March 30, 2023
JOHN A. ZECCAEXECUTIVE VICE PRESIDENT,GLOBAL CHIEF LEGAL, RISK &REGULATORY OFFICER
805 KING FARM BLVD
ROCKVILLE, MD 20850

Ms. Vanessa Countryman, Secretary
U.S. Securities and Exchange Commission
100 F Street NE
Washington, DC 20549
Re:

Regulation Best Execution, File No. S7-32-22, Release No. 34-96496; Order
Competition Rule, File No. S7-31-22, Release No. 34-96495; Regulation NMS:
Minimum Pricing Increments, Access Fees, and Transparency of Better
Priced Orders, File No. S7-30-22, Release No. 34-96494; Disclosure of Order
Execution Information, File No. S7-29-22, Release No. 34-96493

Dear Ms. Countryman:
Nasdaq, Inc. (“Nasdaq”) writes to comment on the four equity market structure reform
proposals that the Securities and Exchange Commission (the “SEC” or the “Commission”)
published on December 14, 2022. 1
I.

EXECUTIVE SUMMARY

On balance, U.S. equities markets today work extraordinarily well. They do so, in largepart, because of their adaptability to changes – changes to technology, to the nature of market
participants, and to market conditions. Market structure regulation also must keep pace withthese changes. In this regard, the SEC’s Proposals raise many topics worthy of considerationand debate.
Nasdaq supports market modernization, provided that it accounts for the mature,interconnected, and complex nature of the market ecosystem. Reform should support a strong
and robust National Best Bid and Offer (“NBBO”) as well as the competitiveness of transparent,
exchanges whose displayed quotes form the NBBO. Whenever possible, we recommend that
equity market structure reforms be incremental and pragmatic and avoid undue risks, costs, andburdens. Reforms are most likely to succeed if they are pursued through a process that is1

See Securities Exchange Act Release No. 34-96495 (December 14, 2022), 88 FR 128(January 3, 2023) (the “Order Competition Proposal”); Securities Exchange Act Release
No. 34-96494 (December 14, 2022), 87 FR 80266 (December 29, 2022) (the “NMS
Proposal”); Securities Exchange Act Release No. 34-96496 (December 14, 2022), 88 FR
5440 (January 27, 2023) (the “Best Execution Proposal” or “Best Ex Proposal”);
Securities Exchange Act Release No. 34-96493 (December 14, 2022), 88 FR 3786
(January 20, 2023) (the “Rule 605 Proposal”) (collectively, the “Proposals”).
1methodical, backed by data, and which reflects as much outreach and consensus as possible.
Most importantly, we believe that reforms should serve the interests of investors by protecting
them and improving their outcomes. With these principles in mind, we take the following
positions on the Proposals.
Tick Size/Access Fee Cap/Pricing Transparency/MDI Acceleration –•Tick Size – Nasdaq supports adjusting the minimum pricing increment (“tick size”) tobetter reflect the trading dynamics of Regulation National Market System (“Reg.
NMS”) securities. However, we think that it is important to recalibrate theCommission’s specific Proposals for new tick sizes need to avoid harming displayed
liquidity and widening spreads. Nasdaq suggests a simpler approach of adding one
tick size below one penny – at $0.005 – to help tick-constrained securities trade morenaturally. Beyond lower-priced tick-constrained securities, we ask the SEC to also
consider a wider minimum tick size of $0.05 for higher-priced and less liquid
securities that currently trade with much wider spreads.

•

Tick Harmonization – We also support the Proposal to harmonize tick sizes across all
trading venue types to eliminate the artificial competitive disparity that exists.
Because harmonizing quoting and trading increments might reduce opportunities forretail investors to receive price improvement, we support that liquidity that interacts
with retail orders may be in increments of 0.001.

•

Access Fee Cap – Nasdaq supports adjusting the access fee cap to accommodate newtick sizes, but the Proposal goes far beyond what is needed for this purpose. It risks
weakening the NBBO by restricting exchanges’ ability to offer meaningful rebates toencourage more liquidity and tighter spreads that underpin the NBBO. The
Commission’s supposition that rebates present harmful conflicts-of-interest to brokers
is not supported with evidence, and it ignores the countervailing benefits associatedwith rebates, which are essential tools for gathering the displayed quotes that form the
NBBO. It would be arbitrary and capricious for the Commission to proceed with the
Proposal in the absence of evidence that the current fee cap is actually harmful to themarket and without meaningfully weighing the costs and benefits of those reductions.
As an alternative, we recommend that the SEC adopt a fee cap that is $0.0015 forsecurities in the $0.005 tick size bucket while maintaining the same $0.0030 cap thatexists today for securities in the $0.01 tick bucket. This alternative would cut accessfees by half for securities in the $0.005 tick bucket, while preserving room forexchanges to continue offer rebates that are needed to bolster market quality and the
NBBO. We ask the SEC to refrain from undertaking any further cap reductions
without first pausing to study the impacts of this initial change on spreads, depth,
institutional trading costs and ETF pricing efficiency.

•

Transparency of Pricing Information – Exchange pricing is already highlytransparent, uniquely so among trading venues, and Nasdaq does not believe that
additional transparency is necessary. Nonetheless, we do not object in principle toenhancing price transparency of volume-based fees and rebates to facilitate brokerdealers’ ability to pass-through fees and rebates to investors. The Commission itself
2

acknowledges that such pass-throughs would alleviate its concern (however
misguided) about rebates creating conflicts for broker-dealers. Accordingly, this
Proposal (along with robust best execution procedures) should remove any basis forslashing access fee caps to diminish the use of rebates. Furthermore, if theCommission moves forward with this proposal, the same standards should apply to allmarket centers.
•

Acceleration of Market Data Infrastructure Rule Provision Relating to Round/OddLots – Finally, Nasdaq supports the Commission’s proposal to accelerate theimplementation of pending provisions of its Market Data Infrastructure (“MDI”) Rulethat would re-define the concept of “round lots” and incorporate odd-lots into the
Securities Information Processor (“SIP”) feeds. However, the proposed 90 day
accelerated timeline is too aggressive and it requires adjustment to account fortechnical realities. Along with the SIP Operating Committee, we support a morereasonable timeline of at least 12 months for implementation.

Order Competition Proposal – Nasdaq believes that finding ways to bring more retailinvestors together in a competitive environment is a worthy goal which would benefit retailinvestors, institutional investors, and the market as a whole. That said, the SEC risks too muchby solely focusing on qualified auctions, as there is no silver bullet solution to the problem it
identifies. In lieu of imposing a prescriptive and untested solution, we instead recommend that
the SEC define a minimum price improvement threshold (e.g., a percentage of the spread) thatbroker-dealers must meet in order to internalize retail order flow. If a broker-dealer is unable toprovide meaningful price improvement on a retail order, then we suggest that it be required tosend its order to interact on an exchange or a similar fair access venue. The Commission should
not, however, prescribe the manner by which such order interaction occurs. Instead, werecommend that it permit participants to innovate their own solutions (subject to the SEC
approval and public comment process) which could, but need not include some form of retailauction, as well as enhanced retail liquidity programs. As to retail liquidity programs, we thinkthat exchanges should have flexibility to operate these programs so that they can deploy
competitive solutions, including by having the freedom to accept, rank, and display orders in$0.0010 increments. In any event, we ask the Commission to refrain from taking action on ordercompetition until after it implements its other Proposals. Further, we ask that it then pause toassess whether these Propose suffice to achieve the Commission’s objectives for ordercompetition and, if not, determine what additional steps would be prudent.
Disclosure of Order Execution Information (“Rule 605 Reform”) – Nasdaq supports theCommission’s Proposal to modernize and improve the usability of Rule 605 reports so that they
provide broker-dealers and investors with more relevant, comprehensive, and understandable
information by which to make best execution determinations and to assess market quality.
Best Execution – We believe it is reasonable for the SEC to adopt its own best execution
rule, as doing so will enhance investor protections through Federal administration andenforcement. However, we ask that the new rule do more than merely add a new layer ofbureaucracy to the existing best execution regimes of the Financial Industry Regulatory
Authority (“FINRA”) and the Municipal Securities Rulemaking Board (“MSRB”). We
3

recommend that it be clear in its standards to avoid setting broker-dealers up for regulation by
enforcement. Accordingly, we recommend that the SEC do the following:II.

•

We ask the SEC to clarify how its interpretation and implementation of best
execution will be the same as, and how they will differ from, those of FINRA and the
MSRB, with a goal of helping broker-dealers to understand how to adjust their
historical practices to meet any new SEC standards going forward. Similarly, we ask
the SEC to be clear about whether, and to what extent, it intends to incorporate into
its rule the existing body of FINRA and MSRB guidance on best execution.

•

To prevent undue burdens associated with overlapping best execution regimes, andconfusion that may arise where the overlap is imperfect, we recommend that the
SEC’s new proposed rule supplant the FINRA and MSRB rules.

•

We recommend that the Commission provide broker-dealers with opportunities tocomply with the new rule before acting to enforce it. In particular, we suggest that
the SEC provide a grace period during which it will temporarily refrain fromenforcement actions against broker-dealers that demonstrate good-faith andreasonable efforts to comply. We also recommend that the SEC consider adopting a“no-action letter” program to provide guidance to broker-dealers as to whether theirprospective behaviors would comply with the rule. Finally, we recommend that the
SEC adopt compliance safe harbors that broker-dealers may rely upon whenevaluating their policies and procedures. We believe that one such safe harbor should
state how broker-dealers can satisfy their best execution duties when routing orders to
exchanges that pay rebates.
INTRODUCTION

The Commission’s review of U.S. equity market structure regulation is an importantundertaking. The markets have evolved significantly since the SEC promulgated the last suchoverhaul of equity market trading rules – Reg. NMS – in 2005. 2 The competitive environmenthas blossomed from a handful of trading venues to a fiercely competitive mix of 16 exchanges
and scores of other market centers, including approximately 32 alternative trading systems, aswell as wholesale market makers and single-dealer platforms. Furthermore, the rapid pace oftechnological innovation has transformed the markets by facilitating faster access, more efficient
executions, and new and more useful tools for investing and trading. As a result of suchinnovations, spreads are tight and trading costs for retail investors are low. Even during periodsof unprecedented crisis and market volatility, the markets have remained resilient and reliable.
Although in many ways, today’s markets work well and better for investors than they did
in 2005, there are always opportunities for improvement. We believe that such improvements
should be consistent with the following principles:2

See Securities Exchange Act Release No. 34-51808 (June 9, 2005), 70 FR 37496 (June29, 2005) (“Regulation NMS”).
4•

Avoid unintended consequences – The Commission must recognize that theequity markets are intricate, interconnected and complex, and that radical or rashchanges, even to a small element, can have significant unintended consequences.

•

Support lit markets and the NBBO – U.S. equity market structure is built atop afoundation of the NBBO and the exchanges that support it. The NBBO is
weakening, however, as trading drifts away from exchanges. To strengthenmarkets, reforms must bolster the NBBO so that it is once again robust andrepresentative. This task, in turn, requires the SEC to enable exchanges tocompete on a level playing field to attract the lit quotes that form the NBBO.

•

Evolution, not revolution – Whenever possible, we recommend that reforms be
incremental and pragmatic rather than drastic and ideological. We ask the SEC toavoid undue risks, costs, and burdens, as well as rigid and prescriptive solutions
that stifle innovation. We think that reforms stand the best chance for success ifthey proceed through a process that is methodical, backed by data, and whichreflects as much consensus as possible.

•

Serve the interests of investors and issuers – Ultimately, reforms must serve theinterests of investors and issuers by protecting them and improving theirexperiences and outcomes.

In particular, we believe that today’s market structure can and should do more tostrengthen the NBBO, including by recognizing and supporting the important role that exchanges(and the quotes they display) play in constructing it. In recent years, the ability of exchanges toprovide this public good has come under pressure as equity trading has continued to shift awayfrom them. The Commission has correctly observed that this trend toward darkness has been
aided by an “unequal playing field when competing for order flow.” 3 This is the result of dark
platforms enjoying far more flexibility than exchanges, including the ability to trade in subpenny price increments (and thus capture orders through sub-tick trade prices) and throughvarious types of client segmentation. As one might expect, any time there are similar platforms
performing similar functions but with varying degrees of regulation, market activity will
naturally gravitate to the platform with less regulation.
Given that Nasdaq has long been a vanguard for prudent market structure reform,
including through initiatives such as Revitalize, TotalMarkets, Intelligent Ticks, and mostrecently, Optimize, 4 Nasdaq welcomes the fact that the SEC’s Proposals reflect many concerns
3

See SEC Chairman Gary Gensler, Prepared Remarks at the Global Exchange and Fintech
Conference (June 9, 2021), https://www.sec.gov/news/speech/gensler-global-exchangefintech-2021-06-09.

4

See Nasdaq, The Promise of Market Reform: Reigniting America’s Economic Engine(last updated Feb. 2018),
5

and, to varying degrees, recommendations that Nasdaq has championed. Notably, the SEC’s
Proposals echo Nasdaq’s calls for tick size reform to help tick-constrained securities trade better,harmonizing tick size across trading venues to help level the competitive playing field,
modernizing execution quality reporting metrics, enhancing the duty of best execution, andrequiring that price improvement for retail orders be meaningful to justify orders trading awayfrom lit markets, where they would otherwise contribute to transparent price discovery. 5
Although Nasdaq welcomes the Commission’s attention to these issues, we believe thatin certain cases, such as access fee caps, tick sizes, and order competition, the specific means that
the SEC proposes to achieve its objectives need to be re-calibrated to avoid collateral harm to themarkets and to investors. Moreover, efforts by the Commission to reverse the erosion of lit
markets will be for naught if such efforts do not also fortify the NBBO. In this regard, we ask
the Commission to avoid measures that would weaken the NBBO, such as drastic cuts to therebate incentives that exchanges use to attract price-forming quotes.
For certain proposals, including qualified auctions, it is incumbent upon the Commission
to reflect upon whether it has sufficient data to conclude that its approach is warranted and is thebest and/or only way to solve the problems it has identified. More generally, the comment
period is an important opportunity for the Commission to gain an understanding of potential,
unintended consequences of each rule as well as the combination of multiple rules together, andtherefore to make adjustments or pivot if warranted.
As the Commission contemplates its next steps on the Proposals, we recommend that theCommission stagger and carefully sequence their adoption and implementation.
In that regard, the Commission must be careful to consider both the individual andcombined effects of its Proposals. In the Open Meeting that launched the Proposals, SEC Staff
insisted that each of the four Proposals stands on its own and is designed to be consideredseparately. However, even a casual observer of equity market structure can see that thesehttps://www.nasdaq.com/docs/Nasdaq_Blueprint_to_Revitalize_Capital_Markets_April_
2018_tcm5044-43175.pdf (“Revitalize”); Nasdaq, TotalMarkets: A Blueprint for a Better
Tomorrow (Apr. 2019),
https://www.nasdaq.com/docs/Nasdaq_TotalMarkets_2019_2.pdf (“TotalMarkets”);
Nasdaq, Intelligent Ticks: A Blueprint for a Better Tomorrow (Dec. 2019),
https://www.nasdaq.com/docs/2019/12/16/Intelligent-Ticks.pdf (“Intelligent Ticks”);
Nasdaq, Optimizing Markets for Today and Tomorrow: A Framework for U.S. Equities
Market Reform (2022), https://www.nasdaq.com/docs/optimizing-markets-for-today-andtomorrow (“Optimize”).
5

Nasdaq notes that it continues to support other Optimize recommendations that theCommission did not address, including increasing the transparency of off-exchange
trading by attributing trade reports to the trade reporting facilities, eliminating theconcepts of round and odd lots, and amending the Securities Information Processor Plans
to reallocate revenue sharing to better reward activity that promotes price discovery andstrengthens the NBBO. See Optimize, supra, note 4.
6

Proposals are intertwined. Moreover, if the Commission abandons or modifies one or moreelements of its Proposals, then we think it would be wise to consider the individual andcollective impacts anew and open an additional public comment period. The Commission muststrive to avoid an outcome where the incomplete adoption of the Proposals or a modified version
leaves the markets worse off than they are today.
III.

TICK SIZE/ACCESS FEE CAP/TIERED PRICING/MDI ACCELERATION
a. Minimum Pricing Increments (“Tick Sizes”)

In 2017, Nasdaq observed that the current “one-size-fits-all approach to tick size issuboptimal for many.” 6 To promote reform, we proposed an intelligent tick structure in 2019, 7
explaining that “[m]any of the issues afflicting the market today can be traced back to the current
tick size regime.” As such, Nasdaq welcomes the Commission’s efforts to revise minimum
pricing increments. However, we are concerned that the Commission’s specific Proposal forthree sub-penny tick buckets is too complex. As we discuss below, data suggests that the
proposed tick buckets are too granular and will provide for too many ticks, which will lead toflickering quotations, increased price instability, less aggregated liquidity, wider spreads, andgreater market fragmentation. Simply put, the Proposal may weaken the NBBO.
Nasdaq, along with a diverse cross-section of the industry, believes that these problems
are avoidable if the SEC pursues a simpler, more incremental alternative approach to tick sizereform – namely, the addition of a single, half-penny tick bucket to accompany the existing onepenny bucket. This alternative approach would address the SEC’s concerns with tick constraints,
while following the Hippocratic dictum of “first, do no harm.” If, after the implementation of
the new half-penny tick (in addition to the current penny tick), certain securities continue to betick constrained, an additional incremental reduction in tick size could be considered, provided it
is clear that another tier is warranted.
We also ask the Commission to re-consider addressing the problem of excessively-wide
spreads 8 in higher-priced and less liquid securities, if not now, then in the near future. The bestsolution would be a $0.05 tick at the high end, though others may have different perspectives.
We recommend that the Commission work with industry to develop a consensus solution.

6

Revitalize, supra, note 4.

7Intelligent Ticks, supra, note 4. Nasdaq also advocated for tick reform in its 2019
TotalMarkets Proposal. See TotalMarkets, supra, note 4.

8

As explained below, we believe that the ideal tick spread is 2-3 ticks, although tradability
is still relatively good up to 4.5 ticks. We note that the SEC agrees that 2 tick spreads are
not enough for efficient trading. See NMS Proposal, supra, note 1, at 80344 (“… TSP
securities that had fewer than two ticks spread prior to the conclusion of the TSP
benefited from the reduction in the tick size when the security’s tick size reverted from$0.05 to $0.01. Thus, our analysis indicates that fewer than 2 ticks spread is on average
too few and that securities would trade better with more ticks intra spread.”).
7

i. The ideal spread is 2-3 ticks.
Research demonstrates that an optimal tick size exists. 9 Analysis shows that spreads forma U-shape, with optimal spreads at the bottom of the U, as shown in the following chart:

The U shape is repeated across all market cap spectrums. 10 Trading is optimal at thecenter of the U, and impaired at both arms: transactions are more expensive both for securities
with prices that are too low (tick-constrained) and for those with prices that are too high(excessively-wide spreads).
We support the SEC’s market-driven bucket approach, as securities at all prices see bothtick constraints and excessively-wide spreads. 11 The following chart shows that prices for tickconstrained securities (in blue) range from $1 to over $50. Securities with optimal spreads (inyellow) have prices ranging from $1 to $250. Excessively-ticked securities (grey and black)range from $1 to $2,000.

9

Many researchers agree that securities with a 2-3 tick spread trade efficiently. Some
researchers have argued that securities with spreads as wide as 4.5 ticks can trade
efficiently as well, but we believe that there is not a consensus on this point. See Phil
Mackintosh, Research on What Ticks Make Spreads Trade Best, (Mar. 2, 2023),
https://www.nasdaq.com/articles/the-tick-spreads-that-help-stocks-trade-best.

10Phil Mackintosh, Why Intelligent Ticks Make Sense, (Jan. 9, 2020),
https://www.nasdaq.com/articles/why-intelligent-ticks-make-sense-2020-01-09. See also
Phil Mackintosh, The Data is Already Out There to Design Better Markets, (Feb. 15,2019), https://www.nasdaq.com/articles/the-data-is-already-out-there-to-design-bettermarkets-2019-02-15.

11

Mackintosh, Research on What Ticks Make Spreads Trade Best, supra, note 9.
8

The chart below demonstrates that for tick-constrained securities, the average time to first
execution is higher relative to other securities, and queues form. 12 As the bid-ask spreadincreases, average time to first execution decreases initially, but then rises again for securities
with extremely high spreads, which exhibit similar delays in time to first execution as tickconstrained securities.

Securities with too many ticks not only have wider spreads, but they also have more odd
lots, and more message traffic, leading to a more fragile NBBO. 13 To understand the impact of
too-many-tick securities on the NBBO, the chart below compares the percentage of time that an
odd lot is at the top of book against the price of the security. Tick-constrained securities almost
always have a round lot at the NBBO. As the number of ticks increase, the amount of time
where the top of book is an odd lot also increases. For securities with the largest number of ticks(in dark-grey and black), the percentage of time that NBBO is the true best price falls below 50
12Phil Mackintosh, The Tick Constrained Stock Problem, (Jan. 20, 2022),
https://www.nasdaq.com/articles/the-tick-constrained-stock-problem.

13

Phil Mackintosh, Why Ticks Matter, (May 19, 2022),
https://www.nasdaq.com/articles/why-ticks-matter.
9and as low as 5 percent. Clearly, this lack of odd lot information reduces the value of the
NBBO. 14:
The existence of the U-shape, with optimal ticks reducing trading costs, improving
liquidity, and reducing issuer cost of capital, is demonstrated in multiple empirical studies. 15
One study found that all securities achieve their optimal prices when their bid-ask spreadis two ticks wide. 16 Stock splits improved liquidity when the bid-ask spread moved toward two
ticks, but reduced liquidity otherwise.
Regulators in Europe have found that the best spread is between 1.5 ticks and 2 ticks
wide for liquid securities, and between 1.5 and 5 ticks for less liquid securities. 17 Analysts
reasoned that, “tick size must be big enough to ensure that there is a relevant cost to
overbidding,” and “[e]xcessively granular tick sizes in securities have a detrimental effect onmarket depth as it is almost cost free to overbid and may discourage liquidity providers fromposting orders.” “If the tick size is too small, the outbidding cost is no longer significant (it costs
next to nothing to outbid) and liquidity does not aggregate effectively as there are too many

14

Adding odd lots to the SIP, as suggested elsewhere in this proposed rule, does not solve
the problem, as odd lots are not included in the NBBO. Over the long run, eliminatinground lots altogether, as discussed below, may be a better resolution.

15

Sida Li & Mao Ye, The Optimal Nominal Price of a Stock: A Tale of Two
Discretenesses, (working paper Nov. 3, 3021), (retrieved from SSRN Elsevier database).

16

Sida Li & Mao Ye, Discrete Price, Discrete Quantity, and the Optimal Price of a Stock,(Mar. 8, 2021), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3763516.

17

AMF (“Autorité de Marchés Financiers”), MIFID II: Impact of the New Tick Size
Regime, (Mar. 2018), https://www.amffrance.org/sites/institutionnel/files/contenu_simple/lettre_ou_cahier/risques_tendances/M
iFID%20II%20Impact%20of%20the%20New%20Tick%20Size%20Regime.pdf; see also
Intelligent Ticks, supra, note 4, at 12.
10increments of possible prices. Insertions, modifications and cancellations of orders are therefore
more frequent, affecting book legibility and price formation.” 18
An XTX white paper on optimal tick sizes suggested that optimal spreads are between 2
and 4 ticks. 19 The authors explained that tick sizes should be calibrated to allow liquidity tocluster at a price point and require market makers to assume meaningful risk when stepping infront of and improving an existing price. The paper noted that tick sizes that are too small cancreate flickering pricing that is hard to access and reduce depth on the quote.
Most other countries follow this optimal tick approach by having tick sizes under $0.01
for securities likely to be tick constrained, while increasing tick size for securities more likely tohave wider spreads. 20
ii. The proposed sub-penny tick structure is more complex than needed.
The SEC correctly describes the problem of tick-constrained securities. 21 Such securities
are “not able to be priced by market forces” because the current “rule 612 minimum pricing
increment of $0.01 may now be too large for certain stocks , which, in turn, results in the pricing
of such stocks being artificially constrained.” 22 Trading in these securities would be improved“if competitive market forces could establish prices in sub-penny increments, which could
reduce quoted spreads,” 23 allowing these securities to “be priced more aggressively within the
spread.” 24 We agree with this description of trading at the first arm of the U.
Based on that analysis, the SEC proposed to add three additional sub-penny tiers to thecurrent $0.01 tick: $0.001, for an Average Quoted Spread (“AQS”) equal to, or less than, $0.008;$0.002, for an AQS greater than $0.008 but less than, or equal to, $0.016; $0.005, for an AQS
greater than $0.016 but less than, or equal to, $0.04; and $0.01, for an AQS greater than $0.04. 25
We believe that this Proposal would, in fact, harm investors by exacerbating problems withsecurities trading with too many ticks. To see the problem, consider the following two charts.
18

MIFID II: Impact of the New Tick Size Regime, supra, note 17.

19

XTX Markets, Tick Sizes and their Effect on the Buy-side, https://www.datocmsassets.com/10954/1555503679-tick-sizes.pdf.

20Phil Mackintosh, What Makes Other Countries’ Trading Tick?(Oct. 6, 2022),
https://www.nasdaq.com/articles/what-makes-other-countries-trading-tick.

21

NMS Proposal, supra, note 1, at 80274 (explaining that tick constrained securities“regularly experience a time-weighted average quoted spread of 1.1 cents or less, whichindicates that these stocks are frequently quoted in the smallest increment permitted
under the rule.”).

22

Id. at 80268.

23

Id.

24

Id.

25

Id. at 80269.
11

The first chart assigns securities trading at the current $0.01 tick into four categories,
using effective (rather than quoted) spreads. These categories align with the cut-offs the SEC
chose in its Proposal: (1) very tick-constrained (pink) - over 1,000 stocks with effective spreadsof less than $0.008; (2) tick-constrained (blue) - almost 2,000 stocks have an effective spreadfrom just under $0.008 to up to $0.016 which, based on research, could benefit from more ticks;(3) optimal ticks (yellow) - around 2,700 stocks are well-ticked, using the broadest definition of
optimal spread ($0.016 – $0.04); and (4) too many ticks (black) - over 4,000 stocks trade morethan $0.04 wide, with around 450 trading more than $0.30 wide.

As shown in the second chart, transitioning from the current regulatory environment to
the SEC Proposal causes all securities in the tenth of a penny group to have 1-8 tick spreads,
while securities in the fifth and half-penny groups will have 4-8 tick spreads, and securities in the
one penny group to have 4 or more ticks. 26 Adding three sub-penny ticks levels, the Proposal
causes more securities to trade with too many ticks, across all price levels.

26

For the purposes of this chart, 4 ticks were included in the optimal range. As noted
above, there is broad consensus that 2-3 ticks is optimal for trading, but some researchstates that spreads up to 4.5 ticks would be acceptable (but not optimal) for goodtradability.
12The dark areas of both charts identify securities with too many ticks. The Proposal
aggravates this problem, introducing it to securities not previously affected by excessively-wide
spreads – this is seen by the increase in dark areas on the second chart versus the first chart.
Overall, the proposal would cause almost all securities to trade at 4-8 tick spreads.
Excessively-wide spreads reduce the incentive for market participants to post bids andoffers quickly, resulting in slower price formation. Because liquidity providers face a higher riskof other stepping ahead of them, the order book will become more unstable, and may widen
spreads as liquidity providers compensate for the increased risk of missing two-sided trades.
Both the NBBO and overall market quality will suffer as liquidity forms in shallow pools at too
many price points, rather than aggregating at a smaller number of price points with depth.
Securities having too many ticks also increases the complexity and costs of (institutional
investors) executing large orders, resulting in longer fill times and an imbalance between
providers and takers of liquidity. What follows is less quote competition, a more dispersed order
book, less informative price formation, and wider spreads – all of which repeat in a selfreinforcing cycle. These trading issues also result in an increase in the use of non-displayed
quotations, widening displayed spreads. The resulting fragmented order book reduces the qualityof the NBBO. 27 All of these developments would harm investors.
iii. A single sub-penny tick is the best approach for now.

27

See Justin Cox, et al., Increasing the Tick: Examining the Impact of the Tick Size Change
on Maker-Taker and Taker-Maker Market Models (2019); Sean Foley, Tom Meling, andBernt Odegaard, Tick Size Wars: The Market Quality Effects of Pricing Grid
Competition (2021).
13

Nasdaq, along with an emerging consensus of others, believe that adding a single, halfpenny tick bucket to the existing $0.01 tick bucket is best approach for reform. 28 We proposethat securities fall into this new $0.005 tick bucket only if they are tick-constrained. Thissolution that would substantially improve market quality by relieving tick constraints for mostsecurities that the SEC targets and avoid the pitfalls of going too granular, too quickly (or at all).
After adopting a half-penny tick, and taking time to study its effects, the SEC could thenconsider whether adoption of an additional tick size is warranted. This is the type ofincremental, market-based and pragmatic solution that works best in our complex markets.
iv. The Commission overlooked problems with excessively-wide spreads.
Higher-priced and less-liquid securities currently suffer from the same problem that weurge the Commission to avoid for tick-constrained securities—that tick sizes are too small
relative to the prices and spreads for such securities. The Commission overlooks the problem ofexcessively-wide spreads in higher-priced securities based on a flawed economic analysis.
First, the Commission’s own analysis of the Tick Size Pilot (“TSP”) does not support theconclusions that it draws in the Proposal. Based on the TSP, the Commission preliminarily
concluded that having a 1-10 tick spread for tick constrained securities is beneficial. The TSP
increased costs to trade by artificially tick-constraining a number of liquid securities that had aspread under 4.5 cents before the TSP. At the end of the TSP, the SEC removed the tickconstraint on those names, and allowed them to return to pre-TSP spreads. From thisexperiment, it is only valid to conclude that removing a constraint from a tick-constrained
security is beneficial. It was not valid for the SEC to conclude, however, that introducing a 10tick spread is beneficial for securities that were not already tick-constrained.
Second, the Commission misinterprets the academic literature suggesting that a manytick spread could be problematic. “Commission review of academic literature suggests that there
are not consistent results as to how a larger tick size would affect market quality for stocks withwider spreads.” 29 This statement is contradicted within the Proposal itself, where theCommission acknowledges that excessively-wide spreads are problematic for certain securities:“for stocks with spreads greater than $0.15, where a $0.01 tick implied more than 15 ticks intraspread, a $0.05 tick where there were only 3 ticks intra-spread, appeared to provide a superior
trading environment.” 30 The academic literature appears to be unambiguous on this point. The
28

See Letter from Michael Blaugrund, NYSE, Jason Clague, Charles Schwab & Co., andJoseph Mecane, Citadel Securities, to V. Countryman, SEC, Re: Equity Market Structure
Proposals (Mar. 6, 2023), https://www.sec.gov/comments/s7-29-22/s72922-20158674326600.pdf; see also Letter from Cboe to V. Countryman, SEC, Re: SEC Proposal on
Regulation NMS: Minimum Pricing Increments, Access Fees, and Transparency of Better
Priced Orders (Feb. 28, 2023), https://www.sec.gov/comments/s7-30-22/s7302220158236-326301.pdf; Anna Lyudvig, IEX Supports SEC Equity Market Proposals, Mar.
22, 2023, https://www.tradersmagazine.com/featured_articles/iex-supports-the-secproposals/ (noting that a forthcoming IEX comment letter advocates for a $0.005 tick).

29

NMS Proposal, supra, note 1, at 80282.

30

Id. at 80322.
14

first statement is incorrect, and the second statement is correct. Providing an approximately 3tick spread for previously wide-spread names can improve the trading environment for thosesecurities. Research studying the TSP shows that a $0.05 tick leads to a reduction in spread of
more than 10% for excessively wide spreads stocks. 31
Third, the Commission concludes that widening tick sizes for certain securities could
have unintended consequences, yet it cites no evidence for that belief. “[T]he Commission
believes that increasing the tick size, for example for higher priced securities, which tend to tradewith wider spreads, could result in the inadvertent and unintended constraining of the pricing ofsuch stocks.” 32 This assertion cites no evidence for the proposition, yet it is a key factor
determining not to address excessively-wide spreads. On the contrary, we believe that there issubstantial evidence that excessively-wide spreads impact the market and increase costs.
Research shows that excessively-wide spreads hurt investors with higher costs andissuers with higher costs of capital. 33 Securities with wide spreads have many more odd lots atthe top of book. Those with spreads over five cents have odd lots at the top of bookapproximately 40 percent of the time, those with spreads from 10 cents to 25 cents have odd lotsat the top of book 50 to 80 percent of the time, and those with spreads more than 25 cents have
odd lots at the top of book 60 to 95 percent of the time. 34 In contrast, stocks with spreads of 2-3
ticks have NBBO at the top of book around 80 percent of the time. Too many ticks in the spreadinduces the problem of pennying (overbidding existing orders by an economically insignificant
amount) and quote flickering, causes order book fragmentation, and diminishes the NBBO

31

See Barbara Rindi and Ingrid Werner, U.S. Tick Size Pilot (working paper May 30,2017), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3041644 (showing that that a$0.05 tick leads to a 12% reduction in spread for stocks with spreads greater than $0.10.).

32

NMS Proposal, supra, note 1, at 80282.

33

Phil Mackintosh, 3 Compelling Reasons for Companies to Split Stocks (Sept. 12, 2019),
https://www.nasdaq.com/articles/3-compelling-reasons-for-companies-to-split-stocks2019-09-12; Phil Mackintosh, A More Intelligent (Tick) Plan for Odd Lots (May 13,2021) https://www.nasdaq.com/articles/a-more-intelligent-tick-plan-for-odd-lots-202105-13.

34

Mackintosh, Why Intelligent Ticks Make Sense, supra, note 10; Mackintosh, Why Ticks
Matter, supra, note 13.
15

because most odd lot quotes rest inside the NBBO. 35 This has become a bigger problem over thelast decade thanks to fewer stock splits. 36
We believe that the best solution to this problem is a $0.05 tick at the high end. A nickeltick will lower the number of ticks in the spread for securities that already trade sometimes 10cents wide, or much more, resulting in greater stability and more efficient price formation. This
would also lessen the problem of market fragmentation and reduce the number of odd lots forhigher-priced securities, improving the NBBO. Having said that, there may be other strategies toaddress this issue, and we recognize that others may have a different perspective. 37 We
recommend that the SEC work with the industry to develop a consensus solution. Further, we
ask that it consider a slow rollout that would allow it to reverse course if any unexpected
negative consequences occur.
b. Tick Harmonization (Fair Competition for Order Flow)
The SEC proposes to level the competitive playing field among trading venues byamending Rule 612 to apply to all trading, not just to on-exchange trading. “This means that allquotes and orders, regardless of price, would be required to execute in the minimum pricing
increments set forth by proposed Rule 612(c) or (d), subject to specified exceptions set forth inproposed Rule 612(e).” 38 This Proposal is intended “to address concerns about the competitive
dynamic between exchanges/ATSs and OTC market makers” owing to the “ability of OTC
market makers to more readily trade in finer sub-penny increments than exchanges and ATSs.” 39
Nasdaq supports leveling the competitive playing field among trading venues to bolster
the NBBO, but also believes that minimum quoting and trading increments need not be the same.
Investors should have the opportunity to benefit from price improvement by trading at
increments finer than the minimum quote, provided that the price improvement is meaningful.

35

Phil Mackintosh, Splitting Stocks Changes Them Fundamentally (June 27, 2019),
https://www.nasdaq.com/articles/splitting-stocks-changes-them-fundamentally-2020-0924; Bartlett, Robert P. and McCrary, Justin and O’Hara, Maureen, The Market Inside theMarket: Odd-Lot Quotes (Feb. 1, 2022), SSRN: https://ssrn.com/abstract=4027099 or
http://dx.doi.org/10.2139/ssrn.4027099.

36

Phil Mackintosh, Three Charts That Show How Dramatic the Drop in Stock Splits Has
Been, (Sept. 24, 2020), https://www.nasdaq.com/articles/three-charts-that-show-howdramatic-the-drop-in-stock-splits-has-been-2019-06-27.

37

We note that the SEC indicated in its analysis that at least some securities with spreads
that are many ticks wide would benefit from a $0.05 tick. See NMS Proposal, supra, note
1, at 80322 (“[F]or stocks with spreads greater than $0.15, where a $0.01 tick implied
more than 15 ticks intra-spread, a $0.05 tick where there were only 3 ticks intra-spread,appeared to provide a superior trading environment.”).

38

Id. at 80283.

39

Id. at 80274.
16

i. Leveling the playing field across venues is fair and efficient.
There are two types of “harmonization” in the Proposal: harmonization across venues andharmonization between quotes and trades. The thrust of the Proposal is to address harmonization
across venues, but the Proposal as written also requires trades and quotes to trade at the same
increments. While simple and elegant in design, we recognize that there are reasons to de-couple
minimum quoting and trading increments (at least for retail orders, to preserve opportunities forretail price improvement) while maintaining harmonization across venues.
We support the Proposal to harmonize ticks across venues because it would provide
customers with greater choice and transparency. As we said in Optimize, “[t]he inability of lit
markets and ATSs to operate in sub-penny increments—while non-ATS dark markets do sofreely—constitutes a key disadvantage for lit markets seeking to provide innovative solutions
that could serve investors well.” 40 This regulatory structure incents customers to move offexchange, increasing the fragility of the NBBO.
Indeed, there has been a trend over the past decade of order flow moving away from lit
venues – a trend that has only accelerated with recent growth in retail investor participation in
the equity markets. This trend has weakened the NBBO. Currently, about 45% of U.S. stock
trading volume takes place off-exchange, as shown in the following chart. 41

This is an unprecedented figure, and much higher for many individual securities. 42 As
the chart below illustrates, dark market activity accounts for more than 60% of many small-cap
stocks trading volumes—with some even approaching 80%.
40

Optimize, supra, note 4, at 11.

41

See id. at 7; see also Nasdaq, Nasdaq Review of SEC Market Structure Proposals
Webinar, Video, (Feb. 16, 2023), https://www.nasdaq.com/videos/nasdaq-review-of-secmarket-structure-proposals-webinar.

42

See Optimize, supra, note 4, at 7.
17

We believe that allowing customers to choose between lit and dark venues based on theirtrading requirements and the venue’s services will allow a healthier equilibrium to develop
between lit and dark trading, and protect the NBBO.
ii. Retail investors should have access to meaningful price improvement.
The Proposal requires venues to use the same minimum pricing increments for executing
trades as for quoting bids and offers. This type of harmonization may erase opportunities forprice improvement, however. We therefore suggest standards that allow flexibility in executing
trades at finer increments of $0.0010 for retail orders, provided that trades in such finer
increments reflect the overall provision of meaningful price improvement to justify such actions(i.e., price improvement that is a meaningful percentage of the spread; perhaps as high as the
midpoint, but in any case, greater than $0.0010). 43
As explained in our analysis of tick sizes, quoting outside of the optimal 2-3 tick spreads
leads to queues for tick constrained securities and slower price formation for securities withoverly-wide spreads. Execution need not be so constrained for retail orders, provided that priceimprovement is meaningful. De minimis price improvements (otherwise known as pennying, oroverbidding existing orders by an economically insignificant amount) undermines the benefits of

43

We note that commenters from NYSE, Charles Schwab & Co., and Citadel Securities
agree with us on this point. See Letter from Michael Blaugrund, NYSE, Jason Clague,
Charles Schwab & Co., and Joseph Mecane, Citadel Securities, to Vanessa Countryman,
SEC, Re: Equity Market Structure Proposals (Mar. 6, 2023),
https://www.sec.gov/comments/s7-29-22/s72922-20158674-326600.pdf (“Separately, we
recommend setting a market-wide harmonized trading increment of $.001 for all symbols
trading at or above $1.00 per share. In our view, the minimum quoting increment and theminimum trading increment do not need to be the same.”). We also support additional
sensible exceptions, such as midpoint and benchmark trades (e.g., volume-weighted
average price transactions).
18

harmonization by attracting liquidity off-exchange without any corresponding material benefit
for the investor.
Meaningful retail price improvement would not undermine quoting in a similar fashion,and therefore retail investors should be allowed to benefit from that price improvement. Of
course, the Commission would need to consider carefully what level of price improvement
would be significant enough to be deemed “meaningful,” and by what measures. The
Commission itself provides one potential option for defining meaningful price improvement in
its Order Competition Proposal, as it proposes that broker-dealers must expose segmented retailorders to qualified auctions before internalizing them unless (with certain exceptions) brokerdealers execute the orders at the midpoint of the NBBO. However, price improvement could bemeaningful at a percentage of the spread that is somewhat less than half.
c. Access Fees
Although Nasdaq supports adjusting the existing access fee cap to accommodate new ticksizes, Nasdaq opposes the Proposal to the extent that it would reduce the cap – and implicitly,
exchange rebates – far beyond what is needed for this purpose, to the detriment of market quality
and the NBBO. Indeed, the Commission lacks a reasonable basis for slashing access fees toaddress its misguided concern that rebates present harmful conflicts-of-interest to broker-dealers.
It presents no new data to support its determination that rebates are harmful, let alone harmful
enough to justify singling them out for harsher treatment than it affords to other agency-principal
conflicts. Indeed, the Commission’s Proposal is arbitrary and capricious, as it lacks anevidentiary record justifying its actions, and fails to weigh the market-wide benefits of rebates,
which incent market-improving activities and the creation of the NBBO.
In lieu of the Proposal, we recommend that the SEC retain the existing $0.0030 cap on
access fees for securities that remain in the existing $0.01 tick bucket, but decrease the cap to$0.0015 for securities in the new $0.005 tick bucket. This recommendation would reduce thecap by half for securities in the $0.005 tick bucket, while still keeping it at a level that would
enable exchanges to provide rebates significant enough to attract the displayed quotes that form
the NBBO. Before it pursues any further fee cap reduction, we ask the SEC to pause to study theeffects of the new $0.0015 cap and act only if it determines that additional reductions are
warranted and prudent.
i. Nasdaq supports adjusting the access fee cap to accommodate new tick sizes,
but the proposed reductions far exceed what is necessary for that purpose.
As Nasdaq stated in its Optimize White Paper, we believe that it would be reasonable for
the Commission to adjust the cap to account for new tick sizes. 44 However, the Proposal far
exceeds what is necessary for that purpose and would have the effect of unduly harming the44

See Optimize, supra, note 4, at 12 (“Nasdaq recognizes that if Commission action
successfully updates tick sizes and narrows spreads for certain stocks, then existingexchange access fees and rebates may no longer be appropriate. They may even distort
trading economics in a manner that undermines the Commission’s goals for competition
and Best Execution. Accordingly, we recommend that access fee caps and rebates be
adjustable so that they remain reasonably proportionate to the tick size of a security.”).
19

competitive positions of exchanges and the market makers that quote on them. Accordingly, theProposal does not meet the requirements of Section 15C of the Exchange Act, which prohibits
the Commission from adopting a rule that imposes a burden on competition that is “notnecessary or appropriate” in furtherance of the purposes of the Exchange Act. 45
The SEC proposes severe reductions in fee caps – in some cases by more than 80 percent– without providing a reasonable justification as to why reductions of this magnitude arenecessary or appropriate to accommodate new ticks. 46 In fact, the SEC’s Proposal would
actually undermine – if not negate entirely – its efforts in its other Proposals to increase theability of exchanges to compete effectively for retail order flow. 47
Although the SEC intends for the Proposal to help exchanges to compete for retail order
flow by making it cheaper for broker-dealers to access liquidity on exchanges, it would, in fact,
offset this competitive benefit by also making it more expensive to provide liquidity to
exchanges. That is, the Proposal would achieve theoretical cost savings only for liquidity
removers. For liquidity providers and market makers that quote on exchanges, the Proposal
would effectively increase their costs of doing so by limiting the ability of exchanges to offer
them rebates. Further, while the explicit venue fee would be reduced for liquidity removers, weestimate that the spread crossing cost for liquidity removers will go up, at the very least, by theamount of the rebate reduction – but most likely more so – thus resulting in higher all in costs forinvestors. 48 In sum, the Proposal would not achieve the SEC’s objective of making lit markets
more competitive or efficient destinations for retail order because it would result in thosemarkets having less liquidity with which retail orders can interact. Agency action that fails toaccomplish its stated objective is arbitrary and capricious. 49
45

See 15 U.S.C. § 78w(a)(2); see also id. § 78k-1(a)(1)(C)(ii) (“It is in the public interest . .
. to assure . . . fair competition . . . between exchange markets and markets other thanexchange markets”).

46

Furthermore, the Proposal fails to reflect a reasonable analysis by the Commission of its
effects on “efficiency, competition, and capital formation,” as is required by Section 3f of
the Exchange Act. See 15 U.S.C. § 78c(f).

47

The SEC asserts that “[t]echnological advances that would improve the efficiency of
exchange functions such as matching trades, as well as changes in the market
environment such as the proliferation of high frequency market making that increases theamount of trading volume, could increase the feasibility for exchanges to lower fees
and/or rebates without reducing revenues.” NMS Proposal, supra, note 1, at 80305,
n.456. However, the SEC fails to identify any specific technological advances that would
accomplish this.

48

See Phil Mackintosh, V is for Volume, and Its Implications for the Access Fee Pilot (Apr.
4, 2019), https://www.nasdaq.com/articles/v-is-for-volume-and-its-implications-for-theaccess-fee-pilot.

49

See Prometheus Radio Project v. FCC, 652 F.3d 431, 471 (3d Cir. 2011) (vacating as
arbitrary and capricious a definitional provision that “lack[ed] a sufficient analyticalconnection to the primary issue [the] Order intended to address”); see also MCI
20

The Proposal would also potentially undermine the competitive positions of exchanges
and the market makers that quote on them by seeking to limit their ability to charge fees andcollect rebates for their respective services. The SEC asserts that its “proposed level of theaccess fee caps seeks to balance the need to reduce the access fee caps to accommodate thereduction in the minimum pricing increments and preserve the ability of the agency market
business models to charge fees for access.” 50 Although the SEC asserts that it achieves thisbalance by maintaining existing rates of exchange capture with proposed combination of new
tick sizes and access fee caps, 51 the SEC contradicts itself on this point when it acknowledges
that the capture rate could actually decrease as a result of the Proposals. 52 Indeed, even if the
SEC was correct that the rate of capture would not diminish, it nevertheless projects that the net
capture or revenue impact of the proposed access fee caps could be negative. 53 Such projected
impacts are contradictory and hardly consistent with a pro-competitive approach.
i. The Commission fails to establish that changes to the cost of trading
justify its proposed reductions to the access fee cap.
The Commission also fails to substantiate its position that sharp fee cap reductions areneeded because the current cap no longer bears a reasonable relationship to the actual costs of a
trade. 54 This argument demonstrates a fundamental misunderstanding of exchanges. Exchanges
operate as platforms, and they have always been high fixed-cost, low marginal cost businesses.
Like book publishers, exchanges cannot engage in marginal cost pricing while remaining viablebusiness enterprises. Moreover, access fees and rebates represent more than the simple
economic costs to an exchange of effecting a trade; they also reflect the value of the informationthat quotes provide to the market, and the value to participants of having access to those quotes.
Lit quotes provide the market with invaluable information about pricing and liquidity.
Participants utilize lit quotes, not only to trade on exchanges, but also to trade elsewhere, in otherparts of the market ecosystem which rely upon or build upon lit quotes.
Telecomms. Corp. v. FCC, 57 F.3d 1136, 1143 (D.C. Cir. 1995) (vacating agency action
on other grounds but expressing “serious concerns” that the challenged action did not“promote the agency’s stated goal”).
50

NMS Proposal, supra, note 1, at 80269-70.

51

See id. at 80290-91 (“The two proposed access fee caps would allow trading centerslargely to maintain their current net capture rate and not impair the agency market
business models, though some business models may change.”).

52

See id. at 80326 (“The Commission nonetheless acknowledges uncertainty over whether
this 2 mil capture rate would persist or be lower.”).

53

See id.

54

See id. at 80289 (“The current access fee caps were designed to prevent fees fromconstituting an excessive percentage of the share price and reflected the then current rates
that were assessed by trading centers. In the intervening seventeen years since rule 610
was adopted, the markets have evolved dramatically. Market innovations andtechnological efficiencies have reduced transaction and trading costs (e.g., lower
commissions and more narrow bid/ask spreads) in the equities markets.”).
21

Even if changes to exchanges’ costs of trading was a valid basis for reducing the accessfee cap, the Commission still fails to establish what is the actual cost to an exchange of a trade,the level of access fee cap that would constitute a reasonable relationship to that cost, and mostimportantly, that the SEC’s proposed reduced fee caps do, in fact, bear a reasonable relationshipto the actual costs to an exchange of a trade. The tasks of determining such costs and setting
appropriate rates based upon those costs are inherently difficult, especially in an industry withdiverse participants and business models; these are tasks that a government agency like theCommission is ill-suited to tackle and from which it should refrain.
ii. The Commission fails to justify its proposed fee cap cuts as necessary andappropriate to address its unfounded concerns about exchange rebates
Nasdaq opposes reductions in fee caps to the extent that the SEC expressly intends forthem to address perceived conflicts-of-interest associated with exchange rebates. Although the
SEC asserts that it intends for fee cap reductions to accommodate new proposed tick sizes, it also
states that one of its other aims in reducing access fees is to “lower the total amount of accessfees collected and rebates distributed, reducing, though not eliminating, any distortionary effects
of exchange rebates on order routing and likely improving market efficiency.” 55 This objective
lacks an evidentiary predicate, as the SEC fails to support its assertion that a distortion exists,that it is harmful, or that it is harmful enough to outweigh the countervailing benefits of rebates.
Moreover, a reduction in the fee cap is unnecessary to address the SEC’s underlying concerns,
which, to the extent they were valid, can be addressed through less-disruptive alternatives.
The Proposal reflects a flawed understanding of exchange rebates and their integral value
to the operation of well-functioning, fair, and orderly equity markets. In fact, rebates are
essential to market quality as they encourage market participants to act as market makers and toprovide the two-sided quotes that make the equity markets function soundly. Market makers
post buy and sell orders simultaneously and profit from capturing spread. They do so at the riskof adverse selection by those with superior information as well as unexpected market volatility.
To compensate for these risks – and minimize the losses that could ensue – market makers widen
spreads. In certain cases, if the risks are too great for a security in comparison to the spread,market makers may choose to refrain from making a market in that security. Exchange rebates
serve to cushion market makers against the risks of adverse selection and price volatility, thereby
incenting them to continue to make markets, even in thinly-traded or volatile securities, and to do
so with tighter spreads than they would otherwise.
Rebates are also critical tools for incenting market participants to display the priceforming quotes that comprise the NBBO. The NBBO – the public reference price for trillions ofdollars of public company capitalization and investor savings – is comprised exclusively of
trading interest displayed on public exchanges, such as Nasdaq. The Proposal would limit
exchanges’ ability to gather liquidity, and it would thereby weaken the public reference price.
Rebates act as an incentive for market participants to quote. Displayed quotes are
essentially free options for the rest of the market to trade at a specific price. Economically, these
options have a real value, and rebates act as an incentive for liquidity providers to provide these
options to the market. If rebates are reduced or removed, we expect that quoting will decrease as
55

Id. at 80303.
22

the firms quoting (providing the option) have less of an incentive to do so. In effect, these firms
are providing an option to trade at a price for little to no compensation when they could
alternatively remove liquidity (which provides no optionality to the market). This frameworksuggests that reducing rebates decreases the prevalence of displayed quotes in the market.
Rebates also incentivize market participants to pool displayed liquidity in their markets,
which deepens the NBBO and makes it more readily accessible to investors. This helps totighten spreads, which reduces transaction costs for investors. Indeed, average spreads on
exchanges that offer rebates are significantly less than those that do not.

Further proof of this can be seen by comparing spread costs and depth in IBKR stock
when it switched its listing from Nasdaq to IEX. Although IEX has a speed-bump to avoid
adverse selection, it offers no rebates. By contrast, Nasdaq has firm quotes and offers rebates toany liquidity provider with an execution. The data in the chart below shows while listed on IEX
in 2018, IBKR spreads increased and depth fell compared to while it was listed on Nasdaq.

Importantly, because rebates also increase depth, it is possible that the costs of accessfees for liquidity takers are more than offset by the tighter spreads and depth that they create.
For example, the chart below shows how rebates increase the spread capture achieved by amarket maker, potentially from $0.01 to around $0.016 when both their bid and offer are23

executed. We also know from the TSP and other work that supply and demand curves are linear.
Thus, the rebate results in additional supply at the inside quote, shown in the diagram as the
NBBO depth increasing from 651 to 1,000. For a larger investor, buying 1,000 at the maker
taker venues actually costs less than buying 651 at a “free” venue and the residual 349 shares one
cent higher.
Rebates also improve market quality by incenting market makers to quote at the NBBO
and in thinly-traded securities. Exchanges that offer rebates have two-sided quotes in moresecurities, more often, and with more depth than those market centers that do not provide rebates.

That is important for the thousands of important growth companies in the market. Other researchshows that tighter spreads help these companies to improve liquidity and reduce their costs ofcapital, 56 potentially adding almost $100 billion to the wealth of investors. 57 Given the SEC’s
role in encouraging capital formation, its failure to account for these facts would be arbitrary.

iii. The Commission’s proposal to limit exchanges’ ability to provide
meaningful rebates would harm the markets.
56

See J.C. Lin et al., Stock Splits, Trading Continuity, and the Cost of Equity Capital, (Jan.
1, 2009), U. of St. Thomas, Minn. Accounting Faculty Publications,
https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.1011.3751&rep=rep1&type=pdf.

57

See Sida Li & Mao Ye, Discrete Price, Discrete Quantity, and the Optimal Price of a
Stock, supra, n.16.
24

By diminishing exchanges’ ability to offer meaningful rebates, the Proposal would also
negatively impact liquidity provision. That is, market makers may no longer have adequate
incentives to make markets in some securities, or may require wider spreads to compensate themfor the risks of doing so. The SEC dismisses this effect by noting that the Proposal would
diminish market distortions that lead to oversupply in liquidity for securities with narrowspreads. 58 This premise, however, is incorrect as tick constraints are the main driver of oversupply of liquidity, not rebates. Insofar as the Proposal would lower tick sizes to address the
problem of tick constraints, the SEC would solve the problem of oversupply without the need torestrict exchange rebates. At the very least, it would be prudent to observe the impact of
reducing tick constraints on oversupply before proceeding to reducing rebates. Moreover, theSEC’s Proposal says nothing about its impact on the provision of liquidity in thinly-tradedsecurities, including those of many small and medium sized companies, where in the absence ofrebates, market makers may no longer find it profitable to make tight markets. Nasdaq notes thatit has been a stated priority of the Commission, in recent years, to prompt exchanges toincentivize the trading of thinly-traded securities due to concern that the current market structure
presents disadvantages for thinly-traded securities. 59 It would be arbitrary and capricious for theCommission to adopt the Proposal without acknowledging and explaining its decision to jettison
this policy. 60
In sum, by impairing the ability of exchanges to offer meaningful rebates to brokerdealers, the SEC risks compromising a well-functioning, fair and orderly market, and risks
damaging companies’ ability to efficiently raise capital. The SEC does so without offering any
evidence that such actions are warranted because it fails to substantiate the harm supposedly

58

NMS Proposal, supra, note 1, at 80328 (“The primary likely effect of the decline inrebates disbursed and access fees collected would be to reduce the amount of liquidity
provision—particularly among stocks with narrow spreads. This reduction in liquidity
provision may not be harmful to trading quality for these stocks, under the reasoning thatthe reduction in rebates would alleviate currently existing distortions that lead to an
oversupply of liquidity relative to the demand of liquidity, and would better allow theforces of supply and demand to determine market prices and lower overall transaction
costs for liquidity demanders.”).

59

See Securities Exchange Act Release No. 34-87327 (Oct. 17, 2019), 84 FR 56956, at
56956 (Oct. 24, 2019) (“The Commission is issuing this Statement to facilitate the abilityof market participants to develop innovative proposals for changes in equity market
structure that are designed to improve trading in thinly traded securities. Although theCommission believes that the current equity market structure generally works well for
securities that trade in higher volume, the Commission has concerns that the current ‘onesize-fits-all’ equity market structure, as largely governed under Regulation NMS, may
not be optimal for thinly traded securities.”) (internal citation omitted).

60

See Sw. Airlines Co. v. FERC, 926 F.3d 851, 856 (D.C. Cir. 2019) (“A full andrational explanation becomes especially important when . . . an agency elects to shift
its policy or depart from its typical manner of administering a program.” (alterations
and internal quotation marks omitted)).
25

attributable to rebates. 61 Instead, the SEC merely assumes that rebates present a conflict-ofinterest to brokers that is harmful to investors, and that the harmful effects of that conflict aresubstantial enough and costly enough to justify the Proposal’s drastic reductions to the existing
access fee caps. That type of unsubstantiated assumption is insufficient to justify a rulemaking
that has the potential to upend the way in which exchanges incentivize market quality.
iv. The Commission’s proposal to restrict rebates is arbitrary and capricious
and fails to heed the lessons of the Transaction Fee Pilot.
As recently as three years ago, the Commission attempted to conduct a pilot program forthe express purpose of determining whether access fees and rebates are distortive and require
further regulation. In explaining its rationale for the pilot program, the SEC acknowledged that“the Commission currently lacks the data necessary to meaningfully analyze the impact thatexchange transaction fee-and-rebate pricing models have on order routing behavior, market andexecution quality, and our market structure generally.” 62
The Commission did not ultimately undertake the Transaction Fee Pilot (after a court
stopped it from doing so), 63 and the Commission offers nothing new in the Proposal todemonstrate that it now has the data it lacked then to reach a reasonable conclusion that makertaker rebates are indeed problematic and warrant regulatory action. In fact, the Proposal copies
portions of the Commission’s arguments verbatim from its 2018 proposal for the Transaction Fee
Pilot. 64 At most, the Commission cites to a few academic studies that raise concerns about
rebates, but all of these studies pre-date or coincide with the Transaction Fee Pilot and ignore
contrary evidence. 65 By relying upon outdated studies and one-sided arguments, and by making
61

See Nat’l Oilseed Processors Ass’n v. OSHA, 769 F.3d 1173, 1178 (D.C. Cir. 2014)(“The reviewing court’s task, then, is to ensure the agency has . . . adduced substantial
evidence in the record to support its determinations,” which “includes requiring theagency to identify relevant factual evidence, to explain the logic and the policies
underlying any legislative choice, to state candidly any assumptions on which it relies,
and to present its reasons for rejecting significant contrary evidence and argument.”)(internal quotation marks omitted).

62

See Securities Exchange Act Release No. 34-84875 (Dec. 19, 2018), 84 FR 5202, at 5203
(Feb. 20, 2019).

63

See N.Y. Stock Exch. LLC v. SEC, 962 F.3d 541 (D.C. Cir. 2020).

64

See Securities Exchange Act Release No. 34-82873 (Mar. 14, 2018), 83 FR 13008, at
13010-11 (Mar. 26, 2018).

65

For example, in 2018, Nasdaq’s own analysis demonstrated that most routing decisions
incurred no opportunity cost from the purported conflict between brokers and investors
regarding fees and rebates. See Phil Mackintosh, Routing 101: Identifying the Cost of
Routing Decisions (Dec. 14, 2018), https://www.nasdaq.com/articles/routing-101identifying-cost-routing-decisions-2018-12-14; see also Letter from J. Davis, VP and
Deputy General Counsel, Nasdaq, Inc., to B. Fields, Re: Proposed Transaction Fee Pilot(Release No. 34-82873; File No, S7-05-18), dated Dec. 17, 2018,https://www.sec.gov/comments/s7-05-18/s70518-4789307-176927.pdf; Letter from E.
26

no independent effort to validate its concerns, the Proposal lays bare the absence of support for
its condemnation of rebates and for its proposed remedy. The SEC should be mindful of thelessons of its failed endeavor to experiment with reducing or eliminating rebates without having
first established that they are problematic. 66 Indeed, as the D.C. Circuit stated in its opinion
invalidating the Transaction Fee Pilot, “[n]ormally, unless an agency's authorizing statute saysotherwise, an agency regulation must be designed to address identified problems.” 67 The SEC
still has not substantiated that rebates actually pose a problem that warrants a regulatory solution.
Even if the SEC had demonstrated that exchange fees and rebates present harmful
conflicts-of-interest for brokers, it never even attempts to weigh the purported harmful effects ofsuch purported conflicts against the beneficial effects of rebates. 68 That is, the Commission
takes an unreasonably narrow view of rebates that emphasizes only their potential negative
effects, while inexplicably ignoring the aforementioned market-wide benefits of rebates that, in
Nasdaq’s view, more than offset such theoretical costs. 69 Because the Commission has failed toKnight, EVP and General Counsel, Nasdaq, Inc., to B. Fields, Re: Proposed Transaction
Fee Pilot (Release No. 34-82873; File No, S7-05-18), dated May 25, 2018,https://www.sec.gov/comments/s7-05-18/s70518-3718533-162485.pdf; Letter from
Elizabeth K. King, General Counsel and Corporate Secretary, NYSE, to B. Fields, Re:
Proposed Transaction Fee Pilot (Release No. 34-82873; File No, S7-05-18), dated May
31, 2018, https://www.sec.gov/comments/s7-05-18/s70518-3755194-162578.pdf.
66

See N.Y. Stock Exch., 962 F.3d at 546 (“Nothing in the Commission’s rulemaking
authority authorizes it to promulgate a “one-off” regulation like Rule 610T merely tosecure information that might indicate to the SEC whether there is a problem worthy of
regulation.”).

67

Id. The NMS Proposal would be even more problematic than the Transaction Fee Pilot
because the changes that the NMS Proposal prescribes would be permanent, rather than
temporary.

68

Agency action is arbitrary and capricious if, for example, an agency “entirely failed toconsider an important aspect of the problem, offered an explanation for its decision thatruns counter to the evidence before the agency, or is so implausible that it could not beascribed to a difference in view or the product of agency expertise.” Motor Vehicle Mfrs.
Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)(emphasis added). An
agency is required to “examine the relevant data and articulate a satisfactory explanation
for its action including a rational connection between the facts found and the choicemade.” Id. (quoting Burlington Truck Lines v. United States, 371 U.S. 156, 168 (1962))(internal quotation marks omitted); Md. People’s Counsel v. FERC, 761 F.2d 768, 779(D.C. Cir. 1985) (an agency’s failure to show that “more good than harm will come of its
action” is arbitrary and capricious).

69

The Commission acknowledges that some argue that rebates are beneficial to themarkets. See NMS Proposal, supra, note 1, at 80288 (“Conversely, others argue that the
maker-taker model may have positive effects by enabling exchanges to compete with
non-exchange trading centers and by narrowing quoted spreads by subsidizing posted
prices. Specifically, maker-taker fees may narrow displayed spreads in some securities
27

consider the benefits of rebates and the harm that would flow from eliminating, or drasticallyreducing, rebates, it has failed to satisfy its obligation under Section 3(f) of the Exchange Act aswell as the Administrative Procedures Act. 70 Where the Commission “duck[s] [a] serious
evaluation of the costs” imposed by a rule, it acts arbitrarily and capriciously. 71
The SEC also ignores the fact that its other Proposals are, by its own admission, adequate
to eliminate or otherwise manage the purported conflict that rebates present, thereby eliminating
any reasonable basis for slashing the access fee caps as it proposes. 72 For example, the SEC’s
insofar as the liquidity rebate effectively subsidizes the prices of displayed liquidity byallowing a maker to post a more aggressive price than it may have in absence of a rebate.
In turn, that displayed liquidity may establish the NBBO, which is often used as thebenchmark for marketable order flow, including retail order flow, that is executed offexchange by either matching or improving upon those prices. Accordingly, retail orders
may benefit indirectly from the subsidy provided by maker-taker exchanges.”)(citations
omitted). However, the Commission does little to actually deal with these benefits.
At most, the Commission dismisses them as being unnecessary in a new tick regime. For
example, it dismisses the concern that restricting rebates would widen spreads by arguingthat a “reduction in tick size also reduces the need for intra-tick pricing.” Id. at 80329.
But this argument ignores the fact that facilitation of intra-tick prices is not the only
function of rebates. As noted above, rebates also tighten spreads by buffering
participants against adverse price impacts. The value of rebates in this regard would notdiminish in a smaller tick regime. In any event, as discussed above, the value of rebates
is borne out by the facts: maker-taker exchanges perform better, and provide better
market quality, than do markets without rebates.
The SEC also suggests that restricting rebates “could also simplify markets by reducing
the need for complex order types that are designed to take advantage of the system of feesand rebates.” See id. at 80288. This argument is mistaken. So-called “complex” ordertypes do not exist solely to help participants to avoid fees or maximize rebates; instead,they also exist to help participants to minimize information leakage and signaling, as wellas to minimize risks of adverse selection (e.g., Nasdaq’s Midpoint Extended Life Orderand IEX’s D-Limit). It is worth noting that many “complex” order types such as
pegging, reserve, discretion are used mostly on behalf of institutions and asset managers.
Such order types would not disappear simply because rebates are reduced.
70

Section 3(f) of the Exchange Act obligates the Commission to “apprise itself—and hence
the public and the Congress—of the economic consequences of a proposed regulation.”Bus. Roundtable v. SEC, 647 F.3d 1144, 1148 (2011) (internal quotation marks omitted).
“By ducking serious evaluation of the costs” imposed by a rule, the Commission acts
arbitrarily and capriciously.” See id. at 1152.

71

Id.

72

The Proposal is unfair, moreover, as it cherry-picks rebates for restriction while ignoringother conflicts that exist in the markets. It (inaptly) conflates the conflicts-of-interest it
perceives for PFOF with those it perceives for rebates, and yet it only proposes to impose
28

Proposal to render exchange fees and rebates determinable at the time of execution will mitigate,
if not eliminate, any conflict by enabling brokers to pass-through rebates and fees to theircustomers. In the NMS Proposal, the SEC expressly acknowledges as much:
If broker-dealers could more easily pass-through rebates to their customers, the potential
financial benefit of such rebates would inure to the customer, not the broker-dealer. Thus,
the potential conflict of interest faced by a broker-dealer when routing its customers’ orders
to a market for execution would be reduced or eliminated because the broker-dealer would
have no direct economic interest in the level of the rebate and would be able to better
objectively assess best execution for each customer’s order. 73
To the extent that brokers choose not to pass-through fees and rebates, any residual conflict
could be adequately addressed through the duty of best execution – as manifested either in its
current form or in the proposed Regulation Best Execution. That is, broker-dealers would be
required to demonstrate why their order routing decisions were consistent with best execution
notwithstanding their receipt of discounted fees or rebates from exchanges. The Proposal istherefore doubly unnecessary—it addresses an unsubstantiated problem and ignores the fact that,in any event, the supposed problem would be remedied by other pending SEC action.
i. Nasdaq recommends that the Commission lower the access fee cap to be$0.0015 for securities in the $0.05 tick bucket and maintain the $0.0030
rate for securities that remain in the $0.01 tick size bucket.
As an alternative to the Commission’s Proposal to reduce the access fee cap sharply,
Nasdaq recommends a more measured approach. We recommend that the Commission maintainthe existing $0.0030 access fee cap for those securities that remain in the current $0.01 tick size
bucket, but reduce the cap by half to $0.0015 for securities that the Commission places into a
new $0.005 tick size bucket. Although this alternative would maintain access fee caps at thesame level for securities with a $0.01 tick size, the reduction to $0.0015 for securities with a ticksize of $0.005 presents an opportunity for the market and the Commission to understand theimpact for lower cap rates for some securities – albeit the Commission and others will need to becareful to parse the difference in impact from the tick size change and the fee cap change.
Nasdaq’s approach would be simpler, more familiar, and less drastic than the Proposal.
The SEC itself acknowledges the benefits of such an alternative in the Proposal: "a reduction inaccess fees that is proportionate to the tick size reduction would reduce trading costs andincrease the competitiveness of on-exchange trading.” 74 The SEC also notes that this alternativea (lower) cap on access fees/ rebates, while imposing no cap upon PFOF or other formsof remuneration.
73

NMS Proposal, supra, note 1 at 80289, n.290.

74

Id. at 80291; see also id. at 80347 (“As an alternative to the proposal, the Commission
could implement an access fee cap that applies proportionally at any tick size. This
alternative would carry the same implementation costs as the proposal. It would also
allow fees and rebates to facilitate similar intra-tick pricing as the current system of feesand rebates, which can narrow spreads in certain instances. It would also allow for29

approach “would also allow fees and rebates to facilitate similar intra-tick pricing as the current
system of fees and rebates, which can narrow spreads in certain instances” as well as “allow for
greater rebates to be paid in stocks with wider ticks, which under the proposal are those withwider spreads, which could lead to a more efficient manner of rewarding liquidity provision.” 75
ii. The Commission should pause to validate its approach before proceedingwith any proposal to reduce access fee caps below $0.015.
As discussed above, neither the record nor the Commission’s reasoning supports
reductions in the access fee caps beyond an adjustment to account for new tick sizes. If the SEC
nevertheless concludes that access fee cap reductions below $0.0015 may be warranted, we ask
that it do so only after pausing to study the impacts of reducing the current cap to $0.0015 andthen using the results of that study to assess whether a further reduction is appropriate andprudent.
As noted earlier, the equity markets are highly complex and interconnected. Even smallchanges to one variable can have unanticipated impacts elsewhere. Thus, any sharp and suddenchange in access fee caps could be dangerous. Accordingly, we recommend that if theCommission wishes to proceed with access fee cap reductions beyond the $0.0015 cap—which,
to be clear, we believe is unwarranted and unsubstantiated on the current record—the SEC
should do so gradually and in phases, with pauses between each phase to examine the effects.
Assuming that the SEC decides to proceed with its own tick size proposal in lieu of
Nasdaq’s alternative, then it should neither change the access fee caps all at once for all of the
new proposed tick sizes, nor change the caps all at once to the full extents proposed. Instead, theSEC should first proceed by testing an incremental access fee cap reduction (from $0.0030 to$0.0015) in the first of the new lower tick size buckets ($0.005).
For the Commission’s Proposal, the simplest way to do this would be to utilize the pausesthat the Commission would impose before moving securities to successive sub-penny tickbuckets. After moving securities from the $0.01 bucket to the $0.005 bucket for the first time,and adjusting the corresponding access fee cap accordingly, the Commission should pause before
reducing the cap further for securities in the $0.005 tick size bucket or moving on to transfer
securities to the next smallest tick size bucket and access fee cap. At minimum, this pause could
coincide with the evaluation periods that the SEC prescribes for determining which securities
will move on further to a smaller tick bucket, 76 but the time period should be long enough for theCommission to determine how the tick-constrained securities that moved into the current bucket
are trading with the new access fee cap, and whether the transition to a new tick size and accessfee cap are having the intended effects. Only if the Commission validates its approach at a given
phase should it proceed to the next phase of implementation. If the study does not validate thegreater rebates to be paid in stocks with wider ticks, which under the proposal are thosewith wider spreads, which could lead to a more efficient manner of rewarding liquidity
provision.”).
75

Id.

76

See id. at 80284 (providing for staggered implementation of the new proposed tick size
regime over the course of five quarters).
30

Commission’s approach, then we ask that it be open to stopping, reversing course, or changing
course once it understands why securities in the new bucket are not trading as expected.
d. Transparency of Pricing Information
Nasdaq does not object in principle to the Commission’s Proposal to require exchanges to
set volume-based access fees and rebates as of the time of execution. 77
To be clear, Nasdaq believes that exchange pricing is already highly-transparent tomarket participants and investors – and uniquely so as compared to other types of market
centers. 78 As the Commission notes, “National securities exchanges establish and amend theirfee schedules by filing proposed fee rule changes, pursuant to section 19(b) of the Exchange Act
and rule 19b–4 thereunder, for Commission review.” 79 Exchanges are required to demonstratethat each such proposed fee is consistent with the Exchange Act by being reasonable, an
equitable allocation, not unfairly discriminatory, and not unduly burdensome to competition. 80
Even though exchange fees are immediately effective upon filing, they remain subject to publiccomment and Commission scrutiny after filing. Indeed, they are subject to suspension for 60
days after filing if the Commission determines – through public comment or otherwise – that the77

See id. at 80292 (“To provide further transparency regarding transaction pricing, theCommission proposes to amend rule 610 to add a new subsection (d) ‘‘Transparency ofFees,’ which would prohibit a national securities exchange from imposing, or permitting
to be imposed, any fee or fees, or providing, or permitting to be provided, any rebate orother remuneration (e.g., discounted fees, other credits, or forms of linked pricing) for the
execution of an order in an NMS stock unless such fee, rebate or other remuneration canbe determined at the time of execution. Under the proposal, any national securities
exchange that imposes a fee or provides a rebate that is based on a certain volume
threshold, or establishes tier requirements or tiered rates based on minimum volume
thresholds, would be required to set such volume thresholds or tiers using volume
achieved during a stated period prior to the assessment of the fee or rebate so that market
participants are able to determine what fee or rebate level would be applicable to any
submitted order at the time of execution.”).

78

Even with recent proposed Commission enhancements to ATS pricing transparency, see
Securities Exchange Act Release No. 34-94062 (Jan. 26, 2022), 87 FR 15496 (Mar. 18,2022), Reg. ATS does not and would not require ATSs to provide the same level oftransparency to customers as it requires for exchanges. For example, ATSs would not be
required to demonstrate that their fees are consistent with Exchange Act standards, andrather than requiring ATSs to publish their full fee schedules on their websites, Form
ATS-N requires ATSs to describe the types of fees, fee structures, variables that impact
fees, differentiation in fees among customer types, and provide a range of potential fees.
Meanwhile, no price transparency requirements exist for other types of non-exchange,
non-ATS market centers, including wholesale market makers, and single-dealer
platforms, where bespoke bilateral pricing agreements are common.

79

NMS Proposal, supra, note 1, at 80292, n.321.

80

See 15 U.S.C. § 78f(b)(5).
31

fees are inconsistent with the Exchange Act. 81 Exchange fees, like all exchange rules, also are
required by law to be published on exchanges’ websites within two business days after filingthem with the Commission, and the Commission also publishes them in the Federal Register andon its own website. 82 On its own accord, Nasdaq furthermore publishes alerts to market
participants, in advance of filing any proposed rule changes, to help educate them about fees andrebates and how they are calculated. 83
Nasdaq also believes that our existing fee structure – which includes many pricing
programs that support market quality – is already aligned with the interests of market participants
and investors. Moreover, a fee structure that rewards our most active customers (andcontributors to market quality and the NBBO during a month, as measured by the volumes ofliquidity they add to and remove from our exchanges) with discounts and rebates at the end ofeach month is a rational and ubiquitous business practice across many industries. 84 We believethat it benefits market participants and investors by allowing us to target incentives where needed
to improve the quality of our markets on a going-forward basis.
Nevertheless, Nasdaq appreciates the Commission’s desire to ensure that exchangetransaction pricing is as transparent as possible. We are open to reforms that will offer added
clarity to market participants and investors, provided that the SEC also holds other market
centers to the same standards of transparency.
We agree with the SEC that this Proposal has the potential to facilitate broker-dealers inpassing-through access fees and rebates to their customers, and in doing so, it could alleviate
concerns (however misplaced) about perceived conflicts-of-interest associated with the makertaker model and the provision of exchange rebates to broker-dealers. 85 When coupled with the81

See 15 U.S.C. § 78s(b)(3)(A)(ii).

82

See 17 CFR § 240.19b-4(l), (m).

83

Nasdaq’s Equity Trader Alerts,
https://www.nasdaqtrader.com/Trader.aspx?id=archiveheadlines&cat_id=2/.

84

Volume-based tiered pricing is a standard, pro-competitive feature of many industries,
including heavily-regulated industries such as retail banking (e.g., preferred checking
accounts with benefits for a bank’s largest depositors). It is a rational pricing model thatrewards customers that contribute the most to a firm, including by increasing the value ofthe firm’s platform to other customers. It is also a model that Nasdaq and its competitors
have long employed with the assent of the Commission. It exists among virtually all
exchanges and ATSs, both in the U.S. and abroad. It is reflected in countless rule filings.
Although pricing tiers differentiate among customers with respect to transaction pricing,
this differential treatment is fair as it is based upon customer activity and contributions,and not the size or identity of a customer. It is worth noting that even less-active
participants often benefit from tiers through sponsored access arrangements and othermeans of aggregating their volumes with other participants.

85

See NMS Proposal, supra, note 1, at 80329-30 (“Access fees create potential conflicts ofinterest. Passing on fees and rebates to end customers could eliminate such distortions
32

new proposed best execution regime, which will in turn address perceived conflicts for thosebroker-dealers that choose not to pass-through their fees and rebates to customers, 86 this
Proposal should eliminate any reasonable basis for the SEC to proceed with dramatic decreases
in access fee caps that would go far beyond that is needed to accommodate a new tick regime.
In adopting this Proposal, however, the SEC must be mindful of potential negative
impacts on market participants and market quality. Although we understand that part of the
motivation for the Proposal is to help small broker-dealers compete against established firms, theProposal might actually have the opposite effect by making participation in exchanges’ growthprograms more expensive in the initial month of participation. It would also limit exchanges’
ability to incent market makers and other participants to quote at the NBBO and to do so in alarge number of securities, including thinly-traded securities. If the SEC moves forward withthis Proposal, then we ask that it exempt growth programs and special pricing programs thatreward market makers and other participants for quoting at the NBBO and providing market
quality.
e. Acceleration of MDI Rule Provisions Relating to Odd and Round Lots
The timing, and perhaps the scope, of the SEC’s Proposal to accelerate certain provisionsof its Market Data Infrastructure Rule needs to be recalibrated.
The Commission proposes to “accelerate implementation of the round lot and odd-lot
information definitions adopted under the MDI Rules so that this information is made available
to investors within the national market system sooner.” 87 Odd lot information would be definedas “(1) odd-lot transactions, and (2) odd-lots at a price greater than or equal to the national best
bid and less than or equal to the national best offer, aggregated at each price level at eachnational securities exchange and national securities association.” 88 Dissemination of Odd Lot
and lead to improved overall order execution for end customers. Additionally, the ability
to pass on the fees and rebates to end customers might also make customers more awareof these fees and rebates so that they can better inform their broker-dealers how to routewith respect to fees and rebates which could also lead to better execution for end
customers.”).
86

The SEC’s best execution concerns regarding the impacts of rebates on broker-dealerrouting determinations are only relevant in the agency context. By contrast, market
makers – whose activities account for a majority of liquidity provision on exchanges –trade on a principal basis. Market makers are not subject to best execution when acting
as principals, such that no such concerns exist with their receipt of exchange rebates.

87

Id. at 80270; see also id. at 80294 (explaining that the MDI Rule set the following
parameters for round lot sizes: “for NMS stocks priced $250.00 or less per share, a round
lot will be 100 shares; for NMS stocks priced $250.01 to $1,000.00 per share, a round lot
will be 40 shares; for NMS stocks priced $1,000.01 to $10,000.00 per share, a round lot
will be 10 shares; and for NMS stocks priced $10,000.01 or more per share, a round lot
will be 1 share.”).

88

Id. at 80270.
33

and Round Lot information would be implemented “90 days from the publication of any
Commission adoption of an earlier implementation of the round lot and odd-lot information
definitions in the Federal Register.” 89
Dissemination of odd lots on the SIPs will take much longer than the projected 90 days.
The SIP Operating Committee recently determined that dissemination of quotes “at or better thanthe protected NBBO” 90 would take 12 or more months to implement. 91 This is more limited than
the Proposal, which will significantly increase the volume of information to be disseminated, andalso may increase the amount of time that it will take to implement.
The added message volume may also lead to delays in processing SIP information. In
light of the possible delay and negative impact on SIP performance, the SEC should consider
limiting the directive to odd lot quotes “at or better than the protected NBBO,” as described in
the UTP/CTA Odd Lot proposal. As the SEC thinks about these short-term solutions, we wish tonote that modern markets do not need round lots, such that the ultimate goal should be toeliminate them altogether. Round lots are a vestige of a bygone era in which markets were floorbased and operated manually. Given that modern computer trading systems frequently disregard
round lot conventions, it seems inconsistent that regulations designed to modernize markets stillretain this artifact of the past. Most countries around the world have already eliminated roundlots and replaced them with alternative tick regimes, as shown below:

We expect that implementation of an effective tick reform proposal may alleviate theneed to speed implementation of the round and odd lot proposals. Marketable ticks force odd
lots onto the same tick as larger orders. Adjusted tick sizes will foster spreads where
economically meaningful bids and offers will accumulate regardless of round lot size.
Elimination of the round lot altogether will make building algorithms simpler and quotes morecompetitive, resulting in an even more consistent market, with more securities able to trade with
optimal spreads and depth.

89

Id. at 80298.

90

Proposal of the CTA and UTP Operating Committees Regarding Odd Lots on the SIPs,(Mar. 2022), https://www.utpplan.com/DOC/Odd_Lots_Proposal.pdf

91

See Letter from Robert Books, Operating Committee Chair, UTP and CTA/CQ Plans, to
V. Countryman, SEC, Re SEC Proposal on Regulation NMS: Minimum Pricing
Increments, Access Fees, and Transparency of Better Priced Orders (Mar. 28, 2023).
34

For the time being, however, implementation of the tiered round lot system is areasonable step toward the ultimate goal of eliminating round lots altogether. We urge theCommission to recognize it as such, and plan for a full transition to single-share round lots.
IV.

ORDER COMPETITION RULE

Nasdaq is supportive of changes that provide greater opportunity for retail andinstitutional investor orders to interact in a competitive public market. The current structure
contains regulatory disparities that make it difficult for such interactions to occur. If certain
disparities were to be addressed, exchanges would have the opportunity to provide platform
solutions to enable more diversified interactions between these different types of investors andmarket participants. While Nasdaq agrees with the goals behind the Commission‘s Proposal, it is
not clear that the particular solution that the Commission proposes in its Order Competition Ruleserves these goals. While retail auctions generally could provide a more competitiveenvironment for retail investors (as well as other investor types) to interact, the effectiveness ofqualified auctions in doing so – with its novel and prescriptive design – is speculative.
Instead of betting everything on a single untested and costly solution, Nasdaq urges theCommission to consider an alternative that would require broker-dealers to expose retail orders
to lit markets unless they provide a meaningful level of price improvement for such orders – a
simple solution that would accomplish the Commission’s aims without forcing the entire
industry to construct the artifice of a qualified auction mechanism on top of it. To the extent thatbroker-dealers choose not to provide meaningful price improvement and retail orders flow to lit
venues, the Commission should allow lit venues to innovate their own mechanisms for attracting
and interacting with such orders. Such market-based solutions could (but need not) include someform of a retail auction – whether of the same design that the SEC proposes or otherwise – aswell as enhanced exchange retail liquidity programs. Time and again, the markets have proventhat they can solve problems through innovation if the Commission affords them the necessary
flexibility to do so.
Regardless, Nasdaq asks the Commission to proceed cautiously and deliberatively in thisarea. We urge it to refrain from adopting its Proposal until such time as it adopts andimplements its other equity market structure Proposals, which would provide the Commission
and the market time and data to study those effects and therefore inform the Commission as towhether, and in what manner, reform of retail order handling is needed. In addition to or in lieu
of the above, Nasdaq recommends that the Commission implement the Order Competition
Proposal on a pilot basis before mandating it for all segmented orders.
a. More Order Competition and More Diverse Interaction would be Good forInvestors
Even though the current market structure often serves retail investors well, we believethat it can serve retail and institutional investors even better. U.S. equity market structure has

35

evolved over time such that the vast majority of retail orders have become disconnected fromdiverse interaction and order-by-order competition. 92
As discussed above, retail order flow has drifted away from exchanges over time due toregulatory disparities between exchanges and other market centers, including the fact thatexchanges must quote and trade in increments of one penny, whereas off-exchange market
centers are not subject to this provision, and may trade in finer increments. 93 These market
centers have far more freedom than exchanges to offer retail investors price improvement when
executing retail orders. Likewise, they enjoy far more commercial flexibility in serving retailinvestors when it comes to the execution prices it can provide. 94 These artificial constraints
reduce competition and potentially negatively impact the NBBO. 95
Although retail investors may receive price or size improvement under the current
structure, they do so at the cost of lost opportunities to search for equal – or even better – price orsize improvement opportunities that may exist on exchanges or other lit markets, including in
hidden orders or in retail price improvement programs. A market structure that works to provide
retail investors with “best” executions should not be one that is content with securing good oreven great executions when doing so potentially leaves better executions on the table.
The trade-off between market quality and off-exchange trading is notable where thesegmentation of “uninformed” retail orders off-exchange leads to more “informed” flow onexchange. As a result, spreads widen and quoted depth falls to reflect the costs of market
making to more informed flow, reducing liquidity for all market participants (including
institutional investors).96 For example, one paper found that a 10 percent rise in “dark” market

92

See Order Competition Proposal, supra, note 1, at 178 (“At present, the vast majority ofretail orders (over 90% of marketable NMS stock orders) are routed to wholesalers,
where they are frequently executed in isolation, on a captive basis. This execution is
subject to competitive forces that apply at the level of average execution quality.
Execution of these orders is not subject to order-by-order competition that occurs whenorder interactions are subject to exchange protocols.”) (internal citation omitted).

93

See 17 CFR § 242.612(a).

94

See Optimize, supra, note 4, at 8 (noting that “off-exchange market centers can segment
their customers’ orders into different execution channels based on trading objectives andcounterparty attributes. But exchanges are restricted from doing the same thing.
Exchanges would undoubtedly provide more tailored execution capabilities to theirmembers and participants. But due to current rules, participants can only find thesefeatures in off-exchange venues. This results in further fragmentation, as participants inoff exchange market centers choose the customers or orders they want to interact with,offer prices better than the NBBO, and earn a higher profit”)

95

See Order Competition Proposal, supra, note 1, at 178.

96

See Phil Mackintosh, What is Segmentation? (Nov. 4, 2021),
https://www.nasdaq.com/articles/what-is-segmentation-2021-11-04.
36

share led to a 9.2 percent increase in effective spreads market-wide. 97 Another study used datafrom the SEC’s TSP to similarly show the trade-off between market quality and off-exchange
trading as an effect of retail segmentation on dark markets. 98 Under the TSP’s temporary “tradeat” regime – which essentially restricted internalization for certain NMS securities and required
quotes to be displayed – the study saw effective spreads tighten by more than the amount of priceimprovement retail received as compared to when the TSP ended and markets returned to“normal.” 99 In particular, the empirical analysis showed that when internalization increased after
the end of the TSP, the average quoted spread widened by about 22 basis points and priceimprovement deteriorated by 5.3 percent. 100
Wider-spread securities cost more to trade than tighter-spread securities. For institutional
investors, we estimate that every basis point of shortfall – which includes a combination of
spread and market impact costs – adds approximately $2.2 billion to trading impact costs. 101
One study shows that spreads would decrease by approximately 25% if retail flow moved to
exchanges, and that an additional reduction in spreads would come from reduced information
asymmetry. 102
The effects of the current model are not limited to wider spreads and higher costs forinvestors. Indeed, as more trading occurs off-exchange, the incentive to display quotes andorders on exchanges falls. This leads to a wider NBBO and increased incentives to trade awayfrom lit markets, which reduces the incentive to display liquidity, and which in turn widens the
NBBO further – all creating a self-reinforcing cycle that undermines transparent markets. At
some point the NBBO is no longer able to serve as a reliable and representative measure of thebest market prices for equity securities. As Nasdaq noted in Optimize, the NBBO is the lynchpinof the U.S. equity markets insofar as investors rely upon it to assess the state of the market for
equity securities and to make informed decisions about buying and selling those securities. 103
Likewise, broker-dealers use the NBBO to price their orders, evaluate market quality, and makedeterminations as to which trading venues would provide their customers with the best available

97

See Frank Hatheway et al., An Empirical Analysis of Market Segmentation on U.S.
Equity Markets (Dec. 2017), https://www.jstor.org/stable/26590485.

98

See Edwin Hu and Dermot Murphy, Competition for Retail Order Flow and Market
Quality (Sept. 23, 2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4070056.

99

Id.

100

Id.

101

See Phil Mackintosh, How Much Does Trading Cost the Buy Side? (Feb. 17, 2022),
https://www.nasdaq.com/articles/how-much-does-trading-cost-the-buy-side.

102

See Hitesh Mittal & Kathryn Berkow, The Good, The Bad & The Ugly of Payment for
Order Flow (May 3, 2021), https://bestexresearch.com/the-good-the-bad-the-ugly-ofpayment-for-order-flow/.

103

See Optimize, supra, note 4.
37

executions. 104 The weaker the NBBO becomes, the less it is able to reliably support these coremarket activities for investors and broker-dealers.
b. Qualified Auctions are a Risky Bet to Solve the Problem that the SEC Identifies
Although Nasdaq agrees with the Commission’s assessment of the problem, we areconcerned that the Commission’s proposal to mandate qualified auctions to solve this problem
would be a risky bet, given that the effectiveness of this novel approach is speculative at present
and its costs would be significant.
Without opining as to whether, and to what extent, qualified auctions would be effective
in increasing competition for retail orders, we think it suffices to say that any such effects are notsufficiently understood or assured. Although there are good reasons to be hopeful that qualified
auctions would be effective, there are also good reasons for doubt. For example, while auctions
are successful in the options context, they may be less so in the equities markets, which are more
fragmented and more order-driven than are options markets. Even the Commission itself
acknowledges that it does not have enough information at this time to assess whether qualified
auctions qualified auctions would achieve their intended effects:
This might enhance order execution quality for individual and institutional investors aswell as improve price discovery. The magnitude of the improvements in order execution
quality that individual and institutional investors may experience as a result of this Proposal
might be less than indicated for a variety of reasons (though it may also be greater),including the implementation of MDI Rules, the effect of which is not yet in the data. …
The Commission acknowledges considerable uncertainty in the costs and benefits of thisrule because the Commission cannot predict how different market participants would adjust
their practices in response to this rule. 105
While the benefits of qualified auctions are speculative, the costs are more certain.
Market participants would be required to make substantial, and by the SEC’s own account, often
disruptive changes to account for qualified auctions. 106 Although the Order Competition
Proposal is highly prescriptive in its own right, many complex issues would still need to be
decided, including, but not limited to, how to implement what may be numerous simultaneous
auctions for the same securities over the course of a trading day, as well as how to integrate
auctions within existing plans and systems for handling trading halts and pauses, SIP and market
data feeds, and order routing functionalities. 107
104

See id.

105

Order Competition Proposal, supra, note 1, at 203.

106

See Order Competition Proposal, supra, note 1, at 203 (“The Proposal would likely cause
wholesalers and some retail brokers to incur significant adjustment costs to theiroperations.”).

107

See id. at 204 (“Market participants would also incur compliance costs, such as
exchanges and NMS Stock ATSs incurring costs for creating qualified auctions, as wellas broker-dealer and trading center compliance costs related to establishing policies andprocedures for identifying and handling segmented orders and originating brokers that38

Thus, mandatory market-wide imposition of this novel Proposal would be a risky gambit,
both for the Commission, and for the markets. If the SEC’s bet on qualified auctions turns out tobe a bad one in that the concept fails to produce the projected benefits, does so at higher-thananticipated costs, or has unintended consequences, then the entire market – including retailinvestors – will be captive to the negative effects. We do not think that this is a bet worth taking.
c. “Meaningful” Price Improvement is an Elegant Alternative
As an alternative to qualified auctions, Nasdaq proposes a simpler, more elegant
approach. As Nasdaq first discussed in Optimize, 108 we recommend that the Commission
incorporate into its Best Execution Rule the concept of “meaningful” price improvement. Under
this proposal, a broker-dealer could only internalize a retail order, consistent with its best
execution obligations, if it either: (1) exposes the order in some way to competition on lit
markets; or (2) commits to provide the order with “meaningful” price improvement. Of course,
the Commission would need to consider carefully what level price improvement should be
deemed “meaningful” enough to justify executing a retail order without competition and without
it contributing to the NBBO. In this regard, the Commission could consider utilizing its own
definition of the concept in the Order Competition Proposal, i.e., an execution that is at or better
than the midpoint of the NBBO. However, it may also be reasonable to provide priceimprovement at another level that is lower than half the spread, and yet substantial enoughsupport competition and positive investor outcomes. 109 This proposed approach could also
provide for an exception for larger orders that would exceed the shares available at the NBBO bysome minimum threshold, similar to the exception proposed within the Order Competition Rulewithin proposed Rule 615 for large orders. 110
This alternative solution would address the Commission’s core concerns about order-byorder competition without also forcing market participants to construct qualified auctions tosubmit segmented orders. NMS plans and their participants (including the exchanges and
FINRA) would incur compliance costs in order to update the consolidated market data
feeds and to broadcast qualified auction messages. FINRA would incur compliance costs
to update the ADF and to broadcast qualified auction messages.”).
108

See Optimize, supra, note 4.

109

See Order Competition Proposal, supra, note 1, at 156. Proposed Rule 615(b)(3) applies
to segmented orders that are executed by a restricted competition trading center at a pricethat is equal to the NBBO midpoint or more favorable for the segmented order (i.e., the
NBBO midpoint or lower for segmented orders to buy or the NBBO midpoint or higher
for segmented orders to sell), as determined with reference to the NBBO at the time thesegmented order was received by the restricted competition trading center. Additionally,
Proposed Rule 615(b)(4) applies to segmented orders that are limit orders with a limit
price selected by the customer that is equal to or more favorable for the segmented orderthan the midpoint of the national best bid and national best offer when the segmented
order is received by the restricted competition trading center.

110

See id. at 156. Proposed Rule 615(b)(2) excepts large orders with a market value of atleast $200,000 calculated with reference to the NBBO midpoint when the order isreceived by a restricted competition trading center.
39

support this competition. Further, this approach would provide a clear metric for investors tomeasure execution quality and price improvement while achieving the Congressional objectives
for a National Market System, as set forth in section 11A of the Exchange Act. 111 Finally, withthis approach, investors would be able to benefit from the significant liquidity within the NBBO
that exists on exchanges and certain other venues as well as exchange retail price improvement
programs, 112 but which is not displayed pursuant to Rule 612. 113
d. The Commission Should Allow Exchanges and Fair Access Venues to Develop
Innovative Mechanisms for Attracting and Interacting with Retail Order Flow
To foster positive outcomes for investors, we recommend that the Commission allow
exchanges to develop and deploy creative solutions for attracting and interacting with retailorders that are exposed to competition (subject to the SEC’s statutory public comment andapproval process). This would allow the Commission to achieve its stated goals, without
incurring the collective risks associated with mandated retail auctions, and it could potentially do
so at lower costs and with greater effectiveness. Nasdaq believes that where the Commission has
embraced competition and innovation, investors have benefitted from reduced prices, increased
functionality, and better market experiences, and would do so here. To be clear, some of thesemarket-based solutions could include retail auctions – whether designed as proposed by the SEC
or otherwise – but they need not be limited as such. The following are but a few examples ofwhat such market-based solutions could entail.
Exchanges could offer separate auction mechanisms for segmented orders with finer
trading increments, but not introduce a requirement for such orders to be exposed exclusively
through any particular mechanism. Instead, participants could choose to expose an order on: (1)an open competition trading center’s order book; (2) within an auction designed by a market; or(3) within a retail liquidity program where quotes could be fully displayed. This approach would
provide open competition trading centers with greater flexibility to design auctions.
Another viable alternative would be for a market to design its own auction. A market
could establish mechanisms targeted to order flows not currently available to or attracted by a111

See 15 U.S.C. § 78k-1(a)(1)(C). These objectives are: (1) economically efficient
execution of securities transactions; (2) fair competition among brokers and dealers,
among exchange markets, and between exchange markets and markets other thanexchange markets; (3) the availability to brokers, dealers, and investors of information
with respect to quotations for and transactions in securities; (4) the practicability ofbrokers executing investors’ orders in the best market; and (5) an opportunity, consistent
with objectives 1 and 4, for investors’ orders to be executed without the participation of adealer.

112

See Order Competition Proposal, supra, note 1, at 144. Retail liquidity programs(“RLPs”) have been granted an exemption from Rule 612 to provide executions in tenthsof a penny. These are programs for retail orders seeking liquidity that allow market
participants to supply liquidity to such retail orders by submitting non-displayed orders
priced at least $0.001 better than the exchange’s protected best bid or offer.

113

17 CFR § 242.612.
40

displayed venue, and it could do this while providing similar protection against adverse
selection, opportunities for price improvement, and other benefits that presently make offexchange trading attractive. For example, a market could elect to adopt a two-sided auction
approach to address the concerns surrounding competition that are identified in the Proposal. A
two-sided auction has the benefit of a trade-through exception for a stopped order 114 when, at thetime of receipt of the order, 115 the trading center had guaranteed an execution at no worse than aspecified price. Utilizing the existing stopped order exception would protect against the risk ofmarket movement during the auction while also guaranteeing the execution of the order. With
this type of auction, there is potential for price improvement. A two-sided auction would offer
the advantages of exposing the order consistent with the SEC’s proposal.
As to retail liquidity programs, we ask the Commission to allow exchanges to operatethese programs with more flexibility so that they can compete more effectively for retail orders.
Exchanges that employ such programs should have exemptions from the minimum quoting ruleso that they can accept, rank, and display orders in $0.0010 increments. There are many otheraspects of flexibility that should be considered, such as the ability to attribute the originating
broker, if not broadly, then at least as to the participant providing the price for that particularorder. The SEC should not stand in the way of competitive venues setting up features that would
allow for better competition for retail investor orders, including but not limited to better ways tosegment retail order flow through better definitions of retail orders as such.
a. Delay Adoption and Implementation of Order Competition Proposal and Proceedwith a Pilot Program First
Notwithstanding the above, if the SEC decides to proceed with qualified auctions, weurge it to do so cautiously and methodically. We repeat our mantra once more – even small
alterations to the intricate and interwoven fabric of the National Market System, while often
well-intended, can have unforeseen and harmful effects. Such risks are heightened where, as
here, the proposed changes would be substantial, their full impacts are unknown, their benefits
are unproven and yet their costs are significant.
Thus, Nasdaq believes that it would be prudent for the Commission to wait to adopt this
Proposal until after it adopts and implements its other similarly far-reaching and consequential
Proposals and studies their impacts and effectiveness. Indeed, it may be the case that these other
Proposals collectively succeed in promoting competition to such an extent that they obviate the114

See Regulation NMS, supra, note 2, at 37527, n.251. (“A stopped order is an order forwhich a trading center has guaranteed, at the time of order receipt, an execution at a priceno worse than a specified price”.).

115

Specifically, the exception applies to the execution by a trading center of a stopped orderwhen the price of the execution of the order was, for a stopped buy order, lower than thenational best bid in the security at the time of execution or, for a stopped sell order,
higher than the national best offer in the security at the time of execution. To qualify forthe exception, the stopped order must be for the account of a customer and the customer
must have agreed to the stop price on an order-by-order basis. See Regulation NMS,
supra, note 2, at 37528.
41need for the introduction of qualified auctions. Alternatively, the data could demonstrate – inways that are not apparent to the Commission now – that qualified auctions would not achieve
their desired effects or that they would have undesirable consequences, such that theCommission might need to modify its approach or abandon the Proposal altogether.
In addition to or in lieu of the above, Nasdaq recommends that the SEC implement the
Proposal on a pilot basis before mandating it for all segmented orders. With a pilot, the qualified
auction would apply to a subset of securities. We suggest that such a pilot persist for a period ofat least eighteen months to obtain adequate data to better inform the market of the impacts andeffects of the proposal. A pilot would allow the Commission the ability to methodically weighthe impacts of a qualified auction on various NMS securities prior to subjecting all NMS
securities to the auction mechanism. Further, a pilot would afford the Commission, as well as
the industry, with an agile process within which to fine-tune the Proposal once it acquired areasonably sufficient amount of data and understanding of the impacts on various NMS
securities.
V.

TRANSPARENCY OF EXECUTION INFORMATION (“RULE 605
PROPOSAL”)

It has been over 20 years since the SEC adopted Rule 605 as part of Reg. NMS, which
requires the public disclosure of execution quality and order routing practices with the intention
to allow market participants to compare execution quality across market centers based onstandardized metrics. 116 By amending Rule 605, 117 the Rule 605 Proposal 118 would enhance theprotections afforded investors through increased transparency of order execution quality and byrequiring additional and more valuable information to be made available to investors.
We agree with the Commission that modernization of the Rule 605 reports is long
overdue. Nasdaq believes that transparency-based initiatives promote stronger investor
protections by informing and empowering investors to make more informed investment andtrading decisions. We strongly support the SEC’s efforts to augment investor protections
through amending existing order execution disclosure rules, which would significantly enhancetheir usefulness and increase industry transparency. Specifically, it provides broker-dealers andinvestors with more relevant, comprehensive, and digestible information by which to make best
execution determinations and to assess market quality.
We recognize that as an exchange, the burden of compliance with the proposed rules
would not fall predominantly on us and, instead, would more directly impact broker-dealers,
retail firms, and off-exchange venues. Consequently, we suggest that the SEC listen closely tothose most directly affected by the Proposal and give due weight to their comments

116

See Securities Exchange Act Release No. 43590 (Nov. 17, 2000), 65 FR 75414, 75416(Dec. 1, 2000) (“Disclosure of Order Execution and Routing Practices”).

117

See 17 CFR § 242.605.

118

See Rule 605 Proposal, supra, note 1.
42

a. Areas of Supporti.

We support expanding the scope of entities covered.

Nasdaq supports the SEC’s proposed expansion of the scope of entities subject to Rule605. Broker-dealers that are not market centers 119 currently are not required to prepare Rule 605
reports. We agree with the Commission that this limits market participants’ ability to assess andcompare the execution quality that broker-dealers obtain for their customers. Most importantly,
expanding the scope of entities covered by including broker-dealers that exceed a 100,000
customer account threshold would increase transparency by providing customers with data thatallows for better direct execution quality comparisons among such broker-dealers.
We believe that the 100,000 customer account threshold, as proposed by the SEC,
appears to balance the associated implementation costs on those broker-dealers that may provide
the execution quality statistics with the greatest benefit.
ii.

We also support expanding the definition of a “Covered Order.”Currently, Rule 605 requires market centers that trade NMS securities to publish monthly
reports about executed “covered orders.” 120 We support the Proposal’s inclusion of certain
orders submitted outside of regular trading hours 121 within the definition of a Covered Order.
This would take into account non-marketable limit orders submitted outside of regular trading
hours or at a time when an NBBO is not disseminated if they become executable after the
opening or reopening of trading during regular trading hours. The definition of a Covered Orderwould also include executable orders submitted with stop prices, and non-exempt short saleorders for which a price test restriction under Regulation SHO is not in effect for the security.

119

Reg NMS defines “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)(46).

120

Reg NMS defines a “covered order” to mean any market order or any limit order(including immediate-or-cancel orders) received by a market center during regular
trading hours at a time when a national best bid and national best offer is being
disseminated, and, if executed, is executed during regular trading hours, but shall exclude
any order for which the customer requests special handling for execution, including, but
not limited to, orders to be executed at a market opening price or a market closing price,orders submitted with stop prices, orders to be executed only at their full size, orders to
be executed on a particular type of tick or bid, orders submitted on a “not held” basis,
orders for other than regular settlement, and orders to be executed at prices unrelated tothe market price of the security at the time of execution. See 17 CFR § 242.600(b)(22).

121“Regular trading hours” is defined as 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). See 17 CFR § 242.600(b)(77).
43

Nasdaq’s support echoes Optimize, 122 where we recommended that the SEC expand its
definition of Covered Orders so that the execution quality statistics prescribed by Rule 605
become more representative of real-world trading activity. We recommended including odd-lots,
as well as short sales, stop orders and premarket orders. As we discuss in greater detail below,
we also advocated in Optimize that “rather than bucket covered orders arbitrarily by share size,
Nasdaq suggests that the Commission instead bucket data about covered orders by notional value
capped at block size. Such a proposal would avoid the drawbacks of the current system while
also ensuring that statistics cover most retail trades.” 123 We repeat these recommendations here.
iii.

We support the addition of new order type categories.

The Rule 605 Proposal additionally seeks to create several new order type categories
while also replacing several others with new order type categories. Nasdaq supports the Rule605 Proposal in its efforts to establish a new order type category for marketable immediate-orcancel orders. Additionally, we support the elimination and replacement of the three current
categories for non-marketable limit orders (inside-the-quote limit orders, at-the-quote limit
orders, and near-the-quote limit orders) with non-marketable limit orders that become
executable, beyond-the-midpoint limit orders and executable orders submitted with stop prices.
We agree with the SEC that these changes to the order type categories would enhance
execution quality information within Rule 605 reports and better group comparable orders.
iv.

We support proposed changes to timestamp conventions.

Nasdaq backs the Rule 605 Proposal’s elimination of time-to-execution categories infavor of average time-to-execution, median time-to-execution, and 99th percentile time-toexecution, each as measured in increments of a millisecond or finer and calculated on a shareweighted basis. Rule 605 does not specify a level of granularity currently for the existing timeto-execution statistics, 124 even as these fields are required to be expressed in number of seconds
and carried out to one decimal place. We believe that the time of order receipt and execution
should be measured in increments of a millisecond or finer, and that realized spread be calculated
at both 15 seconds and one minute.
We believe that Rule 605 reports should add metrics like median price improvement,
rather than just average price improvement, in conjunction with price and size improvement
opportunities that are significant and relevant to best execution decisions. This is consistent withwhat Nasdaq recommended in its Optimize White Paper. 125 The existing time-to-execution
buckets fail to provide meaningful differentiation for market orders and marketable limit orders
and typically provide meaningful information only for non-marketable order types.

122

See Optimize, supra, note 4.

123

Id. at 12.

124

See Rule 605 Proposal, supra, note 1.

125

Optimize, supra, note 4, at 6, n.7.
44

We concur with the SEC that requiring average time-to-execution for all order types, aswell as statistics that would provide data regarding the distribution of execution times withineach order type, would offer more consequential information. These statistics could be used tojudge and compare the average time to execution for a particular order type and still provide
information about the extent to which outlier values may skew the average.
b. Suggested Improvements to Rule 605 Proposali.

Nasdaq recommends bucketing data about covered orders by notional
value rather than shares.

The Proposal modifies order size categories based on round lots (utilizing the new
definition of round lot from the MDI rules), 126 instead of specific share quantities, andestablishes new order size categories for fractional share, odd-lot, and block orders. Nasdaq
acknowledges the benefits of the Proposal over the current order size categories. We suggest,
however, that the Commission instead bucket data about covered orders by notional value.
Although bucketing orders by round lots would be an improvement over current
bucketing by share size, we believe that bucketing data about covered orders by notional value ispreferable. Using notional value bucketing would prove more useful for measuring execution
quality as it would avoid the blending of orders with drastically different notional values.
For example, consider an order for 1,000 shares of a $2 security ($2,000 notional value)
and an order for 1,000 shares of a $175 security ($175,000 notional value). Under the share size
bucket approach or the round lot bucket approach, these two orders would be bucketed together.
However, reporting these orders together would not be effective for measuring execution quality
because it is not meaningful to aggregate statistics of orders with very different notional values
and characteristics (as the statistics would be skewed to reflect the order with higher notional
value). Instead, such orders should be evaluated alongside more similar orders. The Proposal tobucket data by round lots is a step in the right direction; however, it still would result indifferent-sized trades being included in the same bucket, as shown in chart below. This Proposal
also would result in higher-value orders that qualify for retail auctions being mixed with ordersthat do not so qualify (which will affect blended reports at the retail broker level).

126

See 17 CFR § 242.600(b)(82).
45

Nasdaq suggests that the SEC consider the following buckets: less than $10,000, $10,000
to less than $50,000, $50,000 to less than $100,000, $100,000 to less than $200,000, and$200,000 to $400,000. We believe that these buckets are appropriate as they would group orders
with similar characteristics and would make it easier to compare execution quality metrics acrossmarket centers that trade in differently priced securities. The SEC should consider increasing thecurrent cap of $200,000, as this benchmark has not changed with the market or inflation overtime. Further, increasing the cap may provide information that is helpful for institutional buyers.
Using notional value buckets for Rule 605 reporting would facilitate more informed orderrouting decisions and best executions. Additionally, using notional values in determining bucket
sizes would provide for a more future-proof mechanism as markets evolve.
ii.

Nasdaq supports centralized publication of 605 Reports.

Nasdaq commends the SEC for proposing human-readable summary execution quality
reports, which would improve the usability of information on execution quality by making thedata more accessible to a wider audience, including individual investors. We believe it is criticalthat the SEC requires all firms to use a standard format to facilitate comparisons.
Currently, there is no requirement for Rule 605 reports to be posted in a centralized
location, leaving market participants to collect Rule 605 reports in an inefficient and timeconsuming manner. By providing centralized access to Rule 605 reports, market participants
would be more likely to use the data to compare execution quality, leading to increased
competition and improvements in execution quality. We suggest that the SEC require that bothsummary and detailed reports be posted centrally.
VI.

REGULATION BEST EXECUTIONBest execution is an important aspect of modern markets and Nasdaq supports efforts tostrengthen best execution rules to the extent it is beneficial to investors, including by extending it
to asset classes that lack needed transparency and customer-friendly guidelines. Nasdaq believes
it is reasonable for the SEC to seek its own rules in this area to have more direct oversight.
However, the Proposal, as written, lacks clarity about the Commission’s unique vision for best
execution, and we are concerned that its interplay with existing rules will lead to confusion andduplication of efforts. Nasdaq is concerned that rather than driving better outcomes for46

investors, the rule may lead to regulation by enforcement. While the SEC is rightfully concerned
about ensuring that its Regulation Best Execution adequately protects investors, we think that it
can do so while heeding reasonable requests of broker-dealers for fair treatment and efficientregulation.
a. A New SEC Best Execution Rule Could Provide Much-Needed Clarity on Best
Execution, but it Fails to Do So in its Current Form
Although a new Regulation Best Execution presents an opportunity for clarity, Nasdaq isconcerned that the Proposal fails to take advantage of this opportunity. Instead, the Commission
has chosen to structure the Proposed Rule largely as a vague policies and procedures-based rule,similar if not identical to the existing FINRA and MSRB best execution rules in most respects. 127
In replicating the design of the FINRA and MSRB rules, the Commission clearly intends toensure that its Rule, like existing rules, is flexible enough to adapt to new and changing
circumstances. But in replicating the benefits of the FINRA and MSRB rules, the Commission
fails to take the opportunity to clarify areas where there may be confusion and potential for
violations due to lack of understanding rather than truly harming a customer. The Commission
does not state, or provide specific guidance on, which types of trading practices would satisfy its
vision of best execution standards, or in the alternative, which types would not satisfy its vision.
Moreover, as is discussed below, the Commission is not entirely clear as to whether or how its
vision for best execution is distinct from the historical views of FINRA and MSRB. Even inrequiring broker-dealers to establish new “heightened” best execution policies and procedures
when engaging in so-called “conflicted transactions,” the Commission fails to explain what typesof procedures would and would not suffice.
In fact, the Commission’s Best Ex Proposal is arguably vaguer than existing regimes
because the Proposed Rule lacks any accompanying guidance, whereas FINRA and MSRB
supplement their rules with interpretive guidance and supplementary materials that address how
its members can satisfy their obligations. For example, FINRA’s rule identifies five factors thatare among those to be considered in determining whether a firm has used “reasonablediligence” 128 and the MSRB rule provides six factors. 129 FINRA also provides eight factors thatbroker-dealers are permitted to consider in their periodic assessment of execution quality,
including whether order routing practices present an opportunity for price improvement, increase
execution certainty, and increase the speed of execution. MSRB provides five factors dealers
must take into account when assessing execution quality. 130 Additionally, FINRA provides
annual guidance to its members on effective practices on how to ensure they continue to meettheir duty of best execution, by posing a series of questions and answers in its annual Report on

127

See Best Ex Proposal, supra, note 1, at 5441-42.

128

See FINRA Rule 5310 (a)(1)(A) – (D).

129

See MSRB Rule G-18(a).

130

See MSRB Rule G-18, Supplemental Material .08.
47

FINRA’s Examination and Risk Monitoring Program. 131 Proposed Regulation Best Execution,by contrast, fails to provide any specific guidance materials.
Such an approach would be a squandered opportunity for clarity, but more than that, it
would leave broker-dealers with little advance notice of what they must do to comply with the
new Rule. Thus, the Proposal would put broker-dealers at risk of a “gotcha” enforcement action
should the SEC determine, in hindsight, that brokers’ policies, procedures, or practices – even if
historically permitted under FINRA or MSRB rules – nevertheless violate the SEC’s Rule.
b. The Commission Should Take Care to Ensure New Rules Provide Better
Outcomes for Investors and Avoid Regulation Through Enforcement
The goal of Regulation Best Execution should be to facilitate better investor outcomes,
better broker operation, and broker compliance, rather than merely to generate more enforcement
opportunities. Regulation through enforcement is not an appropriate or effective strategy for
regulating vague and subjective standards of conduct. If the Commission has a sense of whatparticular behaviors it does and does not believe are compliant with its Proposed Regulation Best
Execution, then the Commission has a responsibility to articulate its views publicly so thatbroker-dealers have an opportunity to adjust their behaviors accordingly. Broker-dealers should
not have to guess what the Commission is thinking, and certainly, they should not be penalized
for making a wrong guess due to vague rules.
Nasdaq believes that broker-dealers deserve and would benefit from the Commission
providing affirmative guidance on ways in which they may satisfy their obligations under
Regulation Best Execution. Such guidance could include a non-exhaustive list of “safe harbors”
that describe broker policies, procedures or practices that the SEC believes would be consistent
with best execution obligations in circumstances known to be complex, confusing, or
controversial, such as when a broker seeks to route a retail order to a trading venue from which it
receives a rebate.
With respect to rebates, in particular, which as Nasdaq described above, are essential tothe healthy operation of the U.S. equity markets, one such safe harbor could clarify that a brokerdealer would satisfy its obligations, notwithstanding its receipt of exchange rebates, if it
discloses the practice of accepting such rebates to its customers and provides customers with anopportunity to opt-out of sending their orders to any exchange that pays their broker rebates.
The SEC should also consider adopting safe harbors that clarify other circumstances in whichbroker-dealers could satisfy their best execution obligations notwithstanding their receipt of
exchange rebates. For example, another safe harbor could state that a broker’s practice of
passing-through exchange rebates to its customers would be adequate to alleviate any need for
broker-dealers to maintain “heightened” policies and procedures for so-called “conflictedtransactions” in which broker-dealers seek to route orders to exchanges from which they receive131

See 2022 Report on FINRA’s Examination and Risk Monitoring Program at pp. 42-43,
https://www.finra.org/sites/default/files/2022-02/2022-report-finras-examination-riskmonitoring-program.pdf; see also FINRA Regulatory Notice 21-23 (FINRA Reminds
Member Firms of Requirements Concerning Best Execution and Payment for Order
Flow) (June 23, 2021), https://www.finra.org/rules-guidance/notices/21-23.
48

rebates. Indeed, this recommendation would be consistent with the Commission’s own statementin the NMS Proposal that passing-through exchange rebates to brokers’ customers would
eliminate the Commission’s (misguided) concerns about rebates presenting harmful conflicts-ofinterest to brokers. 132
Additionally, the Commission should consider incorporating into the Rule or publishing
as guidance a list of specific factors and metrics that broker-dealers can or must consider when
making their best execution determinations. For example, the Commission should consider
codifying its non-exhaustive list of quantitative and other relevant factors that it has previously
discussed in its Order Execution and Routing Practice Release, which may be relevant to brokerdealers’ best execution analysis. 133 For consistency’s sake, the list should incorporate therelevant factors that are currently identified in the SROs’ best execution rules. 134
If the Commission, at present, is uncertain about its vision for Regulation Best Execution,then it should set up a process that will help it to solidify its views without unfairly penalizing
brokers that act reasonably and in good faith. The SEC could start with reviewing some of
FINRA’s examination findings to familiarize itself with historical concerns. 135
Likewise, the Commission should consider imposing a grace period from enforcement
actions while it educates itself as to the trading behaviors of broker-dealers for a period of time132

See NMS Proposal, supra, note 1, at 80330 (“Access fees create potential conflicts ofinterest. Passing on fees and rebates to end customers could eliminate such distortions
and lead to improved overall order execution for end customers. Additionally, the ability
to pass on the fees and rebates to end customers might also make customers more awareof these fees and rebates so that they can better inform their broker-dealers how to routewith respect to fees and rebates which could also lead to better execution for end
customers.”).

133

These factors include the (1) size of the order, (2) speed of execution, (3) clearing costs,(4) trading characteristics of the security involved, (5) availability of accurate information
affecting choices as to the most favorable market center for execution and the availabilityof technological aids to process such information, and (6) cost and difficulty associatedwith achieving an execution in a particular market center. See Securities Exchange Act
Release No. 34-43590 (Nov. 17, 2000), 65 FR 75414, 75418 (Dec. 1, 2000); see also Best
Execution Proposal, supra, note 1, at 548384.

134

Additionally, as we discuss above, the SEC should aid brokers’ best execution
determinations by amending Rule 605 to require reporting of more useful metrics forevaluating execution quality and price improvement opportunities. Rule 605 no longer
provides a meaningful and relevant yardstick by which broker-dealers and investors canmeasure execution quality. If the Commission believes that price improvement
opportunities are relevant to best execution decisions, then it should update Rule 605 to
capture more relevant and useful data on price and size improvement opportunities andadd metrics like median price improvement rather than just average price improvement.

135

See 2022 Report on FINRA’s Examination and Risk Monitoring Program at 44-45; seealso Best Execution Proposal, supra, note 1, at 5471-72, n. 210.
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(i.e., six months or one year) after adopting Regulation Best Execution. During this grace
period, the Commission would refrain from taking enforcement actions against broker-dealersthat make good faith and reasonable attempts to demonstrate compliance with Regulation Best
Execution. The Commission would also commit to work discretely and collaboratively withsuch broker-dealers to bring them into compliance during the grace period, including by advisingthem as to how to modify or correct any of their policies, procedures, and practices that fail tomeet the Commission’s standards. Meanwhile, those broker dealers that act unreasonably and in
bad faith would not be spared from enforcement scrutiny during the grace period. Before ending
the grace period and lifting its enforcement moratorium, the Commission could publish asummary of its learnings from that period to serve as yet another compliance tool.
Alternatively, or in addition to the grace period discussed above, the Commission also
could establish a no-action letter program that would enable broker-dealers to understandwhether actions they contemplate taking in the future would be viewed by the Commission as
violating Regulation Best Execution. Broker-dealers that receive no-action letters could proceedwith their activities with confidence that the Commission will not take enforcement action
against them, at least with respect to the specific scenario that the Commission reviewed. The
Commission could, over time, publish periodic summaries of its observations from its no-action
letter program to once again facilitate better compliance.
c. The SEC’s Proposed Regulation Best Execution Should Supplant the Current
SRO Best Ex Regimes
In proposing to adopt Regulation Best Execution, the Commission states that the newRule would co-exist with existing FINRA and MSRB best execution rules. 136 Specifically, theCommission proposes that Regulation Best Execution would serve as a regulatory floor, and that
FINRA and MSRB rules and interpretations would continue to apply to the extent that they are
more specific or stringent than the SEC’s Rule. 137 Nasdaq disagrees with this approach, as it
believes that the goal of Regulation Best Execution should be to enhance the duty of best
execution, rather than simply to duplicate (if not triplicate) its administration and enforcement.
To avoid undue confusion and costs associated with maintaining three sets of overlapping best
execution rules, Nasdaq recommends that the new Proposed Regulation Best Execution
incorporate and replace the FINRA and MSRB rules.
Nasdaq is concerned that if the Commission adopts Regulation Best Execution as
proposed, the three best execution rules – while largely the same -- will not be entirely aligned.
Where the rules differ, confusion may arise as to which rule is operative and prevails in a given
circumstance. In certain cases, the SEC rule is more specific or simply different than the FINRA
and MSRB rules, and in other cases, the opposite is true. For example, Proposed Rule 1101(c)requires at least quarterly reviews of execution quality of broker-dealer transactions for or withcustomers or customers of another broker or dealer. In contrast to the SEC’s Proposed Rule, theMSRB rule does not require broker-dealers to conduct reviews more frequently than annually. 138
136

See Best Ex Proposal, supra, note 1, at 5441, n.3 and 5451.

137

See id. at 5451, n.109.

138

MSRB Rule G-18.
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And while FINRA’s rule does require a broker-dealer to conduct quarterly reviews of execution
quality, such reviews must be conducted on a security-by-security, type-of-order basis (e.g., limit
order, market order, and market on open order), 139 whereas the Proposed Rule gives broad
discretion and provides less specificity for such reviews. 140 Additionally, Proposed Rule 1101(c)would apply to a broader range of broker-dealers than does the FINRA rule. 141
Nasdaq is concerned that inconsistencies among the three best execution regimes risk
entrapping broker-dealers in “gotcha” enforcement actions, whereby brokers acting in good faith
to comply with one regime may be held to run afoul of another regime.
Additionally, Nasdaq believes that requiring broker-dealers to maintain compliance withmultiple best execution rules may be overly burdensome, especially where the requirements ofthe three rules deviate from each other. To avoid confusion and inconsistent interpretations,Nasdaq recommends that the Commission supplant overlapping FINRA and MSRB rules andincorporate them, and their guidance, into Regulation Best Execution and, where necessary,reconcile any conflicting rules and guidance.
d. Nasdaq Supports Expanding the Duty of Best Execution to Asset Classes otherthan Equities Securities
We support the Proposal to apply the duty of best execution to broker-dealers in all
securities, including not only equities, but also options, fixed income and digital assets that are
securities or government securities under the Federal securities laws. Expanding the scope of the
Proposal beyond equity securities is prudent. Current FINRA and MSRB best execution rules
apply to broker-dealers in the options, corporate and municipal bonds, and government securities
markets. Therefore, extending the SEC’s rule to the same groups should be straightforward.
However, when extending the best execution principles to other securities markets, theSEC should be mindful of the unique characteristics of those markets. The equity market-based
principles of best execution may not be appropriate for all asset classes. While mature asset
classes such as equities and options have established polices with robust transaction cost analysis
for investors to measure performance, Nasdaq believes that the Commission should tread lightly
when imposing best execution obligations to participants in nascent asset classes, such as digitalassets. The Commission itself acknowledges that it still has limited information about the order
handling and best execution practices of broker-dealers that engage in transactions involving
139

See FINRA Rule 5310, Supplemental Material .09.

140

While review of orders on a security-by-security basis may be much less practical for the
options markets, where there may be hundreds of series of options for one underlying
security, the Commission should maintain consistency with other SRO rules in thebroker-dealer’s execution quality review for standard of review.

141

FINRA’s execution quality review requirement applies only to broker-dealers that routecustomer orders to other broker-dealers for execution on an automated, nondiscretionary
basis or that internalizes customer order flow. However, proposed Rule 1101(c) would
apply to all broker-dealers that are not introducing brokers that transact for or withcustomers.
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digital asset securities. 142 Although we agree that best execution principles could provide
welcome protection to digital assets investors, more study is required to determine how to
implement those principles effectively and without causing unintended harm to that market.
VII.

CONCLUSION

Nasdaq appreciates the Commission’s efforts to modernize and enhance U.S. equity
market structure for the benefit of retail investors. Although the markets work well already, we
agree that opportunities exist to make them work even better, including by helping tickconstrained securities to trade better, increasing competition for retail orders, leveling thecompetitive playing field among trading venues, enhancing best execution obligations, andsupporting the NBBO. And yet, as market structure becomes ever more complex andinterconnected, the manner in which we approach reform is increasingly central. We believe thatwhenever possible, the Commission should act in a cautious, methodical, collaborative andpragmatic fashion, and resist the temptation – however well-intentioned – to do too much, too
soon, and without a sound evidentiary footing and a full appreciation for the impacts andconsequences of its actions. In certain respects, the Commission’s Proposals are consistent withthese admonitions, but in others, recalibrations, moderations, and pauses would be prudent toachieve the best results for the markets and investors. Nasdaq stands ready to partner with theCommission, investors, and the industry to ensure that the U.S. equity markets are optimized forretail investors. We look forward to the public debate in the weeks and months to come.
Sincerely,_________________________________
John A. Zecca

Cc:

The Honorable Gary Gensler, Chairman, SEC
The Honorable Caroline A. Crenshaw, Commissioner, SEC
The Honorable Hester M. Peirce, Commissioner, SEC
The Honorable Jaime Lizárraga, Commissioner, SEC
The Honorable Mark T. Uyeda, Commissioner, SEC
Director Haoxiang Zhu, Division of Trading and Markets

142

See Best Ex Proposal, supra, note 1, at 5448, 5518, n.514.
52