality relative to the NBBO and price
improvement statistics for shares executed at or inside the NBBO--may
limit trade-throughs, even without explicit protection.\655\ Wholesaler
performance can also be monitored using publicly available Rule 605
data. Any decline in average execution quality would be detectable in
these data and would incentivize wholesalers to maintain average
execution quality.\656\
---------------------------------------------------------------------------
\655\ See supra note 612 and surrounding discussion on potential
changes to retail execution quality if Rule 611 is rescinded.
\656\ In addition, the Commission expects forthcoming changes to
Rule 605 statistics to increase the force of this incentive.
---------------------------------------------------------------------------
To empirically examine retail trade-throughs, the analysis
categorizes each trade-through (from Table 5) by venue and broker type
using CAT data. Each trade is assigned to one of three mutually
exclusive categories: ``ATS'' for trades that occurred on an ATS,
``Retail--wholesaler'' for trades that are executed by a wholesaler and
originated from a retail account,\657\ and ``Other'' for all other
trades. The results are shown in Table 7.
---------------------------------------------------------------------------
\657\ For the purpose of this analysis, seven broker-dealers are
classified as wholesalers based on a review of retail broker Rule
606(a) reports from Q4 2025; wholesalers were identified as the
broker-dealers to which retail brokers routed the majority of their
market and marketable limit orders. A trade is classified as
originating from a retail account if it has an ``individual''
account type and is not an IOC order.
---------------------------------------------------------------------------
Panel A shows the percentage of off-exchange trade-throughs by
venue and odd-lot size. One-share trades are unusual--most of these
trade-throughs occur on an ``Other'' venue, likely because they
represent fractional shares.\658\ For other sizes, the fraction of
trade-throughs on ATS is relatively stable at 50-60%, and for retail
orders executed by wholesalers, at 20-30%.
---------------------------------------------------------------------------
\658\ See supra note 644 on the execution practices of one
broker who specializes in fractional shares.
---------------------------------------------------------------------------
Panel B shows trade-through rates by size and venue, scaling the
number of trade-throughs by the number of candidate trades on each
venue--i.e., the trade-through rate scales the number of trade-throughs
by the number of opportunities for trade-throughs. Trade-through rates
on ATSs decline from 20% to 10% as trade size increases, potentially
because larger trades benefit more from executing at the best price.
Rates for retail orders executed by wholesalers also decline from 21%
to 15% as trade sizes increase. The similarity of the rates between
these two columns suggests that institutions routing to ATSs and
wholesalers executing retail orders have a similar willingness to trade
through better-priced odd-lot quotes. This helps alleviate concerns
that retail execution quality is particularly sensitive to the
rescission of Rule 611.
Table 7--Source of Off-Exchange Trade-Throughs
----------------------------------------------------------------------------------------------------------------
Total matched % Retail--
Trade size trade-throughs % ATS wholesaler % Other
----------------------------------------------------------------------------------------------------------------
Panel A: Percent of trade-throughs by trade size and source
----------------------------------------------------------------------------------------------------------------
1........................................... 3,315,307 19 10 70
5........................................... 272,061 63 19 18
10.......................................... 172,198 52 27 21
20.......................................... 64,620 63 20 17
40.......................................... 9,861 66 16 18
----------------------------------------------------------------------------------------------------------------
Panel B: Trade-through rate by trade size and source
----------------------------------------------------------------------------------------------------------------
1........................................... 20 21 52
5........................................... 18 17 23
10.......................................... 14 16 25
20.......................................... 11 16 25
[[Page 36714]]
40.......................................... 10 15 23
----------------------------------------------------------------------------------------------------------------
This table displays the source of off-exchange trade-throughs identified in Table 5. Trades are assigned to one
of three categories using data from CAT. Candidate trades are matched to CAT trade records by date, stock,
timestamp, price, and shares. 60% of trades match exactly on all fields. A further 28% of trades are matched
by adjusting the quantity field in CAT to reflect the way in which fractional shares are reported by the SIP
during the sample--in particular, quantities less than one are rounded up to one, while quantities over one
are rounded down to the nearest integer. A final 12% of candidate trades are matched by allowing for a
timestamp difference of less than 1 millisecond. The final match rate is 99.6%. Trades are assigned to
category ``ATS'' if the matched CAT trades were reported to CAT with a market participant identifier
(``MPID'') identified in CAT as an ATS. Trades are assigned to category ``Retail-wholesaler'' if the matched
CAT trades (1) were reported to CAT with an MPID that a wholesaler typically uses to execute orders from
retail brokers, (2) do not involve an order marked with a time in force of immediate or cancel, and (3)
include at least one side that originated from an ``Individual'' account type order. The remaining trades are
assigned to category ``Other''. For further information about CAT fields see https://www.catnmsplan.com/specifications specifications. Seven broker-dealers were identified as wholesalers based on a review of retail broker Rule
606(a) reports from Q4 2025. Wholesalers were identified as the broker-dealers to which retail brokers routed
the majority of their market and marketable limit orders. Based on these wholesalers, CAT data was used to
select the wholesaler MPIDs where most orders originating from ``Individual'' account types executed.
Panel A shows the fraction of trade-throughs that occur on each venue; the fractions sum to 100% for each row.
Panel B shows the fraction of candidate trades that are trade-throughs by venue and trade size.
ii. Round-Lot Change Trade-Through Analysis
The analysis in the previous section showed that odd-lot quotes
inside the NBBO are traded-through more frequently than round-lot
quotes. One possible explanation is that round lots are larger, and
therefore the incentives to avoid trade-throughs are stronger--as trade
size increases, the benefit of obtaining the best price per share
rises. In other words, the earlier results might not be driven by the
protected status of a round lot. To address this concern, the analysis
in this section holds trade size constant and explores changes in
trade-through rates around a change in the round-lot definition.
As discussed above, the MDI Rules introduced a four-tiered
definition of round lot that is tied to a stock's average closing
price.\659\ The MDI round-lot rules were implemented on November 3,
2025 and stocks with an average closing price greater than $250 during
October 2025 had their round-lot size reduced. This round-lot size
change provides a way to study the effects of Rule 611 because these
stocks changed from having a protected quote size of 100 shares to a
protected quote size of 40 shares or fewer. The effects of trade-
through protection can potentially be estimated by comparing the change
in trade-through rates between an unprotected odd-lot quote before the
round-lot change (October 2025) with the trade-through rate of a
similarly sized protected quote after the change (November and December
2025). A limitation of this approach is that both the NBBO and the
quotes shown in the SIPs changed for stocks that experienced a round-
lot size change, because the NBBO and each exchange's BBO were now
based on a 40-share quote size. As a result, it is not possible to
disentangle the effects of a change in trade-through protection from
the effects of a change in the NBBO benchmark and the broader
dissemination of smaller quotes in the SIP. \660\ Accordingly, the
findings should be interpreted with caution, as multiple factors may
influence the observed changes in trade-through rates.
---------------------------------------------------------------------------
\659\ See supra section VI.C.1.d.i.
\660\ Prior to the change in round-lot size, the NBBO and
exchange BBO for stocks in the sample were based on a 100-share
standard. Information on quote sizes of 99 shares or less were
accessible exclusively through exchange proprietary feeds.
---------------------------------------------------------------------------
This analysis starts by constructing a sample of stock-days that
have a round lot of 100 shares in October. Some of these stock-days
maintain a 100-share round lot throughout the quarter, while those with
an average closing price above $250 in September switch to a 40-share
round lot starting in November. Summary statistics for this sample are
presented in Table 8. The primary difference from the sample in the
previous section is that this sample includes higher-priced stocks once
they switch to a 40-share round lot, whereas the previous sample only
includes stock-days with a 100-share round lot. This difference can be
seen by comparing Table 4 with Table 8--the latter sample has a higher
VWAP, higher dollar volume, and slightly less depth at the best
displayed price.
Table 8--Sample Summary Statistics for Analysis of Trade-Throughs Before and After the Round-Lot Change
--------------------------------------------------------------------------------------------------------------------------------------------------------
Variable Stock-days Mean P5 P25 P50 P75 P95
--------------------------------------------------------------------------------------------------------------------------------------------------------
VWAP......................................................... 54,354 $221 $104 $127 $169 $256 $525
Number of trades............................................. 54,354 30,219 104 4,510 13,370 30,105 96,833
Dollar-volume (millions)..................................... 54,354 $305.5 $0.6 $19.1 $76.4 $223.4 $987.1
Market Cap. (millions)....................................... 54,351 $68,165 $221 $3,212 $11,203 $38,016 $214,562
NBBO TWAQS................................................... 54,354 $0.660 $0.058 $0.161 $0.337 $0.767 $2.296
BDP TWAQS.................................................... 54,354 $0.356 $0.043 $0.109 $0.213 $0.414 $1.093
BDP TW depth at bid.......................................... 54,354 141 25 47 78 141 475
BDP TW depth at offer........................................ 54,354 155 24 45 76 143 558
Effective spread............................................. 54,354 $0.233 $0.024 $0.063 $0.122 $0.246 $0.745
[[Page 36715]]
Effective spread (%)......................................... 54,354 0.110% 0.015% 0.037% 0.065% 0.121% 0.317%
--------------------------------------------------------------------------------------------------------------------------------------------------------
This table displays summary statistics for the sample constructed for the analysis of trade-throughs. The sample starts with all stock-days in the TAQ
Masterfile for the fourth quarter of 2025. The following filters are then applied: to narrow the focus on odd-lots, stock-days with a volume-weighted
average price (``VWAP'') under $100 are dropped; stock-days are dropped if they have a round lot less than 40 shares; to allow for room inside the
NBBO, stock-days are dropped if they a time-weighted average NBBO quoted spread (``NBBO TWAQS'') less than $0.04 over the month of October; December
16th is dropped due to a data quality issue with an exchange proprietary feed; 34 stock-days with a negative ``BDP TWAQS'' are dropped due to a likely
data error; finally, stock-days without any trades are dropped.
Trade data is from the SIP and includes regular-way trades (i.e., a sale condition of ``Regular Trade,'' ``Intermarket Sweep Order'', or ``Odd Lot
Trade''). The market capitalization is calculated by multiplying the shares outstanding from the TAQ Masterfile by the VWAP. The ``NBBO TWAQS'' is the
time-weighted average quoted spread during market hours using the SIP round-lot quotes. The ``BDP TWAQS'' is the time-weighted average quoted spread
during market hours using the best-priced bid and ask regardless of quote size; this is constructed using 16 exchange proprietary feeds. The time-
weighted average depth at the best priced bid (``BDP TW depth at bid'') is measured in shares and, in the case where multiple venues quote at the best
price, the maximum quote size is taken; the depth at the best priced offer is measured analogously. The effective spread is a measure of trading cost
and is computed as twice the absolute difference between the trade price and the NBBO midpoint at the time of the trade; at the stock-day level, the
effective spread is equally weighted across regular trades. The effective spread is measured both in dollars and as a percent of the NBBO midpoint.
For each variable, the following statistics are shown: the number of stock-days in the sample with non-missing values, the mean, and the 5th, 25th,
50th, 75th, and 95th percentiles.
Using the same methodology as the odd-lot quote trade-through
analysis described above,\661\ the Commission compared the trade-
through rates for trade sizes of 1, 5, 10, 20, 40, and 100 shares
around the MDI round-lot size implementation, and did so separately for
stocks that maintained a 100 share round-lot size and those whose
round-lot size was reduced from 100 to 40 shares.\662\ As discussed
above, for each trade size, the trade-through rates are calculated for
``Candidate trades,'' which are trades that occurred when the best
persistent quotes for the trade's size are inside the best persistent
quotes for a 100-share order. This means that for stocks in this
analysis, the best persistent quotes between 40 and 99 shares were
unprotected before the MDI round-lot change but became protected after
the round lot changed from 100 to 40. Therefore, for stocks that
experience a reduction in the round lot, all of the best persistent
quotes become protected after the MDI round-lot change for the 40-share
category, while a portion of the best persistent quotes (those that are
between 40 and 99 shares) become protected for the other trade-size
categories.
---------------------------------------------------------------------------
\661\ See supra section VI.C.1.c.i.
\662\ Based on how the round-lot size is determined, these
stocks would have had an average closing price between $250 and
$1,000 during October 2025.
---------------------------------------------------------------------------
The trade-through statistics are presented in Table 9. Panel A
shows trades that are executed on an exchange, and Panel B shows trades
that are executed off exchange. Trades are grouped together based on
whether the stock maintained a 100-share round lot (indicated by a
``Round-lot change'' of ``None'') or switched from a 100-share to a 40-
share round lot (``100 to 40''). Trades are further grouped by whether
they occurred before the MDI round-lot change (``Pre'') or after
(``Post'').
The ``Candidate trades (%)'' column is generally higher for stocks
that switch round lots. This is consistent with these stocks being
higher-priced and therefore more likely to have quotes better priced
than the 100-share quote. In addition, the ``Candidate trades(%)''
increases in the post-period for stocks that switch round lots,
reflecting a greater likelihood of quotes sized between 40 and 99
shares being inside the 100-share quote after the reduction in the
round-lot size. There is no comparable increase for stocks that
maintained a 100-share round lot.
The next columns show trade-through rates. For stocks that
maintained the 100-share round lot, there is little evidence that the
trade-through rates changed from the pre- to the post-periods, for
either on- or off-exchange trades. Similarly, there is little evidence
that the notional value of the trade-throughs changed for these stocks.
For stocks that switched round lots, however, trade-through rates
and the notional value of the trade-throughs declined across the board.
The declines were smaller for trades that executed on exchange,
indicating that market participants trading on exchange may already be
aware of odd-lot-sized quotes and are likely to trade against them
whether they are protected or not. In addition, the greater presence of
small-sized quotes--as evidenced by the higher fraction of candidate
trades--may make it easier to execute at the best-priced quotes on
exchange. The decline in trade-through rates on exchange was largest
for small trades: for one-share trades, the trade-through rate fell
from 5.8% to 4.3% with the notional value of the trade-throughs falling
from 0.10 basis points to 0.07; for 40-share trades, the trade-through
rate fell from 1.6% to 0.5%, with the notional value declining from
0.02 to 0.01 basis points.
The patterns off exchange are similar but larger in magnitude. For
one-share trades, the trade-through rate fell from 41.6% to 24.2%, with
the notional value of trade-throughs falling from 1.04 to 0.51 basis
points. For 10-share trades, the corresponding declines are from 17.2%
to 7.6%, and 0.53 to 0.17 basis points, respectively. For larger
trades, the trade-through rates converge toward those for on-exchange
trades: for 40-share trades, the trade-through rate falls to 0.2% from
12.6%, while the notional value declines to under 0.01.\663\ As
discussed above, it is difficult to disentangle how much of these
decreases reflect the introduction of trade-through protections versus
changes in the NBBO benchmark. Nevertheless, the results indicate that
the variation in trade-through rates between protected and unprotected
quotes is not driven solely by size.
---------------------------------------------------------------------------
\663\ The forty-share trade-through rates of 0.2% (off exchange)
and 0.6% (on exchange) represent round-lot trade-through rates
because this is the sample with the forty-share round lot. These
estimates are close to the round-lot trade-through rates calculated
in Table 5, and the round-lot trade-through rates calculated in the
OAR Roundtable Analysis using a one-second lookback window--see
supra note 121.
[[Page 36716]]
Table 9--Trade-Through Rates Before and After the Round-Lot Change
--------------------------------------------------------------------------------------------------------------------------------------------------------
Candidate trades (%) Trade-through (%) Notional amount outside
---------------------------------------------------- of best quote (basis
Round-lot change Trade size points)
Pre Post Pre Post -------------------------
Pre Post
--------------------------------------------------------------------------------------------------------------------------------------------------------
Panel A: On-exchange trades
--------------------------------------------------------------------------------------------------------------------------------------------------------
None......................................................... 1 41.7 41.6 5.1 5.6 0.15 0.17
None......................................................... 5 34.9 34.7 3.2 3.5 0.06 0.08
None......................................................... 10 29.0 28.0 2.8 2.7 0.06 0.06
None......................................................... 20 20.9 20.4 2.2 2.4 0.05 0.05
None......................................................... 40 9.7 9.7 1.5 1.7 0.03 0.04
None......................................................... 100 n/a n/a 0.2 0.3 0.01 0.01
100 to 40.................................................... 1 57.3 67.7 5.8 4.3 0.10 0.07
100 to 40.................................................... 5 48.1 61.9 3.8 2.4 0.05 0.03
100 to 40.................................................... 10 39.8 54.3 3.5 1.9 0.04 0.02
100 to 40.................................................... 20 29.0 45.4 2.7 1.5 0.04 0.02
100 to 40.................................................... 40 15.0 35.8 1.6 0.5 0.02 0.01
100 to 40.................................................... 100 n/a n/a 0.4 0.2 0.01 0.01
--------------------------------------------------------------------------------------------------------------------------------------------------------
Panel B: Off-exchange trades
--------------------------------------------------------------------------------------------------------------------------------------------------------
None......................................................... 1 38.5 38.8 31.8 31.0 1.17 1.06
None......................................................... 5 33.9 33.8 18.2 20.5 0.86 1.00
None......................................................... 10 27.4 27.7 16.5 15.6 0.69 0.62
None......................................................... 20 20.5 20.1 13.0 13.1 0.48 0.49
None......................................................... 40 8.9 8.6 11.4 11.2 0.36 0.33
None......................................................... 100 n/a n/a 0.1 0.1 0.00 0.00
100 to 40.................................................... 1 54.2 60.6 41.6 24.2 1.04 0.51
100 to 40.................................................... 5 49.0 57.9 17.9 10.3 0.64 0.31
100 to 40.................................................... 10 41.3 51.6 17.2 7.6 0.53 0.17
100 to 40.................................................... 20 31.4 44.8 13.1 3.9 0.34 0.07
100 to 40.................................................... 40 15.3 31.8 12.6 0.2 0.26 0.00
100 to 40.................................................... 100 n/a n/a 0.1 0.1 0.00 0.00
--------------------------------------------------------------------------------------------------------------------------------------------------------
This table displays trade-through rates for the sample of stock-days described in Table 8. Panel A shows rates for trades that occur on an exchange, and
Panel B shows rates for trades that occur off exchange. The ``Round-lot change'' column indicates whether the stock kept a 100-share round lot
(`None') or switched to a 40-share round lot (`100 to 40'). The ``Trade size'' column indicates the number of shares that transacted in the trade.
Each statistic is calculated for the ``Pre'' and ``Post'' periods separately, where ``Pre'' includes October 2025 and ``Post'' includes November and
December of 2025.
To calculate trade-throughs for a given stock-day, the following procedure is followed. First, the day is divided into 1.2 millisecond intervals with
trades and quotes assigned to the interval by their participant timestamp, and with trades occurring between the 800th and 1000th microsecond of the
interval. This procedure samples approximately one-sixth of all regular trades for the stock-day. Quotes come from the proprietary feeds of the
sixteen exchanges that operated during the entirety of the fourth quarter of 2025. For a given trade size during the 1.2-millisecond interval, each
venue's quotes are aggregated to determine the persistent quote that could have traded against a market order of the specified size. E.g., if the
trade size is 1 share, then a venue's persistent quote is the worst displayed price at the top of the venue's book during the interval; if the trade
size is 10 shares, then the persistent quote is the worst displayed quote with which a 10-share market order would have interacted. The best
persistent bid is the highest persistent bid across the sixteen venues; the best persistent offer is the lowest persistent offer across the sixteen
venues.
A ``Candidate trade'' is a trade that occurs when both the best persistent bid and offer quotes (for a given size) are not crossed and are strictly
inside the best persistent bid and offer quotes for a 100-share trade. An odd-lot trade-through occurs if the candidate trade's execution price is
below the best persistent bid or above the best persistent offer. The concept of a ``Candidate trade'' does not apply to 100-share trades, so these
trades are classified as a trade-through if the execution price is below the best persistent 100-share bid or above the best persistent 100-share
offer. When a trade-through occurs, the difference between the execution price and the best quote is multiplied by the size of the trade to determine
the notional amount outside of the best quote.
The results of the above procedure are collected for 584,318 stock-day-size-location tetrads. Of these tetrads, 40 are dropped because, when there is a
trade-through in the tetrad, the average distance from the best quote is larger than ten times the stock-day's NBBO TWAQS and are therefore likely a
data error. The remaining tetrads are aggregated by the size-location pairs shown in the table. For each row of the table: ``Candidate trades (%)'' is
the fraction of regular way trades that are classified as a ``Candidate trade''; ``Trade-through (%)'' is the number of trade-throughs divided by the
number of candidate trades; ``Notional amount outside of best quote'' is the difference between the execution price and the best quote for trade-
throughs, multiplied by the number of shares in the trade-through and divided by the notional value of the candidate trades.
2. Rescinding Rule 610(e)
a. Benefits
The Commission expects repealing the prohibition on locked and
crossed markets to result in lower operating costs for exchanges and,
relatedly, reduced complexity. Additionally, for a limited number of
stocks, the Commission estimates modestly lower spreads.
Rescinding rule 610(e) is likely to result in exchanges removing
their rules prohibiting locks or crosses, thereby reducing operating
costs. While removing the prohibition on locked and crossed markets
does not require exchanges to modify their rules to permit locked or
crossed markets, it is likely that they will do so. This is because
maintaining the prohibition requires exchanges to operate and maintain
systems designed to prevent locked and crossed markets, which entails
ongoing compliance costs associated with monitoring markets for, and
responding to, locked or crossed market conditions. Absent a mandate,
exchanges are likely to seek to reduce
[[Page 36717]]
these compliance costs.\664\ Removing these rules, and the associated
monitoring and enforcement programs, would therefore reduce exchanges'
operating costs.
---------------------------------------------------------------------------
\664\ See Cboe December 2025 Letter, at 6 calling for the
elimination of the prohibition on locked and crossed markets.
---------------------------------------------------------------------------
Allowing locked and crossed markets could reduce complexity by
eliminating the need for specific order types designed to manage locked
and crossed markets. The prohibition on locked and crossed markets has
resulted in specialized order types, such as ``price-to-comply'' and
other re-pricing orders, which adjust automatically to avoid locking or
crossing the NBBO.\665\ Without a prohibition on locked or crossed
markets, such orders may no longer be necessary and thus could be
expected to disappear, leading to a reduction in the number of order
types used. Having fewer order types reduces market complexity and
should lower the cost that broker-dealers face when managing orders, as
their routing logic would no longer need to avoid locking or crossing
markets.
---------------------------------------------------------------------------
\665\ See, e.g., FIA PTG Paper at 4.
---------------------------------------------------------------------------
The impacts on compliance costs for both exchanges and broker-
dealers are likely to be similar to those associated with the
rescission of Rule 611.\666\ Both rules require market participants to
have systems in place to monitor market conditions and then to use or
maintain specialized order types to avoid violating Rule 610(e) or Rule
611. Thus, rescinding both rules is expected to result in similar
market savings. Accordingly, rescinding Rule 610(e) is expected to
generate annual savings to exchanges of $619,000 associated with
reduced compliance costs.\667\ Further, rescinding Rule 610(e) is
expected to result in reduced compliance costs for broker-dealers that
run SORs, producing annual savings of $2.8 million.\668\
---------------------------------------------------------------------------
\666\ See infra section VI.C.3.a.
\667\ The Commission estimates that rescission of Rule 610(e)
would eliminate 20 exchanges x 60 hours annually = 1,200 annual
burden hours that would be associated with complying with Rule
610(e). The total estimated monetized annual hour burden is 20
exchanges x $30,996 = $619,320. See infra note 577-578 and
surrounding discussion (discussing how the cost per exchange is
estimated).
\668\ See infra note 582 and surrounding discussion.
---------------------------------------------------------------------------
This benefit would be moderated by the fact that, if exchanges
modify their rules to allow locked and crossed markets, both exchanges
and broker-dealers would face one-time costs associated with adjusting
their logic to adapt to the new environment. These costs are likely to
be relatively minor. For exchanges, this is because the modifications
largely consist of removing existing restrictions and ensuring that the
trading environment remains stable. Broker-dealers are also accustomed
to frequent modifications of their logic, as exchanges frequently
change access fees and rebates, which can affect how broker-dealers
route orders.\669\ Further, the changes to broker-dealer systems would
also largely consist of removing logic designed to prevent orders from
locking or crossing markets. However, once these adjustments are
completed, the benefits described above would be realized.
---------------------------------------------------------------------------
\669\ See 2024 Regulation NMS Amendments at section VII.C.2.
---------------------------------------------------------------------------
By removing exchange rules that prohibit locked and crossed
markets, the specialized order types used to prevent such outcomes
would no longer be necessary and would likely be eliminated. Reducing
the set of order types available to broker-dealers when submitting
orders would lower complexity in the trading environment and reduce the
costs associated with designing, maintaining, and updating order
routing systems.
A reduction in complexity could also have the benefit of reducing
the trading disadvantage of less sophisticated liquidity providers.
This could help level the playing field between less and more
sophisticated liquidity providers. Less sophisticated liquidity
providers face adverse selection costs when interacting with more
sophisticated liquidity providers who may be able to act more quickly
due to superior information-processing capacity and reaction times.
Because of this, less sophisticated liquidity providers are at risk of
having stale quotes adversely selected before they can cancel and
update those quotes, which leads to trading losses and thereby
increases the cost of liquidity provision. If market complexity is
reduced, the disadvantage that less sophisticated liquidity providers
face could diminish somewhat, which could lower the cost of providing
liquidity and induce more liquidity provision.
Another benefit of removing the prohibition on locked markets would
be potentially narrower spreads. Allowing markets to lock would narrow
spreads and could allow some investors to execute at prices that are
more advantageous than those available currently. Economically, the
spread compensates liquidity suppliers for several costs: adverse
selection costs (liquidity demanders may have information unknown to
liquidity suppliers), inventory-holding costs (the market maker
acquires a position in a stock that may then change in value), and
order-processing costs.\670\ While this required compensation is
greater than zero, a quoted spread of zero may be a sustainable
equilibrium in the presence of rebates. In a maker-taker rebate system,
a locked market does not imply that there is no compensation for
liquidity providers: on a maker-taker exchange, liquidity providers
receive a rebate generally around 30 mils, or $0.003 per share.\671\
This rebate is funded by an exchange transaction fee charged to the
liquidity demander that is also around $0.003.\672\ Thus, even if
displayed spreads are zero, the economic spread-the actual cost paid by
liquidity demanders to access liquidity-will be the access-fee cap, or
approximately $0.003. In market settings where the cost of liquidity
provision is below $0.003, a displayed spread of $0.00 could therefore
be maintainable as an economic equilibrium.
---------------------------------------------------------------------------
\670\ See, e.g., Roger D. Huang and Hans R. Stoll, The
Components of the Bid-Ask Spread: A General Approach, 10 Rev. Fin.
Stud. 995 (Winter 1997).
\671\ See analysis in 2024 Regulation NMS Amendments.
\672\ For protected quotations priced $1.00 or more, the access
fee cap will be lowered to 10 mils, or $0.001 per share in November,
2026 pursuant to the recently adopted amendments to the tick size
and access fee cap adopted by the Commission in 2024. See supra note
76. Thus, should the proposed rule be adopted and implemented after
that date, the following analysis can simply use $0.001 in place of
$0.003.
---------------------------------------------------------------------------
The reduction in transaction costs due to allowing locked markets
could be significant for some stocks. In the presence of a prohibition
on locked or crossed markets, the minimum displayed spread equals the
minimum pricing increment, or $0.01 for stocks priced greater than
$1.00.\673\ In this case, the actual cost of taking liquidity is half
the spread ($0.005) plus the access fee (normally around $0.003), for a
total of approximately $0.008 ($0.005 + $0.003). Consequently, for some
stocks, removing the prohibition on locked or crossed markets could
reduce the economic spread by more than 50%, from $0.008 to $0.003.
However, the Commission is unable to estimate how many stocks this
would apply to, as there is no reliable way to determine how many
stocks could justify an economic spread at this level.\674\ The
Commission seeks comment on this issue.
---------------------------------------------------------------------------
\673\ For stocks priced below $1.00, the minimum pricing
increment is $0.0001. Additionally, in November 2026 the minimum
pricing increment for stocks priced greater than $1.00 and that have
narrow prevailing quoted spreads will reduce from $0.01 to $0.005.
\674\ See analysis in the 2024 Regulation NMS Amendments.
---------------------------------------------------------------------------
[[Page 36718]]
The reduction in transaction costs from allowing locked markets is
likely to interact with the 2024 Regulation NMS amendments in two ways.
First, the amendments to Rule 612 will, once implemented, allow some
stocks to trade with a reduced minimum pricing increment of $0.005. By
creating a finer grid of allowable price points, these amendments will
increase the opportunities for markets to lock and thereby further
reduce transaction costs.\675\ Second, the amendments to Rule 610(c)
will, once implemented, reduce the access fee cap from $0.003 to
$0.001. This reduction in the fee cap will reduce the rebates that
exchanges can pay for liquidity provision in the maker-taker system.
With smaller rebates, it will become less likely that the rebate alone
will provide sufficient compensation to liquidity suppliers, reducing
the likelihood that a quoted spread of zero can be maintained.\676\
Hence, the implementation of the amendments to Rule 610(c) is expected
to reduce the benefits of allowing locked markets.
---------------------------------------------------------------------------
\675\ For example, suppose, in the absence of rebates, a market
maker is willing to purchase a stock at $10.003 and sell the stock
at $10.007. With a rebate of $0.003, the market maker is willing to
post a buy order up to $10.006 and a sell order as low as $10.004--
i.e., the market maker is willing to offer more aggressive quotes
because some of the required compensation comes in the form of a
rebate. With a tick size of $0.01, the posted buy price will be
$10.00 (the highest allowable price below $10.006) and the posted
sell price will be $10.01 (lowest allowable price above $10.004).
However, with a tick size of $0.005, the market maker is willing to
lock the market by posting both a buy and a sell order at $10.005,
thereby reducing transaction costs.
\676\ Consider the example in id. If the rebate is reduced to
$0.001, then the market maker is only willing to post a buy order up
to $10.004 and a sell order as low as $10.006, resulting in posted
prices of $10.00 and $10.01 rather than a locked market at $10.005.
---------------------------------------------------------------------------
b. Costs
Removing the prohibition on locked and crossed markets is also
expected to be associated with certain costs. One potential cost is
investor confusion. In particular, crossed markets may create
uncertainty regarding the true state of the order book, which could
lead to inefficient trading decisions. This risk would likely be higher
for less sophisticated investors who do not have access to data from
all of the exchanges and therefore cannot view the entire order book
across venues. Access to full-depth of book data would mitigate this
risk by enabling investors to determine whether the lock or cross
reflects market movements or another cause. Investors without such data
would be less able to make this assessment and thus could be confused
about the state of the order book. This cost will likely diminish over
time as market participants adjust to the new trading environment and
adapt their behaviors accordingly.
Additionally, as mentioned above, if the exchanges choose to allow
locked and crossed markets, then they will face one-time costs
associated with modifying their trading rules and the logic in their
trading systems. Broker-dealers will then face related costs to modify
their order routing logic to adapt to the new environment. These costs,
along with the combined implementation costs of rescinding Rule 611,
are discussed below in section VI.C.3.b.
Another potential cost associated with rescinding Rule 610(e) is
the reduced reliability of Rule 605 statistics that reference the NBBO.
This effect is expected to be minor. While locked markets do not pose
significant conceptual challenges for computing most Rule 605
statistics, crossed markets are expected to be rare, and market
participants are already familiar with following guidance on how to
handle such conditions.\677\ The primary exception is the effective
over quoted ratio: in cases where quoted spreads fall to zero when
locked markets are allowed, the ratio cannot be computed because its
denominator cannot be zero. However, other Rule 605 statistics would
still provide meaningful information to investors, and therefore the
overall market impact of this limitation is expected to be minor.
---------------------------------------------------------------------------
\677\ See supra note 235.
---------------------------------------------------------------------------
c. Empirical Analysis
This section presents the Commission's empirical analysis of the
prevalence and economic determinants of locked and crossed markets. A
primary challenge in empirically evaluating the effect of the
amendments is that Rule 610(e) requires exchanges and national
securities associations to enforce rules to prevent displayed
quotations from locking or crossing protected quotations. This
prohibition on locked and crossed markets causes observed locks and
crosses to be less frequent than they would otherwise be if determined
by market forces alone. Further, the locked and crossed markets that
violate Rule 610(e)--e.g., by mistake--are likely to be systematically
different than a quote that intentionally locks or crosses the market.
An empirical analysis therefore requires a setting where locked and
crossed quotes are permissible; behavior in this setting can then serve
as a counterfactual for broader market behavior should Rule 610(e) be
rescinded.
The Commission therefore focuses on odd-lot quotes for high-priced
stocks. This setting is a useful laboratory for multiple reasons.
First, Rule 610(e) only applies to protected (i.e., round-lot) quotes;
odd-lot quotes are not protected, and the rule does not prohibit them
from locking or crossing. Second, odd-lot quotes represent substantial
notional liquidity for high-priced stocks and can therefore emulate the
liquidity provision of round lots for less expensive stocks.\678\
Third, odd-lot quotes occur during the core trading session under the
same market conditions as round-lot quotes, providing a relatively
clean test of market behavior in the absence of Rule 610(e).
---------------------------------------------------------------------------
\678\ See supra note 618.
---------------------------------------------------------------------------
The results of the Commission's analysis are summarized here. The
analysis finds that the typical stock-day in our sample of high-priced
stocks spends almost no time with locked or crossed odd-lot quotes. On
average, a stock-day in our sample spends 0.3% of the trading day
locked, and 0.3% crossed. This indicates that locked and crossed
markets will generally remain rare in the event that Rule 610(e) is
rescinded. However, locked markets are substantially more prevalent
among stocks with tighter spreads: stock-days with a BDP TWAQS of
$0.015 or less spend, on average, 3.8% of the day locked, which rises
to 10.8% at the 90th percentile of the distribution.\679\ This
indicates that there is demand to lock the market when spreads are
narrow, which is expected to lead to a reduction in transaction costs
in the event that Rule 610(e) is rescinded.\680\
---------------------------------------------------------------------------
\679\ The BDP TWAQS is the time-weighted average quoted spread
using the best-priced bid and ask regardless of quote size. See
notes to Table 4.
\680\ One explanation is that locked quotes are not economically
locked due to fees and rebates. With an access fee of 30 mils, a
locked quote implies that the cost of taking liquidity instead of
making liquidity is $0.006. One commenter stated: ``with current . .
. access fees and pricing, the market would be locked . . .
certainly much more often than having it prohibited because
economically it's not a locked market.'' See First TTR Roundtable
Transcript at 146 (Adam Nunes, Hudson River Trading).
---------------------------------------------------------------------------
The Commission acknowledges, however, that these results come from
a subset of high-priced stocks. The behavior of these stocks may vary
systematically from the behavior of lower-priced stocks. Accordingly,
the estimated frequency and duration of locked and crossed markets
should be interpreted with caution, as they may differ for round lots
if Rule 610(e) is rescinded. Nevertheless, the Commission believes that
this setting provides an economically meaningful
[[Page 36719]]
environment to study patterns of market behavior in the absence of the
prohibition on locked and crossed markets.
A detailed discussion of the methodology and results of the
Commission's analysis is set forth below.
The analysis starts by constructing a sample of stock-days with
high share prices. The sample construction has the following steps.
First, all stock-days for the fourth quarter of 2025 are collected from
the TAQ Masterfile.\681\ Second, stock-days are dropped from the sample
if their VWAP is less than $100 or they do not have a trade. Third, to
avoid data errors in an exchange proprietary feed, December 16th is
dropped, as are 38 stock-days that have a negative BDP TWAQS. Finally,
slightly under half of stock-days for the SPY and QQQ symbols are
dropped to alleviate data processing constraints. The result is a
sample of 62,992 stock-days. The sample is larger and more active than
the sample constructed in section VI.C.1.c. because that section
focused on stock-days with a round lot of 100 and relatively wide
spreads.
---------------------------------------------------------------------------
\681\ The data in this analysis precede the implementation of
the 2024 Regulation NMS amendments. Once implemented, stocks that
generally maintain an NBBO TWAQS less than $0.015 will trade with a
reduced minimum pricing increment; this will increase the number of
price points at which market participants can place a quote, which
may increase the opportunities for markets to lock or cross in these
tick-constrained stocks. Additionally, once implemented, the 2024
Regulation NMS amendments will reduce the access fee cap for all
stocks; because access fees are generally used to fund rebates, the
resulting reduction in rebates may put upward pressure on quoted
spreads and thereby reduce the incidences of locked and crossed
markets--see supra notes 675-676 for an example demonstrating this
effect. The data in this analysis also precedes the dissemination of
top-of-book odd-lot quotations by the SIPs, which was implemented on
Monday, April 27, 2026. Market participants may be less likely to
post quotes that lock or cross resting odd-lot quotes once it is
easier and cheaper to see the top-of-book odd-lot quotations; to the
extent that most orders are posted by market participants who see
odd-lot quotations in the proprietary feeds, the dissemination of
odd-lot quotations by the SIPs is unlikely to have a large impact on
the results of this analysis.
---------------------------------------------------------------------------
Summary statistics are presented in Table 10. The sample captures a
wide range of trading activity--stock-days at the 5th percentile have
fewer than 100 trades, while the 95th percentile has over 115,000
trades. Likewise, dollar volume ranges from $0.4 million to $1.2735
billion; overall, the sample covers more than $26 trillion in notional
volume over the quarter.\682\
---------------------------------------------------------------------------
\682\ The total notional is computed by multiplying the average
notional by the number of stock-days in the sample: $419.5 million *
62,992.
---------------------------------------------------------------------------
Turning toward quoted spreads, the sample includes stock-days that
are relatively tick-constrained with an NBBO TWAQS of $0.014 at the 5th
percentile, and also includes stock-days that are far from being tick-
constrained with a NBBO TWAQS over $2 at the 95th percentile.
Importantly, the distribution of the BDP TWAQS lies below the
distribution of the NBBO TWAQS. That is, at each percentile, the BDP
TWAQS is lower than the NBBO TWAQS, indicating that there are often
odd-lots inside the NBBO and thus an opportunity to lock and cross the
market without violating Rule 610(e).
The final two rows of the table show summary statistics for the
fraction of the trading day that the stock-day spends locked or
crossed.\683\ When determining whether the market is locked or crossed,
the analysis uses the best displayed prices of any size--quotes could
be for an odd-lot or a round-lot order. The table shows that stocks in
the sample spend almost no time locked or crossed: the median stock-day
spends 0.0% of the day locked or crossed, and the average is 0.3%. Only
at the 95th percentile of the sample do stock-days spend a non-trivial
amount of the day locked or crossed--at this percentile, the fraction
of the day locked is 0.9% and the fraction crossed is 1.5%; 1% of the
trading day amounts to approximately four minutes.\684\
---------------------------------------------------------------------------
\683\ To avoid including limit-on-open orders, this analysis
uses quotes that are in effect starting at 9:45 a.m. each day. As
part of the opening cross, limit-on-open orders cross each other but
are not executed until the end of the opening process; this process
may extend past 9:30 a.m., which can give the appearance of a
crossed market in the proprietary feeds. When calculating the
fraction of the day that is locked or crossed, the denominator of
the fraction is the amount of time from 9:45 a.m. to market close.
\684\ The typical trading day is 6.5 hours long (9:30 a.m. to 4
p.m.)--390 minutes--1% of which amounts to 4 minutes.
Table 10--Summary Statistics for Analysis of Locked and Crossed Quotes
--------------------------------------------------------------------------------------------------------------------------------------------------------
Variable Stock- days Mean P5 P25 P50 P75 P95
--------------------------------------------------------------------------------------------------------------------------------------------------------
VWAP......................................................... 62,992 $996 $102 $122 $165 $254 $594
Number of trades............................................. 62,992 36,282 68 3,784 13,032 31,210 115,875
Dollar-volume (millions)..................................... 62,992 $419.5 $0.4 $18.4 $79.1 $248.9 $1,273.5
Market Cap. (millions)....................................... 62,981 $80,067 $145 $3,047 $11,375 $40,954 $238,130
NBBO TWAQS................................................... 62,991 $1.422 $0.014 $0.118 $0.299 $0.728 $2.658
BDP TWAQS.................................................... 62,992 $1.028 $0.011 $0.083 $0.190 $0.401 $1.299
Fraction of day with locked quotes........................... 62,992 0.3% 0.0% 0.0% 0.0% 0.0% 0.9%
Fraction of day with crossed quotes.......................... 62,992 0.3% 0.0% 0.0% 0.0% 0.1% 1.5%
--------------------------------------------------------------------------------------------------------------------------------------------------------
This table displays summary statistics for the sample constructed for the analysis of locked and crossed quotes. The sample starts with all stock-days
in the TAQ Masterfile for the fourth quarter of 2025. The following filters are then applied: to narrow the focus on odd-lots, stock-days with a
volume-weighted average price (``VWAP'') under $100 are dropped; December 16th is dropped due to a data quality issue with an exchange proprietary
feed; half of the SPY and QQQ stock-days are dropped due to data processing constraints; 38 stock-days with a negative ``BDP TWAQS'' are dropped due
to a likely data error; finally, stock-days without any trades are dropped.
Trade data is from the SIP and includes regular-way trades (i.e., a sale condition of ``Regular Trade,'' ``Intermarket Sweep Order'', or ``Odd Lot
Trade''). The market capitalization is calculated by multiplying the shares outstanding from the TAQ Masterfile by the VWAP. The ``NBBO TWAQS'' is the
time-weighted average quoted spread during market hours using the SIP round-lot quotes. The ``BDP TWAQS'' is the time-weighted average quoted spread
during market hours using the best displayed prices regardless of quote size; this is constructed using 16 exchange proprietary feeds. The fraction of
the day with locked quotes is computed by dividing the time in which the best bid (of any size) is equal to the best offer by the length of the
trading day; the fraction of the day with crossed quotes is computed analogously using the time in which the best bid is greater than the best offer.
For each variable, the following statistics are shown: the number of stock-days in the sample with non-missing values, the mean, and the 5th, 25th,
50th, 75th, and 95th percentiles.
The primary determinant of a locked market is the spread. Panel A
of Table 11 shows summary statistics for the fraction of the day spent
locked, split by the stock-day's BDP TWAQS. The first row shows results
for the 3,870 stock-
[[Page 36720]]
days that are tick-constrained with a BDP TWAQS below $0.015--i.e.,
this sample spends the majority of the day with a quoted spread of a
penny or less. On average, these stock-days spend 3.8% of the day
locked. At the 90th percentile, the number rises to 10.8%--i.e., nearly
400 stock-days spend over 10% of the day locked. The second row shows
results for the 2,821 stock-days with BDP TWAQS between $0.015 and
$0.03. These stock-days spend much less time locked--0.8% on average,
and 1.6% at the 90th percentile. As spreads widen with each subsequent
row, the amount of time spent locked falls. This suggests that, in the
absence of Rule 610(e), the stocks that are most likely to lock will be
those whose quoted spread is closest to one tick.
Panel B of Table 11 shows summary statistics for the fraction of
the day spent crossed, split by the stock-day's BDP TWAQS. The pattern
in Panel B contrasts with Panel A: stock-days with wider spreads spend
more time crossed. Because stocks with tight spreads are generally more
liquid than stocks with wide spreads, the results in Panels A and B
suggest that crossed markets may be driven by illiquidity while locked
markets are driven by liquidity. Illiquid stocks might be more likely
to cross for multiple reasons.
First, uncrossing a market--by buying at the low asking price and
selling at the higher bid price--is not entirely without risk. A trader
attempting to uncross the market may transact on only one side while
the other quote is canceled or executed by another market participant,
leaving the trader with a position in an illiquid stock that is costly
to unwind. If the gains to uncrossing the market are small, it may not
be worth taking this risk.
Second, uncrossing odd-lot quotes may not be possible due to limit-
up/limit-down (LULD) bands. If a stock is in a straddle state--i.e. one
side of the NBBO is outside of the bands while the other side is
inside--odd-lot quotes that cross outside the bands may be impossible
to uncross until the bands move.\685\
---------------------------------------------------------------------------
\685\ Illiquid stocks can spend a long time in straddle states.
During the fourth quarter of 2025, the average number of tier 2 non-
ETPs with multiple straddle states during a day was 100. The average
time spent in a straddle state for these stock-days was over an
hour. See Reports/Studies: Quarterly Monitoring Report, LULD Plan,
https://www.luldplan.com/studies (last visited April 16, 2026).
---------------------------------------------------------------------------
In the absence of Rule 610(e), round lots of illiquid stocks might
therefore be more likely to cross, although the estimates in Panel B
are likely overestimates because round-lot quotes (unlike odd-lot
quotes) cannot cross outside the LULD bands.
Table 11--Time Spent Locked or Crossed, by Quoted Spread
--------------------------------------------------------------------------------------------------------------------------------------------------------
Stocks per
BDP TWAQS bucket Stock-days day Mean (%) P50 (%) P75 (%) P90 (%) P95 (%) P99 (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Panel A: Time spent with locked quotes
--------------------------------------------------------------------------------------------------------------------------------------------------------
Spread < $0.015............................. 3,870 61 3.8 1.5 5.5 10.8 14.2 20.5
$0.015 < Spread < $0.03..................... 2,821 45 0.8 0.3 0.8 1.6 3.1 10.5
$0.03 < Spread < $0.06...................... 5,072 81 0.2 0.1 0.2 0.4 0.5 1.6
$0.06 < Spread < $0.12...................... 10,317 164 0.1 0.0 0.1 0.2 0.3 0.6
$0.12 < Spread < $0.24...................... 14,373 228 0.0 0.0 0.0 0.1 0.2 0.5
$0.24 < Spread.............................. 26,539 421 0.0 0.0 0.0 0.0 0.1 0.3
--------------------------------------------------------------------------------------------------------------------------------------------------------
Panel B: Time spent with crossed quotes
--------------------------------------------------------------------------------------------------------------------------------------------------------
Spread < $0.015............................. 3,870 61 0.1 0.0 0.0 0.0 0.2 1.9
$0.015 < Spread < $0.03..................... 2,821 45 0.3 0.0 0.1 0.7 1.2 3.7
$0.03 < Spread < $0.06...................... 5,072 81 0.3 0.0 0.1 0.6 1.2 4.6
$0.06 < Spread < $0.12...................... 10,317 164 0.4 0.0 0.2 0.8 1.7 5.6
$0.12 < Spread < $0.24...................... 14,373 228 0.4 0.0 0.2 0.9 1.8 5.6
$0.24 < Spread.............................. 26,539 421 0.3 0.0 0.0 0.6 1.4 4.7
--------------------------------------------------------------------------------------------------------------------------------------------------------
This table displays distributional statistics of the fraction of the stock-day spent locked or crossed. The sample is defined in Table 10. The
statistics are computed for subsamples based on the BDP TWAQS of the stock-day, ranging from a BDP TWAQS under $0.015 to over $0.24. For each
subsample, the following statistics are shown: the number of stock-days in the subsample, the average number of stocks per day, the mean, 50th, 75th,
90th, 95th, and 99th percentiles of the duration variable. The duration variable in Panel A is the fraction of the stock-day spent with a locked
quote, while Panel B shows the fraction of the stock-day spent with a crossed quote. To determine whether the quotes lock or cross, the best-priced
bid and offer of any size are taken from each exchange to construct the best bid and offer prices across all exchanges; the market is locked if the
best bid and offer are equal, and crossed if the best bid is greater than the best offer.
Table 12 further explores the composition of quotes that cause the
market to be locked or crossed. To do so, the analysis focuses on the
subsample of stock-days that are locked or crossed for at least 1% of
the trading day and have a round lot of 100 shares. Panel A shows
results for stock-days that are locked for more than 1% of the day,
split by the stock-day's BDP TWAQS; Panel B does likewise for stock-
days that are crossed for more than 1% of the day. Columns two and
three of the table show the number of stock-days in this subsample and
the average fraction of the day spent locked or crossed.
The remaining three columns decompose the time spent locked or
crossed into three mutually exclusive categories to reflect the three
ways that a market might be locked or crossed: (1) an odd-lot quote may
lock or cross
[[Page 36721]]
another odd-lot quote (e.g., an odd-lot bid is higher than an odd-lot
offer); (2) an odd-lot quote may lock or cross a round-lot quote (e.g.,
an odd-lot bid is higher than a round-lot offer); or (3) two round-lot
quotes may lock or cross each other.
For example, the first row of Panel A shows that there are 2,137
stock-days with a BDP TWAQS less than $0.015 that spend at least 1% of
the day locked and have a round lot of 100 shares. Of these stock-days,
6.7% of the day is spent locked. Further, of the time locked, 20.1% is
attributable to two odd-lots; 72.2% to an odd-lot locking a round lot;
and 7.7% to two round lots locking each other.
The analysis shows that the vast majority of locks and crosses
involve odd-lot quotes. When spreads are narrow, most of the locks and
crosses involve an odd-lot locking or crossing a round lot; when
spreads are wider, most of the locks and crosses involve two odd-lot
quotes. These results underscore the importance of using odd-lot quotes
when studying the determinants of locked and crossed markets--if there
is demand to lock or cross the market, it will be manifested through
odd-lot quotes because of Rule 610(e). In the event of a rescission of
Rule 610(e), this demand to lock or cross the market might extend to
round lots, though the magnitude of the demand to lock or cross round
lots may differ from what is observed with odd-lots.
Table 12--Composition of Quotes That Lock or Cross the Market for Stock-Days Where at Least 1% of the Day Is
Affected, and With a Round Lot of 100 Shares
----------------------------------------------------------------------------------------------------------------
Odd-lot locks
BDP TWAQS bucket Stock- days Fraction of Two odd-lots round lot Two round
day locked (%) (%) (%) lots (%)
----------------------------------------------------------------------------------------------------------------
Panel A: Composition of locked markets
----------------------------------------------------------------------------------------------------------------
Spread < $0.015................. 2,137 6.7 20.1 72.2 7.7
$0.015 < Spread < $0.03......... 507 3.1 52.0 46.6 1.5
$0.03 < Spread < $0.06.......... 88 2.1 64.3 35.1 0.6
$0.06 < Spread < $0.12.......... 28 1.7 59.6 38.6 1.8
$0.12 < Spread < $0.24.......... 28 1.8 72.8 27.2 0.0
$0.24 < Spread.................. 27 1.9 81.1 18.9 0.0
----------------------------------------------------------------------------------------------------------------
Panel B: Composition of crossed markets
----------------------------------------------------------------------------------------------------------------
Spread < $0.015................. 73 4.3 22.3 61.3 16.4
$0.015 < Spread < $0.03......... 172 3.1 40.3 48.4 11.3
$0.03 < Spread < $0.06.......... 290 3.3 44.8 45.3 9.9
$0.06 < Spread < $0.12.......... 729 3.2 58.3 36.8 4.9
$0.12 < Spread < $0.24.......... 1,016 2.9 65.6 31.5 3.0
$0.24 < Spread.................. 1,113 3.0 74.2 23.9 1.9
----------------------------------------------------------------------------------------------------------------
This table displays the composition of quotes that cause the market to lock or cross. The sample starts with the
stock-days defined in Table 10 but only includes the subsample with a round lot of 100 shares and which spend
at least 1% of the day locked (Panel A) or crossed (Panel B). Like Table 11, the statistics are tabulated by
time-weighted BDP TWAQS category. For each category, the following statistics are reported: the number of
stock-days in the sample, the average fraction of the trading day that is affected, and the type of quotes
that cause the markets to lock or cross. A locked or crossed market could be caused by two odd-lots, one odd-
lot and one round lot, or two round lots.
3. Combined Economic Effects
This section discusses the joint benefits and costs that result
from the combined rescission of both Rule 611 and Rule 610(e). The
Commission anticipates rescinding both rules will benefit market
participants by reducing market complexity, which will result in
ongoing cost savings for trading centers and broker-dealers that
operate SORs. However, these firms will also experience one-time
implementation costs to update their systems. Additionally, rescinding
both Rule 611 and Rule 610(e) will increase exchange competition, which
may reduce market data and connectivity costs for broker-dealers.
However, it may also result in a loss of revenue for smaller exchanges
and higher barriers to entry for new exchanges.
a. Reduced Market Complexity
Rescinding both Rule 611 and Rule 610(e) together could reduce
market complexity.\686\ Rescinding both rules would result in fewer
mandatory linkages and routing constraints between trading venues and
also could result in a reduction of order types, such as the
elimination of the ISO order type as well price-to-comply and other re-
pricing order types.\687\ This could result in the simplification of
algorithmic routing and trading strategies, reductions in operational
risk (e.g., broker-dealers will no longer need to deal with the risk of
an execution trading through a protected quote or submitting a quote
that locks or crosses the NBBO), and also a simplification of post-
trade analytics because there would be no need to also monitor for
trade-through compliance. Rescinding Rule 611 would also allow market
participants to simplify their routing strategies by avoiding trading
on venues that may have features that complicate their order routing
and execution, such as speed bumps.
---------------------------------------------------------------------------
\686\ See supra sections II.C.2.a. and VI.B.2.d. for further
discussions on how Rule 611 contributes to increased market
complexity. See also supra section III.B.3. and VI.B.3. for further
discussions on how Rule 610(e) contributes to increased market
complexity.
\687\ See supra sections VI.C.2.d. and VI.C.3. (discussing how
Rule 611 and Rule 610(e) increase market complexity) and supra
sections VI.B.1.a and VI.B.1.b (discussing order types related to
Rule 611 and Rule 610(e)). See also supra sections II.B.2. and
III.B.3 (for commenter discussions on how Rules 611 and 610(e) have
contributed to an increase in the number of order types).
---------------------------------------------------------------------------
Rescinding Rule 611 and Rule 610(e) may reduce market complexity by
removing rules that allow for trading strategies that lead to the
``gaming'' of displayed protected quotes, such as posting flickering
orders as protected quotes designed to attract the routing of
marketable orders or posting orders that are designed to establish
queue priority in a locked market.\688\ This would
[[Page 36722]]
improve the ability of market participants to avoid interacting with
the orders of HFTs and other market participants that engage in these
strategies (i.e., market participants could avoid routing orders to a
venue when they think an HFT quote is at the best price and is likely
to cancel/reprice before their order arrives at the venue), which may
reduce their transactions costs and also the profits HFTs earn from
these strategies.\689\ This, in turn, may reduce the incentives for
HFTs and other market participants to engage in these types of trading
strategies, which would reduce market complexity.
---------------------------------------------------------------------------
\688\ See, e.g., Sida Li et al., Financial Regulation, Clientele
Segmentation, and Stock Exchange Order Types (NBER Working Paper No.
28515, Feb. 2021), available at https://ssrn.com/abstract=3795035
(retrieved from SSRN Elsevier database) (discussing the uses of
different exchange order types to comply with Rule 611 and Rule
610).
\689\ This would represent a transfer from the HFTs and other
market participants who currently engage in these strategies to the
market participants that interact with these HFT orders.
---------------------------------------------------------------------------
Rescinding the rules should result in trading centers and broker-
dealers that run SORs experiencing cost savings related to regularly
maintaining and updating their execution and smart order routing
systems.\690\ For example, the reduction in market complexity may
reduce the time it would take staff to make changes to their systems
and program in logic for a new order type that an exchange or ATS
offers, because they would no longer need to account for additional
logic related to trading through or locking or crossing protected
quotes.
---------------------------------------------------------------------------
\690\ See, e.g., Robinhood Letter at 5 (stating that the
resulting complexity from Rule 611 imposes increased costs on market
participants).
---------------------------------------------------------------------------
To estimate the annual savings for trading centers and broker-
dealers operating SORs, the Commission assumes that rescinding Rule 611
and Rule 610(e) would reduce the time it takes to update trade
execution systems and SORs by 5% to 10%.\691\ Larger broker-dealers
that connect to more exchanges are likely to have more complicated SOR
systems that are more costly to maintain and update. We estimate that
rescinding Rule 611 and Rule 610(e) would save each of the 20 exchanges
between $319,000 and $637,000 annually; \692\ each of the 33 ATSs
between $159,000 and $319,000 annually; \693\ each of the 23 largest
broker-dealers with SORs that connect to 16 or more exchanges between
$159,000 and $319,000 annually; \694\ each of the 21 broker-dealers
with SORs that connect to 11 to 15 exchanges between $54,000 and
$109,000 annually; \695\ each of the 169 broker-dealers with SORs that
connect to 1 to 10 exchanges between $16,000 and $32,000 annually;
\696\ and each of the 225 OTC market makers between $16,000 and $32,000
annually.\697\ We estimate that the total aggregate annual cost savings
will be between $22.8 million and $45.6 million.\698\
---------------------------------------------------------------------------
\691\ The Commission acknowledges uncertainty about how much
time rescinding Rule 611 and Rule 610(e) will save trading centers
and broker-dealers operating SROs in updating their systems and has
requested comment on these estimates.
\692\ The Commission estimates that each exchange employs the
equivalent of 3 full-time Financial Analysts and 4 full-time
Software Developers to maintain its order execution and routing
systems. The Commission's lower bound on the estimated annual
savings for each exchange is ($405 for a financial analyst x 312
hours) + ($462 for a software developer x 416 hours) = $318,552. The
Commission's upper bound on the estimated annual savings for each
exchange is ($405 for a financial analyst x 624 hours) + ($462 for a
software developer x 832 hours) = $637,104.
\693\ The Commission estimates that each ATS employs the
equivalent of 1.5 full-time Financial Analysts and 2 full-time
Software Developers to maintain its order execution system. The
Commission's lower bound on the estimated annual savings for each
ATS is ($405 for a financial analyst x 156 hours) + ($462 for a
software developer x 208 hours) = $159,276. The Commission's upper
bound on the estimated annual savings for each ATS is ($405 for a
financial analyst x 312 hours) + ($462 for a software developer x
416 hours) = $318,552.
\694\ The Commission estimates that each larger broker-dealer
with a SOR that connects to 16 exchanges employs the equivalent of
1.5 full-time Financial Analysts and 2 full-time Software Developers
to maintain its SOR. The Commission's lower bound on the estimated
annual savings for each of these broker-dealers is ($405 for a
financial analyst x 156 hours) + ($462 for a software developer x
208 hours) = $159,276. The Commission's upper bound on the estimated
annual savings for each of these broker-dealers is ($405 for a
financial analyst x 312 hours) + ($462 for a software developer x
416 hours) = $318,552. If a broker-dealer operates both a SOR and an
ATS, then it would save the cumulative amount of both its ATS and
SOR savings. The cost savings for broker-dealers that also operate
as exchange market makers is included in their SOR cost savings
because the Commission believes these broker-dealers use the same
systems for both functions. See Table 1 in supra section VI.B.4.e
for estimates of how many exchanges broker-dealers connect to. See
also supra note 578 for estimates of how many broker-dealers are
exchange market makers.
\695\ The Commission estimates that each broker-dealer with a
SOR that connects to 11 to 15 exchanges employs the equivalent of
0.5 full-time Financial Analysts and 0.7 full-time Software
Developers to maintain its SOR. The Commission's lower bound on the
estimated annual savings for each of these broker-dealers is ($405
for a financial analyst x 52 hours) + ($462 for a software developer
x 72 hours) = $54,324. The Commission's upper bound on the estimated
annual savings for each of these broker-dealers is ($405 for a
financial analyst x 104 hours) + ($462 for a software developer x
144 hours) = $108,648.
\696\ The Commission estimates that each broker-dealer with a
SOR that connects to 1 to 10 exchanges employs the equivalent of
0.15 full-time Financial Analysts and 0.2 full-time Software
Developers to maintain its SOR. The Commission's lower bound on the
estimated annual savings for each of these broker-dealers is ($405
for a financial analyst x 16 hours) + ($462 for a software developer
x 21 hours) = $16,182. The Commission's upper bound on the estimated
annual savings for each of these broker-dealers is ($405 for a
financial analyst x 32 hours) + ($462 for a software developer x 42
hours) = $32,364.
\697\ The Commission estimates that there are 225 broker-dealers
that operate as OTC market-makers. See supra note 578. The
Commission estimates that each of these OTC market-makers employs
the equivalent of 0.15 full-time Financial Analysts and 0.2 full-
time Software Developers to maintain its execution systems. The
Commission's lower bound on the estimated annual savings for each of
these OTC market makers is ($405 for a financial analyst x 16 hours)
+ ($462 for a software developer x 21 hours) = $16,182. The
Commission's upper bound on the estimated annual savings for each of
these OTC market makers is ($405 for a financial analyst x 32 hours)
+ ($462 for a software developer x 42 hours) = $32,364. There will
be overlap between the broker-dealers that operate a SOR and the
broker-dealers that are OTC market makers. For these broker-dealers,
the Commission believes that the costs savings from operating their
SOR and their cost savings from operating as an OTC market maker
will be additive (i.e., they will save on both costs).
\698\ The Commission's lower bound on the total estimated annual
savings is (20 exchanges x $318,552) + (33 ATSs x $159,276) + (23
broker-dealers connect to 16 or more exchanges x $159,276) + (21
broker-dealers connect to 11 to 15 exchanges x $54,324) + (169
broker-dealers connect to 1 to 10 exchanges x $16,182) + (225 OTC
market makers x $16,182) = $22.81 million. The Commission's upper
bound on the total estimated annual savings is (20 exchanges x
$637,104) + (33 ATSs x $318,552) + (23 broker-dealers connect to 16
or more exchanges x $318,552) + (21 broker-dealers connect to 11 to
15 exchanges x $108,648) + (169 broker-dealers connect to 1 to 10
exchanges x $32,364) + (225 OTC market makers x $32,364) = $45.61
million.
---------------------------------------------------------------------------
b. Implementation Costs
We anticipate that rescinding Rule 611 and Rule 610(e) would impose
one-time implementation costs on broker-dealers and trading centers to
remove written policies and procedures designed to prevent trade-
throughs and locked and crossed markets and to capture compliance with
the exceptions to Rule 611. These compliance costs would include both
costs related to legal personnel updating policies and procedures as
well as software engineering and IT costs related to updating and
configuring systems related to trade execution, order handling and
surveillance. Order routing and trade execution logic would need to be
redesigned to allow for trading through the NBBO; routing logic would
need to be modified to remove ISO handling and other trade-through
exception logic; exchange matching engines would need to be updated to
allow for the display of orders that lock or cross the NBBO; SORs would
need to be recalibrated; surveillance alerts that currently hinge on
trade-through exceptions would need to be removed; and staff would need
to be trained on new policies and procedures.
We estimate that each of 33 ATSs would incur one-time
implementation costs of $195,000 to update their systems and policies
and procedures for
[[Page 36723]]
the rescission of Rule 611 and Rule 610(e).\699\ Additionally, we
estimate the one-time implementation costs for each of 23 largest
broker-dealers with SORs that connect to 16 or more exchanges would be
$195,000,\700\ each of the 21 broker-dealers with SORs that connect to
11 to 15 exchanges would be $90,000,\701\ each of the 169 broker-
dealers with SORs that connect to 1 to 10 exchanges would be
$52,000,\702\ and each of the 225 OTC market makers would be
$52,000.\703\ Furthermore, we estimate that the one-time implementation
costs to each of 20 exchanges to update their systems and policies and
procedures for the rescission of Rule 611 and Rule 610(e) would be
$389,000.\704\ Exchanges would incur higher costs because their systems
might contain more complex logic for ensuring they do not display
quotes that lock or cross the NBBO. Exchanges would also have to incur
additional costs to update their rulebooks to account for the
rescission of Rule 611 and Rule 610(e) and related defined terms. We
estimate that the total aggregate one-time implementation costs will be
$40.9 million from rescinding Rule 611 and Rule 610(e).\705\
---------------------------------------------------------------------------
\699\ The Commission estimates that each ATS, on average, would
need 430 hours to update their systems and policies and procedures
for the rescission of Rule 611 and Rule 610(e): 24 hours of legal
time, 36 hours of compliance time, 6 hours of review by a Chief
Compliance Officer, 156 hours of work by a financial analyst, and
208 hours of work by a software developer. The estimated monetized
one-time cost is as follows: ($744 for an attorney x 24 hours) +
($365 for a financial examiner (i.e., compliance) x 36 hours) +
($731 for a financial manager (i.e., Chief Compliance Officer) x 6
hours) + ($405 for a financial analyst x 156 hours) + ($462 for a
software developer x 208 hours) = $194,658. See supra note 577 for
details on how hourly rates are calculated.
\700\ The Commission estimates that each broker-dealer that
operates a SOR that connects to 16 or more exchanges, on average,
would need 430 hours to update its systems and policies and
procedures for the rescission of Rule 611 and Rule 610(e): 24 hours
of legal time, 36 hours of compliance time, 6 hours of review by a
Chief Compliance Officer, 156 hours of work by a financial analyst,
and 208 hours of work by a software developer. The estimated
monetized one-time cost is as follows: ($744 for an attorney x 24
hours) + ($365 for a financial examiner (i.e., compliance) x 36
hours) + ($731 for a financial manager (i.e., Chief Compliance
Officer) x 6 hours) + ($405 for a financial analyst x 156 hours) +
($462 for a software developer x 208 hours) = $194,658. See Table 1
in supra section VI.B.4.e for estimates of how many exchanges
broker-dealers connect to. If a broker-dealer operates both a SOR
and an ATS, then it would incur the cumulative implementation costs
of both its ATS and SOR operations. The implementation costs for
broker-dealers that operate a SOR and also operate as exchange
market makers is already averaged into the cost estimate because the
Commission believes there would be significant overlap in updating
their SOR and exchange market maker systems.
\701\ The Commission estimates that each broker-dealer that
operates a SOR that connects to 11 to 15 exchanges, on average,
would need 190 hours to update their systems and policies and
procedures for the rescission of Rule 611 and Rule 610(e): 24 hours
of legal time, 36 hours of compliance time, 6 hours of review by a
Chief Compliance Officer, 52 hours of work by a financial analyst,
and 72 hours of work by a software developer. The estimated
monetized one-time cost is as follows: ($744 for an attorney x 24
hours) + ($365 for a financial examiner (i.e., compliance) x 36
hours) + ($731 for a financial manager (i.e., Chief Compliance
Officer) x 6 hours) + ($405 for a financial analyst x 52 hours) +
($462 for a software developer x 72 hours) = $89,706.
\702\ The Commission estimates that each broker-dealer that
operates a SOR that connects to 1 to 10 exchanges, on average, would
need 103 hours to update its systems and policies and procedures for
the rescission of Rule 611 and Rule 610(e): 24 hours of legal time,
36 hours of compliance time, 6 hours of review by a Chief Compliance
Officer, 16 hours of work by a financial analyst, and 21 hours of
work by a software developer. The estimated monetized one-time cost
is as follows: ($744 for an attorney x 24 hours) + ($365 for a
financial examiner (i.e., compliance) x 36 hours) + ($731 for a
financial manager (i.e., Chief Compliance Officer) x 6 hours) +
($405 for a financial analyst x 16 hours) + ($462 for a software
developer x 21 hours) = $51,564.
\703\ The Commission estimates that each broker-dealer that
operates as an OTC market maker, on average, would need 103 hours to
update its systems and policies and procedures for the rescission of
Rule 611 and Rule 610(e): 24 hours of legal time, 36 hours of
compliance time, 6 hours of review by a Chief Compliance Officer, 16
hours of work by a financial analyst, and 21 hours of work by a
software developer. The estimated monetized one-time cost is as
follows: ($744 for an attorney x 24 hours) + ($365 for a financial
examiner (i.e., compliance) x 36 hours) + ($731 for a financial
manager (i.e., Chief Compliance Officer) x 6 hours) + ($405 for a
financial analyst x 16 hours) + ($462 for a software developer x 21
hours) = $51,564. There will be overlap between the broker-dealers
that operate a SOR and the broker-dealers that are OTC market
makers. For these broker-dealers, the Commission believes that the
implementation costs related to operating their SOR and their
implementation costs related to operating as an OTC market maker
will be additive (i.e., they will incur both costs).
\704\ The Commission estimates that each exchange, on average,
would need 860 hours to update its systems and policies and
procedures for the rescission of Rule 611 and Rule 610(e): 48 hours
of legal time, 72 hours of compliance time, 12 hours of review by a
Chief Compliance Officer, 312 hours of work by a financial analyst,
and 416 hours of work by a software developer. The estimated
monetized one-time cost is as follows: ($744 for an attorney x 48
hours) + ($365 for a financial examiner (i.e., compliance) x 72
hours) + ($731 for a financial manager (i.e., Chief Compliance
Officer) x 12 hours) + ($405 for a financial analyst x 312 hours) +
($462 for a software developer x 416 hours) = $389,316.
\705\ The Commission estimates that the total one-time
implementation cost for rescinding Rule 611 and Rule 610(e) is:(20
exchanges x $389,316) + (33 ATSs x $194,658) + (23 broker-dealers
connect to 16 or more exchanges x $194,658) + (21 broker-dealers
connect to 11 to 15 exchanges x $89,706) + (169 broker-dealers
connect to 1 to 10 exchanges x $51,564) + (225 OTC market makers x
$51,564) = $40.89 million.
---------------------------------------------------------------------------
c. Increased Exchange Competition
Without Rule 611 and 610(e), broker-dealer demand for access to
trading on every exchange may diminish.\706\ This reduced demand may
lower the cost to be an executing broker-dealer because broker-dealers
would be able to disconnect from some exchanges, which may introduce
pressure on exchanges to attract broker-dealers. This could lead to
lower prices for products such as market data and connectivity and
increase exchanges' incentive to innovate to try to attract or retain
order flow.\707\
---------------------------------------------------------------------------
\706\ See supra section VI.B.4.e. (discussing broker-dealer
demand for liquidity) and VI.C.1.a and VI.C.2.a. Note that off-
exchange trading may increase. See infra note 730 and section
VI.D.2.c. (discussing competition between exchanges and off-exchange
venues).
\707\ See supra section VI.B.4.e.
---------------------------------------------------------------------------
Exchanges may lose revenue because of broker-dealer disconnections
and/or lower prices for data and connectivity. Exchanges that
experience disconnections may lose volume while exchanges that do not
may gain volume. It may become more difficult for small exchanges, as
well as potential new exchanges, to gain market share, reducing the
incentive for new entry. Small exchanges may even lose market share as
broker-dealers shift their routing behavior away from these exchanges.
The fragmentation of displayed liquidity may also decrease.\708\
---------------------------------------------------------------------------
\708\ Market fragmentation may also decrease. See also infra
section VI.D.2.c.
---------------------------------------------------------------------------
i. Benefits
Some broker-dealers may choose to disconnect from existing
exchanges, or not connect to new exchanges, because there is no longer
an ``interference cost'' from not connecting to an exchange.\709\
Broker-dealers that have determined, consistent with their duty of best
execution, that it is reasonable for them to not connect to an exchange
would be able to reorganize their order routing to exclude that
exchange without facing interference costs. Broker-dealers would face
some costs from disconnecting from an exchange because they must update
their routing practices, but there would be no such costs for not
connecting to a new exchange.
---------------------------------------------------------------------------
\709\ See supra sections VI.B.4.e. (defining the ``interference
cost'') and VI.B.4.f. (discussing the role of 611 and 610(e)).
---------------------------------------------------------------------------
A broker-dealer may disconnect from an exchange if the cost to
modify its routing practices and any other costs, such as the cost of
lost execution quality, is lower than the cost to remain connected to
the exchange. However, there may be other reasons that a broker-dealer
decides not to disconnect, such as the up-front costs which have
already been paid and would have to be paid again if the broker-dealer
disconnects and then later reconnects.\710\ Rather
[[Page 36724]]
than fully disconnecting, broker-dealers may choose to subscribe to
fewer services (e.g., unsubscribe from or decrease the number of use
cases for market data, reduce the number of connections) \711\ or
utilize third-party vendors to save on costs rather than fully
disconnecting. For a new exchange, there may be fewer broker-dealers
for whom the cost of connecting to a new exchange is lower than the
cost of not connecting and thus fewer broker-dealers would connect to a
new exchange.\712\
---------------------------------------------------------------------------
\710\ See, e.g., letter from Peter J. Haynes, CFA, Index and
Market Structure Research, TD Securities, The History of OPR in
Canada--It is Not Exactly What You Think? (July 22, 2025) (``TD
Securities Comment'') at 4. See also First TTR Roundtable at 104
(Peter Haynes, TD Securities).
\711\ See supra section VI.B.4.c. (describing exchange
products).
\712\ This would mean a slower uptake for new exchanges. See
infra section VI.C.3.ii.
---------------------------------------------------------------------------
Disconnections may occur at small exchanges and by small- to
medium-sized broker-dealers. Disconnections are more likely to occur at
small exchanges because the effect on execution quality from
disconnecting is likely smaller because small exchanges have less
available liquidity. With the rescission, broker-dealers can
concentrate their orders on venues that contribute relatively more to
overall execution quality. Academic research shows that liquidity and
trading tend to concentrate on the most liquid venues.\713\ If orders
receive better execution quality on larger, more liquid exchanges, then
brokers may concentrate on sending their orders to these venues and
reduce the number of orders that they send to smaller, less liquid
exchanges. Disconnections are less likely to occur at small exchanges
that are part of a large exchange family because there may be more
benefits, relative to an exchange that is independent or part of a
small exchange family, for broker-dealers that have a connection to
multiple exchanges within the large exchange family.\714\
Disconnections are more likely to occur by small- to medium-sized
broker-dealers because they may seek to lower their costs. High-volume
broker-dealers may be better positioned competitively,\715\ and the
effect on execution quality from disconnecting from an exchange may be
smaller for small- to medium-sized broker-dealers to the extent that
they demand less liquidity. Broker-dealers that execute large block
orders for more shares than are available at the NBBO may continue to
connect to as many venues as possible, even if they are small, because
of the effect of disconnecting from a venue on their execution quality.
Small- to medium-sized broker-dealers may already have lower up-front
and ongoing costs, particularly if they outsource some of their
connectivity or data processing to third-party vendors.\716\
---------------------------------------------------------------------------
\713\ See Marco Pagano, Trading Volume and Asset Liquidity, 104
Q. J. Econ. 255 (1989).
\714\ For example, one exchange family has ``integrated trading
technology.'' See NYSE Pillar, NYSE, https://www.nyse.com/trade/pillar (last visited May 11, 2026).
\715\ See infra section VI.D.2.d. (describing competition for
broker execution services).
\716\ See supra section VI.B.4.c. (discussing market data and
connectivity use cases for market participants).
---------------------------------------------------------------------------
Broker-dealers' ability to disconnect, along with the potential for
order flow to shift, may increase the competitive pressure among
exchanges. This may lead exchanges to lower prices for connectivity and
data \717\ or innovate.\718\ Some exchanges may receive more order flow
as broker-dealers shift their market activity, whether after
disconnecting from other venues or not,\719\ potentially leading to
increased revenue from access fees and the SIPs for these exchanges.
---------------------------------------------------------------------------
\717\ For example, if some broker-dealers currently view an
exchange's price for data as being too high, they may unsubscribe
once they are no longer required to comply with Rules 611 and
610(e). If enough broker-dealers unsubscribe, the exchange may find
it advantageous to lower the price of its data to keep more
customers.
\718\ The fact that order flow could shift off exchange as well
is another potential source of competitive pressure that could
encourage lower prices and innovation. See infra section VI.D.2.c.
\719\ In addition to order flow potentially shifting away from
small exchanges as described, broker-dealers may trade less on some
exchanges for other reasons, such as to avoid certain types of
venues except when submitting large block orders or because they
downgrade their connection and devote fewer maintenance resources
rather than fully disconnecting. For example, HFTs may route fewer
orders to exchanges with speedbumps, but maintain a connection.
---------------------------------------------------------------------------
This would also result in a reduction in displayed liquidity
fragmentation. As broker-dealers can disconnect and can concentrate
their orders on venues that offer better execution quality or their
preferred venue type, some exchanges would have more quotes while
others would have fewer.
We estimate that about 4 small- to medium-sized broker-dealers may
disconnect from each of the 5 smallest exchanges that are not part of
the 3 largest exchange families. As explained above, disconnections are
more likely to occur from small exchanges because of the potential for
a lower effect on execution quality. Additionally, disconnections are
more likely to occur from the 5 small exchanges that are not a part of
the three large exchange families because, having connected to at least
one exchange from a large exchange family, there is potentially a lower
cost to connecting to additional exchanges from that family compared to
the cost of connecting to a new exchange family.\720\ It is difficult
to reasonably estimate how many broker-dealers may disconnect, but we
estimate it could be 4 with more or fewer being possible.\721\ As
explained above, exchanges have an incentive to lower prices or
innovate to attract order flow and prevent disconnections. Broker-
dealers may also maintain connections to avoid paying up-front costs
again if they think they may have to reconnect later. They may also
change or reduce their services rather than fully disconnect. Finally,
in light of the competition for broker execution services, even the
potential for small negative impacts on execution quality may limit
broker-dealer willingness to disconnect.\722\ Thus, we do not
anticipate that many disconnections will occur.
---------------------------------------------------------------------------
\720\ Until MX2 comes online, there are no two equities
exchanges owned by the same company outside of the three largest
exchange families. See supra section VI.B.4.a.
\721\ As mentioned above, broker-dealers that connect to all
exchanges are not likely to disconnect from any exchanges. To the
extent there may be disconnections, we would expect broker-dealers
to disconnect from the newest and smallest exchanges. The newest and
smallest exchanges have the smallest number of connections. The
older, more established exchanges that have more connections, and
also more market share, are likely to retain more connections. The
exchanges that are smaller but are members of a large exchange
family are also likely to retain more connections.
\722\ See supra sections VI.B.4.e discussing the value of access
to exchange liquidity for broker-dealer execution costs, and
VI.B.5.b, discussing competition among institutional brokers. In
addition, significant alterations to a broker-dealer's routing
practices would be made in accordance with that broker-dealer's
policies and procedures for compliance with best execution
requirements.
---------------------------------------------------------------------------
We do not expect that a broker-dealer's costs to modify routing
practices, or a broker-dealer's ongoing yearly savings due to a
disconnection, would depend on an exchange's size. We estimate that the
ongoing yearly savings for a broker-dealer would be $187,000 per
disconnection.\723\ We estimate that the average cost a broker-dealer
would save per disconnection per year on market data and connectivity
fees is approximately $307,000.\724\ We also expect that broker-dealers
that disconnect will correspondingly discontinue their exchange
[[Page 36725]]
membership. The estimated average savings for a broker-dealer per
membership discontinuation is about $3,440.\725\ Thus, the total
savings from all disconnections are estimated to be $10 million per
year.\726\ There may be additional broker-dealers who choose to
subscribe to fewer services from an exchange rather than fully
disconnecting. Broker-dealers may instead utilize more third-party
services. Broker-dealers may also need to update their routing system
to account for the change in services. We are uncertain about the cost
savings that this would generate, and how many broker-dealers would
choose to do this, because we are unable to quantify the costs of
third-party services or how many broker-dealers use such services.
Third-party vendors that provide connectivity and data services may
also gain revenue if broker-dealers switch to using these services to
connect to or receive data from an exchange.\727\
---------------------------------------------------------------------------
\723\ The Commission estimates that each broker-dealer, on
average, would spend 429 hours to maintain its SOR: 184 hours of
work by a financial analyst, and 245 hours of work by a software
developer. The estimated monetized cost is as follows: ($405 for a
financial analyst x 184 hours) + ($462 for a software developer x
245 hours) = $187,710. See supra note 577 for details on how hourly
rates are calculated.
\724\ See supra note 467. The cost to connect to the five new
exchanges is $1,536,360 total, or divided by five approximately
$307,272 per exchange.
\725\ This estimate is based on the average yearly membership
cost at 24X, IEX, LTSE, MEMX, and MIAX.
\726\ Each disconnection represents a savings for a broker-
dealer from lower cost to maintain routing practices as well as from
not paying membership, market data, and connectivity fees to the
exchange. Thus, the total savings for all broker-dealer
disconnections is [(savings from lower routing maintenance costs) +
(savings from not paying market data and connectivity fees) +
(savings from not paying membership fees)] x (number of broker-
dealer disconnections), which is [($187,710) + ($307,272) +
($3,440)] x (4 broker-dealers x 5 exchanges) = $9,968,440. See supra
notes 467, 723, and 725.
\727\ On the other hand, the vendors may lose revenue from
customers that decide to disconnect from an exchange or choose not
to connect to a new exchange using a third-party vendor. The
Commission would anticipate that the loss is likely smaller than the
potential gain of revenue from downgrading connections.
---------------------------------------------------------------------------
The Commission believes that the cost to connect to a new exchange
could be lower, and that, without the ``interference cost'' from not
connecting, fewer broker-dealers would find it necessary to connect to
a new exchange compared to today. We are unable to reasonably estimate
the change in the cost to connect due to the loss of the ``interference
cost'' or how many broker-dealers this would impact.\728\ We also
expect that new exchanges will continue to charge zero fees, or lower
fees, for connections and market data for a longer initial period after
they commence to attract more order flow.\729\
---------------------------------------------------------------------------
\728\ The Commission is unable to estimate the change in the
cost to connect because this would require estimating the
interference cost itself. Estimating the interference cost is
infeasible for the Commission, as it would be impractical to create
a detailed reconstruction of the circumstances faced by a SOR under
conditions where it is not connected to some exchanges. This would
include knowledge of the cost to the parent order, and the resulting
impact on broker-dealer revenue, from failed child order routes.
\729\ See First TTR Roundtable Transcript at 86-87 (Chris
Solgan, MIAX Exchange Group) (describing initial waivers of data and
connectivity fees for new exchanges). Additionally, one ATS that has
quotes that are not protected provides its market data for free. See
First TTR Roundtable Transcript at 65 (Ari Burnstein,
IntelligentCross).
---------------------------------------------------------------------------
ii. Costs
After the rescission of Rules 611 and 610(e), it may be more
difficult for new and small exchanges to gain market share, and their
revenue could be lower.\730\ We do not expect that any exchanges would
exit the market or that new exchanges would not be able to enter. The
small exchanges may lose revenue and volume due to some small- to
medium-sized brokers disconnecting, but we do not expect any broker-
dealers that connect to all or almost all exchanges to disconnect. We
expect that broker-dealers may submit fewer orders to small
exchanges.\731\ To the extent that dollar volume decreases on these
exchanges, their revenue from access fees as well as revenue from the
SIPs may decrease.\732\ Because most of the dollar volume traded on
these exchanges comes from broker-dealers that connect to all or almost
all exchanges,\733\ the market share of these exchanges will not
decrease significantly as a result of broker-dealer disconnections. We
would not anticipate that these revenue losses (i.e., from
disconnections, fewer order submissions) would be sufficient to make an
exchange exit. Many of these broker-dealers that connect to all or
almost all exchanges may continue to connect to a new exchange right
away. These new or small exchanges may keep prices on connectivity and
data lower for longer, but this would not impact profitability
significantly because the profit from such sources is already smaller
for these exchanges.\734\
---------------------------------------------------------------------------
\730\ If there is increased competitive pressure among exchanges
and large exchanges do not respond (e.g., by lowering fees or
innovating), these large exchanges may lose market share to other
small- to medium-sized exchanges that better compete to attract
order flow. It is unlikely that large exchanges would lose much
market share to other exchanges because they have the same
incentives to attract order flow as small- to medium-sized
exchanges. See supra note 713. It is also possible that exchanges as
a whole lose market share to off-exchange venues, which could lead
to lower revenue. See supra section VI.C.1.b. (discussing how
exchanges may lose market share to off-exchange venues). It is
uncertain whether this effect would be large enough to lead to large
exchanges losing market share, but we preliminary expect that it
would not.
\731\ See supra note 713.
\732\ See supra section VI.C.1.b. (discussing why there may be
more trading off exchange and less trading on exchange).
\733\ See supra section VI.B.4.e.
\734\ See supra note 480.
---------------------------------------------------------------------------
We estimate that 4 broker-dealers may disconnect from the five
exchanges that are not a part of a large exchange family.\735\ We
estimate that the one time cost per broker-dealer per disconnection to
modify routing practices would be $17,000, or in total $348,000.\736\
The loss in revenue resulting from a disconnection is estimated at
$311,000 per year, which is approximately $1.2 million per exchange or
$6.2 million total.\737\
---------------------------------------------------------------------------
\735\ See supra section VI.C.3.c.i. (discussing why we believe
this number of disconnections would occur on these exchanges).
\736\ The Commission estimates that each broker-dealer, on
average, would spend 43 hours to maintain its SOR: 18 hours of work
by a financial analyst, and 25 hours of work by a software
developer. The estimated monetized cost is as follows: ($405 for a
financial analyst x 18 hours) + ($462 for a software developer x 25
hours) = $17,415. Then, multiplying by the number of broker-dealers
and disconnections, the total cost is ($17,415) x (4 broker-dealers)
x (5 exchanges) = $348,300. See supra note 577 for details on how
hourly rates are calculated.
\737\ See supra notes 724 and 725. To estimate the cost per
disconnection, we add the revenue loss from market data and
connectivity and the revenue loss from membership: ($307,272) +
($3,440) = $310,712. To get the average cost per exchange:
($310,712) x (number of disconnects per exchange) = $1,242,848. To
get the total cost: ($310,712) x (number of disconnects per
exchange) x (number of exchanges) = $6,214,240. A part of this may
represent a transfer. When a broker-dealer disconnects from an
exchange, the broker-dealer saves on costs, while an exchange loses
revenue. At the same time, the broker-dealer no longer receives the
connection and thus the value of the liquidity on that exchange. The
amount of the transfer would not represent the total amount of the
fee but rather the amount of the fee net of the value of liquidity
on the exchange (i.e. this would be the additional ``interference
premium'' related to Rule 611 and Rule 10(e) that they paid to
connect to the exchange). We are unable to quantify the amount of
the transfer because we cannot quantify the ``interference
premium.'' There may be an additional loss in revenue if exchanges
lower their fees or market participants that maintain a connection
change their trading activity by routing fewer orders to these
exchanges, but the Commission does not know by how much exchanges
may lower their fees or how market participants would change their
routing activity.
---------------------------------------------------------------------------
Broker-dealers may face lower execution quality if they disconnect
from exchanges. For example, if a broker-dealer is not connected to the
exchange with the best quote, it may decide to trade through this quote
on an exchange to which it is connected, thus achieving a worse
execution quality for customers. Additionally, if a broker-dealer is
executing a large block order for more shares than available at the
NBBO at the exchanges where it is connected, it may achieve a worse
execution quality because it does not access the liquidity at the
exchanges to which it is not connected.\738\
---------------------------------------------------------------------------
\738\ The broker-dealer may choose to route to these exchanges
using an exchange router or another broker-dealer.
---------------------------------------------------------------------------
[[Page 36726]]
4. Monetized Benefits and Costs
Throughout this economic analysis, we have estimated monetized
benefits and costs per affected entity. In this section, we present
aggregate measures of these monetized effects. These totals include
only benefits and costs that are monetized in the economic analysis and
thus do not encompass all of the proposed amendments' benefits and
costs.
a. Initial and Annual Aggregate Monetized Benefits and Costs
Tables 13 and 14 report the benefits and costs, respectively, that
are monetized in this economic analysis, aggregated across all affected
entities and instances of compliance each year. The annual aggregate
monetized benefit is based on cost savings for trading centers (i.e.,
exchanges, ATSs, and exchange and OTC market makers) and broker-dealers
that operate SORs from rescinding Rule 611 and 610(e). The sources of
annual aggregate cost savings are as follows: (i) compliance cost
savings for trading centers from no longer having to maintain policies
and procedures and surveillance associated with Rule 611; \739\ (ii)
compliance cost savings for broker-dealers that operate SORs from no
longer having to maintain policies and procedures associated with Rule
611; \740\ (iii) compliance cost savings for exchanges from no longer
having to maintain policies and procedures and surveillance associated
with Rule 610(e); \741\ (iv) compliance cost savings for broker-dealers
that operate SORs from no longer having to maintain policies and
procedures associated with Rule 610(e); \742\ (v) costs savings for
trading centers and broker-dealers that operate SORs due to the
reduction in time for updating trade execution systems and SORs from
rescinding Rule 611 and Rule 610(e); \743\ and (vi) costs savings for
broker-dealers that operate SORs due to the disconnection from five
exchanges from rescinding Rule 611 and Rule 610(e).\744\
---------------------------------------------------------------------------
\739\ See supra section VI.C.1.a.
\740\ See id.
\741\ See supra section VI.C.2.a.
\742\ See id.
\743\ See supra section VI.C.3.a.
\744\ See supra sectionVI.C.3.c.i.
---------------------------------------------------------------------------
We estimate the lower and upper bound of total aggregate annual
monetized benefit to be approximately $54.2 million and $77.0 million,
respectively.
Table 13--Aggregate Monetized Benefits
[2025 Dollars]
----------------------------------------------------------------------------------------------------------------
Lower bound of Upper bound of Lower bound of Upper bound of
annual annual Estimated aggregate aggregate
benefit per benefit per number of annual benefit annual benefit
entity entity entities (millions) (millions)
(A) (B) (C) (D) (E)
[(A) x (C)] [(B) x (C)]
----------------------------------------------------------------------------------------------------------------
Exchange........................ \a\ $381,000 \b\ $699,000 \c\ 20 \d\ $7.6 \e\ $14.0
ATS............................. \f\ 190,000 \g\ 350,000 \h\ 33 \i\ 6.3 \j\ 11.5
BD with SOR connecting to 16 or \k\ 190,000 \l\ 350,000 \m\ 23 \n\ 4.4 \o\ 8.0
more exchanges.................
BD with SOR connecting to 11 to \p\ 85,000 \q\ 140,000 \r\ 21 \s\ 1.8 \t\ 2.9
15 exchanges...................
BD with SOR connecting to 1 to \u\ 47,000 \v\ 63,000 \w\ 169 \x\ 8.0 \y\ 10.7
10 exchanges...................
OTC market maker................ \z\ 47,000 \aa\ 63,000 \ab\ 225 \ac\ 10.6 \ad\ 14.3
-------------------------------- -------------------------------
BD with SORs.................... \ae\ 26,000 \af\ 213 \ag\ $5.6
-------------------------------- -------------------------------
BD disconnecting from exchange.. \ah\ $498,000 \ai\ 4-20 \aj\ $10.0
-------------------------------------------------------------------------------
Total....................... .............. .............. .............. \ak\ $54.2 \al\ $77.0
----------------------------------------------------------------------------------------------------------------
Notes:
\a\ $30,996 + $30,996 + $318,552 = $380,544. See supra notes 577, 667, and 692.
\b\ $30,996 + $30,996 + $637,104 = $699,096. See supra notes 577, 667, and 692.
\c\ See supra note 578.
\d\ $380,544 x 20 = $7,610,880.
\e\ $699,096 x 20 = $13,981,920.
\f\ $30,996 + $159,276 = $190,272. See supra notes 577 and 693.
\g\ $30,996 + $318,552 = $349,548. See supra notes 577 and 693.
\h\ See supra note 578.
\i\ $190,272 x 33 = $6,278,976.
\j\ $349,548 x 33 = $11,535,084.
\k\ $30,996 + $159,276 = $190,272. See supra notes 577 and 694.
\l\ $30,996 + $318,552 = $349,548. See supra notes 577 and 694.
\m\ See supra note 694.
\n\ $190,272 x 23 = $4,376,256.
\o\ $349,548 x 23 = $8,039,604.
\p\ $30,996 + $54,324 = $85,320. See supra notes 577 and 695.
\q\ $30,996 + $108,648 = $139,644. See supra notes 577 and 695.
\r\ See supra note 695.
\s\ $85,320 x 21 = $1,791,720.
\t\ $139,644 x 21 = $2,932,524.
\u\ $30,996 + $16,182 = $47,178. See supra notes 577 and 696.
\v\ $30,996 + $32,364 = $63,360. See supra notes 577 and 696.
\w\ See supra note 696.
\x\ $47,178 x 169 = $7,973,082.
\y\ $63,360 x 169 = $10,707,840.
\z\ $30,996 + $16,182 = $47,178. See supra notes 577 and 697.
\aa\ $30,996 + $32,364 = $63,360. See supra notes 577 and 697.
\ab\ See supra note 697.
\ac\ $47,178 x 225 = $10,615,050.
\ad\ $63,360 x 225 = $14,256,000.
[[Page 36727]]
\ae\ $13,140 + $13,140 = $26,280. See supra notes 581 and 582.
\af\ See supra note 582.
\ag\ $26,280 x 213 = $5,597,640.
\ah\ $187,710 + $307,272 + $3,440 = $498,422. See supra notes 723, 724, and 725.
\ai\ We estimate that 4 to 20 distinct broker-dealers may disconnect from 5 exchanges. For example, the same 4
broker-dealers may disconnect from 5 exchanges, resulting in the total cost savings of $9,968,440 = ($498,422
x 5 exchanges) x 4 broker-dealers, or 20 distinct broker-dealers may disconnect, resulting in the total cost
savings of $9,968,440 = $498,422 x 20 broker-dealers. See supra section VI.C.3.c.i.
\aj\ $498,422 x 5 x 4 = $9,968,440.
\ak\ $7,610,880 + $6,278,976 + $4,376,256 + $1,791,720 + $7,973,082 + $10,615,050 + $5,597,640 + $9,968,440 =
$54,212,044.
\al\ $13,981,920 + $11,535,084 + $8,039,604 + $2,932,524 + $10,707,840 + $14,256,000 + $5,597,640 + $9,968,440 =
$77,019,052.
The one-time aggregate monetized cost is based on the following
sources: (i) costs associated with updating best execution policies and
procedures for broker-dealers that operate SORs due to the rescission
of Rule 611; \745\ (ii) costs associated with updating systems and
policies and procedures for exchanges, ATSs, OTC market makers, and
broker-dealers that operate SORs due to the rescission of Rule 611 and
Rule 610(e); \746\ and (iii) costs associated with modifying routing
practices for disconnecting broker-dealers due to the rescission of
Rule 611 and Rule 610(e).\747\ The annual aggregate monetized cost is
based on the loss in revenue from disconnections for five
exchanges.\748\
---------------------------------------------------------------------------
\745\ See supra section VI.C.1.b.
\746\ See supra section VI.C.3.b.
\747\ See supra section VI.C.3.ii.
\748\ See id.
---------------------------------------------------------------------------
We estimate that the total aggregate one-time monetized cost is
approximately $48.2 million and the total aggregate annual monetized
cost is approximately $6.2 million.
Table 14--Aggregate Monetized Costs
[2025 Dollars]
----------------------------------------------------------------------------------------------------------------
Estimated Aggregate one- Aggregate
One-time cost Annual cost number of time cost annual cost
per entity per entity entities (millions) (millions)
(A) (B) (C) (D) (E)
[(A) x (C)] [(B) x (C)]
----------------------------------------------------------------------------------------------------------------
Exchange........................ \a\ $389,000 .............. \b\ 20 \c\ $7.8 ..............
ATS............................. \d\ 195,000 .............. \e\ 33 \f\ 6.4 ..............
BD with SOR connecting to 16 or \g\ 195,000 .............. \h\ 23 \i\ 4.5 ..............
more exchanges.................
BD with SOR connecting to 11 to \j\ 90,000 .............. \k\ 21 \l\ 1.9 ..............
15 exchanges...................
BD with SOR connecting to 1 to \m\ 52,000 .............. \n\ 169 \o\ 8.7 ..............
10 exchanges...................
OTC market maker................ \p\ 52,000 .............. \q\ 225 \r\ 11.6 ..............
BD with SORs.................... \s\ 40,000 .............. \t\ 173 \u\ 6.9 ..............
BD disconnecting from exchange.. \v\ 17,000 .............. \w\ 4-20 \x\ 0.3 ..............
Exchange that experiences .............. \y\ 1,243,000 \z\ 5 .............. \aa\ 6.2
disconnection..................
-------------------------------------------------------------------------------
Total....................... .............. .............. .............. \ab\ 48.2 \ac\ 6.2
----------------------------------------------------------------------------------------------------------------
Notes:
\a\ See supra note 704.
\b\ See supra note 704.
\c\ $389,316 x 20 = $7,786,320.
\d\ See supra note 699.
\e\ See supra note 699.
\f\ $194,658 x 33 = $6,423,714.
\g\ See supra note 700.
\h\ See supra note 700.
\i\ $194,658 x 23 = $4,477,134.
\j\ See supra note 701.
\k\ See supra note 701.
\l\ $89,706 x 21 = $1,883,826.
\m\ See supra note 702.
\n\ See supra note 702.
\o\ $51,564 x 169 = $8,714,316.
\p\ See supra note 703.
\q\ See supra note 703.
\r\ $51,564 x 225 = $11,601,900.
\s\ See supra note 593.
\t\ See supra note 593.
\u\ $40,098 x 173 = $6,936,954.
\v\ See supra note 736.
\w\ See supra note 736.
\x\ $17,415 x 5 x 4 = $348,300.
\y\ See supra note 737.
\z\ See supra note 737.
\aa\ $1,242,848 x 5 = $6,214,240. This amount may include transfers. See supra note 737.
\ab\ $7,786,320 + $6,423,714 + $4,477,134 + $1,883,826 + $8,714,316 + $11,601,900 + $6,936,954 + $348,300 =
$48,172,464.
\ac\ See supra note aa.
[[Page 36728]]
b. Present Values and Annualized Values of Aggregate Monetized Benefits
and Costs
Consistent with the requirements of Executive Order 12866, the
Commission reports estimated total monetized benefits and costs for all
affected entities in two additional ways specified in OMB Circular A-
4.\749\ The two presentations are intended to address the fact that the
various benefits and costs of the proposed amendments would not accrue
at the same point in time; rather, benefits and costs that accrue
sooner are generally more valuable than those that occur later in
time.\750\
---------------------------------------------------------------------------
\749\ See Executive Order (E.O.) 12866 (Sept. 30, 1993), 58 FR
51735, 51741 (Oct. 4, 1993) (requiring agencies to provide an
analysis of benefits, costs, and regulatory alternatives to OIRA for
significant regulatory actions); OMB, Circular A-4, at 31-34, 45
(Sept. 17, 2003) (providing guidance to agencies regarding
compliance with E.O. 12866); see also E.O. 14215 (Feb. 18, 2025), 90
FR 10447, 10448 (Feb. 24, 2025) (requiring independent agencies to
comply with E.O. 12866). In addition, E.O. 14192 requires agencies
to provide their best approximation of the total costs or savings
associated with each new regulation or repealed regulation
consistent with the analyses required by E.O. 12866. See E.O. 14192
(Jan. 31, 2025), 90 FR 9065, 9066 (Feb. 6, 2025). For purposes of
approximating the total cost savings and costs under E.O. 14192, the
Commission uses the annualized monetized benefits and costs using a
real discount rate of 7 percent. See Table 16 and accompanying
discussion.
\750\ See Circular A-4, at 32.
---------------------------------------------------------------------------
We report (1) the present values of expected benefits and costs
that are monetized in our Economic Analysis, aggregated across all
affected entities, over a 10-year time horizon, starting in 2026, as
well as (2) the annualized values over the same time horizon that are
derived from the present values. This time horizon represents the
period over which the principal benefits and costs that are monetized
in the Economic Analysis are expected to accrue.\751\ The present
values and annualized values account for the timing of benefits and
costs through discounting, which is a procedure that accounts for the
time value of money.\752\
---------------------------------------------------------------------------
\751\ See id. at 31 (stating that ``[t]he ending point should be
far enough in the future to encompass all the significant benefits
and costs likely to result from the rule''). For the purposes of
this analysis, we assume the effective date of the amendments, as
well as the start year for the analysis's time horizon, is the
present year. The analysis uses calendar years and accounts for the
compliance periods included in the release (see note a in Table 15).
\752\ See id. at 32 (``The Rationale for Discounting'') & 45
(``Treatment of Benefits and Costs over Time''); see also OIRA,
Regulatory Impact Analysis: A Primer, at 11 (Aug. 15, 2011),
available at https://www.reginfo.gov/public/jsp/Utilities/circular-a-4_regulatory-impact-analysis-a-primer.pdf (``To provide an
accurate assessment of benefits and costs that occur at different
points in time or over different time horizons, an agency should use
discounting. Agencies should provide benefit and cost estimates
using both 3 percent and 7 percent annual discount rates expressed
as a present value as well as annualized.''); Harvey S. Rosen & Ted
Gayer, Public Finance 151 (8th ed. 2008) (defining present value as
``the value today of a given amount of money to be paid or received
in the future'').
---------------------------------------------------------------------------
Table 15 reports the present values of the aggregate monetized
benefits and costs from Tables 13 and 14, combining one-time and annual
monetized benefits and costs. The analysis uses annual real discount
rates of 3 percent and 7 percent over a 10-year time horizon, starting
in 2026.\753\ We estimate that the present value of total monetized
benefits is approximately between $469.3 million (lower bound) and
$666.8 million (upper bound) using a 3 percent discount rate and
approximately between $393.9 million (lower bound) and $559.6 million
(upper bound) using a 7 percent discount rate. We estimate that the
present value of total monetized costs is approximately $102.0 million
using a 3 percent discount rate and approximately $93.3 million using a
7 percent discount rate.
---------------------------------------------------------------------------
\753\ This approach is consistent with OMB Circular A-4. See
Circular A-4, at 31-34 (stating that, ``[f]or regulatory analysis,
[agencies] should provide estimates of net benefits using both 3
percent and 7 percent'' discount rates and discussing why those
rates are reasonable default rates). Also, we use a mid-year
discount rate. See OMB, Circular A-94, at 21-22 (Oct. 19, 1992)
(``When costs and benefits occur in a steady stream, applying mid-
year discount factors is more appropriate.'').
Table 15--Present Value of Aggregate Monetized Benefits and Costs Over 10 Years From 2026 to 2035
[2025 Dollars]
----------------------------------------------------------------------------------------------------------------
Estimated effects \a\ 3% Real discount rate 7% Real discount rate
----------------------------------------------------------------------------------------------------------------
Benefits (lower bound, millions).............................. $469.3 $393.9
Benefits (upper bound, millions).............................. 666.8 559.6
Costs (millions).............................................. 102.0 93.3
----------------------------------------------------------------------------------------------------------------
Notes:
\a\ The present values for aggregated monetized benefits represent the present values of annual aggregated
benefits of $54.2 million (lower bound) and $77.0 million (upper bound) per year (presented in Table 13) over
10 years using each of a 3 percent and 7 percent discount rate. The present values for aggregated monetized
costs represent the present values of one-time costs of $48.2 million and annual aggregated costs of $6.2
million per year (presented in Table 14) over 10 years using each of a 3 percent and 7 percent discount rate.
We assume that monetized benefits and costs accrue mid-year, and we use a mid-year discount rate.
Table 16 reports annualized aggregate monetized benefits and costs
using real discount rates of 3 percent and 7 percent over a 10-year
horizon.\754\ The lump sum present values of aggregate monetized
benefits and costs reported in Table 15 are converted in Table 16 into
a constant stream of annualized benefits and costs over a 10-year time
horizon, starting in 2026.\755\ Annualized benefits and costs may
differ from an aggregation of the recurring monetized annual benefits
and costs discussed earlier in the Economic Analysis because they
incorporate the timing of benefits and costs, through discounting, and
combine one-time and recurring benefits and costs.\756\ We estimate
that annualized total monetized benefits are approximately between
$54.2 million and $77.0 million per year using 3 and 7 percent discount
rate. The annualized total monetized benefits (in 2025 dollars) in
Table 16 are the same as the total monetized benefits (in 2025 dollars)
reported in Table 13 because there are no one-time benefits. We
estimate that annualized total monetized costs are approximately $11.8
million per year using a 3 percent discount rate and approximately
$12.8 million per year using a 7 percent discount rate. Because the
annualized costs are discounted and include both one-time and annual
costs, they should not be compared directly to the aggregate annual
monetized costs in Table 14.
---------------------------------------------------------------------------
\754\ This approach is consistent with the recommended treatment
of benefits and costs over time in Circular A-4. See id. at 45
(``You should present annualized benefits and costs using real
discount rates of 3 and 7 percent'').
\755\ For each discount rate, the annualized monetized benefits
(costs, respectively) in Table 16 represent the constant annual
stream of benefits (costs, respectively) whose present value over
the time horizon equates the corresponding present value in Table
15. See note a, Table 16 for additional calculation details.
\756\ The annualized benefits and costs present these values
over the 10-year time horizon, starting in the present year.
[[Page 36729]]
Table 16--Annualized Aggregate Monetized Benefits and Costsover 10 years From 2026 to 2035
[2025 Dollars]
----------------------------------------------------------------------------------------------------------------
Estimated effects \a\ 3% Real discount rate 7% Real discount rate
----------------------------------------------------------------------------------------------------------------
Benefits (lower bound, millions).............................. $54.2 $54.2
Benefits (upper bound, millions).............................. 77.0 77.0
Costs (millions).............................................. 11.8 12.8
----------------------------------------------------------------------------------------------------------------
Notes:
\a\ For each discount rate, the annualized values are calculated by dividing the corresponding present values in
Table 15 by the sum of discount factors over the time horizon. The discount factor in year t of the time
horizon is equal to 1/(1 + discount rate) (-\0.5\).
D. Effect on Efficiency, Competition, and Capital Formation
1. Efficiency
The rescission of Rule 611 could have competing effects on
efficiency, although the net effect is likely to be an improvement in
efficiency. On one hand, the rescission of Rule 611 could increase the
efficiency of order routing by removing the restriction Rule 611
imposes on how orders are routed. This effect would increase price
efficiency by reducing frictions to trading that could slow the speed
at which information is incorporated into prices. On the other hand,
the rescission of Rule 611 could harm price efficiency to the extent
that it leads to a reduction in displayed quotes, although this effect
is expected to be relatively small.\757\ Thus, the overall effect of
rescinding Rule 611 on market efficiency is likely to be an improvement
in efficiency.
---------------------------------------------------------------------------
\757\ See text surrounding supra note 587 for a discussion of
the effects of the rescission of Rule 611 on liquidity provision,
and for a discussion of why those effects are expected to be
relatively minor.
---------------------------------------------------------------------------
The removal of the prohibition on locked and crossed markets is
expected to improve liquidity for some stocks.\758\ An improvement in
liquidity is associated empirically with improved price
efficiency.\759\ Thus, to the extent that some stocks experience an
improvement in liquidity due to rescinding Rule 610(e), these stocks
could experience an improvement in price efficiency.
---------------------------------------------------------------------------
\758\ See supra section VI.C.2.a.
\759\ See, e.g., Tarun Chordia, et al., Liquidity and Market
Efficiency, 87 J. Fin. Econ. 249 (2008).
---------------------------------------------------------------------------
2. Competition
a. Competition in the Market for Trading Services
The rescission of Rule 611 is expected to increase competition
among trading centers, because exchanges would no longer be able to
attract order flow away from non-exchange trading centers by having a
protected quote. Consequently, there is likely to be an increase in
innovation of trading protocols as exchanges search for other means of
attracting order flow. To the extent that these innovations improve the
trading experience or execution quality on exchanges, they may also
improve liquidity and lead to more volume executing on exchanges.
b. Competition Between Exchanges
Rescinding Rules 611 and 610(e) may increase competitive pressure
among exchanges. This is because one of the anticipated effects of
rescinding Rule 611 is that if small exchanges cannot provide
sufficient value to justify the price of their connectivity products,
then they may see the number of market participants that connect to
them shrink. With the rescission of Rule 611, broker-dealers can
disconnect from an exchange, or not connect to a new exchange, and not
suffer the interference cost when routing orders. This may mean fewer
broker-dealers consider it worthwhile connecting to such exchanges or
utilizing the full set of exchange products they currently
purchase.\760\ In economic terms, these effects reduce demand for
exchange products, which lowers broker-dealers' willingness to pay for
them, unless the exchange offers enough value to justify the price.
These effects would increase competition among exchanges leading to
lower prices and increased innovation in exchange services.
---------------------------------------------------------------------------
\760\ See supra section VI.C.3.c.i, further discussing these
changes in broker-dealer connections.
---------------------------------------------------------------------------
As a result of this increased competition, smaller exchanges may
lose volume or exit the market if some market participants disconnect.
It could also be difficult for new exchanges to enter the market or
gain market share because fewer market participants may choose to
connect. Further, to the extent that the number of market participants
connected to the exchange diminishes, activity on that exchange would
also diminish, resulting in a reduction in liquidity available on that
exchange. This, in turn, would lead to a further reduction in the value
of that exchange, further reducing its membership. This phenomenon may
make it difficult for small exchanges to persist unless they can
differentiate themselves. It may also make it more difficult for new
exchanges to start and to acquire market share. Consequently, there may
be a reduction in the overall number of exchanges, or a reduction in
the rate of entry of new exchanges to the market. The exchanges that
remain may need to compete more on execution quality and innovate new
features to attract order flow. In order to avoid losing customers and
liquidity, exchanges, particularly small or new ones, might charge
lower fees for market data and connectivity.
However, a substantial portion of the cost to broker-dealers of
connecting to an exchange is in the initial new connection costs, which
are already paid for existing connections, so it may be the case that
few broker-dealers disconnect.\761\
---------------------------------------------------------------------------
\761\ See supra section VI.B.5.b.
---------------------------------------------------------------------------
c. Competition Between Exchanges and Off-Exchange Venues
The Proposal's impact on competition between on- and off-exchange
trading venues is uncertain. On the one hand, the rescission of 610(e)
may improve liquidity on exchanges for some stocks, which would make
exchanges relatively more attractive places to transact and lead more
order flow onto exchanges.\762\ Further, to the extent that Rule 611
reduces the efficiency of routing orders on exchanges, rescinding Rule
611 could further make exchanges relatively more attractive venues.
Market fragmentation may thus decrease, to the extent that displayed
liquidity fragmentation decreases.
---------------------------------------------------------------------------
\762\ See supra section VI.C.2.a. (discussing on and off
exchange order flow).
---------------------------------------------------------------------------
On the other hand, the proposal, if adopted, may lead institutional
investors to execute more large orders off exchange. This could occur
because Rule 611 may hinder block trades by restricting trades from
occurring outside protected quotes. The rescission of Rule 611 may
enable large block trades to occur at off-exchange venues at prices
that, while potentially advantageous to the traders, would occur
outside of the NBB or NBO prices on exchanges. This
[[Page 36730]]
could potentially improve the competitive position of off-exchange
venues. As a result of these competitive dynamics, the proposal could
result in an increase in innovation for both on- and off-exchange
venues.
If the proposal is adopted, broker dealers may connect to new ATSs
before connecting to new exchanges because they may feel less
obligation to connect to all exchanges to ensure that they can access
all protected quotes. This may lead to new ATSs experiencing more
growth and exchanges experiencing less growth. This could also result
in an increase in innovation from exchanges, in order to try to retain
their current growth.
The lack of restrictions on executions that would result from
rescinding Rule 611 may result in increased innovation opportunities
for ATSs as well.
d. Competition for Broker Execution Services
The Proposal may lead to an increase in competition for executing
broker services, as it may result in lower fixed costs to becoming an
executing broker. This would occur to the extent that broker-dealers do
not need to connect to as many market centers to be competitive, or it
could occur to the extent that competitive pressures drive market data
and connectivity fees lower. Lower fixed costs would reduce the
barriers to entry and increase competition for order flow in the market
for broker execution services. This effect may be mitigated to the
extent that competitive pressure in the market for broker execution
services does not allow brokers to reduce the number of connections to
market centers.
The rescission may reduce the concentration in the broker-dealer
industry because broker-dealers may face lower costs.\763\. Because
there may be fewer new exchanges, and new exchanges that do enter may
wait longer to charge fees for data and connectivity, the trend of
rising data and connectivity costs may slow. Additionally, existing
exchanges could lower their prices for data and connectivity. Also,
broker-dealers may decide not to connect to some exchanges, and thus
the costs, especially the upfront costs, of being an executing broker-
dealer may decrease.\764\ The Commission believes that high-volume
brokers may continue to be better positioned competitively compared to
small broker-dealers, in part because broker-dealers compete in other
dimensions, such as by offering additional services bundled with
execution. High-volume broker-dealers will likely continue to connect
to all or almost all exchanges and invest in the most sophisticated
technology that allows them to minimize transaction costs and maximize
execution quality.
---------------------------------------------------------------------------
\763\ See supra sections VI.C.3.a. and VI.C.3.c. The broker-
dealer industry continues to be competitive, but it is the
Commission's belief that the industry may become less competitive if
the broker-dealer industry continues the trend of increasing
concentration.
\764\ See First TTR Transcript at 172-3 (Adam Nunes, Hudson
River Trading).
---------------------------------------------------------------------------
e. Competition for Liquidity Provision
Removing the prohibition on locked and crossed markets is expected
to increase competition for liquidity provision by making it easier for
liquidity providers to compete on price. Allowing locked and crossed
markets means that if a liquidity provider sees a profitable
opportunity to provide liquidity, but such provision would lock or
cross the market, it would be able to post the quote at the desired
price. This increased competition to provide liquidity could improve
efficiency and liquidity on exchanges, which could allow exchanges to
better compete with off-exchange market makers for order flow, as
extant research suggests that improved market quality on exchanges is
associated with more volume being routed to exchanges.\765\
---------------------------------------------------------------------------
\765\ See, e.g., Albert J. Menkveld et al., Shades of Darkness:
A Pecking Order of Trading Venues, 124 J. Fin. Econ. 503 (2017).
---------------------------------------------------------------------------
3. Capital Formation
To the extent that the Proposal results in improved liquidity, or
improved price efficiency, it could improve capital formation because
both factors are associated with a decrease in the cost of capital. By
standard economic arguments, investors must be compensated for risk.
Liquidity risk is the risk that a stock may be illiquid when investors
need to liquidate. Investors are compensated for this risk in the form
of higher returns which imply a higher cost of capital. As liquidity
risk diminishes, the compensation that investors need to hold the stock
declines, which implies a lower cost of capital. Thus, to the extent
that liquidity improves, the cost of capital may decline for stocks
experiencing improved liquidity.\766\
---------------------------------------------------------------------------
\766\ See, e.g., Yakov Amihud & Haim Mendelson, Asset Pricing
and the Bid-Ask Spread, 17 J. Fin. Econ. 223 (1986);
[Lcaron]ubo[scaron] P[aacute]stor & Robert F. Stambaugh, Liquidity
Risk and Expected Stock Returns, 111 J. Pol. Econ. 642 (2003).
---------------------------------------------------------------------------
Similarly, mispricing risk is the risk that a stock is not priced
in accordance with its fundamental value. Investors must be compensated
for this risk in the form of a higher cost of capital. Thus, to the
extent that the Proposal improves price efficiency for some stocks it
can reduce the cost of capital for these stocks.\767\
---------------------------------------------------------------------------
\767\ See, e.g., Michael J. Brennan & Ashley W. Wang, The
Mispricing Return Premium, 23 Rev. Fin. Stud. 3437 (2010).
---------------------------------------------------------------------------
A lower cost of capital facilitates capital formation by making
investment easier for firms, and thus to the extent that the proposal
improves liquidity or price efficiency it can facilitate capital
formation.
E. Reasonable Alternatives
1. Venue Trading Volume Threshold for Protected Quotes
As an alternative to rescinding Rule 611, the Commission could
consider a minimum volume threshold requirement for an automated
trading center to qualify for having a protected quote under Rule 611.
Under this alternative, an automated trading center would be required
to have an average daily dollar trading volume of a certain percentage
or more of the aggregate average daily dollar volume for all NMS stocks
as reported by an effective transaction reporting plan over a set
period, e.g., during four out of the preceding six calendar months. The
volume threshold across all NMS stocks, and not merely for a single NMS
stock, is designed to help ensure that the automated trading center has
a large enough market share to support the costs associated with the
requirements to connect and route to the automated trading center to
prevent trading-through its protected quote. Quotes from automated
trading centers below the threshold would continue to be disseminated
via the SIP and could contribute to the NBBO for transparency and
benchmarking purposes, but they would not be protected. Brokers would
not be required to route to those automated trading centers to avoid
trade-throughs, and intermarket sweep order (ISO) obligations would not
attach with respect to their displayed prices.
We believe that both the benefits and costs of this alternative
would be lower than those of the Proposal. Trading centers and broker-
dealers would experience lower one-time implementation costs to
reprogram systems under this alternative. However, the reduction in
their ongoing compliance costs and the ongoing reduction in costs they
experience from simplified maintenance and updates of their order
execution and SOR systems would be smaller. They would still have to
maintain policies and procedures and programming logic to prevent
trading through protected quotes on automated trading centers that meet
the volume
[[Page 36731]]
threshold. Additionally, they may have to make updates to their systems
to track which automated trading centers have protected quotes and
which ones do not. Therefore, market complexity may not be
significantly reduced under this alternative compared to the Proposal.
There would potentially be a smaller increase in the trade-through
rate of displayed limit orders compared to the Proposal, which could
potentially lead to less of a reduction in displayed liquidity and less
investor confusion. Maintaining order protection at larger exchanges
may also reduce the migration of order flow to off-exchange venues,
because market participants would still be required to interact with
the protected quotes on these exchanges before trading at worse prices
off exchange.
Institutional investors could experience a smaller increase in the
execution quality of their large orders compared to the Proposal.
Although their orders could ignore the displayed quotes on smaller
automated trading centers, they would still need to execute against the
displayed quotes on protected trading centers before ``walking the
book'' on an exchange or trading outside the protected quotes off
exchange. This may increase their price impact and information leakage
relative to the Proposal, which could increase the overall execution
cost of the larger parent order.
Under this alternative, larger exchanges may gain more of a
competitive advantage over smaller exchanges and the barriers to entry
for new exchanges may be higher compared to the Proposal. Market
participants would not be able to trade through protected quotes at
larger exchanges, even if a smaller exchange offered better overall
execution quality for an order. This may make market participants less
likely to disconnect from larger exchanges and more likely to
disconnect from smaller, unprotected exchanges. Additionally, new
exchanges would have to wait for a period of at least four months to
qualify for a protected quote after they initially hit the volume
threshold. Compared to the Proposal, this may reduce the incentives for
market participants to connect to a new exchange when it firsts starts,
raising the barriers to entry.
The Commission could vary the costs and benefits of this
alternative by varying the market volume threshold, which would
increase or decrease the number of automated trading centers that
qualify to have a protected quote. For example, if the Commission set
the threshold at 1% of average dollar volume, then 7 exchanges would
have a protected quote under this alternative.\768\ If the Commission
set the threshold higher, e.g., 2% of average dollar volume, then only
6 exchanges would have a protected quote. A higher threshold would
result in this alternative having benefits and costs more similar to
the Proposal, while a lower threshold would result in lower benefits
and costs compared to the Proposal.
---------------------------------------------------------------------------
\768\ This estimate is based on CBOE Market Volume Data from
September 2025-February 2026. Exchanges were identified as being
eligible for a protected quote if their average daily dollar trading
volume was 1% or more of the average daily dollar market trading
volume during at least four of the six months in the sample period.
See supra note 442 for more information in CBOE Market Volume data.
---------------------------------------------------------------------------
2. Large Trade Exception From Rule 611
As an alternative to rescinding Rule 611, the Commission could
consider adding an exception to Rule 611 for large trades of
institutional size. This exception would give trading centers and
broker-dealers more flexibility to negotiate large block crosses that
do not fit one of the other current exceptions to Rule 611, such as
trades executed at benchmark prices (e.g., VWAP or TWAP) or block
crosses executed with an ISO sweep of protected quotes.
Under this alternative, market participants would not experience
most of the costs and benefits discussed in the Proposal. Institutional
investors would experience some improvement in the execution quality of
their large orders compared to the baseline, but it would be less
improvement than they would experience under the Proposal (i.e.,
institutional investors would experience lower execution quality in
this alternative compared to the Proposal). Institutional orders would
have less flexibility in executing child orders, because smaller child
orders would still be limited in their ability to trade through
protected quotes. This may result in higher price impact and greater
information leakage compared to the Proposal. Additionally, trading
centers and broker dealers may incur costs to modify their systems to
incorporate the new exception, but these costs would be small compared
to the costs of the systems modifications they would make under the
Proposal.
3. Only Rescind Locked Market Prohibition, Keep Prohibition on Crossed
Markets.
The Commission could rescind only the prohibition on locked
markets, while leaving in place the prohibition on crossed markets. Due
to the existence of rebates, a stock that has a zero quoted spread,
i.e., a stock with a locked market, may be an economically competitive
and stable outcome since the liquidity providers may still earn the
rebate on a maker/taker exchange resulting in an economic spread that
is greater than zero. Compared to the Proposal, this alternative could
have the benefit of reducing any confusion associated with crossed
markets, while still providing an improved pricing lattice, relative to
the baseline, on which liquidity providers can transact.
This alternative would also be associated with lower benefits in
terms of reduced ongoing compliance costs for broker-dealers and for
exchanges compared to the Proposal. This is because prohibiting crossed
markets but allowing locked markets would require exchanges and broker-
dealers to modify existing systems that currently ensure compliance
with the prohibition on locked and crossed markets, but they could not
do away with such systems entirely as would be the case with the
Proposal. Keeping these systems in place, even if modifying them to
allow for locked markets but prohibiting crossed markets, would not be
expected to result in the reduction of significant compliance costs.
F. Request for Comment
34. Do commenters agree with the Commission's qualitative and
quantitative baseline descriptions of the economic effects of Rule 611,
Rule 610(e), and the structure of trading for NMS stocks? Why or why
not?
35. How do trading centers and broker-dealers routing orders
surveil for compliance with Rule 611? How does this vary based on the
size of the trading center or broker-dealer? To what degree is this
integrated with surveillance for compliance with other SEC or SRO
rules? Please explain. Please provide estimates of the costs trading
centers and broker-dealers incur to surveil for compliance with Rule
611. To what degree are these costs separate or integrated with the
costs associated with surveillance for compliance with other SEC or SRO
rules?
36. Do commenters agree with the Commission's baseline description
of exchange policies and procedures for posting odd-lot and round-lot
quotes that may lock or cross a protected quote? Why or why not? Please
explain.
37. Do commenters agree with the Commission's baseline description
of how exchanges, ATSs, and SDPs handle executions when the NBBO is
locked or crossed? Why or why not? Please explain.
38. Do commenters agree with the Commission's assessment of how
Rule
[[Page 36732]]
611 impacts the handling of institutional orders? How does Rule 611
affect the execution costs of institutional orders? How do the
exceptions to Rule 611 impact the costs of executing institutional
orders? Please provide conceptual and quantitative context.
39. Do commenters agree with the Commission baseline description of
the price improvement wholesalers provide to marketable retail orders?
Why or why not? Please explain.
40. Do commenters agree with the Commission baseline description of
how wholesalers handle and internalize marketable retail orders? Why or
why not? Please explain.
41. Do commenters agree with the Commission baseline description of
how retail brokers evaluate and route orders to wholesalers? Why or why
not? Please explain.
42. Do commenters agree with the Commission baseline description of
the effects Rule 611 has on how wholesalers handle and execute
marketable and non-marketable retail orders? Why or why not? Please
explain.
43. Do commenters agree with the Commission baseline description of
the effects Rule 611 has on displayed liquidity? Why or why not? Please
explain.
44. Do commenters agree with the Commission baseline description of
the effects Rule 611 and Rule 610(e) have on market complexity? Why or
why not? Please explain.
45. Do commenters agree with the Commission's estimates of the cost
to subscribe to market data from all exchanges? Why or why not? Please
explain and provide conceptual and quantitative context.
46. Do commenters agree with the Commission's assumption that
market participants would have about 2 use cases for market data? Why
or why not? Please explain and provide conceptual and quantitative
context.
47. Do commenters agree with the estimate by a commenter of
$200,000 ongoing maintenance costs per exchange and $1.5 million
upfront costs to connect to a new exchange? Why or why not? Please
explain and provide conceptual and quantitative context.
48. Do commenters have an estimate of the ``interference cost''
from not connecting to an exchange currently?
49. How has Rule 611 affected the fragmentation of displayed
liquidity? How have other factors, such as exchange proliferation,
technological advances and electronification of trading, changes in
transaction costs, SIP revenue allocation, the SRO rule filing process,
etc., affected the fragmentation displayed liquidity? Please explain
and provide conceptual and quantitative context.
50. How has Rule 611 affected overall market fragmentation,
including off-exchange trading? How have other factors, such as
exchange proliferation, technological advances and electronification of
trading, changes in transaction costs, SIP revenue allocation, the SRO
rule filing process, etc., affected overall market fragmentation,
including off-exchange trading? Please explain and provide conceptual
and quantitative context.
51. How have Rule 611 and Rule 610(e) affected exchange innovation?
How have other factors, such as fair access requirements, limitations
on segmentation, the SRO rule filing process, etc., affected exchange
innovation? Please explain and provide conceptual and quantitative
context.
52. Do commenters agree with the Commission's assessment of the
benefits and costs of the rescission of Rule 611? Why, or why not?
Please explain.
53. Do commenters agree with the Commission's assessment of the
compliance costs savings for trading centers and broker-dealers
operating SORs from rescinding Rule 611? Why, or why not? Please
explain and provide estimates of these cost savings.
54. Do commenters agree with the Commission's assessment that
rescinding Rule 611 will reduce institutional investor execution costs?
What will be the magnitude of any reduction in institutional investor
execution costs if Rule 611 is rescinded? Please explain and provide
conceptual and quantitative context.
55. Will there be an increase in the rate that institutional orders
trade through the NBBO if Rule 611 is rescinded? If so, how much will
the trade-through rate increase? Please explain and provide conceptual
and quantitative context.
56. Do commenters agree with the Commission's assessment of the
effects rescinding Rule 611 will have on the execution quality of
marketable retail orders? Why, or why not? Please explain and provide
conceptual and quantitative context.
57. Do commenters agree with the Commission's assessment of the
effects rescinding Rule 611 will have on the execution quality of non-
marketable retail orders? Why, or why not? Please explain and provide
conceptual and quantitative context.
58. Do commenters agree with the Commission's assessment of the
effects rescinding Rule 611 will have on displayed liquidity? Why, or
why not? Please explain and provide conceptual and quantitative
context.
59. Do commenters believe more trading will occur off exchange if
Rule 611 is rescinded? Why, or why not? Please explain and provide
conceptual and quantitative context.
60. Do commenters agree with the Commission's assessment of the
benefits and costs of the rescission of Rule 610(e)? Why, or why not?
Please explain.
61. Do commenters agree with the Commission's assessment of the
compliance costs savings for exchanges and broker-dealers operating
SORs from rescinding Rule 610(e)? Why, or why not? Please explain and
provide estimates of these cost savings.
62. Does the Economic Analysis in this release account for all
compliance costs? If not, what other compliance costs would market
participants or exchanges incur? Please provide estimates of the
additional compliance costs that you believe should be considered.
63. Do commenters agree with our assessment that rescinding Rule
611 and Rule 610(e) will reduce market complexity? Why, or why not?
Please explain and provide conceptual and quantitative context.
64. Will rescinding Rule 611 increase exchange innovation? Will
rescinding Rule 611 increase ATS innovation? Why, or why not? Please
explain and provide conceptual and quantitative context.
65. Do commenters agree with our assessment that rescinding Rule
611 and Rule 610(e) will reduce the time it takes trading centers and
broker dealers with SORs to regularly update their trade execution and
SOR systems? Is the Commission's estimate that it will reduce the time
to update these systems by 5%-10% reasonable? If not, how much time
will it save? Do commenters agree with our estimates of the annual
savings this will provide to exchanges, ATSs, OTC market makers, and
broker-dealers operating SORs? Why, or why not? Please explain and
provide estimates of these cost savings.
66. Do commenters agree with our assessment of the implementation
costs trading centers and broker-dealers with SOR systems will incur if
Rule 611 and Rule 610(e) are rescinded? Why, or why not? Please explain
and provide estimates of these implementation costs.
67. Do commenters agree with our estimate of the costs to maintain
a SOR associated with one exchange? Why or why not? Please explain.
68. Do commenters think that prices for market data and
connectivity may decrease? By how much? Do commenters think that new
exchanges will charge lower prices for longer?
[[Page 36733]]
69. Will broker-dealers update their best execution policies and
procedures if Rule 611 is rescinded? If so, how many broker-dealers
will update their best execution policies and procedures? Do you agree
with the Commission's estimate of how much it will cost each broker-
dealer that chooses to update their best execution policies and
procedures? Why or why not? Please explain and provide estimates of
these costs.
70. Do commenters agree that third-party vendors may gain revenue?
Do commenters agree that the gain in revenue as a result of users
subscribing to more third-party vendors (rather than disconnecting from
exchanges) would be larger than the loss of revenue as a result of
users that currently subscribe to third-party vendors disconnecting
from exchanges?
71. Do commenters agree that disconnections may occur at small
independent exchanges and with our estimate of the number of broker-
dealers that will disconnect from exchanges and discontinue exchange
memberships as a result of the proposed amendments, and our estimate of
the resulting economic effects? Why or why not?
72. Do commenters believe that broker-dealers may modify their
market activity by trading more or less on some exchanges to which they
maintain a connection? Why or why not?
73. Do commenters agree that displayed liquidity fragmentation may
decrease? Why or why not?
74. Do commenters agree that no exchanges will exit and that new
exchanges may still enter, but that new and small exchanges may have
more difficulty gaining market share? Why or why not?
75. Do commenters agree with our estimate of the cost to modify
SORs following a disconnection?
76. Does the Economic Analysis in this release account for all
relevant costs? If not, which other costs should the economic analysis
consider? Please provide estimates of additional costs, other than
compliance costs, that you believe should be considered.
77. Do commenters agree with the Commission's assessment of how the
Proposed Rule would impact efficiency, competition, and capital
formation? Why, or why not? Please explain.
78. Do commenters agree with the Commission's analysis of the
benefits and costs of the reasonable alternatives to the Proposed Rule?
Why, or why not? Please explain.
79. Are there any additional reasonable alternatives the Commission
should consider? If so, please describe that alternative and provide
the benefits and costs of that alternative relative to the baseline and
to the proposal.
80. If SROs rescinded their own rules relating to locked and
crossed market prohibitions, what would the reduction in compliance
costs be for SROs and other market participants? Are there other SRO
rules that should be rescinded or modified if Rule 610(e) is rescinded?
VII. Regulatory Flexibility Act Certification
The Regulatory Flexibility Act (``RFA'') \769\ requires Federal
agencies, in promulgating rules, to consider the impact of those rules
on small entities. Section 603(a) \770\ of the Administrative Procedure
Act,\771\ as amended by the RFA, generally requires the Commission to
undertake a regulatory flexibility analysis of all proposed rules, or
proposed rule amendments, to determine the impact of such rulemaking on
``small entities.'' \772\ Section 605(b) of the RFA states that this
requirement shall not apply to any proposed rule or proposed rule
amendment which, if adopted, would not have a significant economic
impact on a substantial number of small entities.\773\
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\769\ 5 U.S.C. 601 et seq.
\770\ 5 U.S.C. 603(a).
\771\ 5 U.S.C. 551 et seq.
\772\ Although section 601(b) of the RFA defines the term
``small entity,'' the statute permits agencies to formulate their
own definitions. The Commission has adopted definitions for the term
``small entity'' for purposes of Commission rulemaking in accordance
with the RFA. Those definitions, as relevant to this proposed
rulemaking, are set forth in 17 CFR 240.0-10 (``Rule 0-10'').
\773\ See 5 U.S.C. 605(b).
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The Commission is proposing to rescind Rule 611 and Rule 610(e).
Rescinding Rule 611 would eliminate requirements for trading centers,
which includes national securities exchanges, NMS stock ATSs, exchange
market makers, OTC market makers, and other broker-dealers executing
orders internally by trading as principal or crossing orders as agent.
The rescission would also result in non-trading center broker-dealers
that operate SORs no longer using ISOs and vendors making systems
modifications to support the rescission of Rule 611. Rescinding Rule
610(e) would remove the rule's requirements for national securities
exchanges and national securities associations.
For purposes of Commission rulemaking in connection with the RFA,
the Commission's definition of a small entity includes an exchange that
has been exempt from the reporting requirements of 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.\774\ Applying this test, no national securities exchange
is a small entity. The only national securities association is also not
a ``small entity.'' \775\
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\774\ See 17 CFR 240.0-10(e) (providing that when used with
reference to an exchange, means any exchange that: (1) has been
exempted from the reporting requirements of Rule 601; and (2) is not
affiliated with any person (other than a natural person) that is not
a small business or small organization); see also 17 CFR 240.0-10(i)
(providing that a person is affiliated with another person if that
person controls, is controlled by, or is under common control with
such other person; and a person shall be deemed to control another
person if that person has the right to vote 25% or more of the
voting securities of such other person or is entitled to receive 25%
or more of the net profits of such other person or is otherwise able
to direct or cause the direction of the management or policies of
such other person).
\775\ See 13 CFR 121.201.
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For purposes of Commission rulemaking in connection with the RFA, a
small entity includes a broker or dealer that: (1) had total capital
(net worth plus subordinated liabilities) of less than $500,000 on the
date in the prior fiscal year as of which its audited financial
statements were prepared pursuant to Rule 17a-5(d) under the Exchange
Act,\776\ or, if not required to file such statements, a broker-dealer
with total capital (net worth plus subordinated liabilities) of less
than $500,000 on the last business day of the preceding fiscal year (or
in the time that it has been in business, if shorter); and (2) is not
affiliated with any person (other than a natural person) that is not a
small business or small organization.\777\ Applying this test and based
on a review of data relating to broker-dealers,\778\ the Commission
estimates, as discussed below, that of the 312 trading centers that are
broker-
[[Page 36734]]
dealers and currently subject to Rule 611, only one would be a ``small
entity'' and also in the scope of the rules the Commission is proposing
to rescind.\779\ With respect to non-trading center broker-dealers, the
Commission estimates that none of the broker-dealers operating SORs and
using ISOs to comply with Rule 611 would be small entities for purposes
of the RFA.\780\
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\776\ 17 CFR 240.17a-5(d).
\777\ See 17 CFR 240.0-10(c); see also 17 CFR 240.0-10(i)
(providing that a broker or dealer is affiliated with another person
if: such broker or dealer controls, is controlled by, or is under
common control with such other person; a person shall be deemed to
control another person if that person has the right to vote 25% or
more of the voting securities of such other person or is entitled to
receive 25% or more of the net profits of such other person or is
otherwise able to direct or cause the direction of the management or
policies of such other person; or such broker or dealer introduces
transactions in securities, other than registered investment company
securities or interests or participations in insurance company
separate accounts, to such other person, or introduces accounts of
customers or other brokers or dealers, other than accounts that hold
only registered investment company securities or interests or
participations in insurance company separate accounts, to such other
person that carries accounts on a fully disclosed basis).
\778\ The Commission considered FOCUS data and information about
broker-dealers made publicly available by FINRA through reports
available at https://brokercheck.finra.org/.
\779\ At the time Rules 611 and 610(e) were adopted, the
Commission certified that these rules would not have a significant
economic impact on a substantial number of small entities. See NMS
Adopting Release at 37598-99.
\780\ The Commission has based this estimate on data from the
consolidated audit trail for November 2025.
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With respect to vendors, as defined in Rule 600(b)(111),\781\ a
``small entity'' includes a securities information processor that: (1)
had gross revenues of less than $10 million during the preceding fiscal
year (or in the time it has been in business, if shorter); (2) provided
service to fewer than 100 interrogation devices or moving tickers at
all times during the preceding fiscal year (or in the time that it has
been in business, if shorter); and (3) is not affiliated with any
person (other than a natural person) that is not a small business or
small organization under this section.\782\ The Commission estimates
that 13 of the 80 vendors including data related to Rule 611 would be
small entities for purposes of the RFA.
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\781\ Regulation NMS Rule 600(b)(11) defines vendor as any
securities information processor engaged in the business of
disseminating transaction reports, last sale data, or quotations
with respect to NMS securities to brokers, dealers, or investors on
a real-time or other current and continuing basis, whether through
an electronic communications network, moving ticker, or
interrogation device.
\782\ 17 CFR 240.0-10(g).
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Based on this analysis, the Commission believes that rescission of
these rules, and the amendments to rules to remove definitions and
administrative rules relevant to Rules 611 and 610(e),\783\
correspondingly would not have a significant impact on a substantial
number of small entities.
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\783\ These changes include proposed rescission of Rule
600(b)(105), defining ``trade-through''; Rule 600(b)(81), defining
``protected bid or protected offer''; Rule 600(b)(82), defining
``protected quotation''; Rule 600(b)(54), defining ``manual
quotation''; Rules 600(b)(6) and (7), which define the terms
``automated quotation'' and ``automated trading center,''
respectively; and Rule 600(b)(47), which defines the term
``intermarket sweep order''; removing ``protected quotation'' from
Rule 610(c) of Regulation NMS; and changing two administrative rules
to: (1) remove paragraph (82) from Rule 30-3, which delegates to the
Director the ability to grant or deny exemptions from Rule 611
pursuant to Rule 611(d); and (2) remove references to Rule 611 and
its related OMB control number from Rule 800, which sets forth the
current control numbers assigned to information collection
requirements of the Commission by the Office of Management and
Budget pursuant to the Paperwork Reduction Act of 1995. See section
IV.B.2.
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The Commission is also proposing to amend the definition of ``core
data'' in Rule 600(b)(26) to eliminate the reference to ``protected bid
and protected offer'' and the definition of ``regulatory data'' in Rule
600(b)(89) to eliminate the reference to ``trade-through exempt
indicators.'' \784\ The Commission added these definitions in
connection with the adoption of market data infrastructure rules.\785\
The Commission certified that the adopted rules would not have a
significant economic impact on a substantial number of small entities
for purposes of the RFA for the reason that none of the entities
subject to the adopted rules were small entities.\786\ As a result, the
Commission preliminarily estimates that none of the entities that would
be affected by the elimination of terms related to Rules 611 and 610(e)
from the definitions of ``core data'' and ``regulatory data'' are small
entities.
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\784\ See supra section IV.B.2.
\785\ See Market Data Infrastructure Adopting Release.
\786\ See id. at 18808-09. See also 17 CFR 240.0-10(e) and (g).
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The Commission also proposes to amend Rule 15c3-5 to remove the
language excepting a broker-dealer routing orders for the purpose of
accessing other trading centers with protected quotations in compliance
with Rule 611 from the requirements of the rule. The Commission
preliminarily estimates that none of the broker-dealers that route
orders to comply with Rule 611 are small entities \787\ for the
purposes of the Regulatory Flexibility Act.
---------------------------------------------------------------------------
\787\ 17 CFR 240.0-10(c).
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Finally, the Commission proposes to amend Rule 15b9-1 to remove an
exemption from becoming a member of a registered national securities
association for broker-dealers that effect off-member-exchange
securities transactions that result from orders that are routed by an
exchange in order to comply with Rule 611.\788\ This exemption was
adopted as part of amendments to Rule 15b9-1 that narrowed the criteria
by which a Commission-registered broker-dealer could be exempted from
becoming a member of a registered national securities association.\789\
At the time of adoption, the Commission certified that the amendments
to Rule 15b9-1 would not have a significant economic impact on a
substantial number of small entities because no more than three small
firms could be significantly impacted by the narrowed exemptions (i.e.,
they could be required to become a member of FINRA if they did not
qualify for one of the adopted exemptions).\790\ Based on this
analysis, the Commission believes that no more than three small
entities are potentially relying on the exemption that the Commission
is proposing to remove. The Commission believes that the proposed
elimination of one of the Rule 15b9-1 exemptions would significantly
impact no more than three small entities, and therefore, would not have
a significant economic impact on a substantial number of small
entities.
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\788\ See supra section IV.B.3.
\789\ See Securities Exchange Act Release No. 98202, 88 FR 61850
(Sept. 7, 2023) (Exemption for Certain Exchange Members).
\790\ See id. at 61892-93. See also 17 CFR 240.0-10(c).
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For the above reasons, the Commission certifies that the proposed
rescissions and the proposed related amendments would not have a
significant economic impact on a substantial number of small entities
for purposes of the RFA.
The Commission invites commenters to address whether the proposed
rules would have a significant economic impact on a substantial number
of small entities, and, if so, what would be the nature of any impact
on small entities. The Commission requests that commenters provide
empirical data to support the extent of such impact.
VIII. Congressional Review Act
For purposes of Subtitle E of the Small Business Regulatory
Enforcement Fairness Act of 1996 (also known as the Congressional
Review Act),\791\ the Commission must seek OMB's determination as to
whether a final regulation constitutes a ``major rule''. Under the
Congressional Review Act, a rule is considered ``major'' where, if
adopted, it results in or is likely to result in:
---------------------------------------------------------------------------
\791\ See 5 U.S.C. chapter 8.
---------------------------------------------------------------------------
An annual effect on the economy of $100 million or more;
A major increase in costs or prices for consumers or
individual industries; or
Significant adverse effects on competition, investment, or
innovation.\792\
---------------------------------------------------------------------------
\792\ See 5 U.S.C. 804(2) defining ``major rule.''
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To help inform OMB's determination as to whether any final rule
that results from the proposal would be a ``major rule,'' the
Commission solicits comment and data on:
The potential effect on the U.S. economy on an annual
basis;
Any potential increase in costs or prices for consumers or
individual industries; and
[[Page 36735]]
Any potential effect on competition, investment, or
innovation.
Commenters are requested to provide empirical data and other
factual support for their views to the extent possible.
IX. Other Matters
This action is an economically significant regulatory action under
section 3(f)(1) of Executive Order 12866 and has been reviewed by OMB,
consistent with Executive Order 14215. This action, if finalized as
proposed, is expected to be an Executive Order 14192 deregulatory
action.
Statutory Authority
Pursuant to the Exchange Act, and particularly sections 2, 3(b), 5,
6, 11, 11A, 15, 15A, 17, 19, 23(a), and 36 thereof, 15 U.S.C. 78b, 78c,
78e, 78f, 78k, 78k-1, 78o, 78o-3, 78q, 78s, 78w(a), and 78mm, the
Commission proposes to amend sections 240.15b9-1, 240.15c3-5, 242.600,
242.610, and 242.611 of Chapter II of Title 17 of the Code of Federal
Regulations.
List of Subjects in 17 CFR Parts 240 and 242
Brokers, Reporting and recordkeeping requirements, Securities.
Text of Rule Amendments
For the reasons stated in the preamble, the Commission is proposing
to amend Title 17, Chapter II of the Code of Federal Regulations as
follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
0
1. The authority citation for part 240 continues to read in part as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78j-4, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o,
78o-4, 78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll,
78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11,
1681w(a)(1), 6801-6809, 6825, 7201 et seq., and 8302; 7 U.S.C.
2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; and Public Law
111-203, 939A, 124 Stat. 1376 (2010); and Public Law 112-106, sec.
503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
0
2. Amend Sec. 240.15b9-1 by revising paragraph (c)(1) to read as
follows:
Sec. 240.15b9-1 Exemption for certain exchange members.
* * * * *
(c) * * *
(1) A broker or dealer may effect transactions in securities
otherwise than on a national securities exchange of which the broker or
dealer is a member that result solely from orders that are routed by a
national securities exchange of which the broker or dealer is a member
to comply with the Options Order Protection and Locked/Crossed Market
Plan; or
* * * * *
0
3. Amend Sec. 240.15c3-5 by revising paragraph (b) to read as follows:
Sec. 240.15c3-5 Risk management controls for brokers or dealers with
market access.
* * * * *
(b) A broker or dealer with market access, or that provides a
customer or any other person with access to an exchange or alternative
trading system through use of its market participant identifier or
otherwise, shall establish, document, and maintain a system of risk
management controls and supervisory procedures reasonably designed to
manage the financial, regulatory, and other risks of this business
activity. Such broker or dealer shall preserve a copy of its
supervisory procedures and a written description of its risk management
controls as part of its books and records in a manner consistent with
Sec. 240.17a-4(e)(7). A broker-dealer that routes orders on behalf of
an exchange or alternative trading system for the purpose of accessing
other trading centers in compliance with a national market system plan
for listed options shall not be required to comply with this rule with
regard to such routing services, except with regard to paragraph
(c)(1)(ii) of this section.
* * * * *
PART 242--REGULATIONS M, SHO, ATS, AC, NMS, SE, AND SBSR, AND
CUSTOMER MARGIN REQUIREMENTS FOR SECURITY FUTURES
0
4. The authority citation for part 242 continues to read as follows:
Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78c-4,
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, 80a-37, and 8343.
0
5. Amend Sec. 242.600 by:
0
a. Removing and reserving paragraph (b)(6);
0
b. Removing and reserving paragraph (b)(7);
0
c. In paragraph (b)(26)(i), removing paragraph (E) and redesignating
paragraphs (F) through (J) as paragraphs (E) through (I);
0
d. In paragraphs (b)(26)(ii), (iii) and (iv), removing the text
``protected bid and protected offer'';
0
e. Removing and reserving paragraph (b)(47);
0
f. Removing and reserving paragraph (b)(54);
0
g. Revising paragraph (b)(72) to read as follows:
(b) * * *
(72) Order size benchmark means the number of shares of the full
displayed size of all bids disseminated pursuant to an effective
national market system plan at the same price as the national best bid
at the time of order receipt, in the case of a market or limit order to
sell, or the full displayed size of all offers disseminated pursuant to
an effective national market system plan at the same price as the
national best offer at the time of order receipt, in the case of a
market or limit order to buy. For midpoint-or-better limit orders, the
full displayed size should be measured at the time the order becomes
executable rather than the time of order receipt. For each order, the
share count shall be capped at the order size.
* * * * *
0
h. Removing and reserving paragraph (b)(81);
0
i. Removing and reserving paragraph (b)(82);
0
j. In paragraph (b)(89)(ii)(B), removing the text ``and trade-though
exempt;''; and
0
k. Removing and reserving paragraph (b)(105).
0
6. Amend Sec. 242.610 by:
0
a. In paragraph (c), removing the text ``protected quotation of the
trading center or against any other'';
0
b. In paragraphs (c)(1) and (c)(2), removing the text ``protected
quotation or other''; and
0
c. Removing and reserving paragraph (e).
0
7. Remove and reserve Sec. 242.611.
By the Commission.
Dated: June 11, 2026.
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2026-12163 Filed 6-16-26; 8:45 am]
BILLING CODE 8011-01-P